AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 2003
REGISTRATION NO. 333-104793
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MERCANTILE BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 6022 52-0898572
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
--------------------------
Mercantile Bank & Trust Building
Two Hopkins Plaza; P.O. Box 1477
Baltimore, Maryland 21203
(410) 237-5900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
--------------------------
John L. Unger
Senior Vice President and General Counsel
Mercantile Bankshares Corporation
Two Hopkins Plaza; P.O. Box 1477
Baltimore, Maryland 21203
(410) 237-5900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
Thomas D. Washburne, Jr. William S. Rubenstein
Venable, Baetjer and Howard, LLP Skadden, Arps, Slate, Meagher & Flom LLP
Two Hopkins Plaza 4 Times Square
Baltimore, Maryland 21201 New York, New York 10036
(410) 244-7400 (212) 735-2642
--------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement and the
satisfaction or waiver of all other conditions to the merger as described in the
enclosed proxy statement/prospectus.
If the securities being registered on this Form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
F&M BANCORP
110 THOMAS JOHNSON DRIVE
FREDERICK, MARYLAND 21702
[ ], 2003
Dear F&M Bancorp stockholder:
You are invited to attend a special meeting of stockholders of F&M Bancorp to be
held on August 6, 2003 at 10:00 a.m., local time, at F&M Bancorp's corporate
headquarters, 110 Thomas Johnson Drive, Frederick, Maryland. At this special
meeting, you will be asked to approve the merger of F&M Bancorp with Mercantile
Bankshares Corporation.
In the merger, Mercantile will issue approximately 10.3 million shares of common
stock and will pay approximately $123.5 million in cash (in each case subject to
upward adjustment in the event that any shares of F&M Bancorp common stock are
issued pursuant to the exercise of outstanding F&M Bancorp stock options). The
per share consideration you will receive for your F&M Bancorp shares will be
based on a formula set forth in the merger agreement. It will be equal to the
aggregate value of all Mercantile common stock and cash being issued in the
merger divided by the total number of F&M Bancorp shares outstanding. The value
of the Mercantile common stock for these purposes will be the average closing
price of Mercantile common stock during the ten-day period ending three days
before the completion of the merger.
You may convert your F&M Bancorp shares into cash, Mercantile common stock or a
combination of cash and Mercantile common stock, subject to allocation
procedures set forth in the merger agreement and described in this document.
Because Mercantile is issuing a fixed number of shares and paying a fixed amount
of cash, there is no assurance that you will receive the form of consideration
that you elect with respect to any or all shares of F&M Bancorp common stock you
hold. REGARDLESS OF WHETHER YOU ELECT TO RECEIVE CASH, MERCANTILE COMMON STOCK
OR A COMBINATION OF CASH AND MERCANTILE COMMON STOCK, THE MERGER AGREEMENT
CONTAINS PROVISIONS DESIGNED TO CAUSE THE VALUE OF THE PER SHARE CONSIDERATION
YOU RECEIVE TO BE SUBSTANTIALLY EQUIVALENT.
To give you an example, if the average closing price of Mercantile common stock
during the applicable valuation period were $39.62 (which was the closing price
on June 11, 2003):
- If you elected to receive all cash, you would receive approximately $49.63
in cash for each F&M Bancorp share you own.
- If you elected to receive all Mercantile common stock, you would receive
approximately 1.2526 shares of Mercantile common stock for each share of
F&M Bancorp common stock you own (having a value of approximately $49.63,
based on the $39.62 average closing price of Mercantile common stock
during the valuation period).
Both Appendix B and the table on page 29 of this document set forth additional
examples of the merger consideration you may receive based on differing
assumptions of the value of Mercantile common stock during the valuation period
described above.
Your board of directors has approved the merger of F&M Bancorp with Mercantile
and unanimously recommends that you vote "FOR" the Mercantile/F&M Bancorp merger
proposal described in this document. The proposed merger requires the receipt of
bank regulatory approvals by Mercantile and the approval of the merger agreement
and the merger by the holders of a majority of the outstanding shares of F&M
Bancorp common stock. Please carefully review this document which explains the
proposed merger in detail. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE
DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" ON PAGE 13 OF THIS DOCUMENT.
F&M Bancorp common stock and Mercantile common stock are listed under the
symbols "FMBN" and "MRBK" on the Nasdaq National Market.
It is important that your shares are represented at the meeting, whether or not
you plan to attend the meeting. Abstentions or failure to vote will have the
same effect as a vote against the merger.
Accordingly, please complete, date, sign and return promptly your proxy card in
the enclosed envelope. You may attend the meeting and vote your shares in person
if you wish, even though you have previously returned your proxy.
Sincerely,
Faye E. Cannon
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES TO BE ISSUED UNDER THIS
DOCUMENT, OR DETERMINED IF THIS DOCUMENT IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF MERCANTILE COMMON STOCK ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR
OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
This document is dated , 2003 and is first being mailed to
stockholders on or about , 2003.
F&M BANCORP
110 THOMAS JOHNSON DRIVE
FREDERICK, MARYLAND 21702
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 6, 2003
------------------------
To the Stockholders of F&M Bancorp:
We will hold a special meeting of stockholders of F&M Bancorp on August 6,
2003, at 10:00 a.m., local time, at F&M Bancorp's corporate headquarters, 110
Thomas Johnson Drive, Frederick, Maryland for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger, dated as of March 13, 2003, by and between F&M Bancorp and
Mercantile Bankshares Corporation, and the consummation of the
transactions contemplated thereby, including the merger of F&M Bancorp
with and into Mercantile upon the terms and subject to the conditions set
forth in the merger agreement. This proposal is more fully described in
the enclosed document. You can find a copy of the merger agreement in
Appendix A to this document.
2. To transact any other business as may properly be brought before the F&M
Bancorp special meeting or any adjournments or postponements of the F&M
Bancorp special meeting.
We have fixed the close of business on June 27, 2003 as the record date for
determining those stockholders entitled to vote at the F&M Bancorp special
meeting and any adjournments or postponements of the F&M Bancorp special
meeting. Accordingly, only stockholders of record on that date are entitled to
notice of, and to vote at, the F&M Bancorp special meeting and any adjournments
or postponements of the F&M Bancorp special meeting.
By Order of the Board of Directors,
Gordon M. Cooley
Secretary
Frederick, Maryland
[ ], 2003
THE BOARD OF DIRECTORS OF F&M BANCORP UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
i
TABLE OF CONTENTS
PAGE
NO.
--------
ADDITIONAL INFORMATION...................................... iv
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... v
SUMMARY..................................................... 1
INFORMATION ABOUT MERCANTILE AND F&M BANCORP.............. 1
F&M BANCORP WILL MERGE INTO MERCANTILE.................... 1
F&M BANCORP WILL HOLD THE SPECIAL MEETING ON AUGUST 6,
2003.................................................... 2
WHAT F&M BANCORP STOCKHOLDERS WILL RECEIVE IN THE
MERGER.................................................. 2
YOU MAY ELECT TO RECEIVE CASH OR STOCK CONSIDERATION...... 3
F&M BANCORP'S REASONS FOR THE MERGER...................... 4
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.... 4
F&M BANCORP'S BOARD OF DIRECTORS RECOMMENDS STOCKHOLDER
APPROVAL
OF THE MERGER........................................... 5
F&M BANCORP'S FINANCIAL ADVISOR SAYS THE MERGER
CONSIDERATION IS FAIR
TO F&M BANCORP STOCKHOLDERS............................. 5
F&M BANCORP STOCKHOLDERS HAVE NO APPRAISAL RIGHTS......... 5
F&M BANCORP OFFICERS AND DIRECTORS HAVE SOME INTERESTS IN
THE MERGER THAT ARE DIFFERENT THAN OR IN ADDITION TO
THEIR INTERESTS AS STOCKHOLDERS......................... 5
THE MERGER IS EXPECTED TO OCCUR IN THE THIRD QUARTER OF
2003.................................................... 6
THE MERGER WILL BE ACCOUNTED FOR UNDER THE PURCHASE METHOD
OF ACCOUNTING........................................... 6
COMPLETION OF THE MERGER IS SUBJECT TO CERTAIN
CONDITIONS.............................................. 6
WE MAY NOT COMPLETE THE MERGER WITHOUT ALL REQUIRED
REGULATORY APPROVALS.................................... 6
TERMINATION OF THE MERGER AGREEMENT....................... 6
F&M BANCORP MUST PAY MERCANTILE A TERMINATION FEE UNDER
CERTAIN CIRCUMSTANCES................................... 7
EFFECT OF MERGER ON RIGHTS OF F&M BANCORP STOCKHOLDERS.... 7
SHARE INFORMATION AND MARKET PRICES....................... 8
COMPARATIVE STOCK PRICES AND DIVIDENDS...................... 9
COMPARATIVE PER SHARE DATA.................................. 9
SELECTED FINANCIAL DATA..................................... 11
RISK FACTORS................................................ 13
THE F&M BANCORP SPECIAL STOCKHOLDERS' MEETING............... 15
RECORD DATE............................................... 15
QUORUM; EFFECT OF ABSTENTIONS............................. 15
PROXIES................................................... 15
VOTE REQUIRED............................................. 16
RECOMMENDATION OF BOARD OF DIRECTORS...................... 16
THE MERGER.................................................. 17
TRANSACTION STRUCTURE..................................... 17
BACKGROUND OF THE MERGER.................................. 17
REASONS OF F&M BANCORP FOR THE MERGER..................... 19
OPINION OF F&M BANCORP'S FINANCIAL ADVISOR................ 20
MERGER CONSIDERATION...................................... 27
ii
PAGE
NO.
--------
ELECTION PROCEDURE........................................ 30
ALLOCATION................................................ 32
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.... 33
EMPLOYEE BENEFIT PLANS AND EXISTING AGREEMENTS............ 35
INTERESTS OF CERTAIN PERSONS IN THE MERGER................ 36
RESTRICTIONS ON RESALES BY AFFILIATES..................... 39
TREATMENT OF OPTIONS...................................... 40
FRACTIONAL SHARES......................................... 40
EFFECTIVE TIME............................................ 40
CONDITIONS TO THE COMPLETION OF THE MERGER................ 41
REPRESENTATIONS AND WARRANTIES............................ 41
CONDUCT OF BUSINESS PENDING THE MERGER.................... 43
NO SOLICITATION BY F&M BANCORP............................ 44
REGULATORY APPROVALS REQUIRED FOR THE MERGER.............. 45
TERMINATION OF THE MERGER AGREEMENT....................... 45
EXTENSION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT... 48
STOCK MARKET LISTING...................................... 48
EXPENSES.................................................. 48
APPRAISAL RIGHTS.......................................... 48
ACCOUNTING TREATMENT...................................... 49
COMPARATIVE RIGHTS OF STOCKHOLDERS.......................... 49
AUTHORIZED CAPITAL STOCK.................................. 49
SIZE OF BOARD OF DIRECTORS................................ 49
REMOVAL OF DIRECTORS...................................... 50
FILLING VACANCIES ON THE BOARD OF DIRECTORS............... 50
NOMINATION OF DIRECTOR CANDIDATES BY STOCKHOLDERS......... 50
CALLING SPECIAL MEETINGS OF STOCKHOLDERS.................. 50
STOCKHOLDER PROPOSALS..................................... 51
AMENDMENTS TO ARTICLES OF INCORPORATION................... 51
AMENDMENTS TO BYLAWS...................................... 51
STOCKHOLDER VOTE ON FUNDAMENTAL ISSUES.................... 52
STOCKHOLDERS' RIGHTS AGREEMENT............................ 52
DESCRIPTION OF MERCANTILE................................... 52
DESCRIPTION OF F&M BANCORP.................................. 53
LEGAL MATTERS............................................... 53
EXPERTS..................................................... 53
OTHER MATTERS............................................... 54
STOCKHOLDER PROPOSALS....................................... 54
WHERE YOU CAN FIND MORE INFORMATION......................... 55
FORWARD-LOOKING STATEMENTS.................................. 56
APPENDIX A: Agreement and Plan of Merger.................... A-1
APPENDIX B: Illustrative Calculations of Merger Elections... B-1
APPENDIX C: Opinion of Keefe, Bruyette & Woods, Inc......... C-1
iii
ADDITIONAL INFORMATION
This document incorporates important business and financial information
about Mercantile and F&M Bancorp from 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 incorporated
by reference in this document by requesting them in writing or by telephone from
Mercantile or F&M Bancorp at the following addresses:
Mercantile Bankshares Corporation F&M Bancorp
Two Hopkins Plaza, P.O. Box 1477 110 Thomas Johnson Drive
Baltimore, Maryland 21203 Frederick, Maryland 21702
Attn: David E. Borowy, Attn: Kaye A. Simmons,
Investor Relations Chief Financial Officer
Telephone: (410) 347-8039 Telephone: (888) 694-4170
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY , 2003
IN ORDER TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
See "Where You Can Find More Information" on page 55 for further
information.
iv
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: As a result of the merger your shares of F&M Bancorp common stock will be
converted into either cash, shares of common stock of Mercantile, or a
combination of cash and Mercantile common stock, subject to the election and
allocation procedures described in this document. To establish fixed pools
of cash and stock consideration, Mercantile and F&M Bancorp agreed that the
total consideration to be paid by Mercantile in the merger would yield a
value of $46.00 per share of F&M Bancorp common stock based upon an average
closing price of $35.85 per share of Mercantile common stock for the ten
trading days up to and including March 12, 2003, the day before the
announcement of the proposed merger, and an exchange ratio of 1.2831. The
parties agreed that Mercantile would pay cash for 25% of the F&M Bancorp
common stock, and issue shares of Mercantile common stock for 75% of the F&M
Bancorp common stock.
Q: CAN I ELECT THE TYPE OF CONSIDERATION THAT I WILL RECEIVE IN THE MERGER?
A: Yes. Subject to the allocation procedures described in this document, you
may elect to receive cash, shares of Mercantile common stock or a
combination of cash and Mercantile common stock in exchange for your shares
of F&M Bancorp common stock.
Q: WHAT IS THE AMOUNT OF CASH AND/OR THE NUMBER OF SHARES OF MERCANTILE COMMON
STOCK THAT I WILL RECEIVE FOR MY SHARES OF F&M BANCORP COMMON STOCK?
A: The actual amount of cash or number of shares of Mercantile common stock
that you will receive for each share of F&M Bancorp common stock you hold
cannot be determined until the third day immediately prior to the effective
time of the merger. Those amounts will be determined based on a formula set
forth in the merger agreement and described in this document. There is a
table on page 29 that sets forth the per share cash consideration and the
per share stock consideration that would be received by F&M Bancorp
stockholders based on a range of assumed average closing prices of
Mercantile common stock. An additional table is attached as Appendix B,
which gives examples of the amount of Mercantile common stock and cash that
may be received based on the election by a hypothetical F&M Bancorp
stockholder to receive all cash or all stock and on different average
closing prices of Mercantile common stock.
Q: IS THE VALUE OF THE PER SHARE CONSIDERATION THAT I RECEIVE EXPECTED TO BE
SUBSTANTIALLY EQUIVALENT REGARDLESS OF WHICH ELECTION I MAKE?
A: Yes. The formula that will be used to calculate the per share consideration
is designed to substantially equalize the value of the consideration to be
received for each share of F&M Bancorp common stock in the merger at the
time the calculation is made, regardless of whether you elect to receive
cash or stock.
Q: WHEN SHOULD I SEND IN MY STOCK CERTIFICATES? HOW DO I ELECT THE FORM OF
CONSIDERATION I PREFER TO RECEIVE?
A: Please DO NOT send in your stock certificates with your proxy card.
Approximately one month prior to the anticipated time of completion of the
merger or, as permitted by the merger agreement, at another date mutually
agreed to by Mercantile and F&M Bancorp you will receive a form of election
and other transmittal materials with instructions for making your election
as to the form of consideration you prefer to receive in the merger. YOU
SHOULD FOLLOW THE INSTRUCTIONS IN THE LETTER OF TRANSMITTAL AND FORM OF
ELECTION REGARDING HOW AND WHEN TO SURRENDER YOUR STOCK CERTIFICATES. The
available elections, election procedures and deadline for making elections
are described beginning on page 30 of this document. To make an election,
you will need to deliver the form of
v
election, any other transmittal materials and your stock certificates
according to the instructions set forth in the form of election to the
exchange agent before the election deadline.
Q: WILL I ALWAYS RECEIVE THE FORM OF CONSIDERATION I ELECT TO RECEIVE?
A: No. A fixed number of shares of Mercantile common stock will be issued and a
fixed amount of cash paid in the merger. Accordingly, there is no assurance
that you will receive the form of consideration that you elect with respect
to any or all shares of F&M Bancorp common stock you hold. If the elections
result in an oversubscription of the pool of cash or Mercantile common
stock, the exchange agent will allocate between cash and Mercantile common
stock following procedures described beginning on page 32 of this document.
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this document, just indicate on your proxy
card how you want to vote with respect to the proposal to approve the merger
agreement with Mercantile. Complete, sign, date and mail the proxy card in
the enclosed postage-paid return envelope as soon as possible so that your
shares will be represented and voted at the special meeting. The board of
directors of F&M Bancorp recommends that its stockholders vote in favor of
the merger.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY
CARD?
A: You may change your vote by revoking your proxy in any of the three
following ways:
- by sending a written notice to the secretary of F&M Bancorp prior to the
special meeting stating that you would like to revoke your proxy;
- by completing, signing and dating another proxy card and returning it by
mail prior to the special meeting; or
- by attending the special meeting and voting in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: If you do not provide your broker with instructions on how to vote your
shares held in "street name," your broker will not be permitted to vote your
shares on the merger proposal. You should therefore instruct your broker how
to vote your shares. Failure to instruct your broker how to vote your shares
will be the equivalent of voting against the merger proposal.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We presently expect to complete the merger in the third quarter of 2003.
However, we cannot assure you when or if the merger will occur. We must
first obtain the approval of F&M Bancorp stockholders at the special meeting
and the necessary regulatory approvals.
Q: WHO CAN I CALL WITH QUESTIONS ABOUT THE SPECIAL MEETING OR THE MERGER OR TO
OBTAIN ADDITIONAL INFORMATION ABOUT MERCANTILE AND F&M BANCORP?
A: F&M Bancorp stockholders may contact Kaye A. Simmons, Chief Financial
Officer of F&M Bancorp, at (888) 694-4170.
vi
SUMMARY
THIS BRIEF SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT. IT
DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. WE URGE YOU TO
READ THE ENTIRE DOCUMENT CAREFULLY AND THE OTHER DOCUMENTS TO WHICH WE REFER TO
FULLY UNDERSTAND THE MERGER. SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE
55. EACH ITEM IN THIS SUMMARY REFERS TO THE PAGE WHERE THAT SUBJECT IS DISCUSSED
IN MORE DETAIL.
INFORMATION ABOUT MERCANTILE AND F&M BANCORP (SEE PAGES 52 - 53).
Mercantile Bankshares Corporation
Two Hopkins Plaza, P.O. Box 1477
Baltimore, Maryland 21203
(410) 237-5900
Mercantile is a financial holding company and a bank holding company,
headquartered in Baltimore, Maryland, that engages in a general banking business
through Mercantile-Safe Deposit and Trust Company ("MSD&T") and 19 community
banks, and a mortgage banking company. Sixteen banks are located in Maryland,
three are in Virginia and one is in southern Delaware. The largest bank, MSD&T,
represents approximately 40% of total assets and operates 22 offices in Maryland
and one commercial office in Pennsylvania. Nearly all of Mercantile's
substantial trust operations and specialized corporate banking services are
provided by MSD&T.
Through its affiliated banks, Mercantile provides a full range of banking
services, including mortgage, trust and investment services designed to meet
substantially all of the financial needs of its customers. Mercantile commenced
operations in 1969. At March 31, 2003, it had total assets of approximately $11
billion, total loans of approximately $7.5 billion, total deposits of
approximately $8.5 billion and approximately $1.4 billion in stockholders'
equity. Mercantile's common stock trades on the Nasdaq National Market under the
symbol "MRBK." The deposits associated with its affiliated banks are insured by
the Federal Deposit Insurance Corporation.
F&M Bancorp
110 Thomas Johnson Drive
Frederick, Maryland 21702
(888) 694-4170
F&M Bancorp is a bank holding company that is headquartered in Frederick,
Maryland. Its operations are conducted through Farmers & Mechanics Bank, a
Maryland-chartered bank that provides banking, insurance and wealth management
services to businesses and to individuals primarily in Maryland. At March 31,
2003, F&M Bancorp had total assets of approximately $2.1 billion, total loans of
approximately $1.3 billion, total deposits of approximately $1.7 billion and
approximately $190 million in stockholders' equity. F&M Bancorp's common stock
trades on the Nasdaq National Market under the symbol "FMBN." The deposits of
Farmers & Mechanics Bank are insured by the Federal Deposit Insurance
Corporation.
F&M BANCORP WILL MERGE INTO MERCANTILE (SEE PAGE 17).
The merger agreement is attached as Appendix A to this document. You should read
the merger agreement because it is the legal document that governs the merger.
The merger agreement provides for the merger of F&M Bancorp with Mercantile,
with Mercantile continuing as the surviving corporation.
Subsequent to the completion of the merger, Mercantile's subsidiary bank,
Fredericktown Bank & Trust Company, will be merged into F&M Bancorp's subsidiary
bank, Farmers & Mechanics Bank. The 16 directors of Mercantile before the merger
will continue to serve as the directors of Mercantile after the merger. However,
upon completion of the merger, Mercantile's board of directors will be increased
by
1
two members and the vacancies will be filled by the appointment of two
individuals who are currently directors of F&M Bancorp.
F&M BANCORP WILL HOLD THE SPECIAL MEETING ON AUGUST 6, 2003 (SEE PAGE 15).
The special meeting of F&M Bancorp stockholders will be held at 10:00 a.m.,
local time, on August 6, 2003, at F&M Bancorp's corporate headquarters, 110
Thomas Johnson Drive, Frederick, Maryland. At the special meeting, F&M Bancorp
stockholders will be asked to vote to approve the merger agreement. You can vote
at the special meeting if you owned F&M Bancorp common stock at the close of
business on June 27, 2003. As of that date, there were shares of F&M
Bancorp common stock entitled to be voted at the special meeting. Approval of
the merger agreement requires that at least a majority of the outstanding shares
of F&M Bancorp common stock be voted in favor of the merger.
WHAT F&M BANCORP STOCKHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGE 27).
The merger agreement provides that at the effective time of the merger each
outstanding share of F&M Bancorp common stock will be converted into either a
number of shares of Mercantile common stock or an amount of cash, subject to the
election and allocation procedures described in this document. The actual amount
of cash or number of shares of Mercantile common stock that you will receive for
each share of F&M Bancorp common stock you hold cannot be determined until the
third day immediately prior to the effective time of the merger. Those amounts
will be determined based on a formula set forth in the merger agreement and
described under the heading "The Merger--Merger Consideration" beginning on page
27 of this document. The formula is designed to substantially equalize the value
of the consideration to be received for each share of F&M Bancorp common stock,
at the time the calculation is made, regardless of whether you elect to receive
cash or stock.
For example, if the average closing price of Mercantile common stock for the
applicable valuation period were $36.92, which was the closing price on
June 11, 2003, a F&M Bancorp stockholder receiving stock would receive
approximately 1.2526 shares of Mercantile common stock per share of F&M Bancorp
common stock having a value, based on such average closing price, of
approximately $49.63 per share, and a F&M Bancorp stockholder receiving cash
would receive approximately $49.63 in cash per share of F&M Bancorp common
stock, subject in each case to the allocation procedures described under the
heading "The Merger--Allocation" beginning on page 32 of this document. Based on
that average price (and assuming that none of the outstanding options to
purchase F&M Bancorp shares has been exercised), approximately 24.56% of the
outstanding shares of F&M Bancorp common stock would be exchanged for cash, and
approximately 75.44% would be exchanged for Mercantile common stock.
The following table sets forth, based on various average closing prices of
Mercantile common stock, the per share cash consideration and the per share
stock consideration, as well as the value of such stock consideration based on
the assumed average closing prices. The table also shows the percentage of
outstanding shares of F&M Bancorp common stock that would be converted into
Mercantile common stock and cash based on such average closing prices. The table
is based on the assumption that no F&M Bancorp options have been exercised prior
to the closing of the merger and the number of exchangeable shares is
10,740,357. To the extent that the number of shares of F&M Bancorp common stock
outstanding increases as a result of the exercise of options, the number of
exchangeable shares will increase and the transaction value will increase. Each
additional exchangeable
2
share resulting from the exercise of options will increase the transaction value
by 0.9623 shares and $11.50 in cash.
PER SHARE PERCENTAGE OF OUTSTANDING
STOCK SHARES OF F&M BANCORP
AVERAGE CONSIDERATION COMMON
CLOSING PRICE (SHARES OF STOCK TO RECEIVE
DURING TRANSACTION MERCANTILE VALUE OF PER PER SHARE -----------------------------
VALUATION VALUE COMMON SHARE STOCK CASH STOCK CASH
PERIOD (IN 000S) STOCK) CONSIDERATION CONSIDERATION CONSIDERATION CONSIDERATION
--------------------- ----------- ------------- ------------- ------------- ------------- -------------
$40.00 $536,943 1.2498 $49.9930 $49.9930 77.0% 23.0%
39.50 531,775 1.2535 49.5118 49.5118 76.8 23.2
39.00 526,607 1.2572 49.0307 49.0307 76.5 23.5
38.50 521,439 1.2610 48.5495 48.5495 76.3 23.7
38.00 516,271 1.2650 48.0684 48.0684 76.1 23.9
37.50 511,103 1.2690 47.5872 47.5872 75.8 24.2
37.00 505,936 1.2731 47.1060 47.1060 75.6 24.4
36.50 500,768 1.2774 46.6249 46.6249 75.3 24.7
36.00 495,600 1.2818 46.1437 46.1437 75.1 24.9
35.50 490,432 1.2863 45.6625 45.6625 74.8 25.2
35.00 485,264 1.2909 45.1814 45.1814 74.5 25.5
34.50 480,096 1.2957 44.7002 44.7002 74.3 25.7
34.00 474,928 1.3006 44.2191 44.2191 74.0 26.0
33.50 469,761 1.3056 43.7379 43.7379 73.7 26.3
33.00 464,593 1.3108 43.2567 43.2567 73.4 26.6
32.50 459,425 1.3162 42.7756 42.7756 73.1 26.9
32.00 454,257 1.3217 42.2944 42.2944 72.8 27.2
31.50 449,089 1.3274 41.8132 41.8132 72.5 27.5
31.00 443,921 1.3333 41.3321 41.3321 72.2 27.8
30.50 438,753 1.3394 40.8509 40.8509 71.8 28.2
30.00 433,586 1.3457 40.3698 40.3698 71.5 28.5
Based on the $34.21 closing price of Mercantile common stock on March 12,
2003, the day prior to the announcement of the proposed merger, the merger had a
value on that date of approximately $44.42 per F&M Bancorp share. Based on the
$39.62 closing price of Mercantile common stock on June 11, 2003, the merger had
a value of approximately $49.63 per F&M Bancorp share.
An additional table is attached as Appendix B, which gives examples of the
Mercantile common stock and cash that may be received based on the election by a
hypothetical F&M Bancorp stockholder to receive all cash or all stock and on
different average closing prices of Mercantile common stock.
NO ASSURANCE CAN BE GIVEN THAT THE CURRENT FAIR MARKET VALUE OF MERCANTILE
COMMON STOCK WILL BE EQUIVALENT TO THE FAIR MARKET VALUE OF MERCANTILE COMMON
STOCK ON THE DATE THAT STOCK IS RECEIVED BY AN F&M BANCORP STOCKHOLDER OR AT ANY
OTHER TIME. THE FAIR MARKET VALUE OF MERCANTILE COMMON STOCK RECEIVED BY AN F&M
BANCORP STOCKHOLDER MAY BE GREATER OR LESS THAN THE CURRENT FAIR MARKET VALUE OF
MERCANTILE DUE TO NUMEROUS MARKET FACTORS.
YOU MAY ELECT TO RECEIVE CASH OR STOCK CONSIDERATION (SEE PAGE 30).
You may elect to receive cash, shares of Mercantile common stock or a
combination of cash and Mercantile common stock in exchange for your shares of
F&M Bancorp common stock. However, since Mercantile is issuing a fixed number of
shares of Mercantile common stock and paying a fixed amount of cash, you cannot
be certain of receiving the form of consideration that you elect with respect to
all of your shares of F&M Bancorp common stock. If the elections result in an
oversubscription of the pool of cash or Mercantile common stock, certain
procedures for allocating cash and Mercantile common stock will be followed by
the exchange agent. See "The Merger--Allocation" beginning on page 32 of this
document.
3
Approximately one month prior to the anticipated time of completion of the
merger or, as permitted by the merger agreement, at such other time as may be
mutually agreed to by Mercantile and F&M Bancorp you will receive a form of
election and other transmittal materials with instructions for making your
election as to the form of consideration you prefer to receive in the merger.
The available elections, election procedures and deadline for making elections
are described under the heading "The Merger--Election Procedure" beginning on
page 30 of this document. If you do not make an election by the election
deadline, you will be deemed to have made an election to receive Mercantile
common stock, subject to the allocation procedures described in this document.
See "The Merger--Allocation" beginning on page 32 of this document.
F&M BANCORP'S REASONS FOR THE MERGER (SEE PAGE 19).
In reaching its determination to approve the merger and adopt the merger
agreement, the F&M Bancorp board consulted with F&M Bancorp's management and its
financial and legal advisors, and considered a number of factors. The following
factors are certain of those considered by the F&M Bancorp board:
- the current and prospective economic and competitive environment facing
the financial services industry generally, and F&M Bancorp in particular;
- the value to be received by holders of F&M Bancorp common stock pursuant
to the merger agreement in relation to the historical trading prices of
F&M Bancorp common stock;
- the substantial increase in the pro forma dividends and earnings per share
of F&M Bancorp stockholders receiving Mercantile common stock pursuant to
the merger (see "Comparative Per Share Data" on page 9);
- the information presented by Keefe, Bruyette & Woods, Inc. ("KBW"), F&M
Bancorp's financial advisor, to the F&M Bancorp board with respect to the
merger and the opinion of KBW that, as of the date of that opinion, the
merger consideration was fair to the holders of F&M Bancorp common stock
from a financial point of view (see "The Merger--Opinion of F&M Bancorp's
Financial Advisor" on page 20);
- the F&M Bancorp board's review, based in part on the presentation of its
financial advisor and F&M Bancorp's management, of the business,
operations, financial condition and earnings of Mercantile on an
historical and a prospective basis and of the combined company on a pro
forma basis and the historical stock price performance and liquidity of
Mercantile common stock, and the resulting relative interests of F&M
Bancorp stockholders and Mercantile stockholders in the common equity of
the combined company;
- the expectation that the merger would constitute a reorganization under
Section 368(a) of the Internal Revenue Code (see "The Merger--Material
United States Federal Income Tax Consequences" on page 33); and
- the alternative strategic courses available to F&M Bancorp, including
remaining independent and exploring other potential business combination
transactions.
Additional factors are discussed under the heading "The Merger--Reasons of F&M
Bancorp for the Merger" beginning on page 19 of this document.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 33).
Neither F&M Bancorp nor Mercantile is required to complete the merger unless it
receives an opinion from its respective counsel that the merger will be treated
for United States federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. Assuming such opinions
are received, we expect that for United States federal income tax purposes
4
F&M Bancorp stockholders generally will not recognize any gain or loss on the
conversion of shares of F&M Bancorp common stock into shares of Mercantile
common stock (although the receipt of any cash may be taxable). This tax
treatment may not apply to some F&M Bancorp stockholders. Determining the actual
United States federal income tax consequences of the merger to you may be
complex and will depend on your specific situation and on factors not within our
control. You should consult your tax advisor for a full understanding of the
merger's tax consequences to you.
F&M BANCORP'S BOARD OF DIRECTORS RECOMMENDS STOCKHOLDER APPROVAL OF THE MERGER
(SEE PAGE 16).
F&M Bancorp's board of directors believes that the merger is in the best
interests of the F&M Bancorp stockholders and has unanimously approved the
merger agreement. F&M Bancorp's board of directors recommends that F&M Bancorp
stockholders vote "FOR" approval of the merger agreement.
F&M BANCORP'S FINANCIAL ADVISOR SAYS THE MERGER CONSIDERATION IS FAIR TO F&M
BANCORP STOCKHOLDERS (SEE PAGE 20).
KBW has served as financial advisor to F&M Bancorp in connection with the merger
and has given an opinion to F&M Bancorp's board of directors that, as of
March 12, 2003 (the date F&M Bancorp's board of directors voted on the merger),
the consideration Mercantile will pay for the F&M Bancorp common stock is fair
to F&M Bancorp stockholders from a financial point of view. A copy of the
opinion delivered by KBW is attached to this document as Appendix C. F&M Bancorp
stockholders should read the opinion completely to understand the assumptions
made, matters considered and limitations of the review undertaken by KBW in
providing its opinion.
F&M BANCORP STOCKHOLDERS HAVE NO APPRAISAL RIGHTS (SEE PAGE 48).
F&M Bancorp stockholders will not have any appraisal rights in connection with
the merger.
F&M BANCORP OFFICERS AND DIRECTORS HAVE SOME INTERESTS IN THE MERGER THAT ARE
DIFFERENT THAN OR IN ADDITION TO THEIR INTERESTS AS STOCKHOLDERS (SEE PAGE 36).
In addition to their interests as stockholders, the directors and executive
officers of F&M Bancorp may have interests in the merger that are different from
or in addition to your interests. These interests relate to or arise from, among
other things:
- the retention of certain of the directors of F&M Bancorp as directors of
Mercantile or a subsidiary bank of Mercantile and the directors' receipt
of compensation for their service;
- the establishment by the surviving bank of an "advisory board" on which
each of the current members of the F&M Bancorp board of directors will be
invited to serve for an initial four-year term and the directors' receipt
of compensation for their service;
- the potential receipt of change in control, severance and bonus payments;
- the receipt of cash payments by certain executive officers in respect of
foregone option grants; and
- the entitlement of each executive officer of F&M Bancorp to receive
reimbursement for tax advice and financial planning.
F&M Bancorp's board of directors was aware of these interests and took them into
account in its decision to approve the merger agreement. For information
concerning the dollar amounts associated with these interests, please see the
discussion on pages 36--37 under the caption "The Merger--Interests of Certain
Persons in the Merger." Certain officers of F&M Bancorp are expected to be
appointed as officers of the surviving bank upon completion of the merger and
receipt of all required approvals. As employees of the surviving bank, they will
be eligible for certain employee benefits as
5
discussed on pages 35--36 under the caption "The Merger--Employee Benefit Plans
and Existing Agreements."
As of the record date, the directors and executive officers of F&M Bancorp and
their affiliates owned and were entitled to vote shares of F&M
Bancorp common stock, which represents approximately % of the outstanding
shares of F&M Bancorp common stock. Each of them has indicated to us that they
intend to vote "FOR" approval of the merger agreement. As of the record date,
neither Mercantile nor any of its directors or executive officers or their
affiliates held any shares of F&M Bancorp common stock. Holders of a majority of
the outstanding shares of F&M Bancorp common stock must vote in favor of the
merger in order for it to be approved.
THE MERGER IS EXPECTED TO OCCUR IN THE THIRD QUARTER OF 2003 (SEE PAGE 40).
The merger of Mercantile and F&M Bancorp will occur shortly after all of the
conditions to its completion have been satisfied or waived. Currently, we
anticipate that the merger will occur in the third quarter of 2003. However, we
cannot assure you when or if the merger will occur. We must first obtain the
approval of F&M Bancorp stockholders at the special meeting and the necessary
regulatory approvals.
THE MERGER WILL BE ACCOUNTED FOR UNDER THE PURCHASE METHOD OF ACCOUNTING (SEE
PAGE 49).
The merger will be accounted for under the purchase method of accounting, as
such term is used under accounting principles generally accepted in the United
States of America. A comparison of the most recent annual financial statements
of Mercantile and F&M Bancorp indicates that Mercantile's investment in F&M
Bancorp will represent less than 20% of Mercantile's assets.
COMPLETION OF THE MERGER IS SUBJECT TO CERTAIN CONDITIONS (SEE PAGE 41).
Completion of the merger is subject to a number of conditions, including the
approval of the merger agreement by F&M Bancorp's stockholders, and the receipt
of regulatory consents and approvals that are necessary to permit completion of
the merger. Certain conditions to the merger may be waived by Mercantile or F&M
Bancorp, as applicable.
WE MAY NOT COMPLETE THE MERGER WITHOUT ALL REQUIRED REGULATORY APPROVALS (SEE
PAGE 45).
The merger requires the consent of the Board of Governors of the Federal Reserve
System, the Maryland Commissioner of Financial Regulation and the Virginia
Bureau of Financial Institutions. We will make filings and notifications for
these purposes. We expect to obtain all necessary regulatory approvals, although
we cannot be certain if or when we will obtain them.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 45).
Mercantile and F&M Bancorp can mutually agree to abandon the merger (and
terminate the merger agreement) at any time prior to the time the merger is
completed, even after stockholder approval. Also, either F&M Bancorp or
Mercantile can generally decide, without the consent of the other, to abandon
the merger in a number of situations, including:
- The other party materially breaches a representation, warranty or covenant
in the merger agreement and the breach is not cured within 30 days
following receipt by the breaching party of written notice of the breach
(or the breach, by its nature, cannot be cured prior to the closing).
- The merger has not been completed by December 31, 2003.
- F&M Bancorp stockholder approval is not obtained at the special meeting.
6
- A regulatory authority denies a necessary approval or issues an order
preventing the merger.
Mercantile can terminate the merger agreement if:
- F&M Bancorp's board of directors withdraws or modifies in a manner adverse
to Mercantile its recommendation of the merger or the merger agreement; or
- F&M Bancorp's board of directors recommends the approval or adoption of
another acquisition proposal.
Subject to certain conditions, F&M Bancorp's board of directors may terminate
the merger agreement if it determines that it has received a superior
acquisition proposal from a third party and it is necessary to terminate the
merger in order to comply with its fiduciary duties to F&M Bancorp and its
stockholders. One such condition is that the merger may be so terminated by F&M
Bancorp only after the fifth day following Mercantile's receipt of written
notice advising Mercantile that the board of directors of F&M Bancorp is
prepared to accept a superior proposal, and only if, during such five-day
period, F&M Bancorp negotiates in good faith with Mercantile to make such
adjustments in the terms and conditions of the merger agreement as would enable
F&M Bancorp to proceed with the merger on such adjusted terms. In any event, F&M
Bancorp may not so terminate the merger agreement unless concurrently with the
termination of the merger agreement F&M Bancorp enters into an acquisition
agreement related to a superior proposal.
F&M Bancorp also may terminate the merger agreement if (1) the average closing
price of Mercantile common stock for the 20 consecutive trading days ending on
the third day immediately prior to the effective date of the merger is less than
$27.37 and (2) Mercantile's stock price has underperformed the NASDAQ Bank Index
by 20% or more since March 12, 2003. This is subject to Mercantile's right to
increase the merger consideration to the extent necessary to cause either of
these two conditions to be deemed not to exist. See "The Merger--Termination of
the Merger Agreement--General" beginning on page 45 of this document.
F&M BANCORP MUST PAY MERCANTILE A TERMINATION FEE UNDER CERTAIN CIRCUMSTANCES
(SEE PAGE 47).
Under the merger agreement, upon the occurrence of specified events, F&M Bancorp
must pay Mercantile a termination fee of $20 million. Generally, F&M Bancorp
would have to pay the termination fee if Mercantile terminates the merger
agreement because F&M Bancorp withdraws or adversely modifies its recommendation
of the merger or the merger agreement, or if F&M Bancorp terminates the merger
agreement in order to accept a superior proposal. F&M Bancorp also would have to
pay the termination fee if a third party makes an acquisition proposal with
respect to F&M Bancorp and thereafter both of the following occur:
- the merger agreement is terminated by mutual agreement, or by Mercantile
or F&M Bancorp because of failure to complete the merger by December 31,
2003, and
- within twelve months of terminating the merger agreement either F&M
Bancorp or Farmers & Mechanics Bank enters into an agreement providing for
or consummates an acquisition proposal.
F&M Bancorp agreed to this termination fee arrangement in order to induce
Mercantile to enter into the merger agreement. This arrangement could have the
effect of discouraging other companies from trying to acquire F&M Bancorp.
EFFECT OF MERGER ON RIGHTS OF F&M BANCORP STOCKHOLDERS (SEE PAGE 49).
The rights of F&M Bancorp stockholders are governed by Maryland law, as well as
F&M Bancorp's articles of incorporation and bylaws. After completion of the
merger, the rights of the former F&M
7
Bancorp stockholders receiving Mercantile common stock in the merger also will
be governed by Maryland law, as well as Mercantile's articles of incorporation
and bylaws. Although Mercantile's articles of incorporation and bylaws are
similar in many ways to F&M Bancorp's articles of incorporation and bylaws,
there are some substantive and procedural differences that will affect the
rights of such F&M Bancorp stockholders.
SHARE INFORMATION AND MARKET PRICES (SEE PAGE 9).
The following table sets forth the closing sale price per share of Mercantile
common stock and F&M Bancorp common stock, and the equivalent per share price
for F&M Bancorp common stock, as of March 12, 2003 (the last full trading day
before the public announcement of the merger). The Equivalent Price Per Share
column is calculated by valuing the Mercantile common stock at $34.21 per share,
multiplying this value by the 10,335,714 shares of Mercantile common stock being
issued in the merger, and adding to this amount the estimated cash consideration
of $123,514,000. This total consideration is then divided by the total number of
shares of F&M Bancorp common stock outstanding as of March 12, 2003 (10,740,357
shares).
MERCANTILE F&M BANCORP EQUIVALENT PER
COMMON STOCK COMMON STOCK SHARE DATA
------------ ------------ --------------
March 12, 2003....................................... $34.21 $31.00 $44.42
The market prices of both Mercantile and F&M Bancorp common stock will fluctuate
prior to the merger. You should obtain current market quotations for Mercantile
common stock and F&M Bancorp common stock.
8
COMPARATIVE STOCK PRICES AND DIVIDENDS
Mercantile's common stock is quoted on the Nasdaq National Market under the
symbol "MRBK." F&M Bancorp's common stock is quoted on the Nasdaq National
Market under the symbol "FMBN." The following table sets forth, for the periods
indicated, the high and low sales prices per share for Mercantile and F&M
Bancorp common stock as reported on the Nasdaq National Market, and the cash
dividends declared per share for Mercantile and F&M Bancorp.
