AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 2003
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
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. / /
-----------
CALCULATION OF REGISTRATION FEE
=================================================================================================================
Title Of Proposed Proposed
Each Class Of Maximum Maximum
Securities Amount Offering Aggregate Amount Of
To Be To Be Price Per Offering Registration
Registered Registered (1) Unit Price (2) Fee (3)
-----------------------------------------------------------------------------------------------------------------
Common Stock, $2.00
par value(1) 10,940,877 shares Not applicable $389,509,201 $31,512.00
=================================================================================================================
(1) Includes as to each share of common stock a right, not currently
exercisable or separately tradable, to purchase additional securities
in certain future events, as described in the enclosed prospectus and
proxy statement. This represents the maximum number of shares of
Mercantile Bankshares Corporation's common stock, par value $2.00 per
share, estimated to be issuable upon the consummation of the merger of
F&M Bancorp with and into Mercantile as described in the Agreement and
Plan of Merger dated as of March 13, 2003 attached as Appendix A to the
proxy statement/prospectus forming part of this registration statement.
(2) Calculated in accordance with Rules 457(f) and 457(c) under the
Securities Act of 1933, the proposed maximum offering price is computed
by subtracting $130,745,940 (the estimated cash to be paid by
Mercantile) from the product of (A) the average of the high and low
prices of F&M Bancorp common stock as reported on Nasdaq on April 22,
2003 ($45.76) and (B) 11,369,212 (the maximum number of shares of F&M
Bancorp common stock expected to be exchanged for the common stock
being registered).
(3) Calculated in accordance with Rule 457(f) and Section 6(b) under the
Securities Act to be $31,512, which is equal to .00008090 multiplied by
the proposed maximum aggregate offering price of $389,509,201.
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 [ ], 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 $36.71:
o If you elected to receive all cash, you would receive
approximately $46.83 in cash for each F&M Bancorp share you
own.
o If you elected to receive all Mercantile common stock, you
would receive approximately 1.2756 shares of Mercantile common
stock for each share of F&M Bancorp common stock you own
(having a value of approximately $46.83, based on the $36.71
average closing price of Mercantile common stock during the
valuation period).
Both Appendix B and the table on page 36 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 14 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 [ ], 2003
-----------------
To the Stockholders of F&M Bancorp:
We will hold a special meeting of stockholders of F&M Bancorp on [ ],
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 [ ], 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................................................................2
F&M BANCORP WILL HOLD THE SPECIAL MEETING ON _________................................................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
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.................................................5
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................................................6
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..............................7
COMPLETION OF THE MERGER IS SUBJECT TO CERTAIN CONDITIONS.............................................7
WE MAY NOT COMPLETE THE MERGER WITHOUT ALL REQUIRED REGULATORY APPROVALS..............................7
TERMINATION OF THE MERGER AGREEMENT...................................................................7
F&M BANCORP MUST PAY MERCANTILE A TERMINATION FEE UNDER CERTAIN CIRCUMSTANCES.........................8
EFFECT OF MERGER ON RIGHTS OF F&M BANCORP STOCKHOLDERS................................................9
SHARE INFORMATION AND MARKET PRICES...................................................................9
COMPARATIVE STOCK PRICES AND DIVIDENDS..................................................................10
COMPARATIVE PER SHARE DATA..............................................................................11
SELECTED FINANCIAL DATA.................................................................................13
RISK FACTORS............................................................................................14
THE F&M BANCORP SPECIAL STOCKHOLDERS' MEETING...........................................................17
RECORD DATE..........................................................................................17
QUORUM; EFFECT OF ABSTENTIONS........................................................................17
PROXIES..............................................................................................17
VOTE REQUIRED........................................................................................17
RECOMMENDATION OF BOARD OF DIRECTORS.................................................................18
THE MERGER..............................................................................................20
TRANSACTION STRUCTURE................................................................................20
BACKGROUND OF THE MERGER.............................................................................20
REASONS OF F&M BANCORP FOR THE MERGER................................................................22
OPINION OF F&M BANCORP'S FINANCIAL ADVISOR...........................................................25
MERGER CONSIDERATION.................................................................................33
ELECTION PROCEDURE...................................................................................37
ALLOCATION...........................................................................................40
ii
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.................................................41
EMPLOYEE BENEFIT PLANS AND EXISTING AGREEMENTS........................................................44
INTERESTS OF CERTAIN PERSONS IN THE MERGER............................................................46
RESTRICTIONS ON RESALES BY AFFILIATES.................................................................50