MERCANTILE F&M BANCORP
------------------------------ ------------------------------
CASH CASH
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
-------- -------- -------- -------- -------- --------
For the period April 1, 2003 through
June 11, 2003................................... $41.30 $33.90 $0.33 $50.85 $43.87 $0.29
Quarter Ended March 31, 2003...................... $40.47 $30.16 $0.30 $44.94 $28.45 $0.29
For year 2002..................................... $45.36 $32.07 $1.18 $35.66 $25.05 $1.12
Quarter Ended:
December 31, 2002............................... 40.39 32.60 0.30 35.00 30.75 0.28
September 30, 2002.............................. 41.40 32.07 0.30 35.27 26.39 0.28
June 30, 2002................................... 44.80 38.89 0.30 35.66 26.20 0.28
March 31, 2002.................................. 45.36 41.80 0.28 28.85 25.05 0.28
For year 2001..................................... $44.50 $33.63 $1.10 $29.99 $19.75 $1.08
Quarter Ended:
December 31, 2001............................... 43.41 35.60 0.28 28.00 23.70 0.27
September 30, 2001.............................. 43.94 35.73 0.28 29.59 21.90 0.27
June 30, 2001................................... 40.10 35.44 0.28 29.99 24.50 0.27
March 31, 2001.................................. 44.50 33.63 0.26 27.06 19.75 0.27
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 year ended December 31, 2002 and the three months
ended March 31, 2003. In presenting the comparative pro forma information for
the periods shown we assumed that we had been combined throughout those periods.
The merger will be accounted for under the "purchase" method of 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 operating results of F&M Bancorp will be reflected in
Mercantile's consolidated financial statements from and after the date the
merger is consummated.
The information listed as "equivalent pro forma" for F&M Bancorp was
obtained by multiplying the pro forma amounts by a 1.2526 exchange ratio. This
is the exchange ratio that would result assuming that a F&M Bancorp stockholder
is receiving 100% of his merger consideration in the form of Mercantile common
stock. This exchange ratio calculation utilizes an assumed valuation of
Mercantile common stock at the June 11, 2003 closing price of $39.62 per share,
multiplying this value by the 10,335,714 shares of Mercantile common stock
assumed to be issued in the merger, and adding to this amount the estimated cash
consideration of $123,514,000. This total consideration is then divided by the
total number of shares of F&M Bancorp common stock outstanding at March 13, 2003
(10,740,357 shares). The resulting amount is then divided by the June 11, 2003
closing price of $39.62
9
to determine the exchange ratio. The calculations are based on the assumption
that none of the outstanding options to purchase F&M Bancorp stock has been
exercised.
We expect that we will incur reorganization and restructuring expenses as a
result of combining our companies. While we hope that the merger also will
provide the new company with financial benefits that include reduced operating
expenses and the opportunity to earn more revenue, the pro forma information
does not reflect these expenses or benefits and does not attempt to predict or
suggest future results.
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 F&M Bancorp's tangible and identifiable intangible assets and
liabilities as of the date the merger is completed. In addition, estimates of
merger-related charges are subject to final decisions related to combining the
companies. Any change in the fair value of the net assets of F&M Bancorp will
change the amount of the purchase price allocable to goodwill. Additionally,
changes to F&M Bancorp's stockholders' equity, including net income and changes
in the market value of Mercantile's common stock 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. The information in the following table is based
on, and should be read together with, the historical financial information that
we have included in this document or presented in our prior filings with the
Securities and Exchange Commission, which are incorporated into this document by
reference. See "Where You Can Find More Information" on page 55.
COMPARATIVE PER COMMON SHARE DATA
AS OF/FOR THE
THREE MONTHS AS OF/FOR THE
ENDED YEAR ENDED
MARCH 31, 2003 DECEMBER 31, 2002
--------------- ------------------
EARNINGS PER COMMON SHARE:
Basic
Mercantile historical....................................... $ 0.71 $ 2.74
F&M Bancorp historical...................................... 0.67 2.26
Pro forma combined.......................................... 0.69 2.60
Equivalent pro forma for one F&M Bancorp common share (1)... 0.86 3.26
Diluted
Mercantile historical....................................... 0.71 2.72
F&M Bancorp historical...................................... 0.66 2.25
Pro forma combined.......................................... 0.69 2.59
Equivalent pro forma for one F&M Bancorp common share (1)... 0.86 3.24
CASH DIVIDENDS DECLARED PER COMMON SHARE:
Mercantile historical....................................... 0.30 1.18
F&M Bancorp historical...................................... 0.29 1.12
Pro forma combined.......................................... 0.30 1.18
Equivalent pro forma for one F&M Bancorp common share (1)... 0.38 1.48
SHAREHOLDERS' EQUITY PER COMMON SHARE:
Mercantile historical....................................... 19.62 19.24
F&M Bancorp historical...................................... 17.63 17.17
Pro forma combined.......................................... 22.18 21.84
Equivalent pro forma for one F&M Bancorp common share (1)... 27.78 27.36
------------------------
(1) The equivalent pro forma represents the pro forma combined amount multiplied
by the exchange ratio of 1.2526.
10
SELECTED FINANCIAL DATA
The following tables present unaudited selected financial information of
Mercantile and F&M Bancorp. The historical information is derived from the
historical financial statements of Mercantile and F&M Bancorp. In all cases, the
financial information for each of Mercantile and F&M Bancorp is presented on a
consolidated basis.
The information in the following tables should be read together with the
historical financial information that Mercantile and F&M Bancorp have presented
in their prior filings with the Securities and Exchange Commission. Mercantile
and F&M Bancorp have incorporated this material into this document by reference
to those other filings. See "Where You Can Find More Information" on page 55. A
comparison of the most recent annual financial statements of Mercantile and F&M
Bancorp indicates that Mercantile's investment in F&M Bancorp will represent
less than 20% of Mercantile's assets.
MERCANTILE BANKSHARES CORPORATION
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED AT OR FOR THE
MARCH 31, YEARS ENDED DECEMBER 31,
------------------------ ---------------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
----------- ---------- ----------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets......... $11,018,621 $9,988,341 $10,790,376 $9,928,786 $8,938,030 $7,895,024 $7,609,563
Loans................ 7,446,553 6,941,615 7,312,027 6,906,246 6,693,294 5,712,130 5,195,467
Deposits............. 8,495,483 7,491,665 8,260,940 7,447,372 6,796,541 5,925,083 5,958,346
Long-term debt....... 290,576 269,201 287,214 269,437 92,547 82,683 40,934
Shareholders'
equity............. 1,352,294 1,245,542 1,324,358 1,230,206 1,173,301 974,040 999,359
STATEMENTS OF INCOME
DATA:
Net interest
income............. $ 111,126 $ 107,188 $ 441,804 $ 418,241 $ 409,385 $ 369,086 $ 353,365
Noninterest
income............. 37,853 34,839 143,750 145,490 125,541 121,991 108,693
Noninterest
expense............ 69,781 66,191 272,608 263,959 243,505 230,420 219,005
Net income........... 48,986 46,175 190,238 181,295 175,230 157,737 147,128
PER COMMON SHARE
DATA:
Net income, basic.... $ 0.71 $ 0.66 $ 2.74 $ 2.57 $ 2.53 $ 2.27 $ 2.05
Net income,
diluted............ 0.71 0.66 2.72 2.55 2.51 2.25 2.04
Cash dividends
declared........... 0.30 0.28 1.18 1.10 1.02 0.94 0.86
Book value (at end of
period)............ 19.62 17.82 19.24 17.63 16.50 14.19 14.07
11
F&M BANCORP
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED AT OR FOR THE
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets........... $2,098,469 $1,883,523 $2,094,986 $1,881,434 $1,795,244 $1,719,334 $1,620,490
Loans.................. 1,317,789 1,170,385 1,305,348 1,162,225 1,220,130 1,114,734 991,756
Deposits............... 1,649,633 1,532,689 1,595,139 1,516,068 1,364,032 1,314,073 1,285,261
Long-term debt 77,918 63,420 78,023 63,444 15,790 100,578 94,246
Shareholders' equity... 189,717 168,993 184,256 167,425 158,036 143,820 148,187
STATEMENTS OF INCOME
DATA:
Net interest income.... $ 19,473 $ 18,023 $ 75,648 $ 68,114 $ 65,036 $ 61,757 $ 60,393
Noninterest income..... 8,331 8,013 31,213 30,712 28,627 24,988 26,289
Noninterest expense.... 16,696 16,777 69,247 65,040 62,632 67,208 63,393
Net income............. 7,199 5,777 24,459 21,121 19,324 13,063 14,633
PER COMMON SHARE DATA:
Net income, basic...... $ 0.67 $ 0.53 $ 2.26 $ 1.93 $ 1.76 $ 1.19 $ 1.34
Net income, diluted.... 0.66 0.53 2.25 1.92 1.75 1.18 1.33
Cash dividends
declared............. 0.29 0.28 0.84 1.09 1.08 0.97 0.92
Book value (at end of
period).............. 17.63 15.57 17.17 15.41 14.35 13.07 13.58
12
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS DOCUMENT, INCLUDING
THE MATTERS ADDRESSED UNDER THE HEADING "FORWARD-LOOKING STATEMENTS" BEGINNING
ON PAGE 56, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY WHEN EVALUATING
THIS TRANSACTION AND THE VALUE OF MERCANTILE COMMON STOCK TO BE RECEIVED IN THIS
TRANSACTION.
BECAUSE THE MARKET PRICE OF MERCANTILE COMMON STOCK MAY FLUCTUATE, YOU CANNOT BE
SURE OF THE VALUE OF THE MERGER CONSIDERATION THAT YOU WILL RECEIVE.
Upon completion of the merger, each share of F&M Bancorp common stock will
be converted into merger consideration consisting of shares of Mercantile common
stock or cash, pursuant to the terms of the merger agreement. The value of the
merger consideration to be received by F&M Bancorp stockholders will be based on
the average closing price of Mercantile common stock during the ten trading day
valuation period ending on the third calendar day prior to the completion of the
merger. This average price may vary from the price of Mercantile common stock on
the date the merger was announced, on the date that this document is mailed to
F&M Bancorp stockholders, or on the date of the special meeting of F&M Bancorp
stockholders. Because Mercantile is issuing a fixed amount of shares as part of
the merger consideration, any change in the price of Mercantile common stock
prior to completion of the merger will affect the value of the merger
consideration that you will receive upon completion of the merger. Stock price
changes may result from a variety of factors, including general market and
economic conditions, changes in our respective businesses, operations and
prospects, and regulatory considerations. Many of these factors are beyond our
control.
Accordingly, at the time of the F&M Bancorp special meeting, you will not be
able to determine the value of the cash consideration or the number of any
shares of Mercantile stock you would receive upon completion of the merger.
THE MARKET PRICE OF THE SHARES OF MERCANTILE COMMON STOCK MAY BE AFFECTED BY
FACTORS DIFFERENT FROM THOSE AFFECTING THE SHARES OF F&M BANCORP COMMON STOCK.
Upon completion of the merger, certain holders of F&M Bancorp common stock
will become holders of Mercantile common stock. Some of Mercantile's current
businesses and markets differ from those of F&M Bancorp and, accordingly, the
results of operations of Mercantile after the merger may be affected by factors
different from those currently affecting the results of operations of F&M
Bancorp. For a discussion of the businesses of Mercantile and F&M Bancorp and of
certain factors to consider in connection with those businesses, see the
documents incorporated by reference into this document and referred to under
"Where You Can Find More Information" on page 55.
YOU MAY NOT RECEIVE THE FORM OF MERGER CONSIDERATION THAT YOU ELECT.
A fixed number of shares of Mercantile common stock will be issued and a
fixed amount of cash paid in the merger. Accordingly, there is no assurance that
a holder of F&M Bancorp common stock will receive the form of consideration that
the holder elects with respect to any or all shares of F&M Bancorp common stock
held by such stockholder. In the merger, Mercantile will issue approximately
10.3 million shares of common stock and will pay approximately $123.5 million in
cash (in each case subject to upward adjustment in the event any shares of F&M
Bancorp common stock are issued pursuant to the exercise of outstanding F&M
Bancorp stock options). If elections are made by F&M Bancorp stockholders that
would result in an oversubscription of the pool of cash or Mercantile common
stock, either those electing to receive cash or those electing to receive
Mercantile common stock will have the consideration of the type they selected
reduced by a pro rata amount and will receive a portion of their consideration
in the form that they did not elect to receive.
Accordingly, there is a risk that you will receive a portion of the merger
consideration in the form that you do not elect, which could result in, among
other things, tax consequences that differ from those that would have resulted
had you received the form of consideration you elected (including with
13
respect to the recognition of taxable gain to the extent cash is received). See
"The Merger--Material United States Federal Income Tax Consequences" beginning
on page 33.
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 Mercantile and F&M
Bancorp. Mercantile's management originally estimated that approximately
$26.5 million of annual pre-tax (or $16.0 million after-tax) cost savings would
be realized from the merger beginning in the fourth quarter 2003. Mercantile's
management estimated at the time the proposed merger was announced that
approximately $5.35 million of cost savings will be derived from consolidation
of bank branches; $5.0 million will be derived from consolidation of technology
and operations; $4.65 million will be derived from business line consolidation;
and $11.50 million will be derived from corporate overhead savings. While we
continue to believe these cost savings estimates are achievable as of the date
of this document, it is possible that the potential cost savings could turn out
to be more difficult to achieve than we anticipated. Our cost savings estimates
also depend on our ability to combine the businesses of Mercantile and F&M
Bancorp in a manner that permits those cost 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, OR COULD RESULT IN THE LOSS OF CUSTOMERS.
Mercantile and F&M Bancorp 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 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. Although a majority of the customers of F&M Bancorp's
subsidiary bank, Farmers & Mechanics Bank, will continue to have their accounts
with Farmers & Mechanics Bank, as the bank surviving the bank merger, some
customers' accounts will be transferred to a Mercantile affiliate bank serving
the market area where the customer is located. Certain customers' branches may
be consolidated with other branches in the market area resulting in new office
locations and new banking associates serving such customers. There can be no
assurance that customers will readily accept changes to their banking
arrangements after the merger.
BECAUSE OF THE CLOSING CONDITIONS IN THE MERGER AGREEMENT AND THE POSSIBILITY
THAT EITHER MERCANTILE OR F&M BANCORP MAY TERMINATE THE MERGER AGREEMENT IN
SPECIFIC INSTANCES, THERE CAN BE NO ASSURANCE THE MERGER WILL BE COMPLETED.
The completion of the merger is subject to the satisfaction or waiver of a
number of closing conditions. If Mercantile and F&M Bancorp are unable to
satisfy all the conditions or such conditions are otherwise not satisfied,
either party will not be required to complete the merger.
MERCANTILE HAS VARIOUS ANTITAKEOVER MEASURES THAT COULD IMPEDE THE TAKEOVER OF
MERCANTILE.
Mercantile has various antitakeover measures in place, some of which are
listed below. Any one or more of these measures may impede the takeover of
Mercantile without the approval of Mercantile's board of directors and may
prevent you from taking part in a transaction in which you could realize a
premium over the current market price of Mercantile common stock.
The antitakeover measures include:
- a stockholders' rights plan which, among other things, provides for the
dilution of the Mercantile common stock holdings of a person who, together
with any affiliate of the person, acquires beneficial ownership of 10% or
more of the outstanding Mercantile common stock; and
- various charter provisions providing for, among other things, a
"staggered" board of directors, fixing the number of directors only by
vote of directors and filling vacancies on the board only by the vote of
the remaining directors, and certain voting requirements in connection
with removal of directors and calling special meetings of stockholders.
14
THE F&M BANCORP SPECIAL STOCKHOLDERS' MEETING
The F&M Bancorp board is providing this document to you in connection with
its solicitation of proxies for use at the special meeting of F&M Bancorp
stockholders and at any adjournments or postponements of the special meeting.
The special meeting will be held at F&M Bancorp's corporate headquarters, 110
Thomas Johnson Drive, Frederick, Maryland, at 10:00 a.m. on August 6, 2003. At
the special meeting, you will be asked to consider and vote to approve the
merger agreement and the consummation of the transactions contemplated thereby,
including the merger.
Mercantile is also providing this document to you as a prospectus in
connection with the offer and sale by Mercantile of its shares of common stock
as a result of the proposed merger.
Your vote is important. Please complete, date and sign the enclosed proxy
card and return it in the postage prepaid envelope provided. If your shares are
held in "street name," you should instruct your broker how to vote by following
the directions provided by your broker.
RECORD DATE
The F&M Bancorp board has fixed the close of business on June 27, 2003 as
the record date for determining the F&M Bancorp stockholders entitled to receive
notice of and to vote at the special meeting. As of the record date, there were
issued and outstanding shares of F&M Bancorp common stock held by
approximately holders of record. Only holders of record of F&M Bancorp
common stock as of the record date are entitled to notice of and to vote at the
special meeting.
QUORUM; EFFECT OF ABSTENTIONS
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares entitled to vote is necessary to constitute a
quorum at the special meeting. Abstentions will be counted solely for the
purpose of determining whether a quorum is present.
Because approval of the merger agreement requires the affirmative vote of
the holders of a majority of the outstanding shares of F&M Bancorp common stock
entitled to vote thereon, abstentions will have the same effect as a vote
against the merger agreement. The proposal to approve the merger agreement is a
"non-discretionary" item, meaning that brokerage firms may not vote shares in
their discretion on behalf of a client if the client has not given voting
instructions.
PROXIES
SOLICITATION. Proxies in the form included in the proxy card accompanying
this document are being solicited by the F&M Bancorp board. Shares represented
by properly executed proxies which are received in time and not revoked will be
voted in accordance with the instructions indicated on the proxies. If no
instructions are indicated, those proxies will be voted "FOR" approval of the
merger agreement and any other matter that may come before the special meeting,
including a motion to adjourn or postpone the special meeting to another time
and/or place for the purpose of soliciting additional proxies or otherwise.
However, no proxy with instructions to vote against approval of the merger
agreement will be voted in favor of any adjournment or postponement of the
special meeting.
Directors and officers of F&M Bancorp or its subsidiaries may solicit
proxies, including personally or by telephone or facsimile or otherwise. None of
these people will receive any special compensation for solicitation activities.
F&M Bancorp will arrange with brokerage firms and other custodians, nominees and
fiduciaries to forward solicitation material to the beneficial owners of stock
held of record by those persons, and F&M Bancorp will reimburse these persons
for their reasonable out-of-pocket expenses.
15
REVOCABILITY. If you hold your shares in your own name, you may revoke your
proxy at any time before its exercise at the special meeting by:
- giving written notice of revocation to the Secretary of F&M Bancorp,
- properly submitting a duly executed proxy bearing a later date, or
- voting in person at the special meeting.
You should address all written notices of revocation and other
communications with respect to revocation of proxies to:
F&M Bancorp
110 Thomas Johnson Drive
Frederick, Maryland 21702
Attention: Gordon M. Cooley, Secretary
A proxy appointment will not be revoked by death or supervening incapacity
of the stockholder executing the proxy unless notice of the death or incapacity
is filed with the Secretary of F&M Bancorp, before the shares are voted.
If your shares are held in "street name" and you have instructed your broker
to vote your shares, you must follow directions provided by your broker to
change your vote.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of F&M Bancorp common stock entitled to vote thereon is required for approval of
the merger agreement. Each share of F&M Bancorp common stock is entitled to one
vote on each matter submitted to the meeting. If you do not vote your shares, it
will have the same effect as a vote "against" the merger agreement.
As of the record date, the directors and executive officers of F&M Bancorp
and their affiliates owned and are entitled to vote shares of F&M
Bancorp common stock, which represents approximately % of the outstanding
shares of F&M Bancorp common stock. Each of them has indicated to us that they
intend to vote "FOR" approval of the merger agreement. As of the record date,
neither Mercantile nor any of its directors or executive officers or their
affiliates held any shares of F&M Bancorp common stock.
RECOMMENDATION OF BOARD OF DIRECTORS
The F&M Bancorp board has unanimously approved the merger agreement,
believes that the merger is in the best interests of F&M Bancorp, and recommends
that you vote "FOR" approval of the merger agreement. See "The Merger--Reasons
of F&M Bancorp for the Merger" on page 19.
16
THE MERGER
THE FOLLOWING DESCRIPTION OF THE MATERIAL INFORMATION PERTAINING TO THE
MERGER, INCLUDING THE MATERIAL TERMS AND CONDITIONS OF THE MERGER AGREEMENT, IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED APPENDICES TO THIS
DOCUMENT, INCLUDING THE MERGER AGREEMENT ATTACHED AS APPENDIX A, WHICH IS
INCORPORATED BY REFERENCE INTO THIS DOCUMENT. WE URGE YOU TO READ THE APPENDICES
IN THEIR ENTIRETY.
TRANSACTION STRUCTURE
The merger agreement provides for a transaction in which F&M Bancorp will
merge with and into Mercantile. Mercantile will be the surviving corporation in
the merger. Each share of F&M Bancorp common stock issued and outstanding at the
effective time of the merger will be converted into either an amount of cash or
a number of shares of Mercantile common stock, as described below. Shares of
Mercantile common stock issued in the merger will be accompanied by the
requisite number of rights under Mercantile's stockholders' rights agreement.
These rights are exercisable for Mercantile preferred stock or common stock
under certain circumstances arising from certain acquisitions of or tender
offers or exchange offers for outstanding Mercantile common stock. See
"Comparative Rights of Stockholders--Stockholders' Rights Agreement." Following
completion of the merger, Mercantile's wholly owned Maryland bank subsidiary,
Fredericktown Bank & Trust Company, will be merged into F&M Bancorp's wholly
owned Maryland bank subsidiary, Farmers & Mechanics Bank. Various Mercantile
affiliate banks in the market area of Farmers & Mechanics Bank may accept
certain branches, assets and liabilities of the surviving bank in connection
with the integration of operations after the merger.
The Mercantile charter will be the charter of the combined company after
completion of the merger, and the Mercantile bylaws will be the bylaws of the
combined company. Upon completion of the merger, two members of F&M Bancorp's
current board of directors will be mutually selected by F&M Bancorp and
Mercantile to join the Mercantile board of directors.
BACKGROUND OF THE MERGER
Over the years the F&M Bancorp board has regularly reviewed F&M Bancorp's
strategic alternatives, including whether F&M Bancorp should continue as an
independent entity or combine with a larger financial institution. This review
generally took into account a variety of factors, including F&M Bancorp's
historical and projected earnings, the merger and acquisition environment
affecting financial institutions, F&M Bancorp's competitive position relative to
other banks and financial services institutions, and the values that might be
obtainable in a business combination with a larger financial institution.
The F&M Bancorp board undertook such a review in January 2003. At meetings
of the F&M Bancorp board on January 9, 2003 and January 21, 2003, the F&M
Bancorp board determined, based on its review of information presented by the
management of F&M Bancorp and an analysis prepared by KBW and the values that
the F&M Bancorp board believed might be obtainable in a business combination
transaction, that it was likely that a business combination transaction would
provide F&M Bancorp stockholders with greater value than that obtainable by F&M
Bancorp through a course of continued independence. The F&M Bancorp board
determined at the January 21 meeting that F&M Bancorp should seek indications of
interest from third parties with respect to a potential business combination,
authorized the engagement of KBW as financial adviser to F&M Bancorp and
directed KBW to seek such indications of interest.
KBW contacted seven financial institutions believed by it and F&M Bancorp's
board and management to be potentially interested in and financially and
otherwise capable of engaging in a business combination with F&M Bancorp. Six of
these companies executed confidentiality agreements with F&M Bancorp and
received information about F&M Bancorp. Each of these companies was
17
requested to deliver a written preliminary indication of interest by
February 14, 2003 containing the proposed terms upon which such party would be
willing to enter into a business combination with F&M Bancorp. Each of these
companies was further advised that, based on the proposals submitted, one or
more companies would be provided access to additional financial and other
information concerning F&M Bancorp and would be provided an opportunity
following such additional due diligence to submit a final indication of interest
to F&M Bancorp.
Four companies submitted written proposals by the date specified by KBW. Two
of these proposals, including the one submitted by Mercantile, were determined
by the F&M Bancorp board to be materially superior to the other two proposals
based on the indicated exchange ratio and the then recent closing stock prices
of the bidders, and Mercantile and the other company submitting these superior
proposals were invited to conduct additional due diligence on F&M Bancorp.
Each of these companies conducted several days of due diligence and each
submitted a revised indication of interest prior to the meeting of the F&M
Bancorp board scheduled for March 7, 2003.
At the March 7 meeting, the F&M Bancorp board reviewed with F&M Bancorp
management, KBW and F&M Bancorp's legal advisors the financial terms of each
proposal, the business, operations and prospects of Mercantile and the other
bidder, certain pro forma financial data giving effect to a combination of F&M
Bancorp with each of the bidders, and the financial terms of other business
combinations in the banking industry. Based on the closing price of the common
stock of Mercantile and the other party on March 6, 2003, Mercantile's proposal,
consisting of 75% stock and 25% cash, had an indicated value of $45.34 per share
of common stock of F&M Bancorp, and the other party's proposal, consisting of
70% stock and 30% cash, had an indicated value of $44.43 per share of F&M
Bancorp common stock. Based on the average closing price of the common stock of
Mercantile and the other party for the ten trading days ending on March 6, 2003,
Mercantile's proposal had an indicated value of $46.00 per share of common stock
of F&M Bancorp, and the other party's proposal had an indicated value of $45.01
per share of common stock of F&M Bancorp. At the conclusion of the meeting, the
F&M Bancorp board authorized management and F&M Bancorp's financial and legal
advisors to seek to negotiate a business combination transaction with
Mercantile.
Shortly thereafter, legal representatives of F&M Bancorp and Mercantile
commenced negotiations of the terms of definitive transaction documents,
Mercantile continued its due diligence review of F&M Bancorp and F&M Bancorp
commenced its due diligence review of Mercantile. Management officials and the
financial advisors of F&M Bancorp and Mercantile continued to discuss financial
and other aspects of the proposed transaction, including Mercantile's proposed
plans for integrating the operations of F&M Bancorp with those of Mercantile.
On March 12, 2003, the F&M Bancorp board held a meeting to discuss and
review, with the assistance of its legal and financial advisors, the definitive
terms of the proposed merger with Mercantile. Management of F&M Bancorp reviewed
with the F&M Bancorp board its due diligence findings concerning Mercantile.
Representatives of KBW reviewed financial information concerning Mercantile and
the proposed transaction, and delivered to the F&M Bancorp board KBW's oral
opinion (which was subsequently confirmed in writing) that, as of such date, the
consideration to be received by F&M Bancorp stockholders in the merger was fair
to the F&M Bancorp stockholders from a financial point of view. See "--Opinion
of F&M Bancorp's Financial Advisor" on page 20.
Based upon the F&M Bancorp board's review of the definitive terms of the
transaction, the opinion of KBW and other relevant factors, the F&M Bancorp
board, by unanimous vote of all directors, authorized and approved the execution
of the merger agreement. On March 13, 2003, the parties entered into the merger
agreement.
18
REASONS OF F&M BANCORP FOR THE MERGER
In reaching its determination to approve the merger and adopt the merger
agreement, the F&M Bancorp board consulted with F&M Bancorp's management and its
financial and legal advisors, and considered a number of factors. The following
include all of the material factors considered by the F&M Bancorp board:
- the F&M Bancorp board's familiarity with and review of F&M Bancorp's
business, operations, financial condition and earnings on an historical
and a prospective basis, including, without limitation, its potential
growth and profitability;
- the current and prospective economic and competitive environment facing
the financial services industry generally, and F&M Bancorp in particular,
including the continued rapid consolidation in the financial services
industry and the competitive effects of the increased consolidation on
financial institutions such as F&M Bancorp;
- the increasing importance of operational scale and financial resources in
maintaining efficiency and remaining competitive over the long term;
- the value to be received by holders of F&M Bancorp common stock pursuant
to the merger agreement in relation to the historical trading prices of
F&M Bancorp common stock;
- the substantial increase in the pro forma dividends and earnings per share
of F&M Bancorp stockholders receiving Mercantile common stock pursuant to
the merger (see "Comparative Per Share Data" on page 9);
- the information presented by KBW to the F&M Bancorp board with respect to
the merger and the opinion of KBW that, as of the date of that opinion,
the merger consideration was fair to the holders of F&M Bancorp common
stock from a financial point of view (see "--Opinion of F&M Bancorp's
Financial Advisor" below);
- the F&M Bancorp board's review, based on the presentation of its financial
advisor, of the business, operations, financial condition and earnings of
Mercantile on an historical and a prospective basis and of the combined
company on a pro forma basis and the historical stock price performance
and liquidity of Mercantile common stock, and the resulting relative
interests of F&M Bancorp stockholders and Mercantile stockholders in the
common equity of the combined company;
- the fact that Mercantile has existing resources to fund the cash portion
of the merger consideration;
- the previous experience of management of Mercantile in completing
acquisition transactions;
- the process conducted by F&M Bancorp's financial advisor in exploring and
determining the potential value which could be realized by F&M Bancorp's
stockholders in a business combination transaction, including the contacts
between F&M Bancorp's financial advisor with certain financial
institutions determined to be the most likely companies to be both
interested in and financially and otherwise capable of engaging in a
business combination transaction with F&M Bancorp, the fact that each of
the selected financial institutions which expressed interest in a business
combination transaction with F&M Bancorp was afforded an opportunity to
submit proposals for such a transaction to F&M Bancorp, the terms of the
proposals received by F&M Bancorp from those institutions and the fact
that the indicated value of the merger consideration in the Mercantile
proposal was higher than the indicated values of the consideration offered
in the other proposals submitted to F&M Bancorp;
- the general impact that the merger could be expected to have on the
constituencies served by F&M Bancorp, including its customers, employees
and communities;
19
- the expectation that the merger would constitute a reorganization under
section 368(a) of the Internal Revenue Code and that it would be accounted
for as a purchase for accounting and financial reporting purposes (see
"--Material United States Federal Income Tax Consequences" on page 33 and
"--Accounting Treatment" on page 49);
- the United States federal income tax consequences to F&M Bancorp
stockholders of receiving cash in exchange for their shares of F&M Bancorp
common stock;
- the fact that Mercantile has agreed to (i) appoint two members of the
board of directors of F&M Bancorp to the board of directors of Mercantile,
(ii) appoint four members of the board of directors of F&M Bancorp to the
board of directors of a subsidiary bank of Mercantile, and (iii) appoint
the other members of the board of directors of F&M Bancorp as members of
an advisory board of Mercantile, all of which are expected to provide a
degree of continuity and involvement by F&M Bancorp following the merger,
in the interest of F&M Bancorp's stockholders, customers and employees;
- that the directors and officers of F&M Bancorp might be deemed to have
interests in the merger other than their interests generally as F&M
Bancorp stockholders (See "--Interests of Certain Persons in the Merger"
on page 36);
- the results of the due diligence investigation of Mercantile conducted by
F&M Bancorp's management and F&M Bancorp's legal advisors;
- the F&M Bancorp board's assessment, with the assistance of counsel,
concerning the likelihood that Mercantile would obtain all requisite
regulatory approvals required for the merger;
- the terms of the $20 million termination fee in favor of Mercantile,
including the risk that the termination fee might discourage third parties
from offering to acquire F&M Bancorp by increasing the cost of a third
party acquisition, and recognizing that the termination fee was a
condition to Mercantile's willingness to enter into the merger agreement;
and
- the alternative strategic courses available to F&M Bancorp, including
remaining independent and exploring other potential business combination
transactions.
The preceding discussion of the information and factors considered by the
F&M Bancorp board was not intended to be exhaustive but includes all of the
material factors considered by the F&M Bancorp board. In the course of its
deliberations with respect to the merger, the F&M Bancorp board discussed the
anticipated impact of the merger on F&M Bancorp, its stockholders, and its
various other constituencies, and no material disadvantages expected to result
from the merger were identified during these discussions. In reaching its
determination to approve and recommend the merger, the F&M Bancorp board did not
assign any relative or specific weights to the factors considered in reaching
that determination, and individual directors may have given differing weights to
different factors.
THE F&M BANCORP BOARD BELIEVES THE MERGER IS IN THE BEST INTERESTS OF F&M
BANCORP AND THE F&M BANCORP STOCKHOLDERS. THE F&M BANCORP BOARD UNANIMOUSLY
RECOMMENDS THE F&M BANCORP STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY
THAT AGREEMENT.
OPINION OF F&M BANCORP'S FINANCIAL ADVISOR
F&M Bancorp engaged KBW to render financial advisory and investment banking
services to and at the request of F&M Bancorp. KBW agreed to assist F&M Bancorp
in analyzing, structuring, negotiating and effecting a transaction. F&M Bancorp
selected KBW because KBW is a nationally recognized investment-banking firm with
substantial experience in transactions similar to the merger and is familiar
with F&M Bancorp and its business. As part of its investment banking business,
KBW is continually engaged in the valuation of financial businesses and their
securities in connection with mergers and acquisitions.
20
As part of its engagement, representatives of KBW attended the meeting of
the F&M Bancorp board held on March 12, 2003, at which the F&M Bancorp board
evaluated the proposed merger with Mercantile. At this meeting, KBW reviewed the
financial aspects of the proposed merger and rendered a verbal opinion,
subsequently confirmed in writing, that, as of such date, the consideration to
be received by F&M Bancorp stockholders in the merger was fair to those
stockholders from a financial point of view. The F&M Bancorp board approved the
merger agreement at this meeting.
The full text of KBW's written opinion is attached as Appendix C to this
document and is incorporated herein by reference. F&M Bancorp's stockholders are
urged to read the opinion in its entirety for a description of the procedures
followed, assumptions made, matters considered, and qualifications and
limitations on the review undertaken by KBW. The description of the opinion set
forth herein is qualified in its entirety by reference to the full text of such
opinion.
KBW'S OPINION SPEAKS ONLY AS OF THE DATE OF THE OPINION. THE OPINION IS
DIRECTED TO THE F&M BANCORP BOARD AND ADDRESSES ONLY THE FAIRNESS, FROM A
FINANCIAL POINT OF VIEW, OF THE MERGER CONSIDERATION TO THE F&M BANCORP
STOCKHOLDERS. IT DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION TO PROCEED
WITH MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY F&M BANCORP
STOCKHOLDER AS TO HOW THE STOCKHOLDER SHOULD VOTE AT THE F&M BANCORP SPECIAL
MEETING ON THE MERGER OR ANY RELATED MATTER.
In rendering its opinion, KBW:
- reviewed, among other things,
- the merger agreement,
- Annual Reports to stockholders and Annual Reports on Form 10-K of
Mercantile,
- Quarterly Reports on Form 10-Q of Mercantile,
- Annual Reports to stockholders and Annual Reports on Form 10-K of F&M
Bancorp, and
- Quarterly Reports on Form 10-Q of F&M Bancorp;
- held discussions with members of senior management of F&M Bancorp and
Mercantile regarding
- past and current business operations,
- regulatory relationships,
- financial condition, and
- future prospects of the respective companies;
- reviewed the market prices, valuation multiples, publicly reported
financial condition and results of operations for F&M Bancorp and
Mercantile and compared them with those of certain publicly traded
companies that KBW deemed to be relevant;
- compared the proposed financial terms of the merger with the financial
terms of certain other transactions that KBW deemed to be relevant; and
- performed other studies and analyses that it considered appropriate.
In conducting its review and arriving at its opinion, KBW relied upon and
assumed the accuracy and completeness of all of the financial and other
information provided to or otherwise made available to KBW or that was discussed
with, or reviewed by KBW, or that was publicly available. KBW did not attempt or
assume any responsibility to verify such information independently. KBW relied
upon the management of F&M Bancorp and Mercantile as to the reasonableness and
achievability of the financial and operating forecasts and projections (and
assumptions and bases therefor) provided to KBW. KBW assumed, without
independent verification, that the aggregate allowances for loan and lease
losses for Mercantile and F&M Bancorp are adequate to cover those losses. KBW
did not make or obtain any evaluations or appraisals of any assets or
liabilities of Mercantile or F&M Bancorp, nor did they examine or review any
individual credit files.
21
The projections furnished to KBW and used by it in certain of its analyses
were prepared by F&M Bancorp's and Mercantile's senior management teams. F&M
Bancorp and Mercantile do not publicly disclose internal management projections
of the type provided to KBW in connection with its review of the merger. As a
result, such projections were not prepared with a view towards public
disclosure. The projections were based on numerous variables and assumptions,
which are inherently uncertain, including factors related to general economic
and competitive conditions. Accordingly, actual results could vary significantly
from those set forth in the projections.
For purposes of rendering its opinion, KBW assumed that, in all respects
material to its analyses:
- 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;
- each party to the merger agreement and all related documents will perform
all of the covenants and agreements required to be performed by such party
under such documents;
- all conditions to the completion of the merger will be satisfied without
any waivers; and
- in the course of obtaining the necessary regulatory, contractual, or other
consents or approvals for the merger, no restrictions, including any
divestiture requirements, termination or other payments or amendments or
modifications, will be imposed that will have a material adverse effect on
the future results of operations or financial condition of the combined
entity or the contemplated benefits of the merger, including the cost
savings and related expenses expected to result from the merger.
KBW further assumed that the merger will be accounted for as a purchase
under generally accepted accounting principles, and that the conversion of F&M
Bancorp's common stock into Mercantile common stock will be tax-free for
Mercantile and F&M Bancorp. KBW's opinion is not an expression of an opinion as
to the prices at which shares of F&M Bancorp common stock or shares of
Mercantile common stock will trade following the announcement of the merger or
the actual value of the shares of common stock of the combined company when
issued pursuant to the merger, or the prices at which the shares of common stock
of the combined company will trade following the completion of the merger.
In performing its analyses, KBW made numerous assumptions with respect to
industry performance, general business, economic, market and financial
conditions and other matters, which are beyond the control of KBW, F&M Bancorp
and Mercantile. Any estimates contained in the analyses performed by KBW 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 such businesses or securities
might actually be sold. Accordingly, these analyses and estimates are inherently
subject to substantial uncertainty. In addition, the KBW opinion was among
several factors taken into consideration by the F&M Bancorp board in making its
determination to approve the merger agreement and the merger. Consequently, the
analyses described below should not be viewed as determinative of the decision
of the F&M Bancorp board with respect to the fairness of the merger
consideration.
The following is a summary of the material analyses presented by KBW to the
F&M Bancorp board on March 12, 2003, in connection with its oral fairness
opinion, which was subsequently confirmed in writing. The summary is not a
complete description of the analyses underlying the KBW opinion or the
presentation made by KBW to the F&M Bancorp board, but summarizes the material
analyses performed and presented in connection with such opinion. The
preparation of a fairness
22
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, KBW 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. KBW did not
address whether any individual analysis did or did not support the overall
fairness conclusion. The financial analyses summarized below include information
presented in tabular format. Accordingly, KBW 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.
SUMMARY OF PROPOSAL. F&M Bancorp stockholders will receive $123,514,106 in
cash and 10,335,714 shares of Mercantile common stock, subject to proportionate
increase in the event that any stock options of F&M Bancorp are exercised
subsequent to March 12, 2003 and prior to the third day immediately prior to the
effective time of the merger. Based upon Mercantile's average closing share
price for the 10 business days prior to and including March 12, 2003 of $35.85
and 10,739,654 F&M Bancorp shares outstanding, KBW calculated a $46.00 price per
F&M Bancorp share. Based upon Mercantile's March 12, 2003 closing price, KBW
calculated a $44.42 price per F&M Bancorp share.
SELECTED PEER GROUP ANALYSIS. KBW compared the financial performance and
market performance of Mercantile to those of a group of comparable mid-atlantic
bank holding companies with assets between $5.0 and $20.0 billion and F&M
Bancorp to those of a group of comparable mid-atlantic bank holding companies
with assets between $1.0 billion and $5.0 billion.
Companies included in Mercantile's peer group were:
Commerce Bancorp, Inc.
First Citizens BancShares, Inc.
FirstMerit Corporation
Fulton Financial Corporation
Hudson United Bancorp
Sky Financial Group Inc.
Susquehanna Bancshares, Inc.
United Bankshares, Inc.
Valley National Bancorp
Companies included in F&M Bancorp's peer group were:
City Holding Company
Community Banks, Inc.
First Commonwealth Financial Corporation
First Community Bancshares, Inc.
National Penn Bancshares, Inc.
Omega Financial Corporation
Provident Bankshares Corporation
S&T Bancorp, Inc.
Sandy Spring Bancorp, Inc.
Sterling Financial Corporation
Union Bankshares Corporation
Virginia Financial Group, Inc.
WesBanco, Inc.
23
To perform this analysis, KBW used the financial information as of and for
the quarter or year ended December 31, 2002. Market price information was as of
March 11, 2003, and 2003 earnings estimates were taken from a nationally
recognized earnings estimate consolidator for comparable companies.
KBW's analysis showed the following concerning Mercantile's and F&M
Bancorp's financial performance:
MERCANTILE F&M BANCORP
PEER PEER
GROUP GROUP
FINANCIAL PERFORMANCE MEASURES: MERCANTILE MEDIAN F&M BANCORP MEDIAN
------------------------------- ---------- ---------- ----------- -----------
Return on Average Equity....................... 15.10% 16.36% 13.82% 14.91%
Return on Average Assets....................... 1.88% 1.19% 1.27% 1.25%
Quarter Net Interest Margin.................... 4.55% 4.19% 4.24% 4.26%
Efficiency Ratio............................... 46% 52% 62% 57%
KBW's analysis showed the following concerning Mercantile's and F&M
Bancorp's financial condition:
MERCANTILE F&M BANCORP
PEER PEER
GROUP GROUP
FINANCIAL CONDITION MEASURES: MERCANTILE MEDIAN F&M BANCORP MEDIAN
----------------------------- ---------- ---------- ----------- -----------
Equity / Assets................................ 12.27% 7.91% 8.80% 9.13%
Leverage Ratio................................. 11.20% 8.11% 8.55% 8.49%
Loan Loss Reserves / Loans..................... 1.90% 1.48% 1.05% 1.36%
Net Charge Offs / Average Loans................ 0.27% 0.24% 0.13% 0.35%
Non Performing Assets / Assets................. 0.31% 0.24% 0.12% 0.41%
Loans / Deposits............................... 89% 86% 82% 81%
KBW's analysis showed the following concerning Mercantile's and F&M
Bancorp's market performance:
MERCANTILE F&M BANCORP
PEER PEER
GROUP GROUP
FINANCIAL PERFORMANCE MEASURES: MERCANTILE MEDIAN F&M BANCORP MEDIAN
------------------------------- ---------- ---------- ----------- -----------
Price to Earnings Multiple, based on 2003 GAAP
estimated earnings........................... 12.0x 12.5x 12.9x 13.5x
Price to Book Multiple Value................... 1.80x 2.01x 1.80x 2.00x
Price to Tangible Book Multiple Value.......... 1.96x 2.47x 1.82x 1.88x
Dividend Yield................................. 3.5% 3.7% 3.7% 3.3%
FINANCIAL IMPACT ANALYSIS. KBW performed pro forma merger analyses that
combined projected income statement and balance sheet information of Mercantile
and F&M Bancorp. Assumptions regarding the accounting treatment, acquisition
adjustments and cost savings were used to calculate the financial impact that
the merger would have on certain projected financial results of Mercantile. The
analysis assumed the 2004 First Call consensus earnings per share estimate of
$3.15 and 8% growth thereafter for Mercantile. For F&M Bancorp, the analysis
assumed the 2003 First Call consensus earnings per share estimate of $2.40 and
9% growth thereafter. This analysis indicated that the merger is expected to be
accretive to estimated earnings per share in 2004, and accretive to cash
earnings per share in 2004. Cash earnings were estimated by adding the
anticipated core deposit intangible amortization expense to GAAP earnings. The
analysis also indicated that the merger is expected to be
24
accretive to Mercantile's book value per share, but dilutive to Mercantile's
tangible book value per share as of December 31, 2002. Furthermore, the analysis
indicated that Mercantile's Tier 1 leverage ratio, Tier 1 risk-based capital
ratio and Total risk-based capital ratio would all decline but remain above
regulatory minimums for well capitalized institutions. This analysis was based
on certain assumptions provided by Mercantile with regard to cost savings,
merger related charges and the amortization of intangibles. For all of the above
analyses, the actual results achieved by Mercantile following the merger will
vary from the projected results, and the variations may be material.
COMPARABLE TRANSACTION ANALYSIS. KBW reviewed certain financial data
related to comparably sized acquisitions of bank holding companies announced
after December 31, 1999, with aggregate transaction values between $250 million
and $1 billion. The transactions included in the group were:
Marshall & Ilsley Corporation / Mississippi Valley Bancshares, Inc.
BB&T Corporation / AREA Bancshares Corporation
BB&T Corporation / Mid-America Bancorp
F.N.B. Corporation / Promistar Financial Corporation
Marshall & Ilsley Corporation / National City Bancorporation
BB&T Corporation / Century South Banks, Inc.
Park National Corporation / Security Banc Corporation
Wachovia Corporation. / Republic Security Financial Corporation
Valley National Bancorp / Merchants New York Bancorp, Inc.
M&T Bank Corporation / Premier National Bancorp
Wells Fargo & Company / Brenton Banks, Inc.
BancorpSouth, Inc. / First United Bancshares, Inc.
Wells Fargo & Company / First Commerce Bancshares, Inc.
Carolina First Corporation / Anchor Financial Corporation
Transaction multiples for the merger were derived from both the $46.00
(based on Mercantile's closing share price for the 10 business days prior to and
including March 12, 2002) and $44.42 (based on Mercantile's closing share price
on March 12, 2003) per share price for F&M Bancorp. KBW compared these results
with announced multiples. The results of the analysis are set forth in the
following table.
MERCANTILE / MERCANTILE /
F&M BANCORP F&M BANCORP COMPARABLE
MERGER MERGER TRANSACTIONS
TRANSACTION PRICE TO: (10-DAY AVERAGE) (MARCH 12, 2003) MEDIAN
--------------------- ---------------- ---------------- ------------
Book Value (12/31/02)............................... 268% 259% 198%
Tangible Book Value (12/31/02)...................... 271% 262% 218%
2002 Earnings per Share............................. 20.4x 19.7x 17.1x
2003 Estimated Earnings per Share (First Call)...... 19.2x 18.5x 15.4x
No company or transaction used as a comparison in the above analysis is
identical to F&M Bancorp, Mercantile or the merger. Accordingly, an analysis of
these results is not mathematical. Rather, it involves complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies.
DISCOUNTED CASH FLOW ANALYSIS. KBW estimated the present value of F&M
Bancorp's common stock based on a continued independence scenario by adding (i)
the present value of the estimated future dividend stream that F&M Bancorp could
generate over the period beginning January 2003 and ending in December 2008, and
(ii) the present value of the terminal value of the F&M Bancorp common stock.
The earnings assumptions that formed the basis of the analysis were based on
First Call consensus earnings per share estimate for 2003 and an assumed
earnings growth rate of 9% for 2004 to 2008. For a projected dividend stream,
KBW assumed a constant dividend payout ratio of 48%. A
25
sensitivity table was presented with a range of discount rates from 10.0% to
14.0% and a range of terminal multiples from 11.5 to 14.5 times were applied to
the 2008 earnings per share estimate. This resulted in a range of values from
$26.23 to $37.70 per share.
KBW stated that the discounted cash flow present value analysis is a widely
used valuation methodology but noted that it relies on numerous assumptions,
including asset and earnings growth rates, terminal values and discount rates.
The analysis did not purport to be indicative of the actual values or expected
values of F&M Bancorp common stock.
CONTRIBUTION ANALYSIS. KBW analyzed the relative contribution of each of
F&M Bancorp and Mercantile to the pro forma balance sheet and income statement
items of the combined entity, including assets, common equity, tangible common
equity, deposits, loans, pro forma ownership, 2002 net income and 2003 estimated
net income. KBW compared the relative contribution of balance sheet and income
statement items with the estimated pro forma ownership for F&M Bancorp based on
an assumed exchange ratio of 1.2831 for 100% of F&M Bancorp's shares. The
results of KBW's analysis are set forth in the following table.
CATEGORY MERCANTILE F&M BANCORP
-------- ---------- -----------
2002 Net Income............................................. 89% 11%
2003 Estimated Net Income................................... 89% 11%
Assets...................................................... 84% 16%
Loans (gross)............................................... 85% 15%
Deposits.................................................... 84% 16%
Common Equity............................................... 88% 12%
Tangible Common Equity...................................... 87% 13%
Pro Forma Ownership (common shares)......................... 83% 17%
OTHER ANALYSES. KBW reviewed the relative financial and market performance
of F&M Bancorp and Mercantile to a variety of relevant industry peer groups and
indices. KBW also reviewed earnings estimates, balance sheet composition,
historical stock performance and other financial data for Mercantile.
The F&M Bancorp board has retained KBW as an independent contractor to act
as financial adviser to F&M Bancorp regarding the merger. As part of its
investment banking business, KBW is continually engaged in the valuation of
banking 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. As specialists in the
securities of banking companies, KBW has experience in, and knowledge of, the
valuation of banking enterprises. In the ordinary course of its business as a
broker-dealer, KBW may, from time to time, purchase securities from, and sell
securities to, F&M Bancorp and Mercantile. As a market maker in securities KBW
may from time to time have a long or short position in, and buy or sell, debt or
equity securities of F&M Bancorp and Mercantile for KBW's own account and for
the accounts of its customers.
F&M Bancorp and KBW have entered into an agreement relating to the services
to be provided by KBW in connection with the merger. F&M Bancorp agreed to pay
KBW a cash fee of $100,000 concurrent with the execution of a definitive merger
agreement, $250,000 concurrent with the mailing of a merger related proxy
statement, and, at the time of closing, a cash fee ("Contingent Fee") equal to
1.00% of the aggregate market value of the consideration paid for F&M Bancorp in
any transaction, or approximately $5,267,000, provided however that any fees
paid prior to the Contingent Fee will be
26
credited against the Contingent Fee. Pursuant to the KBW engagement agreement,
F&M Bancorp also agreed to reimburse KBW for reasonable out-of-pocket expenses
and disbursements incurred in connection with its retention and to indemnify
against certain liabilities, including liabilities under the federal securities
laws.
MERGER CONSIDERATION
The merger agreement provides that at the effective time of the merger each
share of F&M Bancorp common stock issued and outstanding immediately prior to
the effective time will be converted into either a number of shares of
Mercantile common stock or an amount of cash, in each case as described below.
F&M Bancorp stockholders will have the right to elect to convert their F&M
Bancorp common stock into cash, Mercantile common stock or a combination of cash
and Mercantile common stock. See "--Election Procedure." Shares of Mercantile
common stock issued in the merger will be accompanied by the requisite number of
rights under Mercantile's stockholders' rights agreement. See "Comparative
Rights of Stockholders--Stockholders' Rights Agreement." In our discussion we
refer to the number of shares of Mercantile common stock to be received for each
share of F&M Bancorp common stock being converted into Mercantile stock as the
"PER SHARE STOCK CONSIDERATION," and we refer to the amount of cash to be
received for each share of F&M Bancorp common stock being converted into cash as
the "PER SHARE CASH CONSIDERATION."
In the merger, assuming that none of the outstanding options to purchase
shares of F&M Bancorp common stock has been exercised, Mercantile will issue
approximately 10,335,700 shares of common stock and will pay approximately
$123,514,000 in cash. The actual per share stock consideration and per share
cash consideration to be paid to F&M Bancorp stockholders cannot be determined
until the third day immediately prior to the effective time of the merger. We
intend to announce these amounts when known.
The per share cash consideration will be equal to the amount obtained by
dividing the "TRANSACTION VALUE" by the number of "EXCHANGEABLE SHARES." In our
discussion we also refer to that amount as the "PER SHARE CONSIDERATION."
- The "TRANSACTION VALUE" is the dollar amount of the sum of:
(1) the product of (A) the aggregate number of shares Mercantile will
issue pursuant to the merger (which is the product of 1.2831 and 75%
of the exchangeable shares) and (B) the "final stock price," and
(2) the aggregate amount of cash Mercantile will pay pursuant to the
merger (which is the product of (A) 25% of the exchangeable shares
and (B) $46.00). We refer to this aggregate amount of cash as the
"TOTAL CASH AMOUNT."
- The "FINAL STOCK PRICE" is the average of the closing sale prices of
Mercantile common stock as reported on Nasdaq during the ten consecutive
trading days during which the shares of Mercantile common stock are traded
on Nasdaq ending on the third calendar day immediately prior to the
effective time of the merger. We refer to this ten trading-day period as
the "VALUATION PERIOD."
- The number of "EXCHANGEABLE SHARES" is the total number of shares of F&M
Bancorp common stock outstanding as of the close of business on the last
day of the valuation period.
The per share stock consideration will be the number of shares of Mercantile
common stock obtained by dividing the per share consideration by the final stock
price.
The formula described above is designed to substantially equalize the value
of the consideration to be received for each share of F&M Bancorp common stock
in the merger at the time the calculation is made, regardless of whether an F&M
Bancorp stockholder elects to receive cash, Mercantile common
27
stock, or a combination of cash and Mercantile common stock. This equalization
mechanism was deemed to be desirable because the value of the Mercantile common
stock will fluctuate. In order to ensure that the value of the consideration for
each share of F&M Bancorp common stock is as equal as possible upon receipt by
F&M Bancorp stockholders, regardless of the form of the consideration, the
equalization mechanism is to be applied based on the final stock price.
For example, if the average closing price of Mercantile common stock during
the applicable measurement period were $39.62, an F&M Bancorp stockholder
receiving stock would receive 1.2526 shares of Mercantile common stock per share
of F&M Bancorp common stock having a value, based on such average closing price,
of $49.63 per share, and an F&M Bancorp stockholder receiving cash would receive
$49.63 in cash per share of F&M Bancorp common stock, subject in each case to
the allocation procedures described below. Based on that average price, 23.17%
of the outstanding shares of F&M Bancorp common stock would be exchanged for
cash, and 76.83% would be exchanged for Mercantile common stock (assuming that
none of the outstanding options to purchase shares of F&M Bancorp common stock
has been exercised).
If the price of Mercantile common stock increases, then the number of shares
of F&M Bancorp common stock being exchanged for cash would decrease and the
number of shares being exchanged for Mercantile common stock would increase. For
example, if the average closing price during the actual valuation period is
$43.58 (10% higher than $39.62), then 21.52% of the outstanding shares of F&M
Bancorp common stock would be exchanged for cash, and 78.48% would be exchanged
for Mercantile common stock (assuming that none of the outstanding options to
purchase shares of F&M Bancorp common stock has been exercised). Based on the
average closing price of $43.58, an F&M Bancorp stockholder receiving stock
would receive 1.2262 shares of Mercantile common stock per share of F&M Bancorp
common stock having a value, based on that average closing price, of $53.44 per
share, and an F&M Bancorp stockholder receiving cash would receive $53.44 in
cash per share of F&M Bancorp common stock, subject in each case to the
allocation procedures described below.
If the price of Mercantile common stock decreases, then the number of shares
of F&M Bancorp common stock being exchanged for cash would increase and the
number of shares being exchanged for Mercantile common stock would decrease. For
example, if the average closing price during the actual valuation period is
$35.66 (10% lower than $39.62), then approximately 25.10% of the outstanding
shares of F&M Bancorp common stock would be exchanged for cash, and
approximately 74.90% would be exchanged for Mercantile common stock (assuming
that none of the outstanding options to purchase shares of F&M Bancorp common
stock has been exercised). Based on the average closing price of $35.66, an F&M
Bancorp stockholder receiving stock would receive 1.2848 shares of Mercantile
common stock per share of F&M Bancorp common stock having a value, based on such
average closing price, of $45.82 per share, and an F&M Bancorp stockholder
receiving cash would receive $45.82 in cash per share of F&M Bancorp common
stock, subject in each case to the allocation procedures described below.
The following table sets forth, based on various average closing prices of
Mercantile common stock, the per share cash consideration and the per share
stock consideration, as well as the value of such stock consideration based on
the assumed average closing prices. The table also shows the percentage of
outstanding shares of F&M Bancorp common stock that would be converted into
Mercantile common stock and cash based on such average closing prices. The table
is based on the assumption that no F&M Bancorp options have been exercised prior
to the closing of the merger and the number of exchangeable shares is
10,740,357. To the extent that the number of shares of F&M Bancorp common stock
outstanding increases as a result of the exercise of options, the number of
exchangeable shares will increase and the transaction value will increase. Each
additional exchangeable
28
share resulting from the exercise of options will increase the transaction value
by 0.9623 shares and $11.50 in cash.
PER SHARE PERCENTAGE OF OUTSTANDING
STOCK SHARES OF F&M BANCORP
AVERAGE CONSIDERATION COMMON
CLOSING PRICE (SHARES OF STOCK TO RECEIVE
DURING TRANSACTION MERCANTILE VALUE OF PER PER SHARE -----------------------------
VALUATION VALUE COMMON SHARE STOCK CASH STOCK CASH
PERIOD (IN 000S) STOCK) CONSIDERATION CONSIDERATION CONSIDERATION CONSIDERATION
--------------------- ----------- ------------- ------------- ------------- ------------- -------------
$40.00 $536,943 1.2498 $49.9930 $49.9930 77.0% 23.0%
39.50 531,775 1.2535 49.5118 49.5118 76.8 23.2
39.00 526,607 1.2572 49.0307 49.0307 76.5 23.5
38.50 521,439 1.2610 48.5495 48.5495 76.3 23.7
38.00 516,271 1.2650 48.0684 48.0684 76.1 23.9
37.50 511,103 1.2690 47.5872 47.5872 75.8 24.2
37.00 505,936 1.2731 47.1060 47.1060 75.6 24.4
36.50 500,768 1.2774 46.6249 46.6249 75.3 24.7
36.00 495,600 1.2818 46.1437 46.1437 75.1 24.9
35.50 490,432 1.2863 45.6625 45.6625 74.8 25.2
35.00 485,264 1.2909 45.1814 45.1814 74.5 25.5
34.50 480,096 1.2957 44.7002 44.7002 74.3 25.7
34.00 474,928 1.3006 44.2191 44.2191 74.0 26.0
33.50 469,761 1.3056 43.7379 43.7379 73.7 26.3
33.00 464,593 1.3108 43.2567 43.2567 73.4 26.6
32.50 459,425 1.3162 42.7756 42.7756 73.1 26.9
32.00 454,257 1.3217 42.2944 42.2944 72.8 27.2
31.50 449,089 1.3274 41.8132 41.8132 72.5 27.5
31.00 443,921 1.3333 41.3321 41.3321 72.2 27.8
30.50 438,753 1.3394 40.8509 40.8509 71.8 28.2
30.00 433,586 1.3457 40.3698 40.3698 71.5 28.5
Based on the $34.21 closing price of Mercantile common stock on March 12,
2003, the day prior to the announcement of the proposed merger, the merger had a
value on that date of approximately $44.42 per F&M Bancorp share. Based on the
$39.62 closing price of Mercantile common stock on June 11, 2003, the merger had
a value of approximately $49.63 per F&M Bancorp share.
An additional table is attached as Appendix B, which gives examples of the
Mercantile common stock and cash that may be received based on the election by a
hypothetical F&M Bancorp stockholder to receive all cash or all stock and on
different average closing prices of Mercantile common stock.
NO ASSURANCE CAN BE GIVEN THAT THE CURRENT FAIR MARKET VALUE OF MERCANTILE
COMMON STOCK WILL BE EQUIVALENT TO THE FAIR MARKET VALUE OF MERCANTILE COMMON
STOCK ON THE DATE THAT STOCK IS RECEIVED BY AN F&M BANCORP STOCKHOLDER OR AT ANY
OTHER TIME. THE FAIR MARKET VALUE OF MERCANTILE COMMON STOCK RECEIVED BY AN F&M
BANCORP STOCKHOLDER MAY BE GREATER OR LESS THAN THE CURRENT FAIR MARKET VALUE OF
MERCANTILE DUE TO NUMEROUS MARKET FACTORS.
F&M Bancorp may also terminate the merger agreement if shortly before the
effective date of the merger, (1) the trailing 20-day average closing stock
price of Mercantile is less than $27.37 and (2) Mercantile's stock price has
underperformed the NASDAQ Bank Index by 20% or more since March 12, 2003. This
is subject to Mercantile's right to increase the merger consideration to the
extent necessary to cause either of these two conditions to be deemed not to
exist. See "--Termination of the Merger Agreement."
If, between the date of the merger agreement and the effective time, the
shares of Mercantile common stock are changed into a different number or class
of shares by reason of reclassification, split-up, combination, exchange of
shares or readjustment, or a stock dividend is declared with a record
29
date within that period, appropriate adjustments will be made to the per share
cash consideration and the per share stock consideration.
No fractional shares of Mercantile common stock will be issued to any holder
of F&M Bancorp common stock upon completion of the merger. For each fractional
share that would otherwise be issued, Mercantile will pay cash in an amount
equal to the fraction multiplied by the per share cash consideration. No
interest will be paid or accrued on cash payable in lieu of fractional shares of
Mercantile common stock.
The terms of the merger were determined by F&M Bancorp and Mercantile on the
basis of arm's-length negotiations.
ELECTION PROCEDURE
Subject to the allocation mechanism described in the next section, each F&M
Bancorp stockholder may elect to receive with respect to his or her shares of
F&M Bancorp common stock, all cash, all Mercantile common stock or a combination
of cash and Mercantile common stock.
CASH ELECTION SHARES. Stockholders who elect to receive cash for some or
all of their shares will receive the per share cash consideration in respect of
that portion of such holder's shares of F&M Bancorp common stock equal to such
holder's cash election, subject to the allocation mechanism described below. In
our discussion we refer to the shares held by stockholders who have made cash
elections as "cash election shares."
STOCK ELECTION SHARES. Stockholders who elect to receive Mercantile common
stock for some or all of their shares will receive the per share stock
consideration in respect of that portion of such holder's shares of F&M Bancorp
common stock equal to such holder's stock election, subject to the allocation
mechanism described below. In our discussion we refer to the shares held by
stockholders who have made stock elections as "stock election shares."
NON-ELECTION SHARES. Stockholders who indicate that they have no preference
as to whether they receive cash or Mercantile common stock, and stockholders who
do not make a valid election, will be deemed to have made a "non-election."
Stockholders who are deemed to have made a non-election will receive the per
share stock consideration unless there is an oversubscription of the stock
consideration, in which case they may receive the per share cash consideration
for some or all their shares of F&M Bancorp common stock. In our discussion we
refer to the shares held by stockholders who have made no election as
"non-electing shares." See "--Allocation" below.
For example, assuming an F&M Bancorp stockholder holds 100 shares of F&M
Bancorp stock (and that the average closing price of Mercantile common stock for
the applicable ten trading day period were $39.62), if such stockholder made:
- AN ALL STOCK ELECTION, he would receive approximately 125 shares of
Mercantile common stock (and cash in lieu of fractional shares) having a
total value of approximately $4,963; and
- AN ALL CASH ELECTION, he would receive approximately $4,963 in cash.
The actual allocation of cash and stock would be subject in each case to the
allocation procedures described under the heading "The Merger--Allocation"
beginning on page 32 of this document.
A FIXED NUMBER OF SHARES OF MERCANTILE COMMON STOCK WILL BE ISSUED AND A
FIXED AMOUNT OF CASH PAID IN THE MERGER. ACCORDINGLY, THERE IS NO ASSURANCE THAT
A HOLDER OF F&M BANCORP COMMON STOCK WILL RECEIVE THE FORM OF CONSIDERATION THAT
THE HOLDER ELECTS WITH RESPECT TO ANY OR ALL SHARES OF F&M BANCORP COMMON STOCK
HELD BY THAT HOLDER. IF THE ELECTIONS RESULT IN AN OVERSUBSCRIPTION WITH RESPECT
TO SHARES OF F&M BANCORP COMMON STOCK WHICH WOULD OTHERWISE RECEIVE EITHER THE
PER SHARE STOCK CONSIDERATION OR THE PER SHARE CASH CONSIDERATION, THE
PROCEDURES FOR ALLOCATING MERCANTILE COMMON STOCK AND CASH, DESCRIBED BELOW
UNDER "--ALLOCATION," WILL BE FOLLOWED BY THE EXCHANGE AGENT.
30
ELECTION FORM. The merger agreement provides that 35 days prior to the
anticipated date of completion of the merger, or on such different date as
Mercantile and F&M Bancorp shall mutually agree, the companies will mail to F&M
Bancorp stockholders a form of election and other appropriate and customary
transmittal materials. Each election form will allow the holder to specify
(i) the number of shares with respect to which the holder elects to receive the
per share stock consideration, (2) the number of shares with respect to which
the holder elects to receive the per share cash consideration or (3) that the
holder makes no election. The companies will mail the form of election to each
F&M Bancorp stockholder who is a holder of record as of the close of business on
the fifth business day prior to the mailing date. Mercantile will also make
available forms of election to persons who become holders of F&M Bancorp common
stock subsequent to the fifth business day prior to the mailing date up until
the close of business on the business day prior to the election deadline.
Holders of F&M Bancorp common stock who wish to elect the type of merger
consideration they will receive in the merger should carefully review and follow
the instructions set forth in the form of election. Shares of F&M Bancorp common
stock as to which the holder has not made a valid election prior to the election
deadline, which is 5:00 p.m. on the 33rd day following the mailing date, will be
deemed non-electing shares.
TO MAKE AN ELECTION, A HOLDER OF F&M BANCORP COMMON STOCK MUST SUBMIT A
PROPERLY COMPLETED ELECTION FORM SO THAT IT IS ACTUALLY RECEIVED BY THE EXCHANGE
AGENT AT OR PRIOR TO THE ELECTION DEADLINE IN ACCORDANCE WITH THE INSTRUCTIONS
ON THE ELECTION FORM. AN ELECTION FORM WILL BE PROPERLY COMPLETED ONLY IF
ACCOMPANIED BY CERTIFICATES REPRESENTING ALL SHARES OF F&M BANCORP COMMON STOCK
COVERED BY THE ELECTION FORM (OR APPROPRIATE EVIDENCE AS TO THE LOSS, THEFT OR
DESTRUCTION OF SUCH CERTIFICATE, APPROPRIATE EVIDENCE AS TO THE OWNERSHIP OF
THAT CERTIFICATE BY THE CLAIMANT, AND APPROPRIATE AND CUSTOMARY
INDEMNIFICATION).
An election may be revoked or changed by the person submitting the election
form prior to the election deadline. In the event of a revocation of an
election, the exchange agent will, upon receiving a written request from the
holder of F&M Bancorp common stock making a revocation, return the certificates
of F&M Bancorp common stock submitted by that holder, and that holder will be
deemed to have made no election. The exchange agent will have reasonable
discretion to determine whether any election, revocation or change has been
properly or timely made and to disregard immaterial defects in the election
forms, and any good faith decisions of Mercantile regarding these matters will
be binding and conclusive. NEITHER MERCANTILE NOR THE EXCHANGE AGENT WILL BE
UNDER ANY OBLIGATION TO NOTIFY ANY PERSON OF ANY DEFECTS IN AN ELECTION FORM.
LETTER OF TRANSMITTAL. Soon after the completion of the merger, the
exchange agent will send a letter of transmittal to each person who was an F&M
Bancorp stockholder at the effective time of the merger who has not previously
and properly surrendered shares of F&M Bancorp common stock to the exchange
agent. This mailing will contain instructions on how to surrender shares of F&M
Bancorp common stock (if these shares have not already been surrendered) in
exchange for the merger consideration the holder is entitled to receive under
the merger agreement.
Until you surrender your F&M Bancorp stock certificates for exchange, you
will accrue, but will not be paid, any dividends or other distributions declared
after the effective time with respect to Mercantile common stock into which any
of your shares may have been converted. When you surrender your certificates,
Mercantile will pay any unpaid dividends or other distributions, without
interest. After the effective time, there will be no transfers on the stock
transfer books of F&M Bancorp of any shares of F&M Bancorp common stock.
If certificates representing shares of F&M Bancorp common stock are
presented for transfer after the completion of the merger, they will be
cancelled and exchanged for the merger consideration into which the shares of
F&M Bancorp common stock represented by that certificate shall have been
converted.
If a certificate for F&M Bancorp common stock has been lost, stolen or
destroyed, the exchange agent will issue the consideration properly payable
under the merger agreement upon receipt of
31
appropriate evidence as to that loss, theft or destruction, appropriate evidence
as to the ownership of that certificate by the claimant, and appropriate and
customary indemnification.
ALLOCATION
A fixed number of shares of Mercantile common stock will be issued and a
fixed amount of cash paid in the merger. Accordingly, there is no assurance that
you will receive the form of consideration that you elect with respect to any or
all shares of F&M Bancorp common stock you hold. If the elections of all of the
F&M Bancorp stockholders result in an oversubscription of the pool of cash or
Mercantile common stock, the exchange agent will allocate between cash and
Mercantile common stock in the manner described below.
OVERSUBSCRIPTION OF THE CASH CONSIDERATION. If the aggregate cash amount
that would be paid upon the conversion in the merger of the cash election shares
is more than the total cash amount, then:
- all stock election shares and non-electing shares will be converted into
the per share stock consideration;
- the exchange agent will then select from among the cash election shares,
by a pro rata selection process, a sufficient number of shares such that
the aggregate cash amount that will be paid in the merger equals as
closely as possible the total cash amount;
- all shares selected by the exchange agent through the pro rata selection
process described in the prior bullet point will be converted into the per
share stock consideration; and
- the cash election shares that have not been selected by the exchange agent
to be converted into the per share stock consideration will be converted
into the per share cash consideration.
OVERSUBSCRIPTION OF THE STOCK CONSIDERATION. If the aggregate cash amount
that would be paid upon the conversion in the merger of the cash election shares
is less than the total cash amount, then:
- all cash election shares will be converted into the per share cash
consideration;
- the exchange agent will then select from among the non-electing shares and
then, if necessary, from among the stock election shares, by a pro rata
selection process, a sufficient number of shares such that the aggregate
cash amount that will be paid in the merger equals as closely as possible
the total cash amount;
- all shares selected by the exchange agent through the pro rata selection
process described in the prior bullet point will be converted into the per
share cash consideration; and
- the stock election shares and non-electing shares that have not been
selected by the exchange agent to be converted into the per share cash
consideration will be converted into the per share stock consideration.
The allocation described above will be computed by the exchange agent within
ten days after the election deadline, unless the merger has not been completed,
in which case the allocation will be completed as soon as practicable after
completion of the merger. The exchange agent will use an equitable pro rata
allocation process to be mutually determined by F&M Bancorp and Mercantile.
BECAUSE THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF RECEIVING CASH,
MERCANTILE COMMON STOCK, OR BOTH CASH AND MERCANTILE COMMON STOCK WILL DIFFER,
F&M BANCORP STOCKHOLDERS ARE URGED TO READ CAREFULLY THE INFORMATION SET FORTH
UNDER THE CAPTION "--MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES" AND
TO CONSULT THEIR TAX ADVISORS FOR A FULL UNDERSTANDING OF THE MERGER'S TAX
CONSEQUENCES TO THEM. IN ADDITION, BECAUSE THE STOCK CONSIDERATION CAN FLUCTUATE
IN VALUE FROM THE DETERMINATION MADE DURING THE VALUATION PERIOD, THE ECONOMIC
VALUE PER SHARE RECEIVED BY F&M BANCORP STOCKHOLDERS WHO RECEIVE THE STOCK
CONSIDERATION MAY, AS THE DATE OF RECEIPT BY THEM, BE MORE OR LESS THAN THE
AMOUNT OF CASH CONSIDERATION PER SHARE RECEIVED BY F&M BANCORP STOCKHOLDERS WHO
RECEIVE CASH CONSIDERATION.
32
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses the material United States federal income
tax consequences of the merger to a stockholder of F&M Bancorp that holds its
shares of F&M Bancorp common stock as a capital asset. In this discussion, we
refer to such a stockholder as a "HOLDER." This discussion is based upon the
Internal Revenue Code of 1986, as amended, Treasury regulations promulgated
under the Internal Revenue Code, judicial authorities, published positions of
the IRS and other applicable authorities, all as in effect on the date of this
discussion and all of which are subject to change (possibly with retroactive
effect) and to differing interpretations. This discussion does not address all
aspects of United States federal income taxation that may be relevant to holders
in light of their particular circumstances and does not address aspects of
United States federal income taxation that may be applicable to holders subject
to special treatment under the Internal Revenue Code (including banks,
tax-exempt organizations, insurance companies, dealers in securities or foreign
currency, investors in pass-through entities, holders that hold their shares of
F&M Bancorp common stock as part of a hedge, straddle or conversion transaction,
holders that acquired their shares of F&M Bancorp common stock pursuant to the
exercise of employee stock options or otherwise as compensation, and holders who
are not United States persons). In addition, the discussion does not address any
aspect of state, local or foreign taxation. No assurance can be given that the
IRS would not assert, or that a court would not sustain, a position contrary to
any of the tax aspects set forth below.
EACH HOLDER OF F&M BANCORP COMMON STOCK IS URGED TO CONSULT ITS TAX ADVISOR
WITH RESPECT TO THE PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES OF THE MERGER TO IT.
The closing of the merger is conditioned upon the receipt by F&M Bancorp of
the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel to
F&M Bancorp, and the receipt by Mercantile of the opinion of Venable, Baetjer
and Howard, LLP, counsel to Mercantile, each dated as of the effective date of
the merger substantially to the effect that, on the basis of facts,
representations and assumptions set forth or referred to in those opinions
(including factual representations contained in certificates of officers of
F&M Bancorp and Mercantile) which are consistent with the state of facts
existing as of the effective date of the merger, the merger will be treated for
United States federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code. The tax opinions to be delivered
in connection with the merger are not binding on the IRS or the courts, and
neither F&M Bancorp nor Mercantile intends to request a ruling from the IRS with
respect to the United States federal income tax consequences of the merger.
Consequently, no assurance can be given that the IRS will not assert, or that a
court would not sustain, a position contrary to any of those set forth below. In
addition, if any of the facts, representations or assumptions upon which such
opinions are based are inconsistent with the actual facts, the United States
federal income tax consequences of the merger could be adversely affected.
The discussion set forth below, subject to the limitations and
qualifications set forth herein, constitutes the opinion of Skadden, Arps,
Slate, Meagher & Flom LLP and Venable, Baetjer and Howard, LLP as to the
material United States federal income tax consequences of the merger to holders
of F&M Bancorp common stock. In connection with the filing of the registration
statement, Skadden, Arps, Slate, Meagher & Flom LLP has provided an opinion to
F&M Bancorp and Venable, Baetjer and Howard, LLP has provided an opinion to
Mercantile, each dated as of the date of the registration statement of which
this document forms a part substantially to the effect that the merger will be
treated for United States federal income tax purposes as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code. Such opinions are
filed as Exhibits 8(A) and 8(B) to the registration statement of which this
document forms a part, and are based on certain assumptions relating to the
qualification of the merger as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, including, among others, that
(1) the value of the Mercantile common stock issued to F&M Bancorp stockholders
pursuant to the merger as a percentage of the total consideration to be
furnished to F&M Bancorp stockholders in the merger will satisfy the continuity
of shareholder interest requirement for corporate reorganizations, and none of
Mercantile or any party
33
related to Mercantile will acquire or redeem, in connection with the merger,
shares of Mercantile common stock issued to F&M Bancorp stockholders that is
inconsistent with such requirement, (2) Mercantile will continue F&M Bancorp's
historic business or will use a significant portion of F&M Bancorp's historic
business assets in a business, and (3) the merger will be consummated in
accordance with the terms of the merger agreement and the proxy
statement-prospectus.
The United States federal income tax consequences of the merger to a holder
generally will depend on whether the holder exchanges its F&M Bancorp common
stock for cash, Mercantile common stock or a combination of cash and Mercantile
common stock.
EXCHANGE SOLELY FOR CASH. In general, if, pursuant to the merger, a holder
exchanges all of the shares of F&M Bancorp common stock actually owned by it
solely for cash, such holder will recognize gain or loss equal to the difference
between the amount of cash received and its adjusted tax basis in the shares of
F&M Bancorp common stock surrendered, which gain or loss generally will be
long-term capital gain or loss if the holder's holding period with respect to
the F&M Bancorp common stock surrendered is more than one year. If, however, a
holder that exchanges all of the shares of F&M Bancorp common stock actually
owned by it solely for cash also constructively owns shares of F&M Bancorp
common stock that are exchanged for shares of Mercantile common stock in the
merger or owns shares of Mercantile common stock actually or constructively
after the merger, the consequences to such holder may be similar to the
consequences described below under the heading "Exchange for Mercantile Common
Stock and Cash," except that the amount of consideration, if any, treated as a
dividend may not be limited to the amount of such holder's gain.
EXCHANGE SOLELY FOR MERCANTILE COMMON STOCK. If, pursuant to the merger, a
holder exchanges all of the shares of F&M Bancorp common stock actually owned by
it solely for shares of Mercantile common stock, such holder will not recognize
any gain or loss except in respect of cash received in lieu of any fractional
share of Mercantile common stock (as discussed below). The aggregate adjusted
tax basis of the shares of Mercantile common stock received in the merger will
be equal to the aggregate adjusted tax basis of the shares of F&M Bancorp common
stock surrendered for the Mercantile common stock (reduced by the tax basis
allocable to any fractional share of Mercantile common stock for which cash is
received), and the holding period of the Mercantile common stock will include
the period during which the shares of F&M Bancorp common stock were held by such
holder. If a holder has differing bases or holding periods in respect of its
shares of F&M Bancorp common stock, it should consult its tax advisor prior to
the exchange with regard to identifying the bases or holding periods of the
particular shares of Mercantile common stock received in the exchange.
EXCHANGE FOR MERCANTILE COMMON STOCK AND CASH. If, pursuant to the merger,
a holder exchanges all of the shares of F&M Bancorp common stock actually owned
by it for a combination of Mercantile common stock and cash, the holder
generally will recognize gain (but not loss) in an amount equal to the lesser of
(1) the amount of gain realized (i.e., the excess of the sum of the amount of
cash and the fair market value of the Mercantile common stock received pursuant
to the merger over such holder's adjusted tax basis in its shares of F&M Bancorp
common stock surrendered) and (2) the amount of cash received pursuant to the
merger. For this purpose, gain or loss must be calculated separately for each
identifiable block of shares surrendered in the exchange, and loss realized on
one block of shares may not be used to offset gain realized on another block of
shares. Any recognized gain generally will be long-term capital gain if the
holder's holding period with respect to the F&M Bancorp common stock surrendered
is more than one year. If, however, the cash received has the effect of the
distribution of a dividend, the gain would be treated as a dividend to the
extent of the holder's ratable share of accumulated earnings and profits as
calculated for United States federal income tax purposes. See "--Possible
Treatment of Cash as a Dividend" below.
The aggregate tax basis of Mercantile common stock received by a holder that
exchanges its shares of F&M Bancorp common stock for a combination of Mercantile
common stock and cash pursuant to the merger will be equal to the aggregate
adjusted tax basis of the shares of F&M Bancorp common stock surrendered for
Mercantile common stock and cash, reduced by the amount of cash received by
34
the holder pursuant to the merger, and increased by the amount of gain
(including any portion of the gain that is treated as a dividend as described
below), if any, recognized by the holder on the exchange. The holding period of
the Mercantile common stock will include the holding period of the shares of F&M
Bancorp common stock surrendered. If a holder has differing bases or holding
periods in respect of its shares of F&M Bancorp common stock, it should consult
its tax advisor prior to the exchange with regard to identifying the bases or
holding periods of the particular shares of Mercantile common stock received in
the exchange.
POSSIBLE TREATMENT OF CASH AS A DIVIDEND. In general, the determination of
whether the gain recognized in the exchange will be treated as capital gain or
has the effect of a distribution of a dividend depends upon whether and to what
extent the exchange reduces the holder's deemed percentage stock ownership of
Mercantile. For purposes of this determination, the holder is treated as if it
first exchanged all of its shares of F&M Bancorp common stock solely for
Mercantile common stock and then Mercantile immediately redeemed (the "deemed
redemption") a portion of such Mercantile common stock in exchange for the cash
the holder actually received. The gain recognized in the exchange followed by a
deemed redemption will be treated as capital gain if the deemed redemption is
(1) "substantially disproportionate" with respect to the holder or (2) "not
essentially equivalent to a dividend."
The deemed redemption generally will be "substantially disproportionate"
with respect to a holder if the percentage described in (2) below is less than
80% of the percentage described in (1) below. Whether the deemed redemption is
"not essentially equivalent to a dividend" with respect to a holder will depend
upon the holder's particular circumstances. In order for the deemed redemption
to be "not essentially equivalent to a dividend," the deemed redemption must
generally result in a "meaningful reduction" in the holder's deemed percentage
stock ownership of Mercantile. In general, such determination requires a
comparison of (1) the percentage of the outstanding stock of Mercantile that the
holder is deemed actually and constructively to have owned immediately before
the deemed redemption and (2) the percentage of the outstanding stock of
Mercantile that is actually and constructively owned by the holder immediately
after the deemed redemption. In applying the above tests, a holder may, under
the constructive ownership rules, be deemed to own stock that is owned by other
persons or otherwise in addition to the stock actually owned by the holder. As
these rules are complex and dependent upon a holder's specific circumstances,
each holder that may be subject to these rules should consult its tax advisor.
The IRS has ruled that a minority stockholder in a publicly held corporation
whose relative stock interest is minimal and who exercises no control with
respect to corporate affairs is considered to have a "meaningful reduction" if
such stockholder has a relatively minor reduction in its percentage stock
ownership under the above analysis.
CASH RECEIVED IN LIEU OF A FRACTIONAL SHARE. Cash received by a holder in
lieu of a fractional share of Mercantile common stock generally will be treated
as received in redemption of the fractional share, and gain or loss generally
will be recognized based on the difference between the amount of cash received
in lieu of the fractional share and the portion of the holder's aggregate
adjusted tax basis of the shares of F&M Bancorp common stock surrendered that is
allocable to the fractional share. Such gain or loss generally will be long-term
capital gain or loss if the holding period for such shares of F&M Bancorp common
stock is more than one year.
EMPLOYEE BENEFIT PLANS AND EXISTING AGREEMENTS
EMPLOYEE BENEFIT PLANS. Following the effective time of the merger, F&M
Bancorp employees will be eligible to participate in those Mercantile benefit
plans in which similarly situated employees of Mercantile participate. At the
discretion of Mercantile, F&M Bancorp employees will receive benefits that are
either (i) equal to those benefits received by similarly situated Mercantile
employees, or (ii) no less favorable than the benefits such F&M Bancorp
employees received immediately prior to the effective time of the merger. In any
event, as of January 1 of the second calendar year commencing after the
effective time of the merger (I.E., January 1, 2005, if the effective time of
the merger occurs in
35
2003), all F&M Bancorp employees will participate in Mercantile benefit plans to
the same extent as similarly situated employees of Mercantile.
With respect to each Mercantile employee benefit plan for which length of
service is taken into account for any purposes, service with F&M Bancorp or any
of its subsidiaries will be treated as service with Mercantile for purposes of
determining eligibility to participate, vesting and entitlement to benefits,
including severance benefits and vacation entitlements (but not for accrual of
defined benefit pension benefits). Such length of service with F&M Bancorp will
also be taken into account for purposes of satisfying waiting periods, evidence
of insurability requirements or the application of any pre-existing condition
limitations. In addition, each Mercantile plan will waive pre-existing condition
limitations to the same extent waived under the applicable F&M Bancorp plan.
Such employees will also be given credit for amounts paid under a corresponding
benefit plan during the same period for purposes of applying deductibles,
co-payments and out-of-pocket maximums as though such amounts had been paid in
accordance with the terms and conditions of the relevant Mercantile plan.
SEVERANCE PLAN. Following the effective time of the merger, if the
employment of an employee of the former F&M Bancorp is terminated within one
year after the effective time of the merger, such employee will be eligible to
receive the same severance benefits that Mercantile provides its similarly
situated employees as of the date of the merger agreement.