TREATMENT OF OPTIONS..................................................................................51
FRACTIONAL SHARES.....................................................................................51
EFFECTIVE TIME........................................................................................51
CONDITIONS TO THE COMPLETION OF THE MERGER............................................................53
REPRESENTATIONS AND WARRANTIES........................................................................54
CONDUCT OF BUSINESS PENDING THE MERGER................................................................55
NO SOLICITATION BY F&M BANCORP........................................................................58
REGULATORY APPROVALS REQUIRED FOR THE MERGER..........................................................59
TERMINATION OF THE MERGER AGREEMENT...................................................................59
EXTENSION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT...............................................63
STOCK MARKET LISTING..................................................................................64
EXPENSES..............................................................................................64
APPRAISAL RIGHTS......................................................................................64
ACCOUNTING TREATMENT..................................................................................64
COMPARATIVE RIGHTS OF STOCKHOLDERS.......................................................................65
AUTHORIZED CAPITAL STOCK..............................................................................65
SIZE OF BOARD OF DIRECTORS............................................................................65
REMOVAL OF DIRECTORS..................................................................................65
FILLING VACANCIES ON THE BOARD OF DIRECTORS...........................................................66
NOMINATION OF DIRECTOR CANDIDATES BY STOCKHOLDERS.....................................................66
CALLING SPECIAL MEETINGS OF STOCKHOLDERS..............................................................66
STOCKHOLDER PROPOSALS.................................................................................67
AMENDMENTS TO ARTICLES OF INCORPORATION...............................................................67
AMENDMENTS TO BYLAWS..................................................................................68
STOCKHOLDER VOTE ON FUNDAMENTAL ISSUES................................................................68
STOCKHOLDERS' RIGHTS AGREEMENT........................................................................68
DESCRIPTION OF MERCANTILE................................................................................69
DESCRIPTION OF F&M BANCORP...............................................................................70
LEGAL MATTERS............................................................................................70
EXPERTS..................................................................................................70
OTHER MATTERS............................................................................................71
STOCKHOLDER PROPOSALS....................................................................................71
WHERE YOU CAN FIND MORE INFORMATION......................................................................72
FORWARD-LOOKING STATEMENTS...............................................................................74
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 72 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 36 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
v
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 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 37 of this
document. To make an election, you will need to deliver the form of election, any other transmittal
material 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 40
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:
o 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;
vi
o by completing, signing and dating another proxy card and returning it by mail prior to the
special meeting; or
o 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.
vii
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 72.
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 69 - 70).
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 & 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'
1
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 20).
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 14 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 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 _________, 2003 (SEE PAGE 17).
The special meeting of F&M Bancorp stockholders will be held at [10:00 a.m.],
local time, on ________________, 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 ____________, 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 33).
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
33 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.
2
For example, if the average closing price of Mercantile common stock for the
applicable valuation period were $36.71, a F&M Bancorp stockholder receiving
stock would receive approximately 1.2756 shares of Mercantile common stock per
share of F&M Bancorp common stock having a value, based on such average closing
price, of approximately $46.83 per share, and a F&M Bancorp stockholder
receiving cash would receive approximately $46.83 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 40 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 25% of the outstanding shares of F&M Bancorp common stock would be
exchanged for cash, and approximately 75% would be exchanged for Mercantile
common stock.
You will find a table on page 36 of this document that sets forth, based on a
range of assumed average closing prices, the per share cash consideration and
the per share stock consideration that would be received by F&M Bancorp
stockholders, as well as the value of such stock consideration based on the
assumed average closing price of Mercantile common stock during the applicable
measurement period. An additional table is attached as Appendix B, which gives
examples of the Mercantile common stock and cash that may be received based on
either an all cash election or an all stock election by a hypothetical F&M
Bancorp stockholder.