RETENTION PLAN. Prior to the effective time of the merger, in consultation
with Mercantile, F&M Bancorp will adopt a retention program under which certain
employees of F&M Bancorp, designated by the executive committee of F&M Bancorp,
shall be entitled to receive certain cash payments (not to exceed 25% of such
employee's base compensation). Employees designated for participation in the
retention program will be key employees whose skills or experience are
determined by Mercantile and F&M Bancorp to be particularly beneficial to the
combined company. One-half of this cash compensation will be paid at the
effective time of the merger, with the balance to be paid three months after the
effective time, contingent upon the continued employment of such employee as of
the payment date. These retention bonuses will also be payable to such employees
in the event that employment is terminated by Mercantile or one of its
subsidiaries without "cause" or by the employee due to a reduction in base
compensation or relocation of principal workplace by more than 35 miles. The
aggregate cash compensation to be paid pursuant to this retention program may
not exceed $800,000.
BONUS POOL. Within three months after the effective time of the merger,
Mercantile will cause pro-rata bonuses at 2002 levels to be paid to eligible
employees under the F&M Bancorp Stakeholder Incentive Plan, provided such
employees remain employed by Mercantile or one of its subsidiaries. These
pro-rata bonuses will also be payable in the event that such employee's
employment is terminated by Mercantile or one of its subsidiaries without
"cause" or by the employee due to a reduction in base compensation or relocation
of principal workplace by more than 35 miles.
401(K) PLAN. At or prior to the effective time of the merger, F&M Bancorp
will contribute to its 401(k) savings plan its annual discretionary and matching
contribution in respect of calendar year 2003. F&M Bancorp will also amend its
401(k) plan to provide that employees will be entitled to an allocation of such
contributions without regard to whether such employee continues to be employed
on December 31, 2003 and that any participant whose employment is terminated
without "cause" shall be fully vested in his or her 401(k) plan account.
EMPLOYEE STOCK PURCHASE PLAN. After the final scheduled purchase of shares
under F&M Bancorp's employee stock purchase plan just prior to the effective
time of the merger, Mercantile shall cause any remaining funds in a
participant's account to be refunded to such participant.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the F&M Bancorp board of directors that
F&M Bancorp stockholders vote in favor of approval of the merger agreement, F&M
Bancorp stockholders should be
36
aware that F&M Bancorp executive officers and directors may have interests in
the merger that may be different from, or in addition to, their interests as
stockholders of F&M Bancorp. F&M Bancorp's board of directors was aware of these
interests and took them into account in its decision to approve the merger
agreement.
These interests relate to or arise from, among other things:
- the continued indemnification of current directors and officers of F&M
Bancorp and its subsidiaries under the merger agreement and providing
these individuals with director's and officer's liability insurance;
- the potential receipt of change in control, severance and bonus payments;
- the maintenance of a split-dollar life insurance policy for James L. Hogan
pursuant to applicable law;
- the receipt of cash payments by certain executive officers in respect of
foregone option grants;
- the entitlement by each executive officer to receive reimbursement for tax
advice and financial planning;
- two members of the current F&M Bancorp board of directors will become
members of the board of directors of Mercantile and receive a fee in
connection with their service;
- at least four members of the current F&M Bancorp board of directors will
be appointed to serve on the boards of directors of certain Mercantile
affiliate banks in the F&M Bancorp market area and receive a fee in
connection with their service;
- the establishment by the surviving bank of an "advisory board" on which
each of the current members of the F&M Bancorp board of directors will be
invited to serve for an initial four-year term and receive a fee in
connection with their service; and
- acceleration of vesting and conversion of stock options held by directors
and officers of F&M Bancorp to stock options for Mercantile common stock.
INDEMNIFICATION AND INSURANCE. Mercantile and F&M Bancorp have agreed in
the merger agreement that, from and after the effective time of the merger,
Mercantile will indemnify and hold harmless each present and former director and
officer of F&M Bancorp or any of its subsidiaries against any losses, claims,
damages, liabilities, costs, expenses, judgments, fines and amounts paid in
settlement in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative. Mercantile has also
agreed in the merger agreement that, for a period of six years after the
effective time of the merger, it will cause the former directors and officers of
F&M Bancorp to be covered by the policy maintained by Mercantile or by a policy
of at least the same coverage and containing terms no less advantageous to its
beneficiaries than Mercantile policies, subject to certain maximum cost limits.
SEVERANCE AND CHANGE IN CONTROL PAYMENTS. Faye E. Cannon and David R.
Stauffer are participants in the F&M Bancorp Executive Supplemental Income Plan,
which provides, among other things, for certain payments in connection with
termination of employment within three years following a change in control. If
these payment obligations are triggered, Ms. Cannon and Mr. Stauffer will each
be entitled to receive annual cash payments of full salary plus bonus from the
date of employment termination until the third anniversary of the change in
control, in lieu of payment of 65% of salary plus bonus (offset by other
employer-provided retirement benefits) to which they otherwise would have been
entitled during such period. The incremental amount to which Ms. Cannon and
Mr. Stauffer will become entitled to receive upon termination of employment
after the effective time of the merger is approximately $250,000 and $150,000,
respectively, assuming September 30, 2003 as the effective time of the merger.
In the event that such payments are subject to the excise tax imposed on
"parachute payments" under Section 4999 of the Internal Revenue Code,
Ms. Cannon and Mr. Stauffer are entitled to receive gross-up payments for any
amounts payable in respect of such excise tax.
37
F&M Bancorp currently maintains the F&M Bancorp Executive Deferred
Compensation Plan whereby certain participating executives are permitted to
defer receipt of portions of their annual compensation until the time of
termination of their employment. The plan provides that upon a change in
control, F&M Bancorp shall establish a rabbi trust to hold the sum of all
compensation deferred by each of the participating executives plus accrued
interest. Ms. Cannon and Messrs. Stauffer and Hogan are currently participants
in this plan.
Pursuant to individual change in control agreements entered into by and
between F&M Bancorp and certain of its officers, Ms. Simmons and Messrs. Cooley
and Hogan will become entitled to receive lump sum cash payments of
approximately $900,000, $850,000, and $850,000, respectively, if their
employment is terminated for specified reasons following the effective time of
the merger, assuming September 30, 2003 as the effective time of the merger. In
the event that any payments are subject to the excise tax imposed on "parachute
payments" under Section 4999 of the Internal Revenue Code, such executives are
entitled to receive gross-up payments equal to the amount of such excise tax.
Pursuant to the F&M Bancorp Unfunded Deferred Compensation Plan for
Non-Employee Directors, each non-employee director is permitted to defer the
payment of fees otherwise payable for services provided as a director of F&M
Bancorp. Under the terms of this plan, upon a termination of service as a
director following a change in control of F&M Bancorp, each non-employee
director is entitled to receive the balance of his or her deferral account. In
addition, under such circumstances each non-employee director is also entitled
to receive a lump sum cash payment in an amount equal to three times the current
annual retainer. Therefore, in addition to receipt of the deferral accounts, if
any, under such circumstances each non-employee director will become entitled to
receive a lump sum cash payment in the amount of $21,000. In the event that such
payments are subject to the excise tax imposed on "parachute payments" under
Section 4999 of the Internal Revenue Code, such non-employee directors are
entitled to receive gross-up payments equal to the amount of such excise tax.
EXECUTIVE OFFICERS OF SURVIVING BANK. Upon completion of the merger and
receipt of all required approvals, Mercantile intends to appoint O. James
Talbott, II, a senior vice president of Mercantile, to serve as chairman of the
board and chief executive officer of the surviving bank, David R. Stauffer,
senior executive vice president and chief operating officer of F&M Bancorp, to
serve as vice-chairman of the board of the surviving bank, Kaye A. Simmons,
executive vice president and chief financial officer of F&M Bancorp, to serve as
chief financial officer of the surviving bank, Stephen K. Heine, executive vice
president and director of Sales and Marketing for F&M Bancorp, to head
Commercial and Retail Banking for the surviving bank, and David L. Hoffman,
senior vice president of commercial loan administration at Fredericktown Bank &
Trust Company, to serve as chief credit officer of the surviving bank. Neither
Mercantile nor any of its affiliates have entered into any employment agreements
with these individuals.
BONUS PAYMENTS. The merger agreement provides that within three months
after the effective time of the merger, Mercantile will cause pro-rata bonuses
at 2002 levels to be paid to eligible employees under the F&M Bancorp
Stakeholder Incentive Plan if such employees remain employed by Mercantile or
one of its subsidiaries or if such employee's employment is terminated by
Mercantile or one of its subsidiaries without "cause" or by the employee due to
a reduction in base compensation or relocation of principal workplace by more
than 35 miles. Assuming September 30, 2003 as the effective time of the merger,
the payments to which Ms. Cannon and Ms. Simmons and Messrs. Stauffer, Cooley,
and Hogan could become eligible to receive are approximately $175,000, $80,000,
$95,000, $75,000 and $75,000, respectively.
SPLIT-DOLLAR LIFE INSURANCE POLICY. Mercantile has agreed in the merger
agreement to assume the fully-funded split-dollar life insurance plan that F&M
Bancorp currently maintains for Mr. Hogan pursuant to applicable law. Under the
terms of this insurance policy, Mr. Hogan's beneficiary is entitled to receive
$723,140 after reimbursing F&M Bancorp (or its assignee) $247,375, plus
compounded annual interest at a rate of 4.3% from the date of the agreement
until Mr. Hogan's death.
38
REIMBURSEMENT FOR TAX AND FINANCIAL PLANNING ADVICE. At or prior to the
effective time of the merger, F&M Bancorp will reimburse each of its executive
officers for expenses attendant to tax or financial planning advice such
executive officer received from third party advisors in connection with the
consummation of the proposed merger. Following the effective time of the merger
Mercantile will reimburse such executive officers for any additional such
expenses. In no event will any executive officer be reimbursed for any such
expenses in excess of an aggregate of $5,000.
PAYMENTS IN LIEU OF FOREGONE STOCK OPTIONS. At or prior to the effective
time of the merger, F&M Bancorp will pay Ms. Cannon and Mr. Stauffer $846,826
and $445,941, respectively, in respect of stock options to purchase 53,226
shares and 28,029 shares of F&M Bancorp common stock, respectively, that were
intended to be granted in 2003 pursuant to the formula for option grants under
F&M Bancorp's pre-existing option guidelines.
MERCANTILE BOARD OF DIRECTORS. Mercantile has agreed in the merger
agreement that as of the effective time of the merger, it will increase the size
of its board of directors by two members, and as of the effective time
Mercantile and F&M Bancorp shall mutually designate two individuals to fill the
resulting vacancies on Mercantile's board. It is expected that R. Carl Benna and
Howard B. Bowen will be appointed to serve on Mercantile's board.
BANK BOARD OF DIRECTORS. Mercantile has agreed in the merger agreement that
at least four members of the current F&M Bancorp board of directors will be
appointed to serve on the boards of certain Mercantile affiliate banks in the
F&M Bancorp market area.
ADVISORY BOARD. Mercantile has agreed that, promptly following the
effective time of the merger, it will cause surviving bank to establish an
advisory board and to appoint each individual who is currently serving as a
director of F&M Bancorp, if such individuals are willing to serve, as members of
the advisory board. The function of this advisory board will be to advise the
surviving bank with respect to deposit and lending activities in F&M Bancorp's
former market area, to maintain and develop customer relationships and assist
with the integration of F&M Bancorp into Mercantile and its affiliate structure.
The members of the advisory board who are willing to so serve initially shall be
elected or appointed for a term of four years beginning upon the effective time
of the merger. Each member of the advisory board will receive an annual retainer
fee for such service in an amount equal to $15,000.
ACCELERATION AND CONVERSION OF STOCK OPTIONS. All unvested stock options to
purchase F&M Bancorp common stock held by executive officers and directors of
F&M Bancorp will be converted automatically into fully-vested options to
purchase shares of Mercantile common stock. As of the date of the stockholder
meeting, F&M Bancorp executive officers and directors are expected to hold
unvested options to purchase a total of approximately [260,000] shares of F&M
Bancorp common stock with exercise prices ranging from $19 to $32.
RESTRICTIONS ON RESALES BY AFFILIATES
Shares of Mercantile common stock to be issued to F&M Bancorp stockholders
in the merger have been registered under the Securities Act of 1933 and may be
traded freely and without restriction by those stockholders not deemed to be
affiliates (as that term is defined under the Securities Act) of F&M Bancorp.
Any subsequent transfer of shares, however, by any person who is an affiliate of
F&M Bancorp at the time the merger is submitted for a vote of F&M Bancorp
stockholders will, under existing law, require either:
- the further registration under the Securities Act of the Mercantile common
stock to be transferred,
- compliance with Rule 145 promulgated under the Securities Act, which
permits limited sales under certain circumstances, or
- the availability of another exemption from registration.
39
An "affiliate" of F&M Bancorp is a person who directly, or indirectly
through one or more intermediaries, controls, is controlled by, or is under
common control with, F&M Bancorp. These restrictions generally are expected to
apply to the directors and executive officers of F&M Bancorp and the holders of
10% or more of the F&M Bancorp common stock. The same restrictions apply to
certain relatives or the spouse of those persons and any trusts, estates,
corporations or other entities in which those persons have a 10% or greater
beneficial or equity interest. Mercantile will give stop transfer instructions
to the transfer agent with respect to the shares of Mercantile common stock to
be received by persons subject to these restrictions, and the certificates for
their shares will be appropriately legended.
If any person who is an affiliate of F&M Bancorp becomes an affiliate of
Mercantile, such person may only transfer shares in a manner permitted by
Rule 144 promulgated under the Securities Act.
F&M Bancorp has agreed in the merger agreement to use its reasonable efforts
to cause each person who is an affiliate of F&M Bancorp for purposes of
Rule 145 under the Securities Act to deliver to Mercantile a written agreement
intended to ensure compliance with the Securities Act.
TREATMENT OF OPTIONS
Each outstanding option to acquire F&M Bancorp common stock granted under
F&M Bancorp's stock option plans will be converted automatically at the
effective time of the merger into a fully vested option to purchase Mercantile
common stock. F&M Bancorp stock options will continue to be governed by the
terms of the F&M Bancorp stock option plans under which they were granted,
except that:
- the number of shares of Mercantile common stock subject to the new
Mercantile option will be equal to the product of the number of shares of
F&M Bancorp common stock subject to the F&M Bancorp stock option and the
exchange ratio described in the merger agreement, rounded down to the
nearest whole share, and
- the exercise price per share of Mercantile common stock subject to the new
Mercantile stock option will be equal to the exercise price per share of
F&M Bancorp common stock under the F&M Bancorp stock option divided by the
exchange ratio described in the merger agreement, rounded up to the
nearest cent.
FRACTIONAL SHARES
Mercantile will not issue fractional shares in the merger. Instead, a cash
payment will be paid in an amount equal to the product of (i) the fractional
part of a share of Mercantile common stock multiplied by (ii) the per share
consideration established by the terms of the merger agreement.
EFFECTIVE TIME
The merger will become effective at such time as the later of the following
has occurred: (1) articles of merger reflecting the merger are filed with the
Maryland State Department of Assessments and Taxation or (2) at a later time,
not to exceed thirty days, specified in the articles of merger.
We anticipate that the merger will be completed during the third quarter of
2003. However, completion of the merger could be delayed if there is a delay in
satisfying any conditions to the merger. There can be no assurances as to
whether, or when, Mercantile and F&M Bancorp will complete the merger. If the
merger is not completed on or before December 31, 2003, either Mercantile or F&M
Bancorp 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 its covenants in the merger agreement. See
"--Conditions to the Completion of the Merger" and "--Regulatory Approvals
Required for the Merger" beginning on pages 41 and 45, respectively.
40
CONDITIONS TO THE COMPLETION OF THE MERGER
Completion of the merger is subject to various conditions. While it is
anticipated that all of the applicable conditions will be satisfied, there can
be no assurance as to whether or when all of those conditions will be satisfied
or, where permissible, waived.
The respective obligations of Mercantile and F&M Bancorp to complete the
merger are subject to the following conditions:
- approval of the merger agreement by F&M Bancorp's stockholders;
- approval of the merger agreement between Fredericktown Bank & Trust
Company and Farmers & Mechanics Bank by the respective board of directors
and stockholders of each bank;
- receipt of all required regulatory approvals and expiration of all related
statutory waiting periods;
- absence of any order, decree or injunction of a court or agency of
competent jurisdiction which prohibits the completion of the merger;
- absence of any statute, rule or regulation which prohibits, restricts or
makes illegal completion of the merger;
- effectiveness of the registration statement for the Mercantile shares to
be issued in the merger;
- approval by the Nasdaq National Market of listing of the shares of
Mercantile common stock to be issued in the merger;
- accuracy of the other party's representations and warranties contained in
the merger agreement as of the dates specified in that agreement, except,
in the case of most of those representations and warranties, where the
failure to be so accurate would not have a "material adverse effect" on
the party making those representations and warranties (see "--
Representations and Warranties" below), and the performance by the other
party of its obligations contained in the merger agreement in all material
respects;
- the receipt by that party of an opinion of its counsel substantially to
the effect that the merger will be treated for United States federal
income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
- the absence of any pending proceeding by any government entity seeking an
injunction to prevent the merger; and
- the receipt by each party of all other consents required to be obtained by
the party in connection with the merger or the bank merger, except to the
extent that the failure to obtain any required consent would not have a
material adverse effect on the party or the ability of the party to
complete the merger.
REPRESENTATIONS AND WARRANTIES
Each of F&M Bancorp and Mercantile has made representations and warranties
to the other in the merger agreement as to, among other things:
- corporate existence, good standing and qualification to conduct business,
- due authorization, execution, delivery and enforceability of the merger
agreement,
- capital structure,
- governmental and third-party consents necessary to complete the merger,
41
- absence of any violation of agreements or law or regulation as a result of
the merger,
- compliance with laws,
- SEC and regulatory filings,
- financial statements,
- absence of material adverse changes,
- employee benefit matters,
- loan portfolio,
- properties,
- material contracts,
- agreements with regulatory agencies and regulatory approvals,
- absence of legal proceedings and regulatory actions,
- receipt of a fairness opinion from its financial advisor,
- fees payable to financial advisors in connection with the merger, and
- tax matters.
Mercantile has also made representations and warranties to F&M Bancorp with
respect to (A) availability of sufficient cash and cash equivalents on hand to
finance the merger and (B) ownership of F&M Bancorp common stock. F&M Bancorp
has also made representations and warranties to Mercantile with respect to
environmental matters, and the inapplicability of state anti-takeover laws.
The representations and warranties of the parties will be deemed to be true
and correct unless the totality of any facts, circumstances or events
inconsistent with any of those representations or warranties has had or would be
reasonably likely to have a material adverse effect on the business, financial
condition or results of operations of the party making those representations and
warranties and its subsidiaries taken as a whole or on the ability of that party
and its subsidiaries to consummate the transactions contemplated by the merger
agreement. In determining whether a material adverse effect has occurred or is
likely, the parties will disregard any effects resulting from any of the
following:
- changes in banking laws, rules or regulations or interpretations thereof
by courts or governmental authorities,
- changes in generally accepted accounting principles or regulatory
accounting principles that apply to banks, thrifts or their holding
companies generally,
- changes attributable to or resulting from general economic conditions,
including changes in the prevailing level of interest rates,
- any action or omission of either party or their subsidiaries taken with
the prior consent of the other party, or
- any out of pocket transaction expenses in an amount not to exceed
$7,500,000 incurred by a party in connection with the merger agreement and
the merger.
42
CONDUCT OF BUSINESS PENDING THE MERGER
F&M Bancorp has agreed, during the period from the date of the merger
agreement to the completion of the merger (except as expressly provided in the
merger agreement and except as consented by Mercantile), to conduct its business
in the ordinary course consistent with past practice.
In addition, each of the parties has agreed that it will not, and will not
permit any of its subsidiaries to, without the prior consent of the other party,
- take any action that is intended or may reasonably be expected to result
in any of that party's representations and warranties being or becoming
untrue, or in any conditions to the merger not being satisfied;
- declare or pay any dividends on, or make other distributions in respect of
its capital stock, other than, in the case of F&M Bancorp, F&M Bancorp's
normal quarterly dividend not in excess of $0.29 per share, and, in the
case of Mercantile, other than its current quarterly dividend, the amount
of which may be increased consistent with past practice;
- except as required by generally accepted accounting principles or
regulatory accounting principles, change its methods of accounting in
effect as of December 31, 2002; or
- take or cause to be taken any action which would reasonably be expected to
prevent the merger from qualifying as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code.
F&M Bancorp has agreed to additional covenants that place restrictions on
the conduct of the business of F&M Bancorp and its subsidiaries, including
specific covenants providing that F&M Bancorp and its subsidiaries will not,
without the prior consent of Mercantile,
- amend its articles of incorporation, bylaws or other similar governing
documents;
- repurchase, redeem or otherwise acquire any shares of capital stock of F&M
Bancorp or any of its subsidiaries or securities convertible into such
stock, except for the acquisition of certain shares held in trust accounts
or for debts previously contracted;
- split, combine or reclassify any shares of its capital stock or issue or
sell, or authorize the issuance or sale of, any shares of F&M Bancorp
capital stock or any securities convertible into, or any rights or options
to acquire, any F&M Bancorp shares, except for the issuance of F&M Bancorp
common stock pursuant to F&M Bancorp's Employee Stock Purchase Plan or
upon the exercise of outstanding options issued under employee benefit
plans, programs or arrangements in accordance with their present terms;
- enter into any new line of business;
- other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or assume, guarantee
or otherwise become responsible for the obligations of any third party;
- acquire or agree to acquire any business or any corporation, partnership
or other business organization or division of any of those organizations,
or acquire any equity interests or assets, other than in connection with
foreclosures, settlements in lieu of foreclosures or troubled loan or debt
restructurings in the ordinary course of business consistent with past
practice;
- make any capital expenditures, other than in the ordinary course of
business or as necessary to maintain existing assets in good repair and
which do not exceed $250,000 individually or $1,000,000 in the aggregate;
43
- except as required by applicable law or as required to maintain
qualification pursuant to the Internal Revenue Code of 1986, as amended,
adopt, amend or terminate any employee benefit plan or any agreement,
arrangement, plan or policy between F&M Bancorp or any of its subsidiaries
and any of its current or former directors, officers or employees other
than certain retention and pro-rata bonus payments described above (see
"--Interests of Certain Persons in the Merger--Severance and Bonus
Payments");
- except as required by applicable law, increase in any manner the
compensation or fringe benefits of any director, officer or employee or
pay any benefit not required by any plan or agreement in effect as of the
date of the merger agreement;
- file any application to establish, relocate or terminate the operations of
any banking office of F&M Bancorp or any of its subsidiaries;
- other than in the ordinary course of business consistent with past
practice, sell, lease, encumber, assign or otherwise dispose of, or agree
to sell, lease, encumber, assign or otherwise dispose of, any of its
material assets, properties or other rights or agreements; or
- create, renew, amend or terminate, or give notice of a proposed renewal,
amendment or termination of, any material contract, agreement or lease for
goods, services or office space other than the renewal in the ordinary
course of business of any lease term which expires before the completion
of the merger.
Mercantile has also agreed not to take any action or enter into any
agreement that could reasonably be expected to jeopardize or materially delay
the receipt of any regulatory approval.
NO SOLICITATION BY F&M BANCORP
F&M Bancorp has agreed that it will not solicit, initiate, encourage or
facilitate any inquiries, proposals, indications of interest or offers with
respect to any:
- merger, consolidation, share exchange, or similar transaction involving
F&M Bancorp or Farmers & Mechanics Bank; or
- a sale, lease or other disposition directly or indirectly by merger,
consolidation, share exchange or otherwise of assets of F&M Bancorp or
Farmers & Mechanics Bank representing 25% or more of the consolidated
assets of F&M Bancorp (including capital stock of Farmers & Mechanics
Bank) or of Farmers & Mechanics Bank; or
- a transaction in which any person acquires beneficial ownership (as such
term is defined in Rule 13d-3 under the Exchange Act), or the right to
acquire beneficial ownership, or any "group" (as such term is defined
under the Exchange Act) has been formed which beneficially owns or has the
right to acquire beneficial ownership, of 25% or more of F&M Bancorp's or
Farmers & Mechanics Bank's outstanding capital stock.
In our discussion we refer to any offer or proposal of the type described in any
of the above points as an "ACQUISITION PROPOSAL."
Prior to obtaining stockholder approval of the merger with Mercantile,
however, the board of directors of F&M Bancorp may provide information to, or
negotiate or have discussions with, any person relating to an unsolicited
acquisition proposal if F&M Bancorp's board determines, consistent with its
fiduciary duties, that the proposal or offer would be likely to result in a
transaction which, if consummated, would result in such third party (or in the
case of a merger, consolidation or similar transaction, the stockholders of such
third party immediately prior thereto) acquiring, directly or indirectly,
44
(A) more than 50% of the voting power of F&M Bancorp's common stock or, in
the case of a merger, consolidation or similar transaction, the common
stock of the surviving or transferee entity or its publicly-held parent
corporation, or
(B) all or substantially all the assets of F&M Bancorp and its subsidiaries,
taken as a whole.
In addition, in either case, the transaction must be for consideration
consisting of cash and/or securities that the board of directors of F&M Bancorp
determines in its good faith judgment (based on the written advice of KBW) to
have a higher value than the aggregate consideration in the merger with
Mercantile. Further, the board of directors must determine in good faith that
the proposal is more favorable to F&M Bancorp's stockholders than the merger
with Mercantile, taking into account any changes to the terms of the merger
proposed by Mercantile in response to such proposal during the five-day period
Mercantile has to respond to F&M Bancorp after F&M Bancorp provides notice of
another acquisition proposal, as described below.
In our discussion we refer to any offer or proposal described above as a
"SUPERIOR PROPOSAL." Prior to providing confidential information to, or entering
into discussion or negotiations with, the other party in connection with a
superior proposal, the board of directors of F&M Bancorp must determine after
consultation with counsel that failure to take such action would breach the
directors' duties under applicable law. In addition, F&M Bancorp must execute a
confidentiality agreement with the other party and advise Mercantile of the
material terms and conditions relating to that other party's superior proposal.
Mercantile has five days to make a counteroffer, which the board of directors of
F&M Bancorp must consider in good faith before accepting a superior proposal.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
Mercantile and F&M Bancorp have agreed to use their reasonable best efforts
to obtain all regulatory approvals required to consummate the transactions
contemplated by the merger agreement, which include the consent of the Board of
Governors of the Federal Reserve System, the Maryland Commissioner of Financial
Regulation, and the Virginia Bureau of Financial Institutions (because
Mercantile has bank affiliates located in Virginia). We will make filings and
notifications for these purposes. The merger cannot proceed in the absence of
these regulatory approvals. It is presently contemplated that if any additional
governmental approvals or actions are required, such approvals or actions will
be sought. Although Mercantile and F&M Bancorp expect to obtain all necessary
regulatory approvals, there can be no assurance as to if and when these
regulatory approvals will be obtained. There can likewise be no assurance that
the United States Department of Justice or any state attorney general will not
attempt to challenge the merger on antitrust grounds, or, if such a challenge is
made, there can be no assurance as to its result.
TERMINATION OF THE MERGER AGREEMENT
GENERAL. The merger agreement may be terminated at any time prior to
completion of the merger, whether before or after the approval of the merger by
the stockholders of F&M Bancorp, in any of the following ways:
- by mutual consent of Mercantile and F&M Bancorp;
- by either Mercantile or F&M Bancorp, 30 days after the date on which any
application for a required regulatory approval is denied or is withdrawn
at the request of the governmental entity which must grant that approval,
unless within the 30-day period following a denial or withdrawal a
petition rehearing or an amended application has been filed with that
governmental entity, except that no party may so terminate the merger
agreement if a denial or request for withdrawal is a result of the failure
of a party to perform or observe its covenants contained in the merger
agreement;
45
- by either Mercantile or F&M Bancorp, if any governmental entity of
competent jurisdiction has issued a final nonappealable order enjoining or
otherwise prohibiting the merger;
- by either Mercantile or F&M Bancorp, if the merger is not completed on or
before December 31, 2003 unless the failure of the closing to occur by
that date is due to the failure of the party seeking to terminate the
merger agreement to perform covenants and agreements contained in the
merger agreement;
- by either Mercantile or F&M Bancorp, if the approval of the stockholders
of F&M Bancorp required for completion of the merger is not obtained at
the special meeting;
- by either Mercantile or F&M Bancorp, if (i) the terminating party is not
then in material breach of any representation, warranty, covenant or other
agreement contained in the merger agreement and (ii) there has been a
material breach of any of the representations, warranties, covenants or
agreements of the other party in the merger agreement, which breach is not
cured within 30 days following written notice to the party committing the
breach, or which breach, by its nature, cannot be cured prior to the
closing date of the merger, and which breach, individually or together
with all other breaches, would, if occurring or continuing on the closing
date, result in the failure of the condition relating to breaches of
representations and warranties described under "--Conditions to Completion
of the Merger";
- by F&M Bancorp if its board of directors determines that in light of a
superior proposal it must terminate the merger agreement to comply with
its fiduciary duties to F&M Bancorp and its stockholders, provided that
F&M Bancorp may not so terminate the merger agreement unless concurrently
with the termination of the merger agreement F&M Bancorp enters into an
acquisition agreement related to a superior proposal. Furthermore, F&M
Bancorp may not terminate the merger agreement prior to the fifth day
following Mercantile's receipt of a written notice advising Mercantile
that F&M Bancorp's board of directors is prepared to accept a superior
proposal, and only if, during that five-day period F&M Bancorp negotiates
in good faith with Mercantile to make adjustments in the terms and
conditions of the merger agreement as would enable F&M Bancorp to proceed
with the merger on those adjusted terms;
- by Mercantile if F&M Bancorp withdraws or adversely modifies its
recommendation of the merger, or if F&M Bancorp or Farmers & Mechanics
Bank accepts another acquisition proposal; or
- by F&M Bancorp, if the price of Mercantile common stock declines below
certain levels established by formulas set forth in the merger agreement,
as described in the following paragraphs.
PRICE-BASED TERMINATION. According to the terms of the merger agreement,
F&M Bancorp has the right to terminate the merger if both of the following
conditions are satisfied:
(1) the average closing price of Mercantile common stock as reported on the
Nasdaq National Market for the 20 consecutive trading days ending on the third
calendar day immediately prior to the effective date of the merger is less than
$27.37, and
(2) the "Mercantile ratio" is less than the "index ratio."
- "MERCANTILE RATIO" is the amount obtained by dividing the average of
the last reported sale prices per share of Mercantile common stock as
reported on the Nasdaq National Market during the 20-day valuation
period by $34.21 (which is the last reported sale price of Mercantile
common stock on the day prior to the signing of the merger agreement).
- "INDEX RATIO" is the amount obtained by dividing the closing price of
the Nasdaq Bank Index on the third calendar day immediately prior to
the effective date of the merger by the closing price of the Nasdaq
Bank Index on March 12, 2003, and subtracting 0.20 from that quotient.
46
In order to exercise this termination right, F&M Bancorp would have to give
prompt written notice to Mercantile at any time during the three-day period
ending on the day the merger would otherwise become effective. During the
three-day period beginning with its receipt of F&M Bancorp's notice, Mercantile
will have the option to avoid termination by electing to increase the total
stock consideration and/or the total cash consideration in a manner such that
the conditions in either clause (1) or (2) immediately above will be deemed not
to exist:
- the condition set forth in clause (1) will be deemed not to exist if the
total stock consideration and/or the total cash consideration is increased
so that the per share consideration after the increase is not less than
the per share consideration that would have been in effect if the
condition set forth in clause (1) did not exist; and
- the condition set forth in clause (2) will be deemed not to exist if the
total stock consideration and/or the total cash consideration is increased
so that the per share consideration after the increase is not less than
the per share consideration that would have been in effect if the
condition set forth in clause (2) did not exist.
The description in this section of F&M Bancorp's right to terminate the
merger agreement because of a decline of Mercantile's stock price is not
complete and is qualified in its entirety by reference to the specific
provisions of the merger agreement.
It is not possible to know whether the price-based termination right will be
triggered until after the third calendar day immediately prior to the effective
date of the merger. The F&M Bancorp board has made no decision as to whether it
would exercise its right to terminate the merger agreement if the termination
right were triggered. In considering whether to exercise its termination right,
the F&M Bancorp board of directors would, consistent with its fiduciary duties,
take into account all relevant facts and circumstances that exist at that time
and would consult with its financial advisors and legal counsel. If F&M
Bancorp's stockholders approve the merger agreement at the special meeting and
afterward the price-based termination right is triggered, the F&M Bancorp board
of directors will have the authority, consistent with its fiduciary duties, to
elect either to complete the merger, whether or not there is any increase in the
total stock consideration and/or the total cash consideration and without any
further action by or resolicitation of the stockholders of F&M Bancorp, or to
terminate the merger agreement.
TERMINATION FEE. F&M Bancorp must pay Mercantile a termination fee of
$20 million if:
- Mercantile terminates the merger agreement because F&M Bancorp withdraws
or adversely modifies its recommendation of the merger, or if F&M Bancorp
or Farmers & Mechanics Bank accepts another acquisition proposal;
- F&M Bancorp terminates the merger agreement and enters into an acquisition
agreement relating to a superior proposal as permitted by the terms of the
merger agreement; or
- an acquisition proposal has been publicly proposed by any person or such
person has publicly announced its intention to make an acquisition
proposal, or its intention has otherwise become widely known to the F&M
Bancorp stockholders, and after which both of the following occurs:
- the merger agreement is terminated by Mercantile or F&M Bancorp either
(i) by mutual agreement, or (ii) because the merger is not completed on
or before December 31, 2003; and
- within twelve months of terminating the merger agreement F&M Bancorp or
Farmers & Mechanics Bank enters into an agreement providing for, or
consummates, an acquisition proposal.
47
F&M Bancorp agreed to this termination fee arrangement in order to induce
Mercantile to enter into the merger agreement. This arrangement could have the
effect of discouraging other companies from trying to acquire F&M Bancorp.
EFFECT OF TERMINATION. If the merger agreement is terminated, it will
become void and there will be no liability on the part of Mercantile or F&M
Bancorp or their respective officers or directors, except that:
- any termination will be without prejudice to the rights of any party
arising out of the willful breach by the other party of any provision of
the merger agreement;
- certain provisions of the merger agreement relating to the payment of fees
and expenses and the confidential treatment of information will survive
the termination; and
- Mercantile and F&M Bancorp each will bear its own expenses in connection
with the merger agreement and the transactions contemplated by the merger
agreement.
EXTENSION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
EXTENSION AND WAIVER. At any time prior to the completion of the merger,
each of Mercantile and F&M Bancorp may, to the extent legally allowed:
- extend the time for the performance of the obligations under the merger
agreement;
- waive any inaccuracies in the other party's representations and warranties
contained in the merger agreement; and
- waive the other party's compliance with any of its agreements contained in
the merger agreement, or waive compliance with any conditions to its
obligations to complete the merger.
AMENDMENT. Subject to compliance with applicable law, Mercantile and F&M
Bancorp may amend the merger agreement at any time before or after approval of
the merger agreement by F&M Bancorp stockholders. However, after approval of the
merger agreement by F&M Bancorp stockholders, there may not be, without their
further approval, any amendment of the merger agreement that reduces the amount
or changes the form of the consideration to be delivered to the F&M Bancorp
stockholders.
STOCK MARKET LISTING
Mercantile common stock is listed on the Nasdaq National Market. Mercantile
has agreed to use its reasonable best efforts to cause the shares of Mercantile
common stock to be issued in the merger to be listed on the Nasdaq National
Market. It is a condition of the merger that those shares be listed on the
Nasdaq National Market.
EXPENSES
The merger agreement provides that each of Mercantile and F&M Bancorp will
pay its own expenses in connection with the transactions contemplated by the
merger agreement.
APPRAISAL RIGHTS
Appraisal rights are statutory rights that enable stockholders who object to
extraordinary transactions, such as mergers, to demand that the corporation pay
the fair value for their shares as determined by a court in a judicial
proceeding instead of receiving the consideration offered to stockholders in
connection with the extraordinary transaction. Appraisal rights are not
available in all circumstances and exceptions to those rights are set forth in
the laws of Maryland.
48
F&M Bancorp stockholders are not entitled to appraisal rights under Maryland
law in connection with the merger because shares of F&M Bancorp are listed on
the Nasdaq National Market. Maryland law generally states that in connection
with the consummation of a plan of merger, stockholders of a company whose stock
is listed on a national securities exchange or designated as a national market
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. are not entitled to appraisal rights.
ACCOUNTING TREATMENT
Mercantile will account for the merger as a purchase, as that term is used
under generally accepted accounting principles, for accounting and financial
reporting purposes. Under purchase accounting, the assets and liabilities of F&M
Bancorp as of the effective time will be recorded at their respective fair
values and added to those of Mercantile. The amount by which the purchase price
paid by Mercantile exceeds the fair value of the net tangible and identifiable
intangible assets acquired by Mercantile through the merger will be recorded as
goodwill. Financial statements of Mercantile issued after the effective time
will reflect these values and will not be restated retroactively to reflect the
historical financial position or results of operations of F&M Bancorp. A
comparison of the most recent annual financial statements of Mercantile and F&M
Bancorp indicates that Mercantile's investment in F&M Bancorp will represent
less than 20% of Mercantile's assets.
COMPARATIVE RIGHTS OF STOCKHOLDERS
The rights of F&M Bancorp stockholders are currently governed by the
Maryland General Corporation Law (the "MGCL") and the charter and bylaws of F&M
Bancorp. The rights of Mercantile stockholders are currently governed by the
MGCL and the charter and bylaws of Mercantile. The following discussion
summarizes the material differences between the current rights of F&M Bancorp
stockholders and the rights they will have as Mercantile stockholders if they
receive Mercantile Common Stock in the merger.
The following comparison of stockholders' rights is necessarily a summary
and is not intended to be complete or to identify all differences that may,
under given situations, be material to stockholders. This summary is qualified
in its entirety by reference to the MGCL, F&M Bancorp's charter and bylaws and
Mercantile's charter and bylaws.
AUTHORIZED CAPITAL STOCK
MERCANTILE. Mercantile is authorized to issue 130,000,000 shares of common
stock, par value $2.00 per share, and 2,000,000 shares of preferred stock,
without par value. Mercantile's board of directors may reclassify already
classified, but unissued, shares of Mercantile's preferred stock and may alter
the rights, privileges and restrictions on the unissued Mercantile preferred
stock. Currently, no Mercantile preferred stock is outstanding.
F&M BANCORP. F&M Bancorp is authorized to issue 50,000,000 shares of common
stock, par value $5.00 per share. All are currently classified as shares of
common stock. F&M Bancorp's board of directors may classify and reclassify any
unissued shares of capital stock into other classes and series, including one or
more series of preferred stock.
SIZE OF BOARD OF DIRECTORS
MERCANTILE. Mercantile currently has 16 directors, which number may be
increased or decreased by the action of the board. The merger agreement requires
that the board increase the number of members from 16 to 18, and to fill the
vacancies by appointing two F&M Bancorp directors.
49
F&M BANCORP. F&M Bancorp's bylaws provide for sixteen directors, which
number may be increased or decreased by two-thirds of the directors then in
office, so long as the number is not decreased below the minimum number required
by Maryland law. F&M Bancorp's board of directors is currently comprised of
eleven persons.
REMOVAL OF DIRECTORS
MERCANTILE. Mercantile's charter requires the affirmative vote of not less
than two-thirds of all the votes entitled to be cast by the stockholders
generally in the election of directors to remove any director or the entire
board of directors. Directors may be removed only for cause as provided under
Maryland law.
F&M BANCORP. F&M Bancorp's charter provides that a director or the entire
board of directors may be removed only for cause by the affirmative vote of the
holders of at least 80% of the combined voting power of all classes of all
shares of F&M Bancorp capital stock entitled to vote generally in the election
of directors, voting together as a single class.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
MERCANTILE. Under Mercantile's charter, a vacancy on the board of
directors, including a vacancy resulting from an increase in the number of
directors, shall be filled by vote of a majority of directors remaining in
office.
F&M BANCORP. F&M Bancorp's bylaws provide that vacancies on the board of
directors may be filled by (i) election of stockholders, if the vacancy results
from removal of a director, (ii) by the majority of the remaining directors then
in office, whether or not they constitute a quorum, if the vacancy is not
pursuant to an increase in the number of directors or (iii) by the majority of
the entire board if pursuant to an increase in the number of directors.
NOMINATION OF DIRECTOR CANDIDATES BY STOCKHOLDERS
MERCANTILE. Mercantile's bylaws provide that any stockholder entitled to
vote for the election of directors may make nominations for the election of
directors by giving written notice to the Secretary of Mercantile at least 60
days but not more than 90 days prior to the annual meeting of stockholders at
which directors are to be elected. The notice must contain specific information
as set forth in Mercantile's bylaws.
F&M BANCORP. F&M Bancorp's bylaws permit stockholders to nominate
candidates for election to F&M Bancorp's board. The stockholder must deliver or
mail such notice to F&M Bancorp's Secretary not less than 90 days nor more than
120 days prior to the first anniversary of the preceding year's annual meeting
subject to certain adjustments. Such notice must contain specific information as
set forth in F&M Bancorp's bylaws.
CALLING SPECIAL MEETINGS OF STOCKHOLDERS
MERCANTILE. Mercantile's bylaws provide that special meetings of
stockholders may be called at any time for any purpose by Mercantile's board of
directors, chairman, vice-chairman or president, or otherwise as required by
law. In the case of a Maryland corporation which so elects, as Mercantile has,
Maryland law requires that a special meeting of stockholders be held upon the
written request of stockholders entitled to cast at least a majority of all the
votes entitled to be cast at the proposed special meeting.
F&M BANCORP. F&M Bancorp's bylaws provide that special meetings of
stockholders may be called for any purpose by the chairman, the president, or a
majority of the board of directors. A special
50
meeting of stockholders may be called upon the written request of the holders of
shares entitled to cast at least a majority of all votes entitled to be cast at
the proposed special meeting, and then only as required by applicable law.
STOCKHOLDER PROPOSALS
MERCANTILE. Mercantile's bylaws provide that a stockholder wanting to
submit a stockholder proposal must deliver written notice to the Secretary of
Mercantile at least 60 days but not more than 90 days prior to the meeting,
subject to certain adjustments. Stockholder proposals relating to bylaw
amendments must meet the foregoing time requirements and must be submitted no
later than the latter of 10 days following public disclosure by Mercantile of
board action on an amendment, or the 60th day prior to the meeting. Notices of
proposals must contain information specified in Mercantile's bylaws.
F&M BANCORP. F&M Bancorp's bylaws also permit stockholders to make
proposals for any annual meeting of stockholders. The stockholder must deliver
or mail such notice to F&M Bancorp's Secretary not less than 90 days nor more
than 120 days prior to the first anniversary of the preceding year's annual
meeting subject to certain adjustments. Such notice must contain specific
information as set forth in F&M Bancorp's bylaws.
AMENDMENTS TO ARTICLES OF INCORPORATION
MERCANTILE. Maryland law provides that a corporation may amend its articles
of incorporation if the board of directors proposes the amendment to the
stockholders, and such amendment receives the requisite stockholder approval.
Unless a corporation's articles of incorporation provides otherwise, such
amendments must be approved by two-thirds of all votes entitled to be cast on
the matter. Mercantile's charter does not alter the default provisions of
Maryland law.
F&M BANCORP. F&M Bancorp's charter provides that the affirmative vote of
the holders of a majority of the total number of shares of all classes of
capital stock of F&M Bancorp outstanding and entitled to vote in the election of
directors is required to amend provisions of the articles of incorporation,
except that 80% of the aggregate votes entitled to be cast thereon is required
to amend, repeal or adopt provisions inconsistent with current provisions
relating to:
- various matters related to the board of directors, including staggered
terms for three classes of directors, vacancies on the board, size of the
board, and removal of directors; and
- evaluation of business combinations.
AMENDMENTS TO BYLAWS
MERCANTILE. Mercantile's board of directors may amend, alter, suspend or
repeal its bylaws. Actions by the directors relating to the bylaws must be
reported to the stockholders at the next annual meeting and the actions may be
changed or rescinded by majority vote of all the stock then outstanding and
entitled to vote. The directors may not amend the bylaw amendment provision.
F&M BANCORP. F&M Bancorp's bylaws authorize the board of directors to make,
repeal or alter the bylaws of F&M Bancorp. In addition, at a meeting duly called
for such purposes, stockholders can take such actions pursuant to a majority of
all votes cast at the meeting if a quorum is present, but 80% of the aggregate
votes entitled to be cast is required to amend, repeal, or adopt a provision of
the bylaws inconsistent with the purposes and effects of certain provisions of
F&M Bancorp's charter relating to:
- the required proportion of votes;
51
- various matters related to the board of directors, including staggered
terms for three classes of directors, vacancies on the board, size of the
board, and removal of directors; and
- evaluation of business combinations.
STOCKHOLDER VOTE ON FUNDAMENTAL ISSUES
MERCANTILE. Under Maryland law, certain transactions, including a merger,
or statutory share exchange in which the corporation is not the successor, a
consolidation, the sale, lease, exchange or other disposition of all or
substantially all of the property of the corporation, other than in the usual
and regular course of business, or voluntary dissolution of the corporation must
generally be approved by the affirmative vote of the holders of at least
two-thirds of the votes entitled to be cast on the matter. A corporation's
articles of incorporation may require a lower or higher vote for approval, but
the required vote must be at least a majority of the votes entitled to be cast
on the matter. Mercantile's charter does not alter the default provisions of
Maryland law.
F&M BANCORP. F&M Bancorp's charter provides for approval of extraordinary
transactions by the affirmative vote of holders of a majority of the total
number of shares of all classes outstanding and entitled to vote thereon.
STOCKHOLDERS' RIGHTS AGREEMENT
MERCANTILE. Mercantile has a stockholders' rights agreement, which will be
in effect for the combined company after the merger. Rights which under certain
circumstances may become exercisable for the purchase of Mercantile preferred
stock or Mercantile common stock--or exchangeable for Mercantile preferred stock
or Mercantile common stock--attach to each share of Mercantile common stock,
including shares of Mercantile common stock issuable in connection with the
merger agreement, under the Shareholders Protection Rights Agreement adopted by
Mercantile's board of directors in June, 1999. In general, these rights become
exercisable within 10 business days after a person, or group acquires or makes a
tender offer or an exchange offer for the beneficial ownership of 10% or more of
the outstanding Mercantile common stock or at an earlier or later time as the
Mercantile board of directors may determine. Until the rights become
exercisable, they will not be separable from the Mercantile common stock and
will automatically trade with the Mercantile common stock. When rights become
exercisable after a person or group acquires beneficial ownership of 10% or more
of the outstanding common stock of Mercantile, the right of such acquiring
person or group (and any affiliates and associates thereof) become void.
Accordingly, the Rights Agreement can have a deterrent effect on unsolicited
takeover attempts and, therefore, may delay or make it more difficult to achieve
a change in control of Mercantile.
F&M BANCORP. F&M Bancorp does not currently have a stockholders' rights
agreement.
DESCRIPTION OF MERCANTILE
MERCANTILE
Mercantile is a financial holding company and a bank holding company that is
headquartered in Baltimore, Maryland that engages in a general banking business
through Mercantile-Safe Deposit and Trust Company ("MSD&T") and 19 community
banks, and a mortgage banking company. Sixteen banks are located in Maryland,
three are in Virginia and one is in southern Delaware. The largest bank, MSD&T,
represents approximately 40% of total assets and operates 22 offices in Maryland
and one commercial office in Pennsylvania. Nearly all of Mercantile's
substantial trust operations and specialized corporate banking services are
provided by MSD&T.
52
Through its affiliated banks, Mercantile provides a full range of banking
services, including mortgage, trust and investment services designed to meet
substantially all of the financial needs of its customers. Mercantile commenced
operations in 1969. At March 31, 2003, it had total assets of approximately $11
billion, total loans of approximately $7.5 billion, total deposits of
approximately $8.5 billion and approximately $1.4 billion in stockholders'
equity. Mercantile's common stock trades on the Nasdaq National Market under the
symbol "MRBK." The deposits associated with its banking subsidiaries are insured
by the Federal Deposit Insurance Corporation.
The principal executive offices of Mercantile are located at Two Hopkins
Plaza, Baltimore, Maryland 21201 and its telephone number is (410) 237-5900.
RECENT DEVELOPMENTS
On April 8, 2003, Mercantile sold $300,000,000 in subordinated notes in a
Rule 144A offering. The notes mature on April 15, 2013, and bear interest at
4.625% per annum. The proceeds will be used for general corporate purposes,
which may include funding some or all of the cash portion of the merger
consideration.
DESCRIPTION OF F&M BANCORP
F&M Bancorp is a diversified financial services company headquartered in
Frederick, Maryland that is organized under the laws of the State of Maryland
and registered as a bank holding company under the Bank Holding Company Act of
1956, as amended. Based on assets at December 31, 2002, F&M Bancorp was the
fourth largest bank holding company headquartered in Maryland. F&M Bancorp
derives substantially all of its income from operation of its wholly owned
subsidiary, Farmers & Mechanics Bank, a Maryland state-chartered bank.
F&M Bancorp's subsidiaries engage in banking and a variety of related
financial services businesses. Retail banking, commercial banking, mortgage
banking, and trust and investment management services are provided through
Farmers & Mechanics Bank primarily in Maryland. Commercial and consumer
insurance services are provided by the Farmers & Mechanics Bank's insurance
agencies, Keller Stonebraker Insurance, Inc. and Potomac Basin Group Associates,
Inc., primarily in Maryland, Washington, D.C., and West Virginia. Farmers &
Mechanics Bank, through a strategic alliance with Raymond James Financial
Services, provides securities brokerage services.
On March 31, 2003, F&M Bancorp had consolidated assets of approximately
$2.1 billion, total loans of approximately $1.3 billion, total deposits of
approximately $1.7 billion, and total stockholders' equity of approximately $190
million. F&M Bancorp's common stock trades on the Nasdaq National Market under
the symbol "FMBN."
The principal executive offices of F&M Bancorp are located at 110 Thomas
Johnson Drive, Frederick, Maryland 21702 and its telephone number is
(888) 694-4170.
LEGAL MATTERS
Certain legal matters in connection with the validity of Mercantile common
stock offered by this prospectus and proxy statement, to be issued in connection
with the merger, will be passed upon by Venable, Baetjer and Howard, LLP,
Baltimore, Maryland. James L. Shea, a partner in Venable, Baetjer and Howard,
LLP, is a director of Mercantile.
EXPERTS
The consolidated financial statements of Mercantile and subsidiaries as of
December 31, 2002 and 2001 and for each of the years in the three year period
ended December 31, 2002 have been incorporated by reference herein and in the
registration statement in reliance upon the report of
53
PricewaterhouseCoopers LLP, independent accountants, incorporated by reference
herein and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of F&M Bancorp as of December 31, 2002
and for the year then ended incorporated by reference in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated by reference herein, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The consolidated financial statements of F&M Bancorp and subsidiaries as of
December 31, 2001 and 2000, and for each of the years in the two-year period
ended December 31, 2001, incorporated by reference herein, were audited by
Arthur Andersen LLP, independent certified public accountants, as stated in
their report incorporated by reference herein. F&M Bancorp has been unable,
after reasonable efforts, to obtain Andersen's written consent to its being
named in this document as having certified the consolidated financial statements
of F&M Bancorp, which are incorporated by reference herein, as required by
Section 7 of the Securities Act, and F&M Bancorp has, therefore, dispensed with
the requirement to file Andersen's consent in reliance on Rule 437a promulgated
under the Securities Act. As a result, your ability to assert claims against
Andersen may be limited. Furthermore, because F&M Bancorp has been unable to
obtain the written consent of Andersen, you will not be able to recover against
Andersen under Section 11 of the Securities Act for any untrue statements of a
material fact contained in the financial statements audited by Andersen or any
omissions to state a material fact required to be stated therein.
OTHER MATTERS
F&M Bancorp's board of directors does not know of any matters to be
presented at the special meeting other than the proposal to approve the merger.
If any other matters are properly brought before the special meeting or any
adjournment of the special meeting, the enclosed proxy will be deemed to confer
discretionary authority on the individuals named as proxies to vote the shares
represented by the proxy as to any such matters.
STOCKHOLDER PROPOSALS
F&M Bancorp will hold its 2003 annual meeting of stockholders only if the
merger is not consummated. In the event that this meeting is held, any
stockholder proposal must have been received by F&M Bancorp at its corporate
headquarters no later than November 15, 2002.
If F&M Bancorp changes its 2003 annual meeting date to a date more than
30 days from the date of its 2002 annual meeting, then the deadline will be
changed to a reasonable time before F&M Bancorp begins to print and mail its
proxy materials. If F&M Bancorp changes the date of its 2003 annual meeting in a
manner which alters the deadline, F&M Bancorp will so state in the first
quarterly report on Form 10-Q it files with the SEC after the date change or
will notify its stockholders in another reasonable manner.
If a stockholder intends to present a proposal for consideration or make a
nomination for director at the 2003 annual meeting, and such proposal or
nomination is not intended to be considered for inclusion in F&M Bancorp's 2003
annual meeting proxy materials, such stockholder must have given notice of such
proposal or nomination in writing, deliver to the secretary of F&M Bancorp on or
prior to January 16, 2003. However, if the date of the annual meeting is delayed
by more than 60 days from April 16, 2003, a written notice must be delivered to
the secretary of F&M Bancorp no later than the close of business on the tenth
day following the day on which notice of the meeting was mailed to stockholders,
or public announcement of the date of such meeting is made, whoever first
occurs.
54
WHERE YOU CAN FIND MORE INFORMATION
Mercantile and F&M Bancorp file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that Mercantile and F&M Bancorp file
with the SEC at the SEC's public reference room at 450 Fifth Street, NW,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. These SEC filings are also available
to the public from commercial document retrieval services and at the Internet
world wide web site maintained by the SEC at http://www.sec.gov. Mercantile's
filings with the SEC also can be accessed through the Internet world wide web
site maintained by Mercantile at http://www.mercantile.com
Mercantile filed a registration statement with the SEC to register the
issuance of the Mercantile common stock to be issued to F&M Bancorp stockholders
in the merger. This document is a part of that registration statement and
constitutes a prospectus of Mercantile. As allowed by SEC rules, this document
does not contain all the information you can find in Mercantile's registration
statement or the exhibits to that registration statement.
The SEC allows us to "incorporate by reference" information into this
document, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered part of this document, except for any
information superseded by information contained directly in this document or in
later filed documents incorporated by reference in this document.
This document incorporates by reference the documents set forth below that
Mercantile and F&M Bancorp have previously filed with the SEC. These documents
contain important information about Mercantile and F&M Bancorp and their
respective businesses and financial condition.
MERCANTILE SEC FILINGS
(1) Mercantile's Annual Report on Form 10-K for the year ended December 31,
2002;
(2) Mercantile's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003;
(3) Mercantile's Current Reports on Form 8-K, dated January 23, 2003,
February 3, 2003, February 7, 2003, February 27, 2003, March 13, 2003,
April 11, 2003, April 24, 2003, April 25, 2003, May 5, 2003 and June 11, 2003;
(4) Portions of Mercantile's Proxy Statement for its annual meeting of
stockholders on April 30, 2003, filed on March 26, 2003, that have been
incorporated by reference in Mercantile's Annual Report on Form 10-K for the
year ended December 31, 2002; and
(5) Mercantile's registration statements filed under Section 12 of the
Securities Exchange Act of 1934 that contain descriptions of Mercantile's common
stock and preferred stock purchase rights, including all amendments or reports
filed for the purpose of updating such descriptions.
F&M BANCORP SEC FILINGS
(1) F&M Bancorp's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002;
(2) F&M Bancorp's Quarterly Report for the quarter ended March 31, 2003;
(3) F&M Bancorp's Current Reports on Form 8-K dated March 13, 2003,
April 21, 2003 and April 28, 2003; and
(4) F&M Bancorp's registration statement filed pursuant to Section 12 of the
Exchange Act that contains descriptions of F&M Bancorp's common stock and other
rights, including all amendments or reports filed for the purpose of updating
such description.
55
Each of Mercantile and F&M Bancorp also incorporates by reference additional
documents that may be filed with the SEC pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 between the date of this document
and the closing of the merger.
You can obtain any of the documents incorporated by reference from
Mercantile or F&M Bancorp, as the case may be, the SEC or the SEC's Internet web
site as described above. Documents incorporated by reference are available from
the companies without charge, excluding all exhibits, except that if the
companies have specifically incorporated by reference an exhibit in this
document, the exhibit will also be available without charge. You may obtain
documents incorporated by reference in this document by requesting them in
writing or by telephone from the appropriate company at the following addresses:
Mercantile Bankshares Corporation F&M Bancorp
Two Hopkins Plaza, P.O. Box 1477 110 Thomas Johnson Drive
Baltimore, Maryland 21203 Frederick, Maryland 21702
Attn: David E. Borowy, Attn: Kaye A. Simmons,
Investor Relations Chief Financial Officer
Telephone: (410) 347-8039 Telephone: (888) 694-4170
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY , 2003 TO
RECEIVE THEM BEFORE THE F&M BANCORP SPECIAL MEETING.
You should rely only on the information contained or incorporated by
reference in this document. Mercantile and F&M Bancorp have not authorized
anyone to provide you with information that is different from what is contained
in this document. This document is dated , 2003. You should not assume
that the information contained in this document is accurate as of any date other
than that date. Neither the mailing of this document to stockholders nor the
issuance of Mercantile common stock in the merger creates any implication to the
contrary.
FORWARD-LOOKING STATEMENTS
Mercantile and F&M Bancorp make forward-looking statements in this document
and their public documents within the meaning of and pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. A
forward-looking statement encompasses any estimate, prediction, opinion or
statement of belief in this document and the underlying management assumptions.
These "forward-looking statements" include words such as "believes," "expects,"
"anticipates," "intends" and similar expressions. Forward-looking statements
appear in the discussions of matters such as the benefits of the merger between
F&M Bancorp and Mercantile, including future financial and operating results and
cost saving enhancements to revenue that may be realized from the merger, and
Mercantile's and F&M Bancorp's plans, objectives, expectations and intentions
and other statements contained in this document that are not historical facts.
These statements are based upon the current expectations and assessments of the
respective managements of Mercantile and F&M Bancorp and are subject to the
factors included in this document under the caption "Risk Factors" and other
risks described in Mercantile's and F&M Bancorp's respective Annual Reports on
Form 10-K for the year ended December 31, 2002 as filed with the SEC and other
reports filed by Mercantile and F&M Bancorp with the SEC under applicable law.
Our results ultimately may vary from the statements made in this document.
The forward-looking statements are made as of the date of the applicable
document and, except as required by applicable law, Mercantile and F&M Bancorp
assume no obligation to update these forward-looking statements or to update the
reasons why actual results could differ from those projected in the
forward-looking statements. You should consider these risks and uncertainties in
evaluating forward-looking statements and you should not place undue reliance on
these statements. Actual results may differ materially from the anticipated
results discussed in these forward-looking statements because of numerous
possible uncertainties.
56
APPENDIX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
Between
MERCANTILE BANKSHARES CORPORATION
and
F&M BANCORP
Dated as of March 13, 2003
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
--------
ARTICLE I--THE MERGER................................................ A-1
1.1 The Merger.................................................. A-1
1.2 Effective Time.............................................. A-1
1.3 Effects of the Merger....................................... A-1
1.4 Conversion of Company Common Stock.......................... A-1
1.5 Election Procedures......................................... A-3
1.6 Stock Options............................................... A-5
1.7 Parent Common Stock......................................... A-6
1.8 Articles of Incorporation................................... A-6
1.9 Bylaws...................................................... A-6
1.10 Directors and Officers...................................... A-6
1.11 Tax Consequences............................................ A-6
ARTICLE II--EXCHANGE OF SHARES....................................... A-6
2.1 Parent to Make Shares and Cash Available.................... A-6
2.2 Exchange of Shares.......................................... A-6
ARTICLE III--DISCLOSURE SCHEDULES; STANDARDS FOR
REPRESENTATIONS AND WARRANTIES....................................... A-8
3.1 Disclosure Schedules........................................ A-8
3.2 Standards................................................... A-8
ARTICLE IV--REPRESENTATIONS AND WARRANTIES OF THE COMPANY............ A-9
4.1 Corporate Organization...................................... A-9
4.2 Capitalization.............................................. A-9
4.3 Authority; No Violation..................................... A-10
4.4 Consents and Approvals...................................... A-11
4.5 SEC Reports................................................. A-11
4.6 Regulatory Reports.......................................... A-11
4.7 Financial Statements........................................ A-12
4.8 Broker's Fees............................................... A-12
4.9 Absence of Certain Changes or Events........................ A-12
4.10 Legal Proceedings........................................... A-13
4.11 Taxes....................................................... A-13
4.12 Employees................................................... A-13
4.13 Company Information......................................... A-14
4.14 Compliance with Applicable Law.............................. A-14
4.15 Certain Contracts........................................... A-14
4.16 Agreements with Regulatory Agencies......................... A-15
4.17 Environmental Matters....................................... A-15
4.18 Opinion..................................................... A-16
4.19 Approvals................................................... A-16
4.20 Loan Portfolio.............................................. A-16
4.21 Property.................................................... A-17
4.22 Reorganization.............................................. A-17
4.23 State Takeover Laws and Charter Provisions.................. A-17
4.24 Preparation of Representations and Warranties............... A-17
i
PAGE
--------
ARTICLE V--REPRESENTATIONS AND WARRANTIES OF PARENT.................. A-18
5.1 Corporate Organization...................................... A-18
5.2 Capitalization.............................................. A-18
5.3 Authority; No Violation..................................... A-19
5.4 Consents and Approvals...................................... A-20
5.5 SEC Reports................................................. A-20
5.6 Regulatory Reports.......................................... A-20
5.7 Financial Statements........................................ A-20
5.8 Broker's Fees............................................... A-21
5.9 Absence of Certain Changes or Events........................ A-21
5.10 Legal Proceedings........................................... A-21
5.11 Taxes....................................................... A-22
5.12 Employees................................................... A-22
5.13 Parent Information.......................................... A-22
5.14 Compliance with Applicable Law.............................. A-22
5.15 Ownership of Company Common Stock; Affiliates and
Associates.................................................. A-23
5.16 Agreements with Regulatory Agencies......................... A-23
5.17 Opinion..................................................... A-23
5.18 Approvals................................................... A-23
5.19 Loan Portfolio.............................................. A-23
5.20 Property.................................................... A-24
5.21 Reorganization.............................................. A-24
5.22 Certain Contracts........................................... A-24
5.23 Financing................................................... A-25
5.24 Preparation of Representations and Warranties............... A-25
ARTICLE VI--COVENANTS RELATING TO CONDUCT OF BUSINESS................ A-25
6.1 Covenants of the Company.................................... A-25
6.2 Covenants of Parent......................................... A-26
ARTICLE VII--ADDITIONAL AGREEMENTS................................... A-27
7.1 Regulatory Matters.......................................... A-27
7.2 Access to Information....................................... A-27
7.3 Exclusive Dealing........................................... A-28
7.4 Stockholder Meetings........................................ A-31
7.5 Legal Conditions to Merger.................................. A-31
7.6 Affiliates.................................................. A-31
7.7 Stock Exchange Listing...................................... A-31
7.8 Employee Benefit Plans; Existing Agreements................. A-31
7.9 Indemnification............................................. A-33
7.10 Additional Agreements....................................... A-34
7.11 Coordination of Dividends................................... A-34
7.12 Employee Stock Purchase Plan................................ A-34
7.13 Appointment of Directors.................................... A-34
7.14 Execution and Authorization of Bank Merger Agreement........ A-34
7.15 Advisory Board and Affiliate Boards......................... A-35
ii
PAGE
--------
ARTICLE VIII--CONDITIONS PRECEDENT................................... A-36
8.1 Conditions to Each Party's Obligation to Effect the
Merger...................................................... A-36
8.2 Conditions to Obligations of Parent......................... A-36
8.3 Conditions to Obligations of the Company.................... A-37
ARTICLE IX--TERMINATION AND AMENDMENT................................ A-38
9.1 Termination................................................. A-38
9.2 Effect of Termination....................................... A-40
9.3 Amendment................................................... A-40
9.4 Extension; Waiver........................................... A-40
ARTICLE X--GENERAL PROVISIONS........................................ A-40
10.1 Closing..................................................... A-40
10.2 Nonsurvival of Representations, Warranties and Agreements... A-40
10.3 Expenses.................................................... A-40
10.4 Notices..................................................... A-41
10.5 Interpretation.............................................. A-42
10.6 Counterparts................................................ A-42
10.7 Entire Agreement............................................ A-42
10.8 Governing Law............................................... A-42
10.9 Enforcement of Agreement.................................... A-42
10.10 Severability................................................ A-42
10.11 Publicity................................................... A-42
10.12 Assignment; No Third Party Beneficiaries.................... A-42
iii
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of March 13, 2003,
between Mercantile Bankshares Corporation, a Maryland corporation ("Parent"),
and F&M Bancorp, a Maryland corporation (the "Company"). Parent and the Company
are sometimes collectively referred to herein as the "Constituent Corporations."
WHEREAS, the Boards of Directors of Parent and the Company have determined
that it is in the best interests of their respective companies and their
shareholders to consummate the business combination transaction provided for
herein in which the Company will, subject to the terms and conditions set forth
herein, merge (the "Merger") with and into Parent which shall survive the
Merger; and
WHEREAS, as soon as practicable after the execution and delivery of this
Agreement, Frederick Town Bank & Trust Company, a Maryland-chartered commercial
bank and a wholly-owned subsidiary of Parent ("Parent Bank") and Farmers &
Mechanics Bank, a Maryland-chartered commercial bank and a wholly-owned
subsidiary of the Company ("Company Bank"), will enter into an Agreement and
Plan of Merger (the "Bank Merger Agreement"), pursuant to which Company Bank
shall merge with Parent Bank (the "Bank Merger"), and the Bank Merger shall be
consummated immediately following the consummation of the Merger; and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to the terms and conditions of this Agreement, in
accordance with the Maryland General Corporation Law (the "MGCL"), at the
Effective Time (as defined in Section 1.2 hereof), the Company shall merge with
and into Parent. Parent shall be the surviving corporation (hereinafter
sometimes called the "Surviving Corporation") in the Merger, and shall continue
its corporate existence under the laws of the State of Maryland. The name of the
Surviving Corporation shall continue to be Mercantile Bankshares Corporation.
Upon consummation of the Merger, the separate corporate existence of the Company
shall terminate.
1.2 EFFECTIVE TIME. Subject to the provisions of this Agreement, articles
of merger complying with the MGCL (the "Articles of Merger") shall be duly
prepared, executed and delivered for filing with the Maryland State Department
of Assessments and Taxation (the "Department") as provided in the MGCL on the
Closing Date (as defined in Section 10.1 hereof). The term "Effective Time"
shall be the date and time when the Merger becomes effective, as set forth in
the Articles of Merger.
1.3 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger
shall have the effects set forth in Section 3-114 of the MGCL.
1.4 CONVERSION OF COMPANY COMMON STOCK.
(a) At the Effective Time, subject to the other provisions of this
Article I, and Sections 2.2(e) and Section 9.1(h) hereof, each share of the
common stock, par value $5.00 per share, of the Company (the "Company Common
Stock") issued and outstanding immediately prior to the Effective Time (other
than shares of Company Common Stock held directly or indirectly by Parent or the
Company or any of their respective Subsidiaries (as defined below) (except for
Trust Account Shares and DPC Shares, as such terms are defined in
Section 1.4(d) hereof)) shall, by virtue of this Agreement and without any
A-1
action on the part of the holder thereof, be converted into and exchangeable for
the right to receive, at the election of the holder thereof as provided in and
subject to the provisions of Section 1.5, either (i) the Per Share Stock
Consideration (as defined below) or (ii) cash in an amount equal to the Per
Share Consideration (the "Per Share Cash Consideration"; the Per Share Stock
Consideration and the Per Share Cash Consideration are referred to herein
collectively as the "Merger Consideration").
For purposes of this Section 1.4(a):
"Per Share Stock Consideration" shall mean a number of shares of common
stock, par value $2.00 per share, of Parent ("Parent Common Stock")(together
with the number of Parent Rights (as defined in Section 5.2(a) hereof)
associated therewith) equal to the Exchange Ratio.
"Exchange Ratio" shall mean the quotient, rounded to the nearest ten
thousandth, obtained by dividing the Per Share Consideration by the Final Parent
Stock Price.
"Per Share Consideration" shall mean the quotient, rounded to the nearest
ten-thousandth, obtained by dividing the Aggregate Consideration by the total
number of shares of Company Common Stock outstanding as of the close of business
on the Determination Date.
"Aggregate Consideration" shall mean the sum of (x) the Total Stock
Consideration and (y) the Total Cash Amount.
"Total Stock Amount" shall mean the product obtained by multiplying (x)
1.2831 by (y) 75% of the total number of shares of Company Common Stock
outstanding as of the close of business on the Determination Date.
"Total Cash Amount" shall mean the product obtained by multiplying (x)
$46.00 by (y) 25% of the total number of shares of Company Common Stock
outstanding as of the close of business on the Determination Date.
"Total Stock Consideration" shall mean the product obtained by multiplying
(x) the Total Stock Amount by (y) the Final Parent Stock Price.
"Final Parent Stock Price" shall mean the average of the closing sale prices
of Parent Common Stock as reported on the Nasdaq Stock Market's National Market
(the "NASDAQ/NMS") during the Valuation Period.
"Valuation Period" shall mean the ten consecutive trading days during which
the shares of Parent Common Stock are traded on the NASDAQ/NMS ending on the
third calendar day immediately prior to the Effective Time, or if such calendar
day is not a trading day, then ending on the trading day immediately preceding
such calendar day (such day, the "Determination Date").
(b) All of the shares of Company Common Stock converted into the Merger
Consideration pursuant to this Article I shall no longer be outstanding and
shall automatically be cancelled and shall cease to exist, and each holder of a
certificate (each a "Certificate") previously representing any such shares of
Company Common Stock shall thereafter cease to have any rights with respect to
such securities, except the right to receive (i) the Merger Consideration,
(ii) any dividends and other distributions in accordance with Section 2.2(b)
hereof, and (iii) any cash to be paid in lieu of any fractional share of Parent
Common Stock in accordance with Section 2.2(e) hereof.
(c) If, between the date of this Agreement and the Effective Time, the
shares of Parent Common Stock shall be changed into a different number or class
of shares by reason of any reclassification, recapitalization, split-up,
combination, exchange of shares or readjustment, or a stock dividend thereon
shall be declared with a record date within such period, appropriate adjustments
shall be made to the Per Share Cash Consideration and the Per Share Stock
Consideration.
A-2
(d) At the Effective Time, all shares of Company Common Stock that are owned
directly or indirectly by Parent or the Company or any of their respective
Subsidiaries (other than shares of Company Common Stock (x) held directly or
indirectly in trust accounts, managed accounts and the like or otherwise held in
a fiduciary capacity for the benefit of third parties (any such shares, and
shares of Parent Common Stock which are similarly held, whether held directly or
indirectly by Parent or the Company, as the case may be, being referred to
herein as "Trust Account Shares") and (y) held by Parent or the Company or any
of their respective Subsidiaries in respect of a debt previously contracted (any
such shares of Company Common Stock, and shares of Parent Common Stock which are
similarly held, whether held directly or indirectly by Parent or the Company,
being referred to herein as "DPC Shares")) shall be cancelled and shall cease to
exist and no stock of Parent, cash or other consideration shall be delivered in
exchange therefor. All shares of Parent Common Stock that are owned by the
Company or any of its Subsidiaries (other than Trust Account Shares and DPC
Shares) shall become authorized unissued stock of Parent.
(e) The calculations required by Section 1.4(a) shall be prepared jointly by
Parent and the Company prior to the Closing Date.
1.5 ELECTION PROCEDURES.
(a) An election form and other appropriate and customary transmittal
materials (which shall specify that delivery shall be effected, and risk of loss
and title to the certificates theretofore representing shares of Company Common
Stock shall pass, only upon proper delivery of such certificates to the Exchange
Agent) in such form as Parent and the Company shall mutually agree (the
"Election Form") shall be mailed thirty-five days prior to the anticipated
Effective Date or on such other date as the Company and Parent shall mutually
agree (the "Mailing Date") to each holder of record of Company Common Stock as
of the close of business on the fifth business day prior to the Mailing Date
(the "Election Form Record Date").
(b) Each Election Form shall permit the holder (or the beneficial owner
through appropriate and customary documentation and instructions) to specify
(i) the number of shares of such holder's Company Common Stock with respect to
which such holder elects to receive the Per Share Stock Consideration ("Stock
Election Shares"), (ii) the number of shares of such holder's Company Common
Stock with respect to which such holder elects to receive the Per Share Cash
Consideration ("Cash Election Shares"), or (iii) that such holder makes no
election with respect to such holder's Company Common Stock ("No Election
Shares"). Any Company Common Stock with respect to which the Exchange Agent has
not received an effective, properly completed Election Form on or before
5:00 p.m., on the 33rd day following the Mailing Date (or such other time and
date as Parent and the Company may mutually agree) (the "Election Deadline")
shall also be deemed to be "No Election Shares."
(c) Parent shall make available one or more Election Forms as may reasonably
be requested from time to time by all persons who become holders (or beneficial
owners) of Company Common Stock between the Election Form Record Date and the
close of business on the business day prior to the Election Deadline, and the
Company shall provide to the Exchange Agent all information reasonably necessary
for it to perform as specified herein.
(d) Any such election shall have been properly made only if the Exchange
Agent shall have actually received a properly completed Election Form by the
Election Deadline. An Election Form shall be deemed properly completed only if
accompanied by one or more certificates (or customary affidavits and
indemnification regarding the loss or destruction of such certificates or the
guaranteed delivery of such certificates) representing all shares of Company
Common Stock covered by such Election Form, together with duly executed
transmittal materials included in the Election Form. Any Election Form may be
revoked or changed by the person submitting such Election Form at or prior to
the Election Deadline. In the event an Election Form is revoked prior to the
Election Deadline, the
A-3
shares of Company Common Stock represented by such Election Form shall become No
Election Shares and Parent shall cause the certificates representing Company
Common Stock to be promptly returned without charge to the Person submitting the
Election Form upon written request to that effect from the holder who submitted
the Election Form. Subject to the terms of this Agreement and of the Election
Form, the Exchange Agent shall have reasonable discretion to determine whether
any election, revocation or change has been properly or timely made and to
disregard immaterial defects in the Election Forms, and any good faith decisions
of Parent regarding such matters shall be binding and conclusive. Neither Parent
nor the Exchange Agent shall be under any obligation to notify any person of any
defect in an Election Form.
(e) Within ten business days after the Election Deadline, unless the
Effective Time has not yet occurred, in which case as soon thereafter as
practicable, Parent shall cause the Exchange Agent to effect the allocation
among the holders of Company Common Stock of rights to receive Parent Common
Stock or cash in the Merger in accordance with the Election Forms as follows:
(i) CASH ELECTION SHARES MORE THAN TOTAL CASH AMOUNT. If the aggregate
cash amount that would be paid upon the conversion in the Merger of the Cash
Election Shares is greater than the Total Cash Amount, then:
(A) all Stock Election Shares and No Election Shares shall be
converted into the right to receive the Per Share Stock Consideration,
(B) the Exchange Agent shall then select from among the Cash Election
Shares, by a pro rata selection process, a sufficient number of shares
("Stock Designated Shares") such that the aggregate cash amount that will
be paid in the Merger equals as closely as practicable the Total Cash
Amount, and all Stock Designated Shares shall be converted into the right
to receive the Per Share Stock Consideration, and
(C) the Cash Election Shares that are not Stock Designated Shares
will be converted into the right to receive the Per Share Cash
Consideration.
(ii) CASH ELECTION SHARES LESS THAN TOTAL CASH AMOUNT. If the
aggregate cash amount that would be paid upon conversion in the Merger of
the Cash Election Shares is less than the Total Cash Amount, then:
(A) all Cash Election Shares shall be converted into the right to
receive the Per Share Cash Consideration,
(B) the Exchange Agent shall then select first from among the No
Election Shares and then (if necessary) from among the Stock Election
Shares, by a pro rata selection process, a sufficient number of shares
("Cash Designated Shares") such that the aggregate cash amount that will
be paid in the Merger equals as closely as practicable the Total Cash
Amount, and all Cash Designated Shares shall be converted into the right
to receive the Per Share Cash Consideration, and
(C) the Stock Election Shares and the No Election shares that are not
Cash Designated Shares shall be converted into the right to receive the
Per Share Stock Consideration.
(iii) CASH ELECTION SHARES EQUAL TO TOTAL CASH AMOUNT. If the
aggregate cash amount that would be paid upon conversion in the Merger of
the Cash Election Shares is equal or nearly equal (as determined by the
Exchange Agent) to the Total Cash Amount, then subparagraphs (i) and
(ii) above shall not apply and all Cash Election Shares shall be converted
into the right to receive the Per Share Cash Consideration and all Stock
Election Shares and No Election Shares shall be converted into the right to
receive the Per Share Stock Consideration.
A-4
(f) The pro rata selection process to be used by the Exchange Agent shall
consist of such equitable pro ration processes as shall be mutually determined
by Parent and the Company.
1.6 STOCK OPTIONS. (a) Immediately prior to the Effective Time, the
Company will cause each option granted by the Company to purchase shares of
Company Common Stock pursuant to the Company's 1983 Incentive Stock Option Plan,
as amended, the Company's 1995 Stock Option Plan, the Company's 1999 Employee
Stock Option Plan, the Company's 1999 Stock Option Plan for Non-Employee
Directors, the Patapsco Valley Bancshares, Inc. ("PVBI") Incentive Stock Option
Plan, the PVBI Director's Stock Option Plan, the PVBI Employee Stock Purchase
Plan, the Monocacy Bancshares, Inc. ("MBI") 1994 Stock Incentive Plan, and the
MBI 1997 Independent Directors' Stock Option Plan (collectively, the "Company
Option Plans"), (each a "Company Option"), which is then outstanding and
unexercised to become fully vested and, at the Effective Time, each such
fully-vested Company Option shall cease to represent a right to acquire shares
of Company Common Stock and shall be converted automatically into a fully-vested
option to purchase shares of Parent Common Stock (a "Parent Option") in an
amount and at an exercise price determined as provided below (and otherwise
subject to the terms of the Company Option Plan, under which such Company Option
was granted, the agreements evidencing grants thereunder and any other
agreements between the Company and an optionee regarding Company Options):
(1) the number of shares of Parent Common Stock to be subject to the new
option shall be equal to the product of the number of shares of Company
Common Stock subject to the original option and the Exchange Ratio, provided
that any fractional shares of Parent Common Stock resulting from such
multiplication shall be rounded down to the nearest whole share; and
(2) the exercise price per share of Parent Common Stock under the new
option shall be equal to the exercise price per share of Company Common
Stock under the original option divided by the Exchange Ratio, provided that
such exercise price shall be rounded up to the nearest cent.
(3) notwithstanding anything else contained in this Section 1.6(a), it
is the intention of the parties that the assumption of Company Common Stock
hereunder shall meet the requirements of Section 424(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and that each Parent Option
shall qualify immediately after the Effective Time as an incentive stock
option (as defined in Section 422 of the Code) to the extent the related
Company Option so qualified immediately before the Effective Time, and the
foregoing provisions of this Section 1.6(a) shall be interpreted to further
such purpose and intention.
(b) Prior to the Effective Time, Parent shall reserve for issuance the
number of shares of Parent Common Stock necessary to satisfy Parent's
obligations under this Section 1.6. Promptly after the Effective Time (but in no
event later than ten business days thereafter), Parent shall file with the
Securities and Exchange Commission (the "SEC") a registration statement on an
appropriate form under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the shares of Parent Common Stock subject to options to
acquire Parent Common Stock issued pursuant to Section 1.6(a) hereof, and shall
use its best efforts to maintain the current status of the prospectus contained
therein, as well as comply with applicable state securities or "blue sky" laws,
for so long as such options remain outstanding.
(c) Prior to the Effective Time, Parent and the Company shall take all such
steps as may be required to cause any acquisitions of Parent equity securities
(including derivative securities with respect to any Parent equity securities)
and dispositions of Company equity securities (including derivative securities
with respect to any Company equity securities) resulting from the transactions
contemplated by this Agreement by each individual who is anticipated to be
subject to the reporting requirements of Section 16(a) of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), with respect to Parent or
who is subject to the reporting requirements of Section 16(a) of the
A-5
Exchange Act with respect to the Company, to be exempt under Rule 16b-3
promulgated under the Exchange Act.
1.7 PARENT COMMON STOCK. Except for shares of Parent Common Stock owned by
the Company or any of its Subsidiaries (other than Trust Account Shares and DPC
Shares), which shall be converted into authorized unissued stock of Parent as
contemplated by Section 1.4 hereof, the shares of Parent Common Stock issued and
outstanding immediately prior to the Effective Time shall be unaffected by the
Merger and such shares shall remain issued and outstanding.
1.8 ARTICLES OF INCORPORATION. At the Effective Time, the Articles of
Incorporation of Parent, as in effect immediately prior to the Effective Time,
shall be the Articles of Incorporation of the Surviving Corporation.
1.9 BYLAWS. At the Effective Time, the Bylaws of Parent, as in effect
immediately prior to the Effective Time, shall be the Bylaws of the Surviving
Corporation until thereafter amended in accordance with applicable law.
1.10 DIRECTORS AND OFFICERS.
(a) At and after the Effective Time, the directors of Parent shall consist
of all of the directors of Parent serving immediately prior to the Effective
Time and the additional persons who shall become a director of Parent in
accordance with Section 7.13 hereof, each to hold office in accordance with the
Articles of Incorporation and Bylaws of the Surviving Corporation until their
respective successors are duly elected or appointed and qualified.
(b) The officers of Parent immediately prior to the Effective Time shall be
the officers of the Surviving Corporation, each to hold office in accordance
with the Articles of Incorporation and Bylaws of the Surviving Corporation until
their respective successors are duly elected or appointed and qualified.
1.11 TAX CONSEQUENCES. It is intended that the Merger shall constitute a
reorganization within the meaning of Section 368(a) of the Code and that this
Agreement shall constitute a plan of reorganization for the purposes of
Section 368 of the Code.
ARTICLE II
EXCHANGE OF SHARES
2.1 PARENT TO MAKE SHARES AND CASH AVAILABLE. At or prior to the Effective
Time, Parent shall deposit, or shall cause to be deposited, with a bank or trust
company (which may be a Subsidiary of Parent) (the "Exchange Agent") selected by
Parent and reasonably satisfactory to the Company, for the benefit of the
holders of Certificates, for exchange in accordance with this Article II,
(i) certificates representing the shares of Parent Common Stock to be issued
pursuant to Section 1.4 and Section 2.2(a) in exchange for outstanding shares of
Company Common Stock, (ii) such cash as shall be necessary to pay the Per Share
Cash Consideration in accordance with Section 1.4 and 2.2(a) hereof, and
(iii) the cash in lieu of fractional shares to be paid in accordance with
Section 2.2(e) hereof. Such cash and certificates for shares of Parent Common
Stock, together with any dividends or distributions with respect thereto, are
hereinafter referred to as the "Exchange Fund."
2.2 EXCHANGE OF SHARES. (a) As soon as practicable after the Effective
Time, and in no event more than three business days thereafter, the Exchange
Agent shall mail to each holder of record of a Certificate or Certificates who
theretofore has not submitted such holder's Certificate or Certificates with an
Election Form, a form letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent) and instructions
for use in effecting the surrender of the Certificates in exchange for
A-6
the Merger Consideration. The Company shall have the right to review both the
letter of transmittal and the instructions prior to the Effective Time and
provide reasonable comments thereon. After completion of the allocation
procedure set forth in Section 1.5 and upon surrender of a Certificate or
Certificates for exchange and cancellation to the Exchange Agent, together with
a properly executed letter of transmittal or Election Form, as the case may be,
the holder of such Certificate or Certificates shall be entitled to receive in
exchange therefor (x) a certificate representing that number of whole shares of
Parent Common Stock which such holder of Company Common Stock became entitled to
receive pursuant to the provisions of Article I hereof and/or (y) a check
representing the aggregate Per Share Cash Consideration and/or the amount of
cash in lieu of fractional shares, if any, which such holder has the right to
receive in respect of the Certificate or Certificates surrendered pursuant to
the provisions of Article I, and the Certificate or Certificates so surrendered
shall forthwith be cancelled. No interest will be paid or accrued on the Per
Share Cash Consideration, the cash in lieu of fractional shares or the unpaid
dividends and distributions, if any, payable to holders of Certificates.