YOU MAY ELECT TO RECEIVE CASH OR STOCK CONSIDERATION (SEE PAGE 37).
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 40 of this
document.
Approximately one month prior to the anticipated time of completion of the
merger 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 37 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 40 of this document.
3
F&M BANCORP'S REASONS FOR THE MERGER (SEE PAGE 22).
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:
o the current and prospective economic and competitive
environment facing the financial services industry generally,
and F&M Bancorp in particular;
o 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;
o 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 11);
o 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 25);
o 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;
o the expectation that the merger would constitute a
reorganization under Section 368(a) of the Internal Revenue
Code (see "The Merger--Certain United States Federal Income
Tax Consequences" on page 41); and
o 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 22 of this document.
4
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 41).
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 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 19).
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 25).
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 64).
F&M Bancorp stockholders will not have any appraisal rights in connection with
the merger.
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 (SEE PAGE 46).
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:
o 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;
o 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;
o the potential receipt of change in control, severance and
bonus payments;
o the receipt of cash payments by certain executive officers in
respect of foregone option grants; and
o 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.
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 51).
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.
6
THE MERGER WILL BE ACCOUNTED FOR UNDER THE PURCHASE METHOD OF ACCOUNTING (SEE
PAGE 64).
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 53).
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 59).
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 59).
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:
o 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).
o The merger has not been completed by December 31, 2003.
o F&M Bancorp stockholder approval is not obtained at the
special meeting.
7
o A regulatory authority denies a necessary approval or issues
an order preventing the merger.
Mercantile can terminate the merger agreement if:
o 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
o 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 59 of this document.
F&M BANCORP MUST PAY MERCANTILE A TERMINATION FEE UNDER CERTAIN CIRCUMSTANCES
(SEE PAGE 62).
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:
8
o 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
o 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 65).
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 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 10).
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.
9
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
---- --- -------- ---- --- --------
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
10
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 information listed as "equivalent pro forma" for F&M Bancorp was
obtained by multiplying the pro forma amounts by a 1.2756 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 April 22, 2003 closing price of
$36.71 per share, multiplying this value by the 10,335,700 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 April 22, 2003 closing price of $36.71 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
11
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 72.
COMPARATIVE PER COMMON SHARE DATA
AS OF/FOR THE THREE
MONTHS ENDED AS OF/FOR THE 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) 0.88 3.32
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) 0.88 3.30
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 1.51
SHAREHOLDERS' EQUITY PER COMMON SHARE:
Mercantile historical 19.62 19.24
F&M Bancorp historical 17.63 17.17
Pro forma combined 21.84 21.51
Equivalent pro forma for one F&M Bancorp common share (1) 27.86 27.44
-------------------------------------------------------------------------------
(1) The equivalent pro forma represents the pro forma combined amount
multiplied by the exchange ratio of 1.2756.
12
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 72. 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
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). 17.67 15.57 17.17 15.41 14.35 13.07 13.58
13
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 74, 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 72.
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
14
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 respect
to the recognition of taxable gain to the extent cash is received). See "The
Merger--Certain United States Federal Income Tax Consequences" beginning on page
41.
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. 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.
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
15
disruptions that cause us to lose customers or cause customers to take their
deposits out of our banks.
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:
o 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
o 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.
16
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 ______, 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 _________,
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
17
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.
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:
o giving written notice of revocation to the Secretary of F&M
Bancorp,
o properly submitting a duly executed proxy bearing a later
date, or
o 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
18
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 22.
19
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. 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
20
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 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, 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,
21
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 25.
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.
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:
o 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;
o 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;
o the increasing importance of operational scale and financial
resources in maintaining efficiency and remaining competitive
over the long term;
22
o 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;
o 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
"Summary--Comparative Per Share Data" on page 11);
o 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);
o 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;
o the fact that Mercantile has existing resources to fund the
cash portion of the merger consideration;
o the previous experience of management of Mercantile in
completing acquisition transactions;
o 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;
o 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;
23
o 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 "--Certain
United States Federal Income Tax Consequences" on page 41 and
"--Accounting Treatment" on page 64);
o 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;
o 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;
o 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 46);
o the results of the due diligence investigation of Mercantile
conducted by F&M Bancorp's management and F&M Bancorp's legal
advisors;
o 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;
o 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
o 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
24
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.
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.
25
In rendering its opinion, KBW:
o reviewed, among other things,
o the merger agreement,
o Annual Reports to stockholders and Annual Reports on
Form 10-K of Mercantile,
o Quarterly Reports on Form 10-Q of Mercantile,
o Annual Reports to stockholders and Annual Reports on
Form 10-K of F&M Bancorp, and
o Quarterly Reports on Form 10-Q of F&M Bancorp;
o held discussions with members of senior management of F&M
Bancorp and Mercantile regarding
o past and current business operations,
o regulatory relationships,
o financial condition, and
o future prospects of the respective companies;
o 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;
o compared the proposed financial terms of the merger with the
financial terms of certain other transactions that KBW deemed
to be relevant; and
o 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.
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
26
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:
o the merger will be completed substantially in accordance with
the terms set forth in the merger agreement;
o 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;
o 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;
o all conditions to the completion of the merger will be
satisfied without any waivers; and
o 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
27
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 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. 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.
28
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.
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%
29
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 PERFORMANCE 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 12.0x 12.5x 12.9x 13.5x
2003 GAAP estimated earnings
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
30
anticipated core deposit intangible amortization expense to GAAP earnings. The
analysis also indicated that the merger is expected to be 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.
TRANSACTION PRICE TO: MERCANTILE / F&M MERCANTILE / F&M COMPARABLE
BANCORP MERGER BANCORP MERGER TRANSACTIONS
(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
31
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 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%
32
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, provided however that any fees paid prior to the Contingent Fee
will be 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
33
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."
o 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."
o 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."
o 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
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
34
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 $36.71, an F&M Bancorp stockholder
receiving stock would receive 1.2756 shares of Mercantile common stock per share
of F&M Bancorp common stock having a value, based on such average closing price,
of $46.83 per share, and an F&M Bancorp stockholder receiving cash would receive
$46.83 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, 25% of
the outstanding shares of F&M Bancorp common stock would be exchanged for cash,
and 75% 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
$40.38 (10% higher than $36.71), then 22.84% of the outstanding shares of F&M
Bancorp common stock would be exchanged for cash, and 77.16% 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 $40.38, an F&M Bancorp stockholder receiving stock
would receive 1.2471 shares of Mercantile common stock per share of F&M Bancorp
common stock having a value, based on that average closing price, of $50.36 per
share, and an F&M Bancorp stockholder receiving cash would receive $50.36 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
$33.04 (10% lower than $36.71), then approximately 26.56% of the outstanding
shares of F&M Bancorp common stock would be exchanged for cash, and
approximately 73.44% 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 $33.04, an F&M
Bancorp stockholder receiving stock would receive 1.3104 shares of Mercantile
common stock per share of F&M Bancorp common stock having a value, based on such
average closing price, of $43.29 per share, and an F&M Bancorp stockholder
receiving cash would receive $43.29 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
35
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 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 COMMON
CONSIDERATION STOCK TO RECEIVE
AVERAGE CLOSING TRANSACTION (SHARES OF VALUE OF PER PER SHARE ------------------------------
PRICE DURING VALUE MERCANTILE SHARE STOCK CASH STOCK CASH
VALUATION PERIOD (IN 000S) COMMON 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 $36.71 closing price of Mercantile common stock on April 22, 2003, the
merger had a value of approximately $46.83 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.
36
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 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 Mercantile 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
37
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 $36.71), if such stockholder
made:
o AN ALL STOCK ELECTION, he would receive approximately 128
shares of Mercantile common stock (and cash in lieu of
fractional shares) having a total value of approximately
$4,683; and
o AN ALL CASH ELECTION, he would receive approximately $4,683 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 40 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.