(b) No dividends or other distributions declared after the Effective Time
with respect to Parent Common Stock and payable to the holders of record thereof
shall be paid to the holder of any unsurrendered Certificate until the holder
thereof shall surrender such Certificate in accordance with this Article II.
After the surrender of a Certificate in accordance with this Article II, the
record holder thereof shall be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Parent Common Stock represented by such
Certificate.
(c) If any certificate representing shares of Parent Common Stock is to be
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the Certificate so surrendered shall be properly endorsed (or accompanied
by an appropriate instrument of transfer) and otherwise in proper form for
transfer, and that the person requesting such exchange shall pay to the Exchange
Agent in advance any transfer or other taxes required by reason of the issuance
of a certificate representing shares of Parent Common Stock in any name other
than that of the registered holder of the Certificate surrendered, or required
for any other reason, or shall establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(d) After the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares of Company Common Stock which were
issued and outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates representing such shares are presented for transfer
to the Exchange Agent, they shall be cancelled and exchanged for certificates
representing shares of Parent Common Stock or cash or both, as provided in this
Article II.
(e) Notwithstanding anything to the contrary contained herein, no
certificates or scrip representing fractional shares of Parent Common Stock
shall be issued upon the surrender for exchange of Certificates, no dividend or
distribution with respect to Parent Common Stock shall be payable on or with
respect to any fractional share, and such fractional share interests shall not
entitle the owner thereof to vote or to any other rights of a shareholder of
Parent. In lieu of the issuance of any such fractional share, Parent shall pay
to each former stockholder of the Company who otherwise would be entitled to
receive a fractional share of Parent Common Stock an amount in cash determined
by multiplying (i) the Per Share Consideration by (ii) the fraction of a share
of Parent Common Stock which such holder would otherwise be entitled to receive
pursuant to Section 1.4 hereof.
(f) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of the Company for twelve months after the Effective Time shall be
paid to Parent. Any stockholders of the Company who have not theretofore
complied with this Article II shall thereafter look only to Parent for payment
of the Merger Consideration, the cash in lieu of fractional shares and/or the
unpaid dividends and distributions on Parent Common Stock deliverable in respect
of each share of Company
A-7
Common Stock such stockholder holds as determined pursuant to this Agreement, in
each case, without any interest thereon. Notwithstanding the foregoing, none of
Parent, the Company, the Exchange Agent or any other person shall be liable to
any former holder of shares of Company Common Stock for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(g) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by Parent, the
posting by such person of a bond in such amount as Parent may reasonably direct
as indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the Merger Consideration deliverable in respect thereof
pursuant to this Agreement.
ARTICLE III
DISCLOSURE SCHEDULES; STANDARDS
FOR REPRESENTATIONS AND WARRANTIES
3.1 DISCLOSURE SCHEDULES. Prior to the execution and delivery of this
Agreement, the Company has delivered to Parent, and Parent has delivered to the
Company, a schedule (in the case of the Company, the "Company Disclosure
Schedule," and in the case of Parent, the "Parent 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 of such party's
representations or warranties contained in Article IV, in the case of the
Company, or Article V, in the case of Parent, or to one or more of such party's
covenants contained in Article VI; provided, however, that notwithstanding
anything in this Agreement to the contrary (a) no such item is required to be
set forth in the Disclosure Schedule as an exception to a representation or
warranty if its absence would not result in the related representation or
warranty, standing alone, being deemed untrue or incorrect under the standard
established by Section 3.2, and (b) the mere inclusion or exclusion of an item
in a Disclosure Schedule shall not be deemed an admission to any unrelated third
party for any purpose.
3.2 STANDARDS. (a) No representation or warranty of the Company contained
in Article IV or of Parent contained in Article V shall be deemed untrue or
incorrect for purposes of this Agreement, and no party hereto shall be deemed to
have breached a representation or warranty for purposes of this Agreement, in
any case, as a consequence of the existence or absence of any fact, circumstance
or event unless such fact, circumstance or event, individually or when taken
together with all other facts, circumstances or events inconsistent with any
representations or warranties contained in Article IV, in the case of the
Company, or Article V, in the case of Parent, has had a Material Adverse Effect
with respect to the Company or Parent, respectively.
(b) As used in this Agreement, the term "Material Adverse Effect" means,
with respect to Parent or the Company, as the case may be, a material adverse
effect on (i) the business, results of operations or financial condition of such
party and its Subsidiaries taken as a whole, other than any such effect
attributable to or resulting from (v) any change in banking or similar laws,
rules or regulations of general applicability or interpretations thereof by
courts or governmental authorities, (w) any change in GAAP (as defined herein)
or regulatory accounting principles applicable to banks, thrifts or their
holding companies generally, (x) changes attributable to or resulting from
changes in general economic conditions, including changes in the prevailing
level of interest rates, (y) any action or omission of the Company or Parent or
any Subsidiary of either of them taken with the prior written consent of the
other party hereto, or (z) any out of pocket transaction expenses in an
aggregate amount not to exceed $7,500,000 incurred by such party in connection
with this Agreement or the transactions contemplated hereby or (ii) the ability
of such party and its Subsidiaries to consummate the transactions contemplated
hereby.
A-8
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Subject to Article III, the Company hereby represents and warrants to Parent
as follows:
4.1 CORPORATE ORGANIZATION. (a) The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland. The Company has the corporate power and authority to own or lease all
of its properties and assets and to carry on its business as it is now being
conducted, and is duly licensed or qualified to do business in each jurisdiction
in which the nature of the business conducted by it or the character or location
of the properties and assets owned or leased by it makes such licensing or
qualification necessary. The Company is duly registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended (the "BHC Act").
The Articles of Incorporation and Bylaws of the Company, copies of which have
previously been made available to Parent, are true and correct copies of such
documents. As used in this Agreement, the word "Subsidiary" when used with
respect to any party, means any corporation, partnership or other organization,
whether incorporated or unincorporated, which is consolidated with such party
for financial reporting purposes, including the Company Bank.
(b) The Company Bank is a commercial bank duly organized, validly existing
and in good standing under the laws of State of Maryland. The deposit accounts
of the Company Bank are insured by the Federal Deposit Insurance Corporation
(the "FDIC") through the Savings Association Insurance Fund or the Bank
Insurance Fund to the fullest extent permitted by law, and all premiums and
assessments required to be paid in connection therewith have been paid when due.
Each of the Company's other Subsidiaries is duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation or
organization. Each of the Company's Subsidiaries has the corporate power and
authority to own or lease all of its properties and assets and to carry on its
business as it is now being conducted and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the business conducted by
it or the character or the location of the properties and assets owned or leased
by it makes such licensing or qualification necessary. The articles of
incorporation, bylaws and similar governing documents of each Subsidiary of the
Company, copies of which have previously been made available to Parent, are true
and correct copies of such documents.
(c) Except as set forth in Section 4.1 (c) of the Company Disclosure
Schedule, the minute books of the Company and each of its Subsidiaries, copies
of which have previously been made available to Parent, contain true and correct
records of all meetings and other corporate actions held or taken since
December 31, 1999 through the date of this Agreement of their respective
stockholders and Boards of Directors (including committees of their respective
Boards of Directors).
4.2 CAPITALIZATION. (a) As of the date of this Agreement, the authorized
capital stock of the Company consists of 50,000,000 shares of Company Common
Stock. As of the date of this Agreement, there were 10,740,357 shares of Company
Common Stock issued and outstanding plus the net amount of any shares issued on
March 12, 2003 upon the exercise of the outstanding options described in the
following sentence. As of the date of this Agreement, there were no shares of
Company Common Stock reserved for issuance upon exercise of outstanding stock
options except for up to 628,855 shares of Company Common Stock reserved for
issuance upon the exercise of previously issued stock options pursuant to the
Company Option Plans. All of the issued and outstanding shares of Company Common
Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. Except as referred to above, or reflected in
Section 4.2 (a) of the Company Disclosure Schedule, the Company does not have
and is not bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the purchase or issuance
of any shares of Company Common Stock or any other equity security of the
Company or any securities representing the right to purchase or otherwise
receive any shares of Company Common Stock or any other equity security of the
Company. As of the
A-9
date of this Agreement, the names of the optionees, the date of each option to
purchase Company Common Stock granted, the number of shares subject to each such
option, the expiration date of each such option, and the price at which each
such option may be exercised under the Company Option Plans are set forth in
Section 4.2(a) of the Company Disclosure Schedule.
(b) Section 4.2(b) of the Company Disclosure Schedule sets forth a true and
correct list of all of the Subsidiaries of the Company. Except as set forth in
Section 4.2(b) of the Company Disclosure Schedule, the Company owns, directly or
indirectly, all of the issued and outstanding shares of the capital stock of
each of such Subsidiaries, free and clear of all liens, charges, encumbrances
and security interests whatsoever, and all of such shares are duly authorized
and validly issued and are fully paid, nonassessable (except as otherwise may be
provided for in the Financial Institutions Article of the Annotated Code of
Maryland) and free of preemptive rights, with no personal liability attaching to
the ownership thereof. No Subsidiary of the Company has or is bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of capital
stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
4.3 AUTHORITY; NO VIOLATION. (a) The Company has full corporate power and
authority to execute and deliver this Agreement and the Company and the Company
Subsidiaries have full corporate power and authority 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 approved by the Board of Directors of the Company. The Board of
Directors of the Company has declared the transactions contemplated by this
Agreement to be advisable and has directed that this Agreement and the
transactions contemplated hereby be submitted to the Company's stockholders for
approval at a meeting of such stockholders and, except for the adoption of this
Agreement by the requisite vote of the Company's stockholders, no other
corporate proceedings on the part of the Company are necessary to approve this
Agreement and to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by the Company and (assuming
due authorization, execution and delivery by Parent) this Agreement constitutes
a valid and binding obligation of the Company, enforceable against the Company
in accordance with its terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency and similar laws affecting creditors' rights and
remedies generally. The execution and delivery of the Bank Merger Agreement and
the consummation of the transactions contemplated thereby will have been duly
and validly approved by the Board of Directors of the Company Bank. The Board of
Directors of the Company Bank will have declared the transactions contemplated
by the Bank Merger Agreement to be advisable and will have directed that the
Bank Merger Agreement and the transactions contemplated thereby be submitted to
the Company Bank's sole stockholder for approval and, except for the approval of
the Bank Merger Agreement by the Company Bank's sole stockholder, no other
corporate proceedings on the part of the Company Bank are necessary to approve
the Bank Merger Agreement and to consummate the transactions contemplated hereby
and thereby. The Bank Merger Agreement, upon execution and delivery by the
Company Bank (assuming due authorization, execution and delivery by Parent
Bank), will constitute a valid and binding obligation of the Company Bank,
enforceable against the Company Bank in accordance with its terms, except as
enforcement may be limited by general principles of equity whether applied in a
court of law or a court of equity and by bankruptcy, insolvency and similar laws
affecting creditors' rights and remedies generally.
A-10
(b) Except as set forth in Section 4.3(b) of the Company Disclosure
Schedule, neither the execution and delivery of this Agreement by the Company,
nor the execution and delivery of the Bank Merger Agreement by the Company Bank,
nor the consummation by the Company and the Company Subsidiaries of the
transactions contemplated hereby or thereby, nor compliance by the Company or
the Company Subsidiaries with any of the terms or provisions hereof or thereof,
will (i) violate any provision of the Articles of Incorporation or Bylaws of the
Company or the articles of incorporation, bylaws or similar governing documents
of any of its Subsidiaries, or (ii) assuming that the consents and approvals
referred to in Section 4.4 hereof are duly obtained, (x) violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to the Company or any of its Subsidiaries, or any of their respective
properties or assets, or (y) violate, conflict with, result in a breach of any
provision of or the loss of any benefit under, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default) under,
result in the termination of or a right of termination or cancellation under,
accelerate the performance required by, or result in the creation of any lien,
pledge, security interest, charge or other encumbrance upon any of the
respective properties or assets of the Company or any of its Subsidiaries under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which the Company or any of its Subsidiaries is a party, or by
which they or any of their respective properties or assets may be bound or
affected.
4.4 CONSENTS AND APPROVALS. Except for (a) the filing with the SEC of a
proxy statement in definitive form relating to the meeting of the Company's
stockholders to be held in connection with this Agreement and the transactions
contemplated hereby (the "Proxy Statement"), (b) the approval of this Agreement
by the requisite vote of the stockholders of the Company, and (c) such filings,
authorizations or approvals set forth in Section 4.4 of the Company Disclosure
Schedule, no consents or approvals of or filings or registrations with any
court, administrative agency or commission or other governmental authority or
instrumentality (each a "Governmental Entity") or with any third party are
required to be made by or obtained by the Company or any of its Subsidiaries in
connection with (1) the execution and delivery by the Company of this Agreement
and (2) the execution and delivery by the Company Bank of the Bank Merger
Agreement and (3) the consummation by the Company of the Merger and the other
transactions contemplated hereby, including the Bank Merger and the consummation
by the Company Bank of the Bank Merger.
4.5 SEC REPORTS. The Company has previously made available to Parent a
true and correct copy of each (a) final registration statement, prospectus,
report, schedule and definitive proxy statement filed since December 31, 1999 by
the Company with the SEC pursuant to the Securities Act or the Exchange Act (the
"Company Reports") and (b) communication mailed by the Company to its
shareholders since December 31, 1999, and no such Company Report (when filed and
at their respective effective time, if applicable) or communication (when
mailed) contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances in which they were made,
not misleading, except that information as of a later date shall be deemed to
modify information as of an earlier date. The Company has timely filed all
Company Reports and other documents required to be filed by it under the
Securities Act and the Exchange Act since December 31, 1999, and, as of their
respective dates, all Company Reports complied with the published rules and
regulations of the SEC with respect thereto.
4.6 REGULATORY REPORTS. The Company and each of its Subsidiaries have
timely filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were required to
file since December 31, 1999 with (i) the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), (ii) the FDIC, (iii) any state
banking commissions or any other state bank regulatory authority, or any state
insurance regulatory authority (each a "State Regulator") and (iv) any other
self-regulatory organization ("SRO") (collectively, the "Regulatory Agencies"),
and have paid all fees and assessments due and payable in connection therewith.
Except
A-11
for normal examinations conducted by a Regulatory Agency in the regular course
of the business of the Company and its Subsidiaries, and except as set forth on
Section 4.6 of the Company Disclosure Schedule, no Regulatory Agency has
initiated any proceeding or, to the knowledge of the Company, investigation into
the business or operations of the Company or any of its Subsidiaries since
December 31, 1999. There is no unresolved violation, criticism, or exception by
any Regulatory Agency with respect to any report or statement relating to any
examinations of the Company or any of its Subsidiaries.
4.7 FINANCIAL STATEMENTS. The Company has previously made available to
Parent copies of (a) the balance sheet of the Company and its Subsidiaries as of
December 31 for the fiscal year 2001, and the related consolidated statements of
earnings, stockholders' equity and cash flows for the fiscal years 1999 through
2001, inclusive, accompanied by the audit report of Arthur Andersen LLP, which
was at the time of such report the independent public accountants with respect
to the Company (on April 8, 2002, the Company announced that it had appointed
Deloitte & Touche LLP to replace Arthur Andersen LLP as its independent
accountants) and (b) the balance sheet of the Company and its Subsidiaries as of
December 31 for the fiscal year 2002, and the related consolidated statements of
earnings, stockholders' equity and cash flows for the fiscal years 2000 through
2002, inclusive, accompanied by the audit report of Deloitte & Touche LLP,
independent public accountants with respect to the Company (the "2002 Audited
Financial Statements"). The December 31, 2002 consolidated balance sheet of the
Company (including the related notes, where applicable) fairly presents the
consolidated financial position of the Company and its Subsidiaries as of the
date thereof, and the other financial statements referred to in this
Section 4.7 (including the related notes, where applicable) fairly present, and
the financial statements to be filed with the SEC after the date hereof will
fairly present (subject, in the case of the unaudited statements, to recurring
audit adjustments normal in nature and amount), the results of the consolidated
operations and consolidated financial position of the Company and its
Subsidiaries for the respective fiscal periods or as of the respective dates
therein set forth; each of such statements (including the related notes, where
applicable) complies, and the financial statements to be filed with the SEC
after the date hereof will comply, with applicable accounting requirements and
with the published rules and regulations of the SEC with respect thereto; and
each of such statements (including the related notes, where applicable) has
been, and the financial statements to be filed with the SEC after the date
hereof will be, prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied during the periods involved, except as
indicated in the notes thereto or, in the case of unaudited statements, as
permitted by Form 10-Q of the SEC. The books and records of the Company and its
Subsidiaries have been, and are being, maintained in accordance with GAAP and
any other applicable legal and accounting requirements.
4.8 BROKER'S FEES. Neither the Company nor any Subsidiary of the Company
nor any of their respective officers or directors has employed any broker or
finder or incurred any liability for any broker's fees, commissions or finder's
fees in connection with any of the transactions contemplated by this Agreement,
except that the Company has engaged, and will pay a fee or commission to, Keefe,
Bruyette & Woods, Inc. ("KBW") in accordance with the terms of a letter
agreement between KBW and the Company, a true and correct copy of which has been
previously made available by the Company to Parent.
4.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. (a) Except as set forth on
Section 4.9(a) of the Company Disclosure Schedule and except as disclosed in the
2002 Audited Financial Statements or any Company Report (as defined in
Section 4.5) filed with the SEC prior to March 1, 2003, since December 31, 2002
there has been no change or development or combination of changes or
developments which, individually or in the aggregate, has had a Material Adverse
Effect on the Company.
A-12
(b) Except as set forth in Section 4.9(b) of the Company Disclosure Schedule
and except as disclosed in the 2002 Audited Financial Statements or any Company
Report filed with the SEC prior to March 1, 2003, since September 30, 2002 the
Company and its Subsidiaries have carried on their respective businesses in the
ordinary course consistent with their past practices.
(c) Except as set forth in Section 4.9(c) of the Company Disclosure
Schedule, since September 30, 2002 neither the Company nor any of its
Subsidiaries has (i) increased the wages, salaries, compensation, pension, or
other fringe benefits or perquisites payable to any executive officer, employee,
or director from the amount thereof in effect as of September 30, 2002, granted
any severance or termination pay, entered into any contract to make or grant any
severance or termination pay, amended or modified the terms of any agreement,
plan or arrangement to which an executive officer, employee or director is a
party, granted any options to purchase securities of the Company, or paid any
bonus, (ii) suffered any strike, work stoppage, slowdown, or other labor
disturbance, (iii) been a party to a collective bargaining agreement, contract
or other agreement or understanding with a labor union or organization, or
(iv) had any union organizing activities.
4.10 LEGAL PROCEEDINGS. (a) Except as set forth in Section 4.10(a) of the
Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is
a party to any, and there are no pending or, to the Company's knowledge,
threatened, legal, administrative, arbitral or other proceedings, claims,
actions or governmental or regulatory investigations of any nature against the
Company or any of its Subsidiaries, or their respective assets, including any
such proceeding challenging the validity or propriety of the transactions
contemplated by this Agreement.
(b) Except as set forth in Section 4.10(b) of the Company Disclosure
Schedule, there is no injunction, order, judgment or decree imposed upon the
Company, any of its Subsidiaries or the assets of the Company or any of its
Subsidiaries.
4.11 TAXES. (a) Except as set forth in Section 4.11 of the Company
Disclosure Schedule, each of the Company and its Subsidiaries has (i) duly and
timely filed (including applicable extensions granted without penalty) all Tax
Returns (as hereinafter defined) required to be filed at or prior to the
Effective Time, and all such Tax Returns are true and correct, and (ii) paid in
full or made adequate provision in the financial statements of the Company (in
accordance with GAAP) for all Taxes (as hereinafter defined) shown to be due on
such Tax Returns. Except as set forth in Section 4.11of the Company Disclosure
Schedule, (i) neither the Company nor any of its Subsidiaries has requested any
extension of time within which to file any Tax Returns in respect of any fiscal
year which have not since been filed and no request for waivers of the time to
assess any Taxes are pending or outstanding, and (ii) with respect to each
taxable period of the Company and its Subsidiaries, the federal and state income
Tax Returns of the Company and its Subsidiaries have been audited by the
Internal Revenue Service ("IRS") or appropriate state tax authorities or the
time for assessing and collecting income Tax with respect to such taxable period
has closed and such taxable period is not subject to review.
(b) For the purposes of this Agreement, "Taxes" shall mean all taxes,
charges, fees, levies, penalties or other assessments imposed by any United
States federal, state, local or foreign taxing authority, including income,
excise, property, sales, transfer, franchise, payroll, withholding, social
security or other taxes, including any interest, penalties or additions
attributable thereto. For purposes of this Agreement, "Tax Return" shall mean
any return, report, information return or other document (including any related
or supporting information) with respect to Taxes.
4.12 EMPLOYEES. (a) Section 4.12(a) of the Company Disclosure Schedule
sets forth a true and correct list of each deferred compensation plan, incentive
compensation plan, equity compensation plan, "welfare" plan, fund or program
(within the meaning of section 3(1) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")); "pension" plan, fund or program (within the
meaning of section 3(2) of ERISA); each employment, termination or severance
agreement; and each other employee benefit plan, fund, program, agreement or
arrangement, in each case, that is sponsored,
A-13
maintained or contributed to or required to be contributed to by the Company,
any of its Subsidiaries or by any trade or business, whether or not incorporated
(an "ERISA Affiliate"), all of which together with the Company would be deemed a
"single employer" within the meaning of Section 4001(b) of ERISA, for the
benefit of any employee or former employee of the Company or any Subsidiary (the
"Plans").
(b) The Company has heretofore made available to Parent with respect to each
of the Plans true and correct copies of each of the following documents, if
applicable: (i) the Plan document and any amendments thereto; (ii) any related
trust or other funding vehicle; (iii) the most recent determination letter from
the IRS for such Plan as well as the application materials submitted to the IRS;
(iv) the most recent summary plan description and related summaries of material
modifications for each ERISA Plan, as well as the most recent summary, if any,
with respect to each Plan for which a summary plan description is not required
under ERISA; (v) for the three most recent plan years, all annual reports (5500
Series) for each Plan that have been filed with any governmental agency and
(vi) all other material documents relating to any Plan as may be reasonably
requested by Parent.
(c) Except as set forth in Section 4.12(c) of the Company Disclosure
Schedule, each of the Plans is in compliance with applicable law, including (but
not limited to) the Code and ERISA; each of the Plans intended to be "qualified"
under section 401(a) of the Code has received a favorable determination letter
from the IRS and, to the Company's knowledge, no event has occurred that would
reasonably be expected to affect such determination; neither the Company nor any
ERISA Affiliate maintains (or has maintained within the last five years) a
pension plan subject to Title IV of ERISA or section 412 of the Code other than
any such plan terminated prior to the date hereof pursuant to Section 4041(b) of
ERISA, which plan received a favorable determination letter from the Internal
Revenue Service upon its termination; neither the Company nor any ERISA
Affiliate maintains or contributes to (or has ever had an obligation to maintain
or contribute to) any multiemployer plan (within the meaning of
section 4001(a)(3) of ERISA) or any multiple employer plan (within the meaning
of section 413 of the Code); there are no pending, or to the knowledge of
Company, threatened or anticipated claims (other than routine claims for
benefits) by, on behalf of, or against any of the Plans, the funding vehicles
related thereto or their fiduciaries; and neither the Company nor any ERISA
Affiliate has any obligation, nor has made any representation in connection with
any medical, death or other welfare benefits for their employees after they
retire, except to the extent required under the group health plan continuation
requirements of sections 601 through 609 of ERISA, section 4980B of the Code or
applicable state law.
4.13 COMPANY INFORMATION. The information relating to the Company and its
Subsidiaries which is provided to Parent by the Company for inclusion in the
Proxy Statement and the registration statement on Form S-4 (the "S-4") in which
the Proxy Statement will be included as a prospectus, or in any other document
filed with any other regulatory agency in connection herewith, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances in which
they are made, not misleading. The Proxy Statement (except for such portions
thereof that relate to Parent or any of its Subsidiaries) will comply with the
provisions of the Exchange Act and the rules and regulations thereunder.
4.14 COMPLIANCE WITH APPLICABLE LAW. The Company and each of its
Subsidiaries holds, and has at all times held, all licenses, franchises, permits
and authorizations necessary for the lawful conduct of their respective
businesses under and pursuant to all, and have complied with and are not in
default in any respect under any, applicable law, statute, order, rule,
regulation, policy and/or guideline of any Governmental Entity relating to the
Company or any of its Subsidiaries, and neither the Company nor any of its
Subsidiaries has received notice of any violations of any of the above.
4.15 CERTAIN CONTRACTS. (a) Except as set forth on Section 4.15(a) of the
Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is
a party to or bound by any contract
A-14
(whether written or oral) (i) with respect to the employment of any directors,
(ii) which, upon the consummation of the transactions contemplated by this
Agreement, will (either alone or upon the occurrence of any additional acts or
events) result in any payment or benefits (whether of severance pay or
otherwise) becoming due, or the acceleration or vesting of any rights to any
payment or benefits, from Parent, the Company, the Surviving Corporation or any
of their respective Subsidiaries to any officer, director or consultant of the
Company or any of its Subsidiaries, (iii) which is a material contract (as
defined in Item 601(b)(10) of Regulation S-K of the SEC) to be performed after
the date of this Agreement that has not been filed or incorporated by reference
in the Company Reports, (iv) which is an agreement (including data processing,
software programming and licensing contracts) not terminable on 90 days or less
notice involving the payment of more than $250,000 per annum, or (v) which
restricts the conduct of any line of business by the Company or any of its
Subsidiaries. Each contract of the type described in this Section 4.15(a) is
referred to herein as a "Company Contract." Section 4.15(a) of the Company
Disclosure Schedule contains a true, correct and complete list of all Company
Contracts. The Company has previously delivered or made available to Parent true
and correct copies of each contract described in Section 4.15(a) of the Company
Disclosure Schedule.
(b) Except as set forth in Section 4.15(b) of the Company Disclosure
Schedule, (i) each Company Contract is valid and binding and in full force and
effect, (ii) the Company and each of its Subsidiaries has performed all
obligations required to be performed by it to date under each Company Contract,
(iii) no event or condition exists which constitutes or, after notice or lapse
of time or both, would constitute, a default on the part of the Company or any
of its Subsidiaries under any Company Contract, and (iv) no other party to any
Company Contract is, to the knowledge of the Company, in default in any respect
thereunder.
4.16 AGREEMENTS WITH REGULATORY AGENCIES. Except as set forth in
Section 4.16 of the Company Disclosure Schedule, neither the Company nor any of
its Subsidiaries is subject to any cease-and-desist or other order issued by, or
is a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient of
any extraordinary supervisory letter from, or has adopted any board resolutions
at the request of (each, a "Regulatory Agreement"), any Regulatory Agency that
restricts the conduct of its business or that in any manner relates to its
capital adequacy, its credit policies, its management or its business, nor has
the Company or any of its Subsidiaries been advised by any Regulatory Agency
that it is considering issuing or requesting any Regulatory Agreement.
4.17 ENVIRONMENTAL MATTERS. Except as set forth in Section 4.17 of the
Company Disclosure Schedule,
(a) each of the Company and its Subsidiaries and all real property owned by
the Company or its Subsidiaries and, to the knowledge of the Company, each of
the Participation Facilities and the Loan Properties (each as hereinafter
defined) and all real property leased by the Company or its Subsidiaries, are in
compliance with all applicable federal, state and local laws, including common
law, regulations and ordinances, and with all applicable decrees, orders and
contractual obligations relating to pollution or the discharge of, or exposure
to, Hazardous Materials (as hereinafter defined) in the environment or workplace
("Environmental Laws");
(b) There is no suit, claim, action or proceeding pending or, to the
knowledge of the Company, threatened, before any Governmental Entity or other
forum in which the Company or any of its Subsidiaries, or, to the knowledge of
the Company, any Participation Facility or any Loan Property, has been or, with
respect to threatened proceedings, may be, named as a defendant (x) for alleged
noncompliance (including by any predecessor) with any Environmental Laws, or
(y) relating to the release, threatened release or exposure to any Hazardous
Material whether or not occurring at or on a site owned, leased or operated by
the Company or any of its Subsidiaries, any Participation Facility or any Loan
Property; and
A-15
(c) To the knowledge of the Company, during the period of (x) the Company's
or any of its Subsidiaries' ownership or operation of any of their respective
current or former properties, (y) the Company's or any of its Subsidiaries'
participation in the management of any Participation Facility, or (z) the
Company's or any of its Subsidiaries' interest in a Loan Property, there has
been no release of Hazardous Materials in, on, under or affecting any such
property. To the knowledge of the Company, prior to the period of (x) the
Company's or any of its Subsidiaries' ownership or operation of any of their
respective current or former properties, (y) the Company's or any of its
Subsidiaries' participation in the management of any Participation Facility, or
(z) the Company's or any of its Subsidiaries' interest in a Loan Property, there
was no release of Hazardous Materials in, on, under or affecting any such
property, Participation Facility or Loan Property.
The following definitions apply for purposes of this Section 4.17:
(x) "Hazardous Materials" means any chemicals, pollutants, contaminants, wastes,
toxic substances, petroleum or other regulated substances or materials,
(y) "Loan Property" means any property in which the Company or any of its
Subsidiaries holds a security interest, and, where required by the context, said
term means the owner or operator of such property; and (z) "Participation
Facility" means any facility in which the Company or any of its Subsidiaries
participates or has participated in the management and, where required by the
context, said term means the owner or operator of such property.
4.18 OPINION. Prior to the execution of this Agreement, the Company has
received an opinion from KBW to the effect that as of the date thereof and based
upon and subject to the matters set forth therein, the Merger Consideration to
be received by the stockholders of the Company is fair to such stockholders from
a financial point of view. Such opinion has not been amended or rescinded.
4.19 APPROVALS. The Company knows of no reason why all regulatory
approvals required for the consummation of the transactions contemplated hereby
(including the Merger and the Bank Merger) should not be obtained.
4.20 LOAN PORTFOLIO. (a) Except as set forth in Section 4.20 of the
Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is
a party to any written or oral (i) loan agreement, note or borrowing arrangement
(including leases, credit enhancements, commitments, guarantees and
interest-bearing assets) (collectively, "Loans"), other than any Loan the unpaid
principal balance of which does not exceed $250,000, under the terms of which
the obligor was, as of December 31, 2002, over 90 days delinquent in payment of
principal or interest or in default of any other provision, of which default the
Company or a Subsidiary had knowledge or should have had knowledge, or
(ii) Loan with any director, executive officer or five percent or greater
stockholder of the Company or any of its Subsidiaries, or to the knowledge of
the Company, any person, corporation or enterprise controlling, controlled by or
under common control with any of the foregoing. Section 4.20(a) of the Company
Disclosure Schedule sets forth (i) all of the Loans in original principal amount
in excess of $250,000 of the Company or any of its Subsidiaries that as of
December 31, 2002, were classified by any bank examiner (whether regulatory or
internal) as "Other Loans Specially Mentioned," "Special Mention,"
"Substandard," "Doubtful," "Loss," "Classified," "Criticized," "Credit Risk
Assets," "Concerned Loans," "Watch List" or words of similar import, together
with the principal amount of and accrued and unpaid interest on each such Loan
as of such date and the identity of the borrower thereunder, (ii) by category of
Loan (i.e., commercial, consumer, etc.), all of the other Loans of the Company
and its Subsidiaries that as of December 31, 2002, were classified as such,
together with the aggregate principal amount of and accrued and unpaid interest
on such Loans by category and (iii) each asset of the Company that as of
December 31, 2002, was classified as "Other Real Estate Owned" and the book
value thereof.
(b) Each Loan in original principal amount in excess of $250,000 (i) is
evidenced by notes, agreements or other evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been
A-16
perfected and (iii) is the legal, valid and binding obligation of the obligor
named therein, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
4.21 PROPERTY. Section 4.21 of the Company Disclosure Schedule sets forth
a true, correct and complete list of all the real properties owned or leased by
the Company or a Company Subsidiary. Each of the Company and its Subsidiaries
has good and marketable title or a valid and enforceable leasehold, as
applicable, free and clear of all liens, encumbrances, mortgages, pledges,
charges, defaults or equitable interests to all of the properties and assets,
real and personal, tangible or intangible, which are reflected on the
consolidated balance sheet of the Company as of December 31, 2002 or acquired
after such date, except (i) liens for taxes not yet due and payable or contested
in good faith by appropriate proceedings, (ii) pledges to secure deposits
incurred in the ordinary course of business, (iii) such imperfections of title,
easements and encumbrances, if any, as do not impair the use of the respective
property as such property is used on the date of this Agreement, and, with
respect to all fee-owned property, do not impair the fair market value of such
property, (iv) for dispositions of or encumbrances on such properties or assets
in the ordinary course of business, (v) mechanics', materialmen's, workmen's,
repairmen's, warehousemen's, carrier's and other similar liens and encumbrances
arising in the ordinary course of business, (vi) liens securing obligations that
are reflected in such consolidated balance sheet or (vii) the lessor's interest
in any such property that is leased. Except as set forth in Section 4.21(a) of
the Company Disclosure Schedule, (x) all leases pursuant to which the Company or
any Subsidiary of the Company, as lessee, leases real or personal property are
valid and enforceable in accordance with their respective terms and are bona
fide, arm's length leases, at rents that constituted market rents as of the
respective dates such leases were entered into, (y) neither the Company nor any
of its Subsidiaries nor, to the knowledge of the Company, any other party
thereto, is in default thereunder nor has any event occurred which, with the
giving of notice or the passage of time or both, would constitute a default
thereunder, and (z) the consummation of the transactions contemplated hereby
will not cause a default, right of termination by the landlord or imposition of
any penalty thereunder. With respect to all fee and leased property of the
Company or its Subsidiaries, (a) all facilities, building and improvements are
in good condition and repair, ordinary wear and tear excepted, and sufficient
for the operation of the business conducted thereon with such utilities and
related services as are adequate for the use and operation thereof, and
(b) adequate insurance covering any improvements situated on such property, or
such other necessary insurance, is in full force and effect. The Company has
provided or shall provide to Parent copies of all documents creating or
evidencing fee or leasehold interests of the Company or a Company Subsidiary and
any modifications or amendments thereto.
4.22 REORGANIZATION. The Company has no reason to believe that the Merger
will fail to qualify as a reorganization under Section 368(a) of the Code.
4.23 STATE TAKEOVER LAWS AND CHARTER PROVISIONS. Assuming the accuracy of
the representations and warranties of Parent set forth in Section 5.15 hereof,
the Company has taken all necessary action to exempt the transactions
contemplated by this Agreement from Section 3-602 of the MGCL. To the knowledge
of the Company, the Company has no "interested stockholder" as that term is
defined in Section 3-601(j) of the MGCL, or shares of capital stock subject to
restrictions on voting rights pursuant to Section 3-702 of the MGCL.
4.24 PREPARATION OF REPRESENTATIONS AND WARRANTIES. In making the
representations and warranties set forth herein, and preparing and delivering
the Company Disclosure Schedules, the Company has used all reasonable efforts to
make representations and warranties that, taken together with the Company
Disclosure Schedules, would be true and correct in all material respects without
regard to the standard set forth in Section 3.2.
A-17
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT
Subject to Article III, Parent hereby represents and warrants to the Company
as follows:
5.1 CORPORATE ORGANIZATION. (a) Parent is a corporation duly organized,
validly existing and in good standing under the laws of the State of Maryland.
Parent has the corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being conducted,
and is duly licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary. Parent is duly registered as a bank holding company
under the BHC Act. The Articles of Incorporation and Bylaws of Parent, copies of
which have previously been made available to the Company, are true and correct
copies of such documents as in effect as of the date of this Agreement.
(b) Each Subsidiary of Parent is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization. Each Subsidiary of Parent has the corporate power and authority to
own or lease all of its properties and assets and to carry on its business as it
is now being conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary. The deposit accounts of each
Subsidiary of Parent that is a bank or savings association are insured by the
FDIC through the Bank Insurance Fund and/or the Savings Association Insurance
Fund to the fullest extent permitted by law, and all premiums and assessments
required in connection therewith have been paid when due. The charter documents
and bylaws of Mercantile-Safe Deposit and Trust Company (the "Significant
Subsidiary"), copies of which have previously been made available to the
Company, are true and correct copies of such documents as in effect as of the
date of this Agreement.
(c) The minute books of Parent and the Significant Subsidiary contain true
and correct records of all meetings and other corporate actions held or taken
since December 31, 1999 of their respective stockholders and Boards of Directors
(including committees of their respective Boards of Directors).
5.2 CAPITALIZATION. (a) As of the date of this Agreement, the authorized
capital stock of Parent consists of 130,000,000 shares of Parent Common Stock
and 2,000,000 shares of preferred stock, without par value ("Parent Preferred
Stock"). As of the date of this Agreement, there were 68,875,046 shares of
Parent Common Stock and no shares of Parent Preferred Stock issued and
outstanding. As of the date of this Agreement, no shares of Parent Common Stock
or Parent Preferred Stock were reserved for issuance, except that 3,300,282
shares of Parent Common Stock were reserved for issuance upon the exercise of
stock options pursuant to the 1989 and 1999 Omnibus Stock Plans, Dividend
Reinvestment Program and Employee Stock Repurchase Plan (collectively, the
"Parent Stock Plans"). All of the issued and outstanding shares of Parent Common
Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. As of the date of this Agreement, except as
referred to above and except for rights (the "Parent Rights") distributed to the
holders of Parent Common Stock pursuant to the Stockholder Protection Rights
Agreement, dated as of June 8, 1999, between Parent and Mercantile-Safe Deposit
and Trust Company, as Rights Agent, Parent does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of Parent
Common Stock or any other equity securities of Parent or any securities
representing the right to purchase or otherwise receive any shares of Parent
Common Stock or Parent Preferred Stock or any other equity securities of Parent.
The shares of Parent Common Stock to be issued pursuant to the Merger will be
duly authorized and validly issued and, at the Effective Time, all such shares
will be fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to the ownership thereof.
A-18
(b) Section 5.2(b) of the Parent Disclosure Schedule sets forth a true and
correct list of all of the Parent Subsidiaries as of the date of this Agreement.
Except as set forth in Section 5.2(b) of the Parent Disclosure Schedule, as of
the date of this Agreement, Parent owns, directly or indirectly, all of the
issued and outstanding shares of capital stock of each of the Subsidiaries of
Parent, free and clear of all liens, charges, encumbrances and security interest
whatsoever, and all of such shares are duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof. Except as set forth in
Section 5.2(b) of the Parent Disclosure Schedule, as of the date of this
Agreement, no Subsidiary of Parent has or is bound by any outstanding
subscriptions, options, warrants, calls commitments or agreements of any
character with any party calling for the purchase or issuance of any shares of
capital stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
5.3 AUTHORITY; NO VIOLATION. (a) Parent has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of Parent, and no other corporate
proceedings on the part of Parent are necessary to approve this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Parent and (assuming due authorization,
execution and delivery by the Company) this Agreement constitutes a valid and
binding obligation of Parent, enforceable against Parent in accordance with its
terms, except as enforcement may be limited by general principles of equity
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
The execution and delivery of the Bank Merger Agreement and the consummation of
the transactions contemplated thereby will have been duly and validly approved
by the Board of Directors of Parent Bank. The Board of Directors of Parent Bank
will have declared the transactions contemplated by the Bank Merger Agreement to
be advisable and will have directed that the Bank Merger Agreement and the
transactions contemplated thereby be submitted to Parent Bank's sole stockholder
for approval and, except for the approval of the Bank Merger Agreement by Parent
Bank's sole stockholder, no other corporate proceedings on the part of Parent
Bank are necessary to approve the Bank Merger Agreement and to consummate the
transactions contemplated hereby and thereby. The Bank Merger Agreement, upon
execution and delivery by the Parent Bank (assuming due authorization, execution
and delivery by the Company Bank), will constitute a valid and binding
obligation of Parent Bank, enforceable against Parent Bank in accordance with
its terms, except as enforcement may be limited by general principles of equity
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
(b) Neither the execution and delivery of this Agreement by Parent, nor the
execution and delivery of the Bank Merger Agreement by Parent Bank, nor the
consummation by Parent or Parent Bank of the transactions contemplated hereby or
thereby, nor compliance by Parent or Parent Bank with any of the terms or
provisions hereof or thereof, will (i) violate any provision of the Articles of
Incorporation or Bylaws of Parent, or the articles of incorporation or bylaws or
similar governing documents of any of its Subsidiaries or (ii) assuming that the
consents and approvals referred to in Section 5.4 are duly obtained,
(x) violate any statute, code, ordinance, rule, regulation, judgment, order,
writ, decree or injunction applicable to Parent or any of its Subsidiaries or
any of their respective properties or assets, or (y) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of Parent or the
Significant Subsidiary under, any of the terms, conditions or provisions of any
note, bond, mortgage,
A-19
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Parent or the Significant Subsidiary is a party, or by which
they or any of their respective properties or assets may be bound or affected.
5.4 CONSENTS AND APPROVALS. Except for (a) the filing of applications and
notices, as applicable, with the Federal Reserve Board under the BHC Act, and
with the FDIC under the Bank Merger Act, and approval of such applications and
notices, (b) the filing with the SEC of the Proxy Statement and the filing and
declaration of effectiveness of the S-4, (c) the filing of the Articles of
Merger with the Department, (d) such filings and approvals as are required to be
made or obtained under the securities or "Blue Sky" laws of various states in
connection with the issuance of the shares of Parent Common Stock pursuant to
this Agreement, (e) approval of the listing of the Parent Common Stock to be
issued in the Merger on the NASDAQ/NMS, (f) approval of the transactions
contemplated by this Agreement by the Maryland Commissioner of Financial
Regulation and/or filings in connection therewith pursuant to the Financial
Institutions Article of the Annotated Code of Maryland, (g) filings with or
approvals of the Maryland Insurance Commissioner, (h) filings with or approvals
of the Virginia Bureau of Financial Institutions, and (i) such filings,
authorizations or approvals as may be set forth in Section 5.4 of the Parent
Disclosure Schedule, no consents or approvals of or filings or registrations
with any Governmental Entity or with any third party are required to be made by
Parent in connection with (1) the execution and delivery by Parent of this
Agreement and (2) the execution and delivery by Parent Bank of the Bank Merger
Agreement and (3) the consummation by Parent of the Merger and the other
transactions contemplated hereby, and the consummation by Parent Bank of the
Bank Merger.