ELECTION FORM. The merger agreement provides that 35 days prior to the
anticipated date of completion of the merger, 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
38
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
39
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 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:
o all stock election shares and non-electing shares will be
converted into the per share stock consideration;
o 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;
o 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
o 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:
o all cash election shares will be converted into the per share
cash consideration;
40
o the exchange agent will then select 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 such that the aggregate cash amount that will be
paid in the merger equals as closely as possible the total
cash amount;
o 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
o 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 "--CERTAIN 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.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of certain 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
41
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 UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE MERGER.
Consummation 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 upon 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 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.
Assuming the opinions referred to above are received, 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, the holder 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
42
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 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
43
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
44
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 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 selected 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). 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
45
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 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:
o 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;
o the potential receipt of change in control, severance and
bonus payments;
o the maintenance of a split-dollar life insurance policy for
James L. Hogan pursuant to applicable law;
o the receipt of cash payments by certain executive officers in
respect of foregone option grants;
o the entitlement by each executive officer to receive
reimbursement for tax advice and financial planning;
o 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;
46
o 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;
o 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
o 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 than
such policy 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.
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
47
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
48
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.
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.
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.
49
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:
o the further registration under the Securities Act of the
Mercantile common stock to be transferred,
o compliance with Rule 145 promulgated under the Securities Act,
which permits limited sales under certain circumstances, or
o the availability of another exemption from registration.
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
50
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:
o 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
o 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 "--
51
Regulatory Approvals Required for the Merger" beginning on pages 53 and 59,
respectively.
52
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:
o approval of the merger agreement by F&M Bancorp's
stockholders;
o 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;
o receipt of all required regulatory approvals and expiration of
all related statutory waiting periods;
o absence of any order, decree or injunction of a court or
agency of competent jurisdiction which prohibits the
completion of the merger;
o absence of any statute, rule or regulation which prohibits,
restricts or makes illegal completion of the merger;
o effectiveness of the registration statement for the Mercantile
shares to be issued in the merger;
o approval by the Nasdaq National Market of listing of the
shares of Mercantile common stock to be issued in the merger;
o 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;
o 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;
o the absence of any pending proceeding by any government entity
seeking an injunction to prevent the merger; and
53
o 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:
o corporate existence, good standing and qualification to
conduct business,
o due authorization, execution, delivery and enforceability of
the merger agreement,
o capital structure,
o governmental and third-party consents necessary to complete
the merger,
o absence of any violation of agreements or law or regulation as
a result of the merger,
o compliance with laws,
o SEC and regulatory filings,
o financial statements,
o absence of material adverse changes,
o employee benefit matters,
o loan portfolio,
o properties,
o material contracts,
o agreements with regulatory agencies and regulatory approvals,
o absence of legal proceedings and regulatory actions,
o receipt of a fairness opinion from its financial advisor,
54
o fees payable to financial advisors in connection with the
merger, and
o 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:
o changes in banking laws, rules or regulations or
interpretations thereof by courts or governmental authorities,
o changes in generally accepted accounting principles or
regulatory accounting principles that apply to banks, thrifts
or their holding companies generally,
o changes attributable to or resulting from general economic
conditions, including changes in the prevailing level of
interest rates,
o any action or omission of either party or their subsidiaries
taken with the prior consent of the other party, or
o 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.
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,
55
o 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;
o 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;
o 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
o 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,
o amend its articles of incorporation, bylaws or other similar
governing documents;
o 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;
o 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;
o enter into any new line of business;
o 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;
56
o 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;
o 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;
o 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");
o 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;
o file any application to establish, relocate or terminate the
operations of any banking office of F&M Bancorp or any of its
subsidiaries;
o 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
o 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.
57
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:
o merger, consolidation, share exchange, or similar transaction
involving F&M Bancorp or Farmers & Mechanics Bank; or
o 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
o 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,
(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
58
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:
o by mutual consent of Mercantile and F&M Bancorp;
o 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
59
request for withdrawal is a result of the failure of a party
to perform or observe its covenants contained in the merger
agreement;
o 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;
o 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;
o 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;
o 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";
o 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; or
o 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
60
o 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."
o "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).
o "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.
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:
o 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
o 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
61
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:
o 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 and Merchants Bank
accepts another acquisition proposal;
o 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
o 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:
o 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
o 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.