5.5 SEC REPORTS. Parent has previously made available to the Company a
true and correct copy of each (a) final registration statement, prospectus,
report, schedule and definitive proxy statement filed since December 31, 1999 by
Parent with the SEC pursuant to the Securities Act or the Exchange Act (the
"Parent Reports") and (b) communication mailed by Parent to its shareholders
since December 31, 1999, and no such Parent Report (when filed and at its
respective effective time, if applicable) or communication (when mailed)
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading, except that information as of a later date shall be deemed to modify
information as of an earlier date. Parent has timely filed all Parent Reports
and other documents required to be filed by it under the Securities Act and the
Exchange Act since December 31, 1999, and, as of their respective dates, all
Parent Reports complied with the published rules and regulations of the SEC with
respect thereto.
5.6 REGULATORY REPORTS. Parent and each of its Subsidiaries have timely
filed all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
December 31, 1999 with any Regulatory Agency, and have paid all fees and
assessments due and payable in connection therewith. Except for normal
examinations conducted by a Regulatory Agency in the regular course of the
business of Parent and its Subsidiaries, no Regulatory Agency has initiated any
proceeding or, to the knowledge of Parent, investigation into the business or
operations of Parent or any of its Subsidiaries since December 31, 1999. There
is no unresolved violation, criticism, or exception by any Regulatory Agency
with respect to any report or statement relating to any examinations of Parent
or any of its Subsidiaries.
5.7 FINANCIAL STATEMENTS. Parent has previously made available to the
Company copies of (a) the consolidated balance sheet of Parent and its
Subsidiaries as of December 31 for the fiscal year 2001 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the fiscal years 1999 through 2001, inclusive, as reported in Parent's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed
with the SEC under the Exchange Act, accompanied by the audit report of
PricewaterhouseCoopers LLP, independent public accountants with respect to
Parent, (b) the unaudited balance sheet of Parent and its Subsidiaries as of
December 31 for the fiscal
A-20
year 2002 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the fiscal years 2000 through 2002,
inclusive, as presented in Parent's draft Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 previously delivered by Parent to the
Company (the "Parent Draft 10-K"), and (c) the unaudited consolidated balance
sheets of Parent and its Subsidiaries as of September 30, 2002 and
September 30, 2001 and the related unaudited consolidated statements of income,
changes in shareholders' equity and cash flows for the nine-month periods then
ended as reported in Parent's Quarterly Report on Form 10-Q for the period ended
September 30, 2002 filed with the SEC under the Exchange Act. The December 31,
2002 consolidated balance sheet of Parent (including the related notes, where
applicable) fairly presents the consolidated financial position of Parent and
its Subsidiaries as of the date thereof, and the other financial statements
referred to in this Section 5.7 (including the related notes, where applicable)
fairly present and the financial statements to be filed with the SEC after the
date hereof will fairly present (subject, in the case of the unaudited
statements, to recurring audit adjustments normal in nature and amount), the
results of the consolidated operations and changes in shareholders' equity and
consolidated financial position of Parent and its Subsidiaries for the
respective fiscal periods or as of the respective dates therein set forth; each
of such statements (including the related notes, where applicable) complies, and
the financial statements to be filed with the SEC after the date hereof will
comply, with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto; and each of such statements
(including the related notes, where applicable) has been, and the financial
statements to be filed with the SEC after the date hereof will be, prepared in
accordance with GAAP consistently applied during the periods involved, except as
indicated in the notes thereto or, in the case of unaudited statements, as
permitted by Form 10-Q of the SEC. The books and records of Parent and its
Subsidiaries have been, and are being, maintained in accordance with GAAP and
any other applicable legal and accounting requirements.
5.8 BROKER'S FEES. Neither Parent nor any Subsidiary of Parent, nor any of
their respective officers or directors, has employed any broker or finder or
incurred any liability for any broker's fees, commissions or finder's fees in
connection with any of the transactions contemplated by this Agreement, except
that Parent has engaged, and will pay a fee or commission to, Sandler O'Neill &
Partners, L.P.
5.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Parent Draft 10-K or any Parent Report (as defined in Section 5.5) filed with
the SEC prior to March 1, 2003, since December 31, 2002, there has been no
change or development or combination of changes or developments which,
individually or in the aggregate, has had a Material Adverse Effect on Parent.
5.10 LEGAL PROCEEDINGS. (a) Except as disclosed in the Parent Draft 10-K
or any Parent Report, neither Parent nor any of its Subsidiaries is a party to
any and there are no pending or, to Parent's knowledge, threatened, legal,
administrative, arbitral or other proceedings, claims, actions or governmental
or regulatory investigations of any nature against Parent or any of its
Subsidiaries required to be disclosed in such Parent Report, or any such
proceeding challenging the validity or propriety of the transactions
contemplated by this Agreement.
(b) There is no injunction, order, judgment or decree imposed upon Parent,
or any of its Subsidiaries or the assets of Parent or any of its Subsidiaries.
A-21
5.11 TAXES. Each of the Parent and the Significant Subsidiary has
(i) duly and timely filed (including applicable extensions granted without
penalty) all Tax Returns required to be filed at or prior to the Effective Time,
and all such Tax Returns are true and correct, and (ii) paid in full or made
adequate provision in the financial statements of Parent (in accordance with
GAAP) for all Taxes shown to be due on such Tax Returns. Neither Parent nor the
Significant Subsidiary has requested any extension of time within which to file
any Tax Returns in respect of any fiscal year which have not since been filed
and no request for waivers of the time to assess any Taxes are pending or
outstanding. With respect to each taxable period of Parent and the Significant
Subsidiary, the federal and state income Tax Returns of Parent and the
Significant Subsidiary have been audited by the IRS or appropriate state tax
authorities or the time for assessing and collecting income Tax with respect to
such taxable period has closed and such taxable period is not subject to review.
5.12 EMPLOYEES. Each of the Parent Plans (hereinafter defined) is in
compliance with the applicable law, including the Code and ERISA; each of the
Parent Plans intended to be "qualified" within the meaning of section 401(a) of
the Code has received a favorable determination letter from the IRS and, to
Parent's knowledge, no event has occurred that would reasonably be expected to
affect such determination; no Parent Plan has an accumulated or waived funding
deficiency within the meaning of section 412 of the Code; neither Parent nor any
Parent ERISA Affiliate has incurred, directly or indirectly, any liability to or
on account of a Parent Plan pursuant to Title IV of ERISA (other than liability
for premiums due the Pension Benefit Guaranty Corporation (the "PBGC") (which
premiums have been paid when due)); to the knowledge of Parent no proceedings
have been instituted to terminate any Parent Plan that is subject to Title IV of
ERISA; no "reportable event," as such term is defined in section 4043(c) of
ERISA, has occurred with respect to any Parent Plan (other than a reportable
event with respect to which the thirty day notice period has been waived); and
no condition exists that presents a risk to Parent of incurring a liability to
or on account of a Parent Plan pursuant to Title IV of ERISA (other than
liability for premiums due the PBGC); no Parent Plan is a multiemployer plan
(within the meaning of section 4001(a)(3) of ERISA) and no Parent Plan is a
multiple employer plan as defined in Section 413 of the Code; and there are no
pending, or, to the knowledge of Parent, threatened or anticipated claims (other
than routine claims for benefits) by, on behalf of or against any of the Parent
Plans or any trusts related thereto. "Parent Plan" means each deferred
compensation plan, incentive compensation plan, equity compensation plan,
"welfare" plan, fund or program (within the meaning of section 3(1) of the
ERISA); "pension" plan, fund or program (within the meaning of section 3(2) of
ERISA); each employment, termination or severance agreement; and each other
employee benefit plan, fund, program, agreement or arrangement, in each case,
that is sponsored, maintained or contributed to or required to be contributed to
as of the date of this Agreement by Parent, any of its Subsidiaries or by any
trade or business, whether or not incorporated (a "Parent ERISA Affiliate"), all
of which together with Parent would be deemed a "single employer" within the
meaning of Section 4001(b) of ERISA, for the benefit of any employee or former
employee of Parent or any Subsidiary.
5.13 PARENT INFORMATION. The information relating to Parent and its
Subsidiaries to be contained in the Proxy Statement and the S-4, or in any other
document filed with any other regulatory agency in connection herewith, will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances in which
they are made, not misleading. The Proxy Statement (except for such portions
thereof that relate to the Company or any of its Subsidiaries) will comply with
the provisions of the Exchange Act and the rules and regulations thereunder. The
S-4 will comply with the provisions of the Securities Act and the rules and
regulations thereunder.
5.14 COMPLIANCE WITH APPLICABLE LAW. Parent and each of its Subsidiaries
holds, and has at all times held, all licenses, franchises, permits and
authorizations necessary for the lawful conduct of their respective businesses
under and pursuant to all, and have complied with and are not in default in any
A-22
respect under any, applicable law, statute, order, rule, regulation, policy
and/or guideline of any Governmental Entity relating to Parent or any of its
Subsidiaries and neither Parent nor the Significant Subsidiary has received
notice of any violations of any of the above.
5.15 OWNERSHIP OF COMPANY COMMON STOCK; AFFILIATES AND ASSOCIATES.
(a) Neither Parent nor any of its affiliates or associates (as such terms
are defined under the Exchange Act) (i) beneficially owns, directly or
indirectly, or (ii) is a party to any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of any shares of
capital stock of the Company (other than Trust Account Shares); and
(b) Neither Parent nor any of its Subsidiaries is an "interested
stockholder" of the Company or an "associate" or "affiliate" of any "interested
stockholder" of the Company (as such terms are defined in Section 3-601 of the
MGCL).
5.16 AGREEMENTS WITH REGULATORY AGENCIES. Except as disclosed in Parent's
Annual Report on Form 10-K for the year ended December 31, 2001, neither Parent
nor any of its Subsidiaries is subject to any cease-and-desist or other order
issued by, or is a party to any written agreement, consent agreement or
memorandum of understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any board
resolutions at the request of (each, a "Parent Regulatory Agreement"), any
Regulatory Agency that restricts the conduct of its business or that in any
manner relates to its capital adequacy, its credit policies, its management or
its business, nor has Parent, the Significant Subsidiary or Parent Bank been
advised by any Regulatory Agency that it is considering issuing or requesting
any Parent Regulatory Agreement.
5.17 OPINION. Prior to the execution of this Agreement, Parent has
received an opinion from Sandler O'Neill & Partners, L.P. to the effect that as
of the date thereof and based upon and subject to the matters set forth therein,
the Merger Consideration to be paid by Parent is fair to Parent from a financial
point of view. Such opinion has not been amended or rescinded.
5.18 APPROVALS. Parent knows of no reason why all regulatory approvals
required for the consummation of the transactions contemplated hereby (including
the Merger and the Bank Merger) should not be obtained.
5.19 LOAN PORTFOLIO. (a) Except as set forth on Section 5.19(a) of the
Parent Disclosure Schedule, neither Parent nor any of its Subsidiaries is a
party to any written or oral (i) Loan, other than any Loan the unpaid principal
balance of which does not exceed $1,500,000 under the terms of which the obligor
was, as of December 31, 2002, over 90 days delinquent in payment of principal or
interest or, to the knowledge of Parent, in default of any other provision, or
(ii) Loan with any director, executive officer or five percent or greater
stockholder of Parent or any of its Subsidiaries, or to the knowledge of Parent,
any person, corporation or enterprise controlling, controlled by or under common
control with any of the foregoing. Section 5.19(a) of Parent Disclosure Schedule
sets forth (i) all of the Loans in original principal amount in excess of
$1,500,000 of Parent or any of its Subsidiaries that as of December 31, 2002,
were classified by any bank examiner (whether regulatory or internal) as "Other
Loans Specially Mentioned," "Special Mention," "Substandard," "Doubtful," "Loss,
"Classified," "Criticized," "Credit Risk Assets," "Concerned Loans," "Watch
List" or words of similar import, together with the principal amount of and
accrued and unpaid interest on each such Loan as of such date and the identity
of the borrower thereunder, (ii) by category of Loan (i.e., commercial,
consumer, etc.), all of the other Loans of Parent and its Subsidiaries that as
of December 31, 2002, were classified as such, together with the aggregate
principal amount of and accrued and unpaid interest on such Loans by category
and (iii) each asset of Parent that as of December 31, 2002, was classified as
"Other Real Estate Owned" and the book value thereof.
A-23
(b) Each Loan in original principal amount in excess of $1,500,000 (i) is
evidenced by notes, agreements or other evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been perfected and
(iii) is the legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
5.20 PROPERTY. Each of Parent and its Subsidiaries has good and marketable
title free and clear of all liens, encumbrances, mortgages, pledges, charges,
defaults or equitable interests to all of the properties and assets, real and
personal, tangible or intangible, and which are reflected on the consolidated
balance sheet of Parent as of December 31, 2002, except (i) liens for taxes not
yet due and payable or contested in good faith by appropriate proceedings,
(ii) pledges to secure deposits and other liens incurred in the ordinary course
of business, (iii) such imperfections of title, easements and encumbrances, if
any, as do not interfere with the use of the respective property as such
property is used on the date of this Agreement, (iv) for dispositions of or
encumbrances on such properties or assets in the ordinary course of business,
(v) mechanics', materialmen's, workmen's, repairmen's, warehousemen's, carrier's
and other similar liens and encumbrances arising in the ordinary course of
business, (vi) liens securing obligations that are reflected in such
consolidated balance sheet, (vii) the lessor's interest in any such property
that is leased, or (viii) as disclosed in Section 5.20 of the Parent Disclosure
Schedule. All leases pursuant to which Parent or any Subsidiary of Parent, as
lessee, leases real or personal property are valid and enforceable in accordance
with their respective terms and neither Parent nor any of its Subsidiaries nor,
to the knowledge of Parent, any other party thereto is in default thereunder.
5.21 REORGANIZATION. Parent has no reason to believe that the Merger will
fail to qualify as a reorganization under Section 368(a) of the Code.
5.22 CERTAIN CONTRACTS. Except as set forth in Section 5.22(a) of the
Parent Disclosure Schedule, (a) neither Parent nor the Significant Subsidiary is
a party to or bound by any contract (whether written or oral) (i) with respect
to the employment of any directors, (ii) which, upon the consummation of the
transactions contemplated by this Agreement, will (either alone or upon the
occurrence of any additional acts or events) result in any payment or benefits
(whether of severance pay or otherwise) becoming due, or the acceleration or
vesting of any rights to any payment or benefits, from Parent, the Company, the
Surviving Corporation or any of their respective Subsidiaries to any officer,
director or consultant of Parent or any of its Subsidiaries, (iii) as of the
date of this Agreement which is a material contract (as defined in Item
601(b)(10) of Regulation S-K of the SEC) to be performed after the date of this
Agreement that has not been filed or incorporated by reference in the Parent
Reports, (iv) which is a consulting agreement (including data processing,
software programming and licensing contracts) not terminable on 90 days or less
notice involving the payment of more than $1,500,000 per annum, or (v) which
materially restricts the conduct of any line of business by Parent or any of its
Subsidiaries. Each contract of the type described in this Section 5.22(a),
whether or not set forth in Section 5.22(a) of the Parent Disclosure Schedule,
is referred to herein as a "Parent Contract." Parent has previously delivered or
made available to the Company true and correct copies of each contract of the
type described in this Section 5.22(a).
(b) Except as set forth in Section 5.22(b) of the Parent Disclosure
Schedule, (i) each Parent Contract is valid and binding and in full force and
effect, (ii) Parent and each of its Subsidiaries has performed all obligations
required to be performed by it to date under each Parent Contract, (iii) no
event or condition exists which constitutes or, after notice or lapse of time or
both, would constitute, a default on the part of Parent or any of its
Subsidiaries under any Parent Contract, and (iv) no other party to any Parent
Contract is, to the knowledge of Parent, in default in any respect thereunder.
A-24
5.23 FINANCING. Parent has available sufficient cash and cash equivalents
on hand to pay the Total Cash Amount as contemplated by Section 1.4 hereof.
5.24 PREPARATION OF REPRESENTATIONS AND WARRANTIES. In making the
representations and warranties set forth herein, and preparing and delivering
the Parent Disclosure Schedules, Parent has used all reasonable efforts to make
representations and warranties that, taken together with the Parent Disclosure
Schedules, would be true and correct in all material respects without regard to
the standard set forth in Section 3.2.
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1 COVENANTS OF THE COMPANY. During the period from the date of this
Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement or with the prior written consent of
Parent, the Company and its Subsidiaries shall carry on their respective
businesses in the ordinary course consistent with past practice. Without
limiting the generality of the foregoing, and except as set forth in
Section 6.1 of the Company Disclosure Schedule or otherwise contemplated by this
Agreement or consented to in writing by Parent, the Company shall not, and shall
not permit any of its Subsidiaries to:
(a) solely in the case of the Company, declare or pay any dividends on, or
make other distributions in respect of, any of its capital stock, other than the
Company's normal quarterly dividend not in excess of $0.29 per share of Company
Common Stock;
(b) (i) repurchase, redeem or otherwise acquire (except for the acquisition
of Trust Account Shares and DPC Shares, as such terms are defined in
Section 1.4(d) hereof) any shares of the capital stock of the Company or any
Subsidiary of the Company, or any securities convertible into or exercisable for
any shares of the capital stock of the Company or any Subsidiary of the Company,
(ii) split, combine or reclassify any shares of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in lieu
of or in substitution for shares of its capital stock, or (iii) issue, deliver
or sell, or authorize or propose the issuance, delivery or sale of, any shares
of its capital stock or any securities convertible into or exercisable for, or
any rights, warrants or options to acquire, any such shares, or enter into any
agreement with respect to any of the foregoing other than pursuant to the
Company's Employee Stock Purchase Plan (the "ESPP"), except, in the case of
clauses (ii) and (iii), for the issuance of Company Common Stock upon the
exercise or fulfillment of rights or options issued or existing pursuant to
employee benefit plans, programs or arrangements, all to the extent outstanding
and in existence on the date of this Agreement and in accordance with their
present terms;
(c) amend its Articles of Incorporation, Bylaws or other similar governing
documents;
(d) make any capital expenditures other than those not in excess of $250,000
individually and $1,000,000 in the aggregate which are made in the ordinary
course of business or are necessary to maintain existing assets in good repair;
(e) enter into any new line of business;
(f) acquire or agree to acquire, by merging or consolidating with, or by
purchasing an equity interest in or a portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof or otherwise acquire any equity
interests in or assets of any business or any corporation, partnership,
association or other business organization or division thereof, other than in
connection with foreclosures, settlements in lieu of foreclosure or troubled
loan or debt restructurings in the ordinary course of business consistent with
past practices;
A-25
(g) take any action that is intended or may reasonably be expected to result
in any of its representations and warranties set forth in this Agreement being
or becoming untrue, or in any of the conditions to the Merger set forth in
Article VIII not being satisfied;
(h) change its methods of accounting in effect at December 31, 2002, except
as required by changes in GAAP or regulatory accounting principles as concurred
to by the Company's independent auditors;
(i) (i) except as set forth in Section 7.8 hereof, as required by applicable
law or as required to maintain qualification pursuant to the Code, adopt, amend,
or terminate any employee benefit plan (including any Plan) or any agreement,
arrangement, plan or policy between the Company or any Subsidiary of the Company
and one or more of its current or former directors, officers or employees,
except that the Company may adopt the retention program and make the pro rata
bonus payments, in each case as described in Section 6.1(i) of the Company
Disclosure Schedule, or (ii) except as required by applicable law, increase in
any manner the compensation or fringe benefits of any director, officer or
employee or pay any benefit not required by any Plan or agreement (including the
granting of stock options, stock appreciation rights, restricted stock,
restricted stock units or performance units or shares);
(j) other than activities in the ordinary course of business consistent with
past practice, sell, lease, encumber, assign or otherwise dispose of, or agree
to sell, lease, encumber, assign or otherwise dispose of, any of its assets,
properties or other rights or agreements which individually or in the aggregate
are material to the Company and its Subsidiaries taken as a whole;
(k) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or assume, guarantee,
endorse or otherwise as an accommodation become responsible for the obligations
of any other individual, corporation or other entity;
(l) file any application to establish, relocate or terminate the operations
of any banking office of it or any of its Subsidiaries;
(m) create, renew, amend or terminate or give notice of a proposed renewal,
amendment or termination of, any material contract, agreement or lease for
goods, services or office space to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries or their
respective properties is bound, other than the renewal in the ordinary course of
business of any lease the term of which expires prior to the Closing Date;
(n) take or cause to be taken any action which would reasonably be expected
to prevent the Merger from qualifying as a reorganization under Section 368(a)
of the Code; or
(o) agree to do any of the foregoing.
6.2 COVENANTS OF PARENT. Except as otherwise contemplated by this
Agreement or consented to in writing by the Company, Parent shall not, and shall
not permit any of its Subsidiaries to:
(a) solely in the case of Parent, declare or pay any dividends on or make
any other distributions in respect of any of its capital stock other than its
current quarterly dividends; PROVIDED, HOWEVER, that nothing contained herein
shall prohibit Parent from increasing the quarterly cash dividend on the Parent
Common Stock in a manner consistent with past practice;
(b) take any action that is intended or may reasonably be expected to result
in any of its representations and warranties set forth in this Agreement being
or becoming untrue, or in any of the conditions to the Merger set forth in
Article VIII not being satisfied;
(c) take any action or enter into any agreement that would reasonably be
expected to jeopardize or materially delay the receipt of any Requisite
Regulatory Approval (as defined in Section 8.1(c));
A-26
(d) change its methods of accounting in effect at December 31, 2002, except
in accordance with changes in GAAP or regulatory accounting principles as
concurred to by Parent's independent auditors;
(e) take or cause to be taken any action which would reasonably be expected
to prevent the Merger from qualifying as a reorganization under Section 368(a)
of the Code; or
(f) agree to do any of the foregoing.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 REGULATORY MATTERS. (a) The Company shall promptly prepare and file
with the SEC the Proxy Statement and Parent shall promptly prepare and file with
the SEC the S-4, in which the Proxy Statement will be included as a prospectus.
Each of the Company and Parent shall use its reasonable best efforts to have the
S-4 declared effective under the Securities Act as promptly as practicable after
such filing, and the Company shall thereafter mail the Proxy Statement to its
stockholders. Parent shall also use its reasonable best efforts to obtain as
promptly as practicable all necessary state securities law or "Blue Sky" permits
and approvals required to carry out the transactions contemplated by this
Agreement.
(b) The parties hereto shall cooperate with each other and use their
reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and filings, and
to obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and Governmental Entities which are
necessary or advisable to consummate the transactions contemplated by this
Agreement (including the Merger and the Bank Merger). The Company and Parent
shall have the right to review in advance, and to the extent practicable each
will consult the other on, in each case subject to applicable laws relating to
the exchange of information, all the information relating to the Company or
Parent, as the case may be, and any of their respective Subsidiaries, which
appears in any filing made with, or written materials submitted to, any third
party or any Governmental Entity in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right, each of the
parties hereto shall act reasonably and as promptly as practicable. The parties
hereto agree that they will consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of all third
parties and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
apprised of the status of matters relating to completion of the transactions
contemplated herein.
(c) Parent and the Company shall, upon request, furnish each other with all
information concerning themselves, their Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the Proxy Statement, the S-4 or any other statement, filing,
notice or application made by or on behalf of Parent, the Company or any of
their respective Subsidiaries to any Governmental Entity in connection with the
Merger and the other transactions contemplated by this Agreement.
(d) Parent and the Company shall promptly furnish each other with copies of
written communications received by Parent or the Company, as the case may be, or
any of their respective Subsidiaries, Affiliates or Associates (as such terms
are defined in Rule 12b-2 under the Exchange Act as in effect on the date of
this Agreement) from, or delivered by any of the foregoing to, any Governmental
Entity in respect of the transactions contemplated hereby.
7.2 ACCESS TO INFORMATION. (a) Upon reasonable notice and subject to
applicable laws relating to the exchange of information, each party shall, and
shall cause each of its Subsidiaries to, afford to the officers, employees,
accountants, counsel and other representatives of the other party, reasonable
access, during normal business hours during the period prior to the Effective
Time, to all its properties,
A-27
books, contracts, commitments, records, officers, employees, accountants,
counsel and other representatives and, during such period, it shall, and shall
cause its Subsidiaries to, make available to the other party all information
concerning its business, properties and personnel as the other party may
reasonably request; provided, however, that the Company's rights under this
Section 7.2(a) are limited such that access and information will be provided to
the Company only to the extent reasonably necessary for the Company to confirm
Parent's compliance with the provisions of this Agreement and the accuracy of
Parents representations and warranties set forth in Article V of this Agreement.
Neither party nor any of its Subsidiaries shall be required to provide access to
or to disclose information where such access or disclosure would violate or
prejudice the rights of its customers, jeopardize any attorney-client privilege
or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty
or binding agreement entered into prior to the date of this Agreement. The
parties hereto will make appropriate substitute disclosure arrangements under
circumstances in which the restrictions of the preceding sentence apply.
(b) All information furnished to Parent by the Company pursuant to
Section 7.2(a) shall be subject to, and Parent shall hold all such information
in confidence in accordance with, the provisions of the confidentiality
agreement, dated January 30, 2003 (the "Confidentiality Agreement"), between
Parent and the Company.
(c) No investigation by either of the parties or their respective
representatives shall affect the representations, warranties, covenants or
agreements of the other set forth herein.
7.3 EXCLUSIVE DEALING.
(a) The Board of Directors of the Company has carefully considered and
deliberated upon the terms and conditions of the Merger has concluded that the
Merger is fair to, and in the best interests of the stockholders of the Company,
with the intent that this Agreement be binding, subject to the terms and
conditions hereof. In the process of so concluding, the Board of Directors of
the Company has, at the expense of the Company, received the written advice of
KBW, its financial advisor, to the effect that, as of the date thereof and based
upon and subject to the matters set forth therein, the Merger Consideration to
be received by the stockholders of the Company in the Merger is fair to such
stockholders from a financial viewpoint. Accordingly, in view of the commitments
of the parties and the time and expense required to consummate the Merger and
while this Agreement is in effect, and subject to subsections (b), (c) and (e),
the Company shall not, nor shall it permit any of the Company's Subsidiaries to,
nor shall it authorize or permit any director, officer or agent of the Company
or any of the Company's Subsidiaries or any investment banker, attorney,
accountant or other advisor of the Company or any of the Company's Subsidiaries
to, and it shall cause its and its Subsidiaries' directors, officers, agents,
investment bankers, attorneys, accountants and other advisors not to, directly
or indirectly, (i) solicit, initiate or encourage, or take any other action to
induce or facilitate, any Acquisition Proposal (as hereinafter defined), or (ii)
enter into, continue or otherwise participate in any discussions or negotiations
regarding, or furnish to any person (other than Parent, Parent Bank or their
respective representatives) any nonpublic information with respect to, or take
any other action to facilitate, any inquiry or the making of any proposal that
constitutes or may reasonably be expected to lead to, any Acquisition Proposal,
except that, if the Company receives a communication that it believes may, upon
clarification, constitute a Superior Proposal (as hereinafter defined), the
Company may communicate with the person making such communication to the limited
extent necessary to obtain the necessary clarification.
(b) At any time prior to obtaining the stockholder approval with respect to
the Merger, the Board of Directors of the Company may, in response to a BONA
FIDE written Acquisition Proposal that constitutes a Superior Proposal, and did
not otherwise result from a breach of this Section 7.3, and subject to
compliance with Sections 7.3(c) through (e), and provided that and only to the
extent that the Board of Directors of the Company has determined in good faith,
after consultation with outside
A-28
counsel to the Company, experienced in providing representation in such matters,
that failure to take such action would breach the fiduciary duties under
applicable law of the Company's Board of Directors (i) furnish nonpublic
information with respect to the Company and the Company's Subsidiaries to the
person making such Acquisition Proposal (and its representatives) pursuant to a
confidentiality agreement which contains terms that are equivalent to, and in no
respect less favorable to the Company than the Confidentiality Agreement (it
being understood and agreed that, notwithstanding anything in this Agreement to
the contrary, the Company shall be entitled to waive any "standstill" or similar
provision in such confidentiality agreement which would preclude such person
from making an Acquisition Proposal to the Company for the limited purpose of
enabling such person to make an Acquisition Proposal to the Company during the
45-day period following execution of such confidentiality agreement, and any
such waiver shall not constitute a breach of this Section 7.3), provided that
all such information is provided on a prior or substantially current basis to
Parent, and (ii) participate in discussions or negotiations with the person
making such Acquisition Proposal (and its representatives) regarding such
Acquisition Proposal. Without limiting the generality of the foregoing, it is
understood that any violation of the restrictions set forth in the preceding
sentence by any director or officer of the Company or any of the Company's
Subsidiaries or any investment banker, attorney, accountant or other advisor of
the Company or any of the Company's Subsidiaries shall be deemed to be a breach
of this Section 7.3 by the Company.
(c) Except as set forth in the next sentence or in Section 7.3(e), neither
the Board of Directors of the Company nor any committee thereof shall
(i) withdraw or modify in a manner adverse to Parent, or propose publicly to
withdraw or modify in a manner adverse to Parent, the recommendation or
declaration of advisability by such Board of Directors or any such committee of
this Agreement or the Merger or recommend, or propose publicly to recommend, the
approval or adoption of any Acquisition Proposal or resolve or agree to take any
such action (any such action or any such resolution or agreement to take such
action being referred to herein as an "Adverse Recommendation Change"),
(ii) adopt or approve any Acquisition Proposal or propose publicly to adopt or
approve any Acquisition Proposal or resolve or agree to take any such action or
(iii) cause or permit the Company or any of the Company's Subsidiaries to enter
into any letter of intent, memorandum of understanding, agreement in principle,
acquisition agreement, merger agreement, option agreement, joint venture
agreement, partnership agreement or other agreement (other than a
confidentiality agreement referred to in Section 7.3(b)) (each, an "Acquisition
Agreement") constituting or related to, or which is intended to or has a
reasonable possibility of leading to, any Acquisition Proposal or resolve or
agree to take any such action. In the case, however, of any Acquisition Proposal
which is a Superior Proposal which did not result from a breach of this
Section 7.3, if the Board of Directors of the Company determines in good faith,
after consultation with outside counsel experienced in providing representation
in such matters, that failure to do so would constitute a breach of the
fiduciary duties of the Board of Directors under applicable law, the Board of
Directors of the Company may, at any time prior to the approval by the
stockholders of the Company with respect to the Merger, cause the Company to
terminate this Agreement pursuant to Section 9.1(g) and concurrently enter into
an Acquisition Agreement; PROVIDED, however, that the Company shall not
terminate this Agreement pursuant to Section 9.1(g), and any purported
termination pursuant to Section 9.1(g) shall be void and of no force or effect,
unless (A) the Company has complied with all the provisions of this
Section 7.3, including the notification provisions in this Section 7.3, and with
all applicable requirements of Section 10.3 (including the payment of the
Termination Fee (as defined in Section 10.3 hereof) prior to or concurrently
with such termination) in connection with such Superior Proposal; (B) the Board
of Directors of the Company causes the Company to notify Parent in writing (such
notice, a "Notice of Superior Proposal") that it intends to enter into such
Acquisition Agreement, attaching to such Notice of Superior Proposal the most
current version of such Acquisition Agreement and all other proposed written
agreements, arrangements or understandings, including the forms of any
agreements with third parties, and all applicable financial statements and
evidence of any planned financing relating to such
A-29
Superior Proposal (and a description of all material oral agreements with
respect thereto), and the Company does not enter into such Acquisition Agreement
during the five-day period following receipt by Parent of such Notice of
Superior Proposal (the "Response Period"); (C) if Parent makes a counteroffer to
such Superior Proposal during the Response Period (a "Counteroffer"), the Board
of Directors of the Company considers in good faith such Counteroffer and causes
the Company's financial and legal advisors to negotiate in good faith with
respect to the terms of such Counteroffer; (D) if Parent makes a Counteroffer,
and (x) the Board of Directors of the Company determines in its good faith
judgment (based on the written advice of KBW) that such Superior Proposal is a
Superior Proposal to such Counteroffer and (y) the Board of Directors of the
Company determines in good faith, after consultation with outside counsel
experienced in providing representation in such matters, that failure to accept
such Superior Proposal would constitute a breach of the fiduciary duties of the
Board of Directors under applicable law; and (E) in the event that any amendment
to the price or any other material term of a Superior Proposal occurs during the
Response Period, the Company provides a new Notice of Superior Proposal (in
which case a new Response Period shall accordingly begin and the Company must
again comply with all of the terms of this Section 7.3 with respect to such
amended Superior Proposal).
(d) In addition to the obligations of the Company set forth in Sections 7.3
(a) through (c), the Company shall promptly (and in any event within 24 hours)
advise Parent orally of any Acquisition Proposal, the material terms and
conditions of such Acquisition Proposal (including any subsequent amendment or
other modification to such material terms and conditions) and the identity of
the person making such Acquisition Proposal.
(e) The Company may communicate information about any Acquisition Proposal
to its stockholders if, in the judgment of the Company's Board of Directors,
based upon the advice of outside counsel experienced in providing representation
in such matters, the failure to communicate information would violate federal or
state securities laws or constitute a breach of the directors' fiduciary duty.
Nothing contained in this Agreement shall prevent the Company or its Board of
Directors from complying with Rule 14e-2 promulgated under the Exchange Act with
regard to an Acquisition Proposal.
(f) For purposes of this Agreement, "Acquisition Proposal" means any
inquiry, proposal, indication of interest or offer from any person (other than
Parent or Parent Bank) relating to any of the following, in one transaction or
series of transactions, (i) a merger, consolidation, share exchange or similar
transaction involving the Company or the Company Bank, (ii) a sale, lease or
other disposition directly or indirectly by merger, consolidation, share
exchange or otherwise of assets of the Company or the Company Bank representing
25% or more of the consolidated assets of the Company (including capital stock
of the Company Bank) or of the Company Bank, or (iii) a transaction in which any
person shall acquire beneficial ownership (as such term is defined in
Rule 13d-3 under the Exchange Act), or the right to acquire beneficial
ownership, or any "group" (as such term is defined under the Exchange Act) shall
have been formed which beneficially owns or has the right to acquire beneficial
ownership, of 25% or more of the Company's or the Company Bank's outstanding
capital stock.
(g) For purposes of this Agreement, "Superior Proposal" means any BONA FIDE
written offer not solicited by or on behalf of the Company or any of the
Company's Subsidiaries made by a third party to engage in any transaction
described in the definition of "Acquisition Proposal" which, if consummated,
would result in such third party (or in the case of a merger, consolidation or
similar transaction, the stockholders of such third party immediately prior
thereto) acquiring, directly or indirectly, (A) more than 50% of the voting
power of (x) the Company Common Stock or (y) in the case of a merger,
consolidation or similar transaction, the common stock of the surviving or
transferee entity or its publicly-held parent corporation or (B) all or
substantially all the assets of the Company and the Company's Subsidiaries,
taken as a whole, in either case for consideration consisting of cash and/or
securities that the Board of Directors of the Company determines in its good
faith judgment
A-30
(based on the written advice of KBW) to have a higher value than the aggregate
Merger Consideration and which proposal is determined in good faith by the Board
of Directors of the Company to be more favorable to the Company's stockholders
than the Merger, in each case taking into account any changes to the terms of
this Agreement proposed by Parent in response to such Superior Proposal during
the Response Period; PROVIDED, HOWEVER, that no such written offer requiring
financing that is not committed shall be a Superior Proposal unless in the good
faith judgment of the Board of Directors of the Company, after consultation with
KBW, such financing is readily capable of being obtained.
7.4 STOCKHOLDER MEETINGS. The Company shall take all steps necessary to
duly call, give notice of, convene and hold a meeting of its stockholders to be
held as soon as is reasonably practicable after the date on which the S-4
becomes effective for the purpose of voting upon the approval of this Agreement
and the consummation of the transactions contemplated hereby, including the
Merger. The Company will, through its Board of Directors, subject to the
fiduciary duties of such board, recommend to its stockholders approval of this
Agreement and the transactions contemplated hereby including the Merger, and
such other matters as may be submitted to its stockholders in connection with
this Agreement.
7.5 LEGAL CONDITIONS TO MERGER. Each of Parent and the Company shall, and
shall cause its Subsidiaries to, use their reasonable best efforts (a) to take,
or cause to be taken, all actions necessary, proper or advisable to comply
promptly with all legal requirements which may be imposed on such party or its
Subsidiaries with respect to the Merger and the Bank Merger and, subject to the
conditions set forth in Article VIII hereof, to consummate the transactions
contemplated by this Agreement including the Merger and the Bank Merger, and
(b) to obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any Governmental
Entity and any other third party which is required to be obtained by the Company
or Parent or any of their respective Subsidiaries in connection with the Merger
and the Bank Merger and the other transactions contemplated by this Agreement,
and to comply with the terms and conditions of such consent, authorization,
order or approval.
7.6 AFFILIATES. The Company shall use its reasonable best efforts to cause
each director, executive officer and other person who is an "affiliate" (for
purposes of Rule 145 under the Securities Act) of the Company to deliver to
Parent, as soon as practicable after the date of this Agreement, a written
agreement, in the form of EXHIBIT 7.6 hereto.
7.7 STOCK EXCHANGE LISTING. Parent shall use its reasonable best efforts
to cause the shares of Parent Common Stock to be issued in the Merger to be
approved for listing on the NASDAQ/NMS, subject to official notice of issuance,
as of the Effective Time.
7.8 EMPLOYEE BENEFIT PLANS; EXISTING AGREEMENTS. (a) Following the
Effective Time, the employees of the Company and its Subsidiaries (the "Company
Employees") shall be eligible to participate in employee benefit plans of Parent
or its Subsidiaries in which similarly situated employees of Parent or its
Subsidiaries participate, to the same extent that similarly situated employees
of Parent or its Subsidiaries participate; PROVIDED, HOWEVER, that until
January 1 of the second calendar year commencing after the Effective Time,
Parent may instead provide such employees with participation in the employee
benefit plans of Parent or its Subsidiaries on a basis that is no less favorable
to such employees than those plans in which they participated immediately prior
to the Effective Time (it being understood that inclusion of Company Employees
in Parent's employee benefit plans may occur at different times with respect to
different plans). Following the Effective Time, the Company Employees shall be
eligible to receive upon termination if such termination occurs within one year
after the Effective Time, severance benefits upon the terms set forth in
Section 7.8 of the Parent Disclosure Schedule, which terms represent the
benefits in effect on the date of this Agreement for similarly situated
employees of Parent or its Subsidiaries.
A-31
(b) With respect to each Parent Plan for which length of service is taken
into account for any purpose, service with the Company or any of its
Subsidiaries (or predecessor employers to the extent the Company provides past
service credit) shall be treated as service with Parent for purposes of
determining eligibility to participate, vesting, and entitlement to benefits,
including for severance benefits and vacation entitlement (but not for accrual
of defined benefit pension benefits); PROVIDED HOWEVER, that such service shall
not be recognized to the extent that such recognition would result in a
duplication of benefits. Such service also shall apply for purposes of
satisfying any waiting periods, evidence of insurability requirements, or the
application of any preexisting condition limitations. Each Parent Plan shall
waive pre-existing condition limitations to the same extent waived under the
applicable Company Plan. Company Employees shall be given credit for amounts
paid under a corresponding benefit plan during the same period for purposes of
applying deductibles, copayments and out-of-pocket maximums as though such
amounts had been paid in accordance with the terms and conditions of Parent
Plan.
(c) As of the Effective Time, Parent shall assume and honor and shall cause
the appropriate Subsidiaries of Parent to assume and to honor in accordance with
their terms all agreements listed in Section 7.8 of the Company Disclosure
Schedule, copies of which have been provided to Parent (the "Benefit
Agreements"). Parent acknowledges and agrees that the Merger will constitute a
"change in control" of the Company for all purposes under such agreements. The
second sentence of this Section 7.8(c) is intended to be for the benefit of, and
the agreement evidenced by the second sentence that the Merger constitutes a
"change of control" of the Company for all purposes under the agreements
described in this Section 7.8(c) shall be enforceable by, each director, officer
or employee that is a party to any Benefit Agreement.
(d) Parent and the Company agree that, prior to the Effective Time, the
Company, in consultation with Parent, may adopt a change in control retention
plan (the "Retention Plan"), substantially as provided in Section 6.1(i) of the
Company Disclosure Schedule. Notwithstanding any other provision of this
Agreement, any Plan or otherwise, Parent agrees to maintain in full force and
effect, without amendment or modification, the Retention Plan until such time as
all Parent or Company obligations are fulfilled thereunder.
(e) Notwithstanding anything in this Agreement to the contrary, Parent
covenants and agrees that it shall not, and shall cause its Subsidiaries not to,
terminate the employment of any holder of a Company Option that is converted
into a Parent Option pursuant to the terms of this Agreement until a date that
is at least three business days following the date on which Parent shall have
complied with the filing requirements set forth in Section 1.6(b) hereof and
shall have given such holder notice of such compliance. This Section 7.8(e) is
intended to be for the benefit of, and shall be enforceable by, each person who
is the holder of a Company Option that is converted into a Parent Option
pursuant to the terms of this Agreement.
(f) From and after the Closing, Parent shall reimburse each executive
officer of the Company for the expense of any tax or financial planning advice
such executive officer receives from third party advisors, such reimbursement to
be made promptly upon Parent's receipt of a copy of any invoice with respect
thereto and regardless of whether such executive officer is them employed by
Parent or any of its Subsidiaries; provided, however, that in no event shall
Parent be required to reimburse any individual executive officer's expenses in
excess of the Reimbursement Limit for such executive officer. The "Reimbursement
Limit" with respect any particular executive officer shall be an amount equal to
$5,000 less the amount of any such expenses reimbursed to such executive officer
by the Company at or prior to the Closing. This Section 7.8(f) is intended to be
for the benefit of, and shall be enforceable by, each such executive officer.
A-32
(g) To the extent permitted by applicable law, Parent or Parent Bank shall
assume and continue to maintain the split dollar life insurance policy
identified on Section 7.8(g) of the Company Disclosure Schedule provided that
such obligation does not result in additional out of pocket costs to the
Company. This Section 7.8(g) is intended to be for the benefit of, and shall be
enforceable by, the named insured in such policy.
7.9 INDEMNIFICATION. (a) In the event of any threatened or actual claim,
action, suit, proceeding or investigation, whether civil, criminal or
administrative, including any such claim, action, suit, proceeding or
investigation in which any person who is now, or has been at any time prior to
the date of this Agreement, or who becomes prior to the Effective Time, a
director or officer of the Company or any of its Subsidiaries (the "Indemnified
Parties") is, or is threatened to be, made a party based in whole or in part on,
or arising in whole or in part out of, or pertaining to (i) the fact that he is
or was a director or officer of the Company or any of its Subsidiaries or (ii)
this Agreement or any of the transactions contemplated hereby, whether in any
case asserted or arising before or after the Effective Time, the parties hereto
agree to cooperate and use their best efforts to defend against and respond
thereto. It is understood and agreed that after the Effective Time, Parent shall
indemnify and hold harmless, as and to the fullest extent permitted by law, each
such Indemnified Party against any losses, claims, damages, liabilities, costs,
expenses (including reasonable attorney's fees and expenses in advance of the
final disposition of any claim, suit, proceeding or investigation to each
Indemnified Party to the fullest extent permitted by law upon receipt of any
undertaking required by applicable law), judgments, fines and amounts paid in
settlement in connection with any such threatened or actual claim, action, suit,
proceeding or investigation, and in the event of any such threatened or actual
claim, action, suit, proceeding or investigation (whether asserted or arising
before or after the Effective Time), the Indemnified Parties may retain counsel
reasonably satisfactory to them after consultation with Parent; PROVIDED,
HOWEVER, that (1) Parent shall have the right to assume the defense thereof and
upon such assumption Parent shall not be liable to any Indemnified Party for any
legal expenses of other counsel or any other expenses subsequently incurred by
any Indemnified Party in connection with the defense thereof, except that if
Parent elects not to assume such defense or counsel for the Indemnified Parties
reasonably advises that there are issues which raise conflicts of interest
between Parent and the Indemnified Parties, the Indemnified Parties may retain
counsel reasonably satisfactory to them after consultation with Parent, and
Parent shall pay the reasonable fees and expenses of such counsel for the
Indemnified Parties, (2) Parent shall in all cases be obligated pursuant to this
paragraph to pay for only one firm of counsel for all Indemnified Parties, (3)
Parent shall not be liable for any settlement effected without its prior written
consent (which consent shall not be unreasonably withheld) and (4) Parent shall
have no obligation hereunder to any Indemnified Party when and if a court of
competent jurisdiction shall ultimately determine, and such determination shall
have become final and nonappealable, that indemnification of such Indemnified
Party in the manner contemplated hereby is prohibited by applicable law. Any
Indemnified Party wishing to claim Indemnification under this Section 7.9, upon
learning of any such claim, action, suit, proceeding or investigation, shall
promptly notify Parent thereof, provided that the failure to so notify shall not
affect the obligations of Parent under this Section 7.9 except to the extent
such failure to notify materially prejudices Parent. Parent's obligations under
this Section 7.9 shall continue in full force and effect without time limit from
and after the Effective Time.
(b) Parent shall cause the persons serving as executive officers and
directors of the Company immediately prior to the Effective Time to be covered
for a period of six years from the Effective Time by the directors' and
officers' liability insurance policy maintained by the Company with respect to
acts or omissions occurring prior to the Effective Time which were committed by
such executive officers and directors in their capacity as such; provided that
Parent may substitute therefor (i) policies of at least the same coverage and
amounts containing terms and conditions which are applicable to the directors
and executive officers of Parent, or (ii) policies of at least the same coverage
and amounts containing terms and conditions not less advantageous than such
policy maintained by the Company as of the date
A-33
of this Agreement; provided, further, that in no event shall Parent be required
to pay annualized aggregate premiums for insurance under this
Section 7.9(b)(ii) in excess of 150% of the amount of the aggregate premiums
paid by the Company for the period from August 29, 2002 to and including
August 28, 2003 for such purpose, which premiums for such prior period are
hereby represented and warranted by the Company to be $74,715.
(c) In the event Parent or any of its successors or assigns
(i) consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Parent
assume the obligations set forth in this Section 7.9.
(d) The provisions of this Section 7.9 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
7.10 ADDITIONAL AGREEMENTS. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger or the Bank Merger, the proper officers and directors of
each party to this Agreement and their respective Subsidiaries shall take all
such necessary action as may be reasonably requested by Parent.
7.11 COORDINATION OF DIVIDENDS. After the date of this Agreement each of
Parent and the Company shall coordinate with the other the declaration of any
dividends in respect of Parent Common Stock and the Company Common Stock and the
record dates and payments dates relating thereto, it being the intention of the
parties that the holders of Company Common Stock shall not receive more than one
dividend, or fail to receive one dividend, for any single calendar quarter with
respect to their shares of Company Common Stock and any shares of Parent Common
Stock any holder of Company Common Stock receives in exchange therefor in the
Merger.
7.12 EMPLOYEE STOCK PURCHASE PLAN. Parent shall cause to be refunded to an
employee of the Company or a Company Subsidiary any funds deducted from the
employee's compensation in respect of the ESPP after the completion of the
scheduled purchase of shares thereunder that occurs immediately prior to the
Effective Time.
7.13 APPOINTMENT OF DIRECTORS. Effective as of the Effective Time, Parent
shall cause its Board of Directors to be expanded by two(2) members, and shall
appoint the Company Directors (as defined below) to fill the vacancy on Parent's
Board of Directors created by such increase. In connection with the annual
meeting of Parent next following the Effective Time, Parent shall nominate the
Company Directors for election as a director by the stockholders of the Company,
to continue serving in the class to which such directors were appointed, and
Parent shall solicit proxies for such directors' election at such annual
meeting. The term "Company Directors" shall mean the individuals who shall be
designated by mutual agreement of Parent and the Company to become a member of
the Board of Directors of Parent as of the Effective Time pursuant to this
Section 7.13.
7.14 EXECUTION AND AUTHORIZATION OF BANK MERGER AGREEMENT.
(a) As soon as reasonably practicable after the date of this Agreement, but
in any event no later than 10 days after the date of this Agreement, (a) Parent
shall (i) cause the Board of Directors of Parent Bank to approve the Bank Merger
Agreement, (ii) cause Parent Bank to execute and deliver the Bank Merger
Agreement, and (iii) approve the Bank Merger Agreement as the sole stockholder
of Parent Bank, and (b) the Company shall (i) cause the Board of Directors of
the Company Bank to approve the Bank Merger Agreement, (ii) cause the Company
Bank to execute and deliver the Bank Merger Agreement, and (iii) approve the
Bank Merger Agreement as the sole stockholder of the Company Bank.
A-34
(b) The Bank Merger Agreement shall provide that effective as of the
effective time of the Bank Merger, the directors of Surviving Bank shall consist
of all the directors of Parent Bank serving immediately prior to the effective
time of the Bank Merger and the Bank Directors (as defined below), each to hold
office in accordance with the Articles of Incorporation and Bylaws of the
Surviving Bank until their respective successors are duly elected or appointed
and qualified. The Bank Merger Agreement shall contain other terms that are
normal and customary in light of the transactions contemplated hereby and such
additional terms as are necessary to carry out the purposes of this Agreement.
The term "Bank Directors" shall mean the individuals who shall be designated by
Parent to become members of the Board of Directors of Surviving Bank as of the
effective time of the Bank Merger pursuant to the Bank Merger Agreement.
(c) The Company and Parent may revise the sequence of events or other
procedural matters relating to the accomplishment of the Merger and Bank Merger
in such manner as they may reasonably determine will best facilitate
accomplishment of the Merger and Bank Merger; PROVIDED, HOWEVER, that any action
taken pursuant to this Section shall not (i) alter or change the kind or amount
of consideration to be issued to the holders of the Company's Common Stock as
provided for in this Agreement; (ii) adversely affect the tax consequences of
the Merger to the holders of the Company's Common Stock, or (iii) otherwise
cause any closing condition not to be capable of being fulfilled (unless duly
waived by the party entitled to the benefits thereof).
7.15 ADVISORY BOARD AND AFFILIATE BOARDS. Parent shall, effective as of
the effective time of the Bank Merger, cause Surviving Bank to establish an
Advisory Board ("Advisory Board") and to appoint each individual who is
currently serving as a director of the Company, if such persons are willing to
so serve, as members of the Advisory Board established by Surviving Bank, the
function of which shall be to advise Surviving Bank with respect to deposit and
lending activities in the Company's former market area, to maintain and develop
customer relationships and assist with the integration of the Company and the
Company Bank into Parent's affiliate structure. The members of the Advisory
Board who are willing to so serve initially shall be elected or appointed for an
initial term of four years beginning on the Effective Date. Each member of the
Advisory Board shall receive an annual retainer fee for such service in an
amount equal to $15,000 less the aggregate annual amount such member may receive
in connection with service as a member of the board of directors of Parent or a
Parent Subsidiary. The Advisory Board annual retainer fee shall be payable in
quarterly installments or in one lump sum at any time in advance at the option
of Surviving Bank. In addition, Parent shall designate four (4) individuals
currently serving as a director of the Company, if such persons are willing to
serve, to be elected or appointed to the board of directors of a Parent
Subsidiary bank (including the Bank Directors) each to hold office in accordance
with the Articles of Incorporation and Bylaws of such Parent Subsidiary until
their respective successors are duly elected or appointed and qualified. Persons
elected or appointed to serve on the board of directors of a Parent Subsidiary
shall receive such compensation as is provided to other members of such Parent
Subsidiary board of directors. Service on the board of directors of the Company
or the Surviving Bank or on the Advisory Board shall constitute continued
service for purposes of the Company Option Plans. This Section 7.15 is intended
to be for the benefit of, and shall be enforceable by, each person who is
currently serving as a director of the Company.
A-35
ARTICLE VIII
CONDITIONS PRECEDENT
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) STOCKHOLDER APPROVAL; BANK MERGER APPROVAL. This Agreement and the
Merger shall have been approved and adopted by the requisite vote of the holders
of the outstanding shares of Company Common Stock under applicable law. The Bank
Merger Agreement and the Bank Merger shall have been approved and adopted by the
requisite votes of the Boards of Directors of Parent Bank and the Company Bank
and the respective holders of the outstanding shares of Parent Bank stock and
Company Bank stock under applicable law.
(b) LISTING OF SHARES. The shares of Parent Common Stock which shall be
issued to the stockholders of the Company upon consummation of the Merger shall
have been authorized for listing on the NASDAQ/NMS, subject to official notice
of issuance.
(c) OTHER APPROVALS. All regulatory approvals required to consummate the
transactions contemplated hereby (including the Merger and the Bank Merger)
shall have been obtained, and shall remain in full force and effect and all
statutory waiting periods in respect thereof shall have expired (all such
approvals and the expiration of all such waiting periods being referred to
herein as the "Requisite Regulatory Approvals").
(d) S-4. The S-4 shall have become effective under the Securities Act and
no stop order suspending the effectiveness of the S-4 shall have been issued and
no proceedings for that purpose shall have been initiated or threatened by the
SEC.
(e) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Merger (an
"Injunction") shall be in effect. No statute, rule, regulation, order,
injunction or decree shall have been enacted, entered, promulgated or enforced
by any Governmental Entity which prohibits, restricts or makes illegal
consummation of the Merger.
8.2 CONDITIONS TO OBLIGATIONS OF PARENT. The obligation of Parent to
effect the Merger is also subject to the satisfaction or waiver by Parent at or
prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. (i) Subject to Section 3.2, the
representations and warranties of the Company set forth in this Agreement (other
than those set forth in Section 4.2) 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 (ii) the representations and warranties of the Company set
forth in Section 4.2 of this Agreement shall be true and correct in all material
respects (without giving effect to Section 3.2 of this Agreement) 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. Parent shall have received a certificate signed on behalf of
the Company by the Chief Executive Officer or the Chief Financial Officer of the
Company to the foregoing effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Parent shall have
received a certificate signed on behalf of the Company by the Chief Executive
Officer or the Chief Financial Officer of the Company to such effect.
A-36
(c) NO PENDING GOVERNMENTAL ACTIONS. No proceeding initiated by any
Governmental Entity seeking an Injunction shall be pending.
(d) FEDERAL TAX OPINION. Parent shall have received an opinion from
Venable, Baetjer and Howard, LLP, counsel to Parent ("Parent's Counsel"), in
form and substance reasonably satisfactory to Parent, dated the Effective Time,
substantially to the effect that on the basis of facts, representations and
assumptions set forth in such opinion which are consistent with the state of
facts existing at the Effective Time, the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code. In rendering
such opinion, Parent's Counsel may require and rely upon representations and
covenants, including those contained in certificates of officers of Parent, the
Company and others, reasonably satisfactory in form and substance to such
counsel.
(e) CONSENTS. All consents and approvals (including such consents and
approvals set forth in Section 4.4 of the Company Disclosure Schedule) required
to be obtained by the Company or its Subsidiaries in connection with the
consummation by the Company of the Merger and the other transactions
contemplated hereby, or the consummation by the Company Bank of the Bank Merger
have been obtained in a form and content reasonably satisfactory to Parent,
except to the extent that the failure to obtain any required consent or approval
would not have a Material Adverse Effect on (i) the Company and its
Subsidiaries, taken as a whole, or (ii) the ability of the Company or the
Company Bank to consummate the transactions contemplated by this Agreement.
8.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to effect the Merger is also subject to the satisfaction or waiver by
the Company at or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. (i) Subject to Section 3.2, the
representations and warranties of Parent set forth in this Agreement (other than
those set forth in Section 5.2) 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 (ii) the representations and warranties of Parent set forth in
Section 5.2 of this Agreement shall be true and correct in all material respects
(without giving effect to Section 3.2 of this Agreement) 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. The Company shall have received a certificate signed on behalf of
Parent by the Chief Executive Officer or the Chief Financial Officer of Parent
to the foregoing effect.
(b) PERFORMANCE OF OBLIGATIONS OF PARENT. Parent shall have performed in
all material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and the Company shall have received a
certificate signed on behalf of Parent by the Chief Executive Officer or the
Chief Financial Officer of Parent to such effect.
(c) NO PENDING GOVERNMENTAL ACTIONS. No proceeding initiated by any
Governmental Entity seeking an Injunction shall be pending.
(d) FEDERAL TAX OPINION. The Company shall have received an opinion from
Skadden, Arps, Slate, Meagher & Flom LLP (the "Company's Counsel"), in form and
substance reasonably satisfactory to the Company, dated the Effective Time,
substantially to the effect that on the basis of facts, representations and
assumptions set forth in such opinion which are consistent with the state of
facts existing at the Effective Time, the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code. In rendering
such opinion, the Company's Counsel may require and rely upon representations
and covenants, including those contained in certificates of officers of Parent,
the Company and others, reasonably satisfactory in form and substance to such
counsel.
(e) CONSENTS. All consents and approvals (including such consents and
approvals set forth in Section 5.4 of the Parent Disclosure Schedule) required
to be obtained by Parent or its Subsidiaries in
A-37
connection with the consummation by Parent of the Merger and the other
transactions contemplated hereby, or the consummation of Parent Bank of the Bank
Merger, have been obtained in a form and content reasonably satisfactory to the
Company, except to the extent that the failure to obtain any required consent or
approval would not have a Material Adverse Effect on (i) the Parent, the Company
and their respective Subsidiaries, taken as a whole on a combined basis, or
(ii) the Parent's or Parent Bank's ability to consummate the transactions
contemplated by this Agreement.
ARTICLE IX
TERMINATION AND AMENDMENT
9.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of the Company:
(a) by mutual consent of the Company and Parent in a written instrument, if
the Board of Directors of each so determines by a vote of a majority of the
members of its entire Board;
(b) by either Parent or the Company upon written notice to the other party
(i) 30 days after the date on which any request or application for a Requisite
Regulatory Approval shall have been denied or withdrawn at the request or
recommendation of the Governmental Entity which must grant such Requisite
Regulatory Approval, unless within the 30-day period following such denial or
withdrawal a petition for rehearing or an amended application has been filed
with the applicable Governmental Entity, PROVIDED, HOWEVER, that no party shall
have the right to terminate this Agreement pursuant to this
Section 9.1(b)(i) if such denial or request or recommendation for withdrawal
shall be due to the failure of the party seeking to terminate this Agreement to
perform or observe the covenants and agreements of such party set forth herein
or (ii) if any Governmental Entity of competent jurisdiction shall have issued a
final nonappealable order enjoining or otherwise prohibiting the Merger;
(c) by either Parent or the Company if the Merger shall not have been
consummated on or before December 31, 2003, unless the failure of the Closing to
occur by such date shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe the covenants and agreements of such party
set forth herein;
(d) by either Parent or the Company provided that in the case of the Company
it shall not be in material breach of any of its obligations under Section 7.4
if any approval of the stockholders of the Company required for the consummation
of the Merger shall not have been obtained by reason of the failure to obtain
the required vote at a duly held meeting of such stockholders or at any
adjournment or postponement thereof;
(e) by either Parent or the Company (provided that the terminating party is
not then in material breach of any representation, warranty, covenant or other
agreement contained herein) if there shall have been a material breach of any of
the representations or warranties set forth in this Agreement on the part of the
other party, which breach is not cured within thirty days following written
notice to the party committing such breach, or which breach, by its nature,
cannot be cured prior to the Closing; PROVIDED, HOWEVER, that neither party
shall have the right to terminate this Agreement pursuant to this
Section 9.1(e) unless the breach of representation or warranty, together with
all other such breaches, would entitle the party receiving such representation
not to consummate the transactions contemplated hereby under Section 8.2(a) (in
the case of a breach of representation or warranty by the Company) or
Section 8.3(a) (in the case of a breach of representation or warranty by
Parent);
(f) by either Parent or the Company (provided that the terminating party is
not then in material breach of any representation, warranty, covenant or other
agreement contained herein) if there shall have been a material breach of any of
the covenants or agreements set forth in this Agreement on the part of the other
party, which breach shall not have been cured within thirty days following
receipt by
A-38
the breaching party of written notice of such breach from the other party
hereto, or which breach, by its nature, cannot be cured prior to the Closing;
(g) by Parent in the event an Adverse Recommendation Change has occurred or
the Company or the Company Bank accepts an Acquisition Proposal, or by the
Company if the Company shall have entered into an Acquisition Agreement in
accordance with Section 7.3 and subject to the Company's compliance with
Section 10.3(b) hereof; or
(h) by the Company at any time during the three-day period following the
Determination Date (as defined below), if:
(1) the Average Closing Price (as defined below) shall be less than the
product of 0.80 and the Starting Price; and
(2) (i) the number obtained by dividing the Average Closing Price by the
Starting Price (such number being referred to herein as the "Parent Ratio")
shall be less than (ii) the number obtained by dividing the Index Price on
the Determination Date by the Index Price on the Starting Date and
subtracting 0.20 from such quotient (such number being referred to herein as
the "Index Ratio")
subject to the following. If the Company elects to exercise its termination
right pursuant to the immediately preceding sentence, it shall give prompt
written notice to Parent; provided that such notice of election to terminate may
be withdrawn at any time within the aforementioned three-day period. During the
three-day period commencing with its receipt of such notice, Parent shall have
the option of increasing the Total Stock Amount and/or the Total Cash Amount in
a manner such that the conditions set forth in either clauses (1) or (2) above
shall be deemed not to exist; PROVIDED, HOWEVER, that the Total Cash Amount
shall not be increased in a manner that would cause the failure of the
conditions set forth in Sections 8.2(d) or 8.3(d) hereof. For purposes hereof,
the condition set forth in clause (1) above shall be deemed not to exist if the
Total Stock Amount and/or the Total Cash Amount is increased so that the Per
Share Consideration after such increase is not less than the Per Share
Consideration that would have been in effect if the condition set forth in
clause (1) above did not exist. For purposes hereof, the condition set forth in
clause (2) above shall be deemed not to exist if the Total Stock Consideration
and/or the Total Cash Amount is increased so that the Per Share Consideration
after such increase is not less than the Per Share Consideration that would have
been in effect if the condition set forth in clause (2) above did not exist. If
Parent makes this election, within such three-day period, it shall give prompt
written notice to Company of such election and the revised Total Stock Amount
and/or Total Cash Amount, whereupon no termination shall have occurred pursuant
to this Section 9.1(h) and this Agreement shall remain in effect in accordance
with its terms (except as the Total Stock Consideration and/or Total Cash Amount
shall have been so modified), and any references in this Agreement to "Total
Stock Consideration," "Total Stock Amount," "Per Share Stock Consideration" and
"Per Share Cash Consideration" shall thereafter be deemed to refer to the Total
Stock Consideration, Total Stock Amount, Per Share Stock Consideration and Per
Share Cash Consideration after giving effect to any adjustment made pursuant to
this Section 9.1(h). For purposes of this Section 9.1(h), the following terms
shall have the meanings indicated:
"Average Closing Price" means the average of the last reported sale prices
per share of Parent Common Stock as reported on the NASDAQ/NMS (as reported in
THE WALL STREET JOURNAL or, if not reported therein, in another mutually agreed
upon authoritative source) for the 20 consecutive trading days ending on the
Determination Date.
"Index Price" on a given date means the closing price of the NASDAQ Bank
Index.
"Starting Price" shall mean $34.21.
A-39
If Parent declares or effects a stock dividend, reclassification,
recapitalization, split-up, combination, exchange of shares or similar
transaction between the Starting Date and the Determination Date, the prices for
the common stock of Parent shall be appropriately adjusted for the purposes of
applying this Section 9.1(h).
9.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either Parent or the Company as provided in Section 9.1, this Agreement shall
forthwith become void and have no effect except (i) Sections 7.2(b), 9.2 and
10.3 shall survive any termination of this Agreement and (ii) that,
notwithstanding anything to the contrary contained in this Agreement, no party
shall be relieved or released from any liabilities or damages arising out of its
willful breach of any provision of this Agreement.
9.3 AMENDMENT. Subject to compliance with applicable law, this Agreement
may be amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by the stockholders of either
the Company or Parent; PROVIDED, HOWEVER, that after any approval of the
transactions contemplated by this Agreement by the Company's stockholders, there
may not be, without further approval of such stockholders, any amendment of this
Agreement which reduces the amount or changes the form of the consideration to
be delivered to the Company stockholders hereunder other than as contemplated by
this Agreement. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
9.4 EXTENSION; WAIVER. At any time prior to the Effective Time, each of
the parties hereto, by action taken or authorized by its Board of Directors,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other party hereto, (b) waive any
inaccuracies in the representations and warranties of the other party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions of the other party contained herein.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in a written instrument signed on behalf of
such party, but such extension or waiver or failure to insist on strict
compliance with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
ARTICLE X
GENERAL PROVISIONS
10.1 CLOSING. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") will take place at 10:00 a.m. on the first
day which is (a) the last business day of a month and (b) at least one business
day after the satisfaction or waiver (subject to applicable law) of the latest
to occur of the conditions set forth in Article VIII hereof (other than those
conditions which relate to actions to be taken at the Closing) (the "Closing
Date"), at the offices of Venable, Baetjer and Howard, LLP unless another time,
date or place is agreed to in writing by the parties hereto.
10.2 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for those covenants and agreements contained herein and
therein which by their terms apply in whole or in part after the Effective Time.
10.3 EXPENSES. (a) Except as set forth in Section 10.3(b), all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such costs and
expenses.
(b) In the event that (i) (A) an Acquisition Proposal has been publicly
proposed by any person (other than Parent or any of its affiliates) or such
person has publicly announced its intention (whether or not conditional) to make
an Acquisition Proposal or such an Acquisition Proposal or intention has
A-40
otherwise become widely known to the Company's stockholders, (B) thereafter this
Agreement is terminated by either the Company or Parent, pursuant to
Section 9.1(a) or (c) and (C) within 12 months after such termination, the
Company, or the Company Bank enters into any definitive agreement providing for,
or consummates, any Acquisition Proposal, other than a transaction which results
in the Company's stockholders immediately prior to such transaction owning fifty
percent or more of the stock of the resulting entity or the publicly traded
parent corporation thereof immediately after such transaction, or (ii) this
Agreement is terminated by Parent or the Company, pursuant to Section 9.1(g),
then the Company shall pay Parent a fee equal to $20,000,000 (the "Termination
Fee") by wire transfer of same day funds to an account designated by Parent
(x) in the case of a termination by Parent or by the Company pursuant to
Section 9.1(g), concurrently with such termination and (y) in the case of a
payment as a result of any event referred to in Section 10.3(b)(i)(C), upon the
first to occur of such events. The Company acknowledges that the agreements
contained in this Section 10.3(b) are an integral part of the transactions
contemplated by this Agreement and constitute liquidated damages and not a
penalty, and that, without these agreements, Parent would not enter into this
Agreement or cause Parent Bank to enter into the Bank Merger Agreement;
accordingly, if the Company fails promptly to pay or cause to be paid the
amounts due pursuant to this Section 10.3(b), and, in order to obtain such
payment, Parent commences a suit that results in a judgment against the Company
for the amounts set forth in this Section 10.3(b), the Company shall pay to
Parent its reasonable costs and expenses (including attorneys' fees and
expenses) in connection with such suit and any appeal relating thereto, together
with interest on the amounts set forth in this Section 10.3(b) at the prime rate
of Citibank, N.A. in effect on the date such payment was required to be made.
10.4 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt requested)
or delivered by an express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Parent, to:
Mercantile Bankshares Corporation
Two Hopkins Plaza
Baltimore, Maryland 21201
Attention: Chief Executive Officer
with a copy to:
Venable, Baetjer and Howard, LLP
Two Hopkins Plaza
Baltimore Maryland 21201
Attention: Thomas D. Washburne, Jr., Esq.
and
(b) if to the Company, to:
F&M Bancorp
110 Thomas Johnson Drive
Frederick, Maryland 21705
Attention: Chief Executive Officer
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
Attention: William S. Rubenstein, Esq.
A-41
10.5 INTERPRETATION. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." This Agreement shall be deemed effective for all purposes as of,
and the phrases "the date of this Agreement," "the date hereof" and terms of
similar import, unless the context otherwise requires, shall be deemed to refer
to, 12:01 a.m., March 13, 2003. No provision of this Agreement shall be
construed to require the Company, Parent or any of their respective Subsidiaries
or affiliates to take any action that would violate any applicable law
(including common law), rule or regulation.
10.6 COUNTERPARTS. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
10.7 ENTIRE AGREEMENT. This Agreement (including the documents and the
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof, other than the
Confidentiality Agreement between Parent and the Company.
10.8 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland, without regard to any
applicable conflicts of law.
10.9 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that the provisions contained in this Agreement
were not performed in accordance with its specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions thereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
10.10 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
10.11 PUBLICITY. Except as expressly permitted by this Agreement or
otherwise required by law or the rules of the NASDAQ/NMS, so long as this
Agreement is in effect, neither Parent nor the Company shall, or shall permit
any of its Subsidiaries to, issue or cause the publication of any press release
or other public announcement with respect to, or otherwise make any public
statement concerning, the transactions contemplated by this Agreement without
the consent of the other party, which consent shall not be unreasonably
withheld.
10.12 ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns. Except as otherwise
expressly provided herein, this Agreement (including the documents and
instruments referred to herein) is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder.
A-42
IN WITNESS WHEREOF, Parent and the Company have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
MERCANTILE BANKSHARES CORPORATION
By: /s/ EDWARD J. KELLY, III
------------------------------------------------
Name: Edward J. Kelly, III
Title: Chairman, President and Chief Executive
Officer
F&M BANCORP
By: /s/ FAYE E. CANNON
------------------------------------------------
Name: Faye E. Cannon
Title: President and Chief Executive Officer
A-43
APPENDIX B
ILLUSTRATIVE CALCULATIONS OF MERGER ELECTIONS
The following table sets forth illustrative calculations of stock
consideration and cash consideration at different Final Mercantile Stock
Prices(1) that would be received by an F&M Bancorp stockholder holding 100
shares of F&M Bancorp common stock depending on whether the stockholder made
(1) an all cash election or (2) an all stock election.
Assuming that none of the outstanding options to purchase shares of F&M
Bancorp common stock has been exercised, the aggregate merger consideration to
be issued and paid by Mercantile is approximately 10,335,700 shares of
Mercantile common stock and approximately $123,514,000 million in cash. This
consideration will be issued in exchange for all outstanding shares of F&M
Bancorp common stock. These calculations assume that at the end of the Valuation
Period,(2) there are 10,740,357 shares of F&M Bancorp common stock outstanding.
These calculations also assume that there are no oversubscriptions of either
Mercantile common stock or cash. THERE CAN BE NO ASSURANCE AS TO WHAT THE FINAL
MERCANTILE STOCK PRICE WILL BE OR WHAT THE VALUE OF THE MERCANTILE COMMON STOCK
TO BE ISSUED IN THE MERGER WILL BE AT OR FOLLOWING THE EFFECTIVE TIME OF THE
MERGER. See "The Merger--Merger Consideration."
ILLUSTRATIVE ELECTION ALTERNATIVES FOR A HOLDER OF 100 SHARES OF F&M BANCORP
COMMON STOCK
ALL CASH
ELECTION(3) ALL STOCK ELECTION(3)
------------- ---------------------------------------
ASSUMED NUMBER OF VALUE OF
FINAL MERCANTILE MERCANTILE MERCANTILE
STOCK PRICE CASH RECEIVED SHARES RECEIVED(4) SHARES RECEIVED(4)
--------------------- ------------- ------------------ ------------------
$40.00....... $4,999.30 124.98 $4,999.30
39.50 4,951.18 125.35 4,951.18
39.00 4,903.07 125.72 4,903.07
38.50 4,854.95 126.10 4,854.95
38.00 4,806.84 126.50 4,806.84
37.50 4,758.72 126.90 4,758.72
37.00 4,710.60 127.31 4,710.60
36.50 4,662.49 127.74 4,662.49
36.00 4,614.37 128.18 4,614.37
35.50 4,566.25 128.63 4,566.25
35.00 4,518.14 129.09 4,518.14
34.50 4,470.02 129.57 4,470.02
34.00 4,421.91 130.06 4,421.91
33.50 4,373.79 130.56 4,373.79
33.00 4,325.67 131.08 4,325.67
32.50 4,277.56 131.62 4,277.56
32.00 4,229.44 132.17 4,229.44
31.50 4,181.32 132.74 4,181.32
31.00 4,133.21 133.33 4,133.21
30.50 4,085.09 133.94 4,085.09
30.00 4,036.98 134.57 4,036.98
------------------------
(1) The Final Mercantile Stock Price is the average of the closing sale prices
of Mercantile common stock as reported on the Nasdaq Stock Market during
the applicable valuation period. The Final Mercantile Stock Price amounts
set forth in the chart have been included for representative purposes only.
The actual Final Mercantile Stock Price could be more than $40 or less than
$30.
(2) The valuation period is the 10 consecutive trading days ending on the
third calendar day prior to the effective time of the merger.
(3) All cash elections and all stock elections will be apportioned on a pro
rata basis as described in the proxy statement/prospectus in the section
entitled "The Merger--Allocation."
(4) The value of any cash or stock consideration is based on the Assumed Final
Mercantile Stock Price. Cash will be paid in lieu of any fractional share,
and accordingly, the value shown will be paid in the form of cash to the
extent of such fractional share.
B-1
APPENDIX C
OPINION OF KEEFE, BRUYETTE & WOODS, INC.
March 13, 2003
The Board of Directors
F&M Bancorp
110 Thomas Johnson Drive
P.O. Box 518
Frederick, MD 21702
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the stockholders of F&M Bancorp ("F&M") of
the merger consideration in the proposed merger (the "Merger") of F&M with and
into Mercantile Bankshares Corporation ("Mercantile"), pursuant to the Agreement
and Plan of Merger, dated as of March 13, 2003, between F&M and Mercantile (the
"Agreement"). Pursuant to the terms of the Agreement, Mercantile will exchange
10,335,714 shares of common stock, par value $2.00 per share, and cash in the
amount of $123,514,106 for all of the shares of common stock, par value $5.00
per share, of F&M (the "Common Shares") outstanding as of March 12, 2003
(subject to proportionate increase in the event any stock options of F&M are
exercised subsequent to that date and prior to the Determination Date (as
defined in the Agreement)). Holders of F&M Common Shares will have the right to
receive the "Per Share Consideration" as defined in the Agreement for each
outstanding F&M Share. Each holder may elect to receive the Per Share
Consideration in either shares of Mercantile Common Stock, cash or a combination
of shares of Mercantile Common Stock and cash (the "Merger Consideration"). The
actual form of Merger Consideration that each shareholder will receive will be
subject to proration in the event that the aggregate elections exceed either the
total number of shares of Mercantile Common Stock or cash provided above.
Keefe, Bruyette & Woods, Inc., as part of its investment banking business,
is continually engaged in the valuation of bank and bank holding company
securities in connection with acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for various other purposes. As specialists in the securities of
banking companies, we have experience in, and knowledge of, the valuation of
banking enterprises. In the ordinary course of our business as a broker-dealer,
we may from time to time purchase securities from, and sell securities to, F&M
and Mercantile, and as a market maker in securities, we may from time to time
have a long or short position in, and buy or sell, debt or equity securities of
F&M and Mercantile for our own account and for the accounts of our customers. We
have acted exclusively for the Board of Directors of F&M in rendering this
fairness opinion and will receive a fee from F&M for our services.
In connection with this opinion, we have reviewed, analyzed and relied upon
material bearing upon the financial and operating condition of F&M and
Mercantile and the Merger, including among other things, the following: (i) the
Agreement; (ii) the Annual Reports to Stockholders and Annual Reports on Form
10-K for the three years ended December 31, 2001 of F&M and Mercantile; (iii)
certain interim reports to stockholders and Quarterly Reports on Form 10-Q of
F&M and Mercantile and certain other communications from F&M and Mercantile to
their respective stockholders; and (iv) other financial information concerning
the businesses and operations of F&M and Mercantile furnished to us by F&M and
Mercantile for purposes of our analysis. We have also held discussions with
senior management of F&M and Mercantile regarding the past and current business
operations, regulatory relations, financial condition and future prospects of
their respective companies and such other matters as we have deemed relevant to
our inquiry. In addition, we have compared certain financial and stock market
information for F&M and Mercantile with similar information for certain
C-1
other companies the securities of which are publicly traded, reviewed the
financial terms of certain recent business combinations in the banking industry
and performed such other studies and analyses as we considered appropriate.
In conducting our review and arriving at our opinion, we have relied upon
the accuracy and completeness of all of the financial and other information
provided to us or publicly available and we have not assumed any responsibility
for independently verifying the accuracy or completeness of any such
information. We have relied upon the management of F&M and Mercantile as to the
reasonableness and achievability of the financial and operating forecasts and
projections (and the assumptions and bases therefor) provided to us, and we have
assumed that such forecasts and projections reflect the best currently available
estimates and judgments of such managements and that such forecasts and
projections will be realized in the amounts and in the time periods currently
estimated by such managements. We are not experts in the independent
verification of the adequacy of allowances for loan and lease losses and we have
assumed that the aggregate allowances for loan and lease losses for F&M and
Mercantile are adequate to cover such losses. In rendering our opinion, we have
not made or obtained any evaluations or appraisals of the property of F&M or
Mercantile, nor have we examined any individual credit files.
We have assumed that, in all respects material to our analyses, the
following: (i) the merger will be completed substantially in accordance with the
terms set forth in the merger agreement; (ii) 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;
(iii) each party to the merger agreement and all related documents will perform
all of the covenants and agreements required to be performed by such party under
such documents; (iv) all conditions to the completion of the merger will be
satisfied without any waivers; and (v) in the course of obtaining the necessary
regulatory, contractual, or other consents or approvals for the merger, no
restrictions, including any divestiture requirements, termination or other
payments or amendments or modifications, will be imposed that will have a
material adverse effect on the future results of operations or financial
condition of the combined entity or the contemplated benefits of the merger,
including the cost savings, revenue enhancements and related expenses expected
to result from the merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial position and results of operations of F&M
and Mercantile; (ii) the assets and liabilities of F&M and Mercantile; and (iii)
the nature and terms of certain other merger transactions involving banks and
bank holding companies. We have also taken into account our assessment of
general economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuation and knowledge of
the banking industry generally. Our opinion is necessarily based upon conditions
as they exist and can be evaluated on the date hereof and the information made
available to us through the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration in the Merger is fair, from a financial
point of view, to holders of the Common Shares.
Very truly yours,
/s/ Keefe, Bruyette & Woods, Inc.
C-2
PART-II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Maryland General Corporation Law (the "MGCL") provides that a
corporation may indemnify any director made a party to a proceeding by reason of
service in that capacity unless it is established that: (1) the act or omission
of the director was material to the matter giving rise to the proceeding and (a)
was committed in bad faith or (b) was the result of active and deliberate
dishonesty, or (2) the director actually received an improper personal benefit
in money, property or services, or (3) in the case of any criminal proceeding,
the director had reasonable cause to believe that the act or omission was
unlawful. To the extent that a director has been successful in defense of any
proceeding, the MGCL provides that he shall be indemnified against reasonable
expenses incurred in connection therewith. A Maryland corporation may indemnify
its officers to the same extent as its directors and to such further extent as
is consistent with law.
The Registrant's Charter provides, as to indemnification:
(a) The liability of directors and officers to Mercantile or its
stockholders for money damages shall be limited to the maximum extent that the
liability of directors and officers of Maryland corporations is permitted to be
limited by Maryland law. This limitation on liability shall apply to events
occurring at the time a person serves as a director or officer of Mercantile
whether or not such person is a director or officer at the time of any
proceeding in which liability is asserted.
(b) To the maximum extent permitted by Maryland law, Mercantile shall
indemnify its currently acting and its former directors against any and all
liabilities and expenses incurred in connection with their services in such
capacities, shall indemnify its currently acting and its former officers to the
full extent that indemnification shall be provided to directors, and shall
indemnify, to the same extent, its employees and agents and persons who serve
and have served, at its request as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture or other
enterprise. Mercantile shall advance expenses to its directors, officers and
other person referred to above to the extent permitted by Maryland law.
Mercantile's board of directors may by By-law, resolution or other agreement
make further provision for indemnification of directors, officers, employees and
agents to the extent permitted by Maryland law.
(c) References to Maryland law shall include the MGCL as from time to time
amended. Neither the repeal or amendment of this paragraph, nor any other
amendment to the Articles of Incorporation, shall eliminate or reduce the
protection afforded to any person by the foregoing provisions of this paragraph
with respect to any act or omission which shall have occurred prior to such
repeal or amendment.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
These Exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
(a) Exhibit Index
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
(2)* Agreement and Plan of Merger, dated as of March 13, 2003
between the Registrant and F&M Bancorp (included as
Appendix A to the Prospectus and Proxy Statement)
(4) Rights Agreement dated as of June 8, 1999 between the
Registrant and the Rights Agent, including Form of Rights
Certificate and Articles Supplementary (Incorporated by
reference to Form 8-K of Registrant filed June 11, 1999,
Exhibit 4, Commission File No. 0-5127 and to Form 8-A of
Registrant filed June 11, 1999, Exhibits 1, 2 and 3,
Commission File No. 0-5127)
(5)* Opinion of Venable, Baetjer and Howard, LLP regarding
legality
(8)A. Opinion of Venable, Baetjer and Howard, LLP regarding tax
matters
B. Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding tax matters
(23)A. Consent of PricewaterhouseCoopers, LLP as to Registrant
B. Consent of Deloitte & Touche, LLP as to F&M Bancorp
C.* Consent of Venable, Baetjer and Howard, LLP (included in the
opinion filed as Exhibit 5)
D.* Consent of Keefe, Bruyette & Woods, Inc.
E. Consent of Venable, Baetjer and Howard, LLP (included in the
opinion filed as Exhibit 8(A))
F. Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in the opinion filed as Exhibit 8(B))
(24)* Power of Attorney of Mercantile Board of Directors
A.+ Power of Attorney of Mercantile Director Elected on
April 30, 2003
B.+ Power of Attorney of Mercantile Director Elected on
April 30, 2003
(99)* Form of Proxy Card for F&M Bancorp Special Meeting of
Stockholders
A.+ Consent of Nominee Director R. Carl Benna
B.+ Consent of Nominee Director Howard B. Bowen
------------------------
* Previously filed on April 28, 2003 in the Registrant's Registration
Statement on Form S-4.
+ Previously filed on June 3, 2003 in the Registrant's Amendment No. 1 to
Registration Statement on Form S-4.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new
II-2
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned Registrant hereby undertakes as follows:
(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(2) that every prospectus (i) that is filed pursuant to the immediately
preceding paragraph (1) or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide public offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20 above or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other that the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the proxy
statement/prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes the
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned Registrant hereby undertakes
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be
II-3
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
not more than a 20 percent change in the maximum offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered here, and the offering
of such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 3 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Baltimore, State of
Maryland on June 18, 2003.
MERCANTILE BANKSHARES CORPORATION
By: /s/ EDWARD J. KELLY, III
------------------------------------------------
Name: Edward J. Kelly, III
Title: CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ EDWARD J. KELLY, III Chairman of the Board, President and
------------------------------------ Chief Executive Officer (Principal June 18,
Edward J. Kelly, III Executive Officer) 2003
/s/ TERRY L. TROUPE
------------------------------------ Chief Financial Officer and Treasurer June 18,
Terry L. Troupe (Principal Financial Officer) 2003
/s/ WILLIAM T. SKINNER, JR.
------------------------------------ Controller (Principal Accounting June 18,
William T. Skinner, Jr. Officer) 2003
A majority of the Board of Directors:
Cynthia A. Archer, Richard O. Berndt, William R. Brody, Eddie C. Brown,
George L. Bunting, Jr., Anthony W. Deering, Darrell D. Friedman, Freeman A.
Hrabowski, Robert A. Kinsley, Wallace Mathai-Davis, Morton P. Plant, Christian
H. Poindexter, Clayton S. Rose, Donald L. Shepard and James L. Shea.
Date: June 18, 2003 By: /s/ EDWARD J. KELLY, III
------------------------------------------------
Edward J. Kelly, III
for himself and as attorney-in-fact
II-5
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT INDEX DESCRIPTION
----------- -------------------------
8(A) Opinion of Venable, Baetjer and Howard, LLP regarding tax
matters
8(B) Opinion of Skadden, Arps, Slate, Meagher & Flom, LLP
regarding tax matters
23(A) Consent of PricewaterhouseCoopers, LLP as to Registrant
23(B) Consent of Deloitte & Touche LLP as to F&M Bancorp
23(E) Consent of Venable, Baetjer and Howard, LLP (included in the
opinion filed as Exhibit 8(A))
23(F) Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in the opinion filed as Exhibit 8(B))