62
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:
o 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;
o 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
o 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:
o extend the time for the performance of the obligations under
the merger agreement;
o waive any inaccuracies in the other party's representations
and warranties contained in the merger agreement; and
o 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.
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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.
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.
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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 fourteen 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 14 to 16, and to
fill the vacancies by appointing two F&M Bancorp directors.
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
65
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.
66
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 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:
o 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
o evaluation of business combinations.
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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:
o the required proportion of votes;
o 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
o 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
68
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.
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.
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.
69
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 PricewaterhouseCoopers
LLP, independent accountants, incorporated by reference herein and upon the
authority of said firm as experts in accounting and auditing.
70
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.
71
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.
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.
72
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 and April 25, 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 statement filed under Section 12 of the
Securities Exchange Act of 1934 that contains descriptions of Mercantile's
common stock and preferred stock purchase rights, including all amendments or
reports filed for the purpose of updating such description.
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 Current Reports on Form 8-K dated March 13, 2003
and April 21, 2003; and
(3) 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.
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
73
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
74
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.
75
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
Between
MERCANTILE BANKSHARES CORPORATION
and
F&M BANCORP
Dated as of March 13, 2003
================================================================================
A-1
TABLE OF CONTENTS
PAGE
----
ARTICLE I - THE MERGER...................................................................................1
1.1 THE MERGER.................................................................................1
1.2 EFFECTIVE TIME.............................................................................1
1.3 EFFECTS OF THE MERGER......................................................................2
1.4 CONVERSION OF COMPANY COMMON STOCK.........................................................2
1.5 ELECTION PROCEDURES........................................................................4
1.6 STOCK OPTIONS..............................................................................6
1.7 PARENT COMMON STOCK........................................................................7
1.8 ARTICLES OF INCORPORATION..................................................................8
1.9 BYLAWS.....................................................................................9
1.10 DIRECTORS AND OFFICERS.....................................................................8
1.11 TAX CONSEQUENCES...........................................................................8
ARTICLE II - EXCHANGE OF SHARES..........................................................................9
2.1 PARENT TO MAKE SHARES AND CASH AVAILABLE...................................................9
2.2 EXCHANGE OF SHARES.........................................................................9
ARTICLE III - DISCLOSURE SCHEDULES; STANDARDS FOR
REPRESENTATIONS AND WARRANTIES..........................................................................12
3.1 DISCLOSURE SCHEDULES......................................................................12
3.2 STANDARDS.................................................................................12
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF THE COMPANY..............................................14
4.1 CORPORATE ORGANIZATION....................................................................14
4.2 CAPITALIZATION............................................................................15
4.3 AUTHORITY; NO VIOLATION...................................................................15
4.4 CONSENTS AND APPROVALS....................................................................17
4.5 SEC REPORTS...............................................................................17
4.6 REGULATORY REPORTS........................................................................17
4.7 FINANCIAL STATEMENTS......................................................................18
4.8 BROKER'S FEES.............................................................................18
4.9 ABSENCE OF CERTAIN CHANGES OR EVENTS......................................................19
4.10 LEGAL PROCEEDINGS.........................................................................19
4.11 TAXES.....................................................................................19
4.12 EMPLOYEES.................................................................................20
4.13 COMPANY INFORMATION.......................................................................21
4.14 COMPLIANCE WITH APPLICABLE LAW............................................................21
4.15 CERTAIN CONTRACTS.........................................................................21
4.16 AGREEMENTS WITH REGULATORY AGENCIES.......................................................22
i
4.17 ENVIRONMENTAL MATTERS.....................................................................22
4.18 OPINION...................................................................................23
4.19 APPROVALS.................................................................................23
4.20 LOAN PORTFOLIO............................................................................24
4.21 PROPERTY..................................................................................24
4.22 REORGANIZATION............................................................................25
4.23 STATE TAKEOVER LAWS AND CHARTER PROVISIONS................................................25
4.25 PREPARATION OF REPRESENTATIONS AND WARRANTIES.............................................25
ARTICLE V - REPRESENTATIONS AND WARRANTIES OF PARENT....................................................26
5.1 CORPORATE ORGANIZATION....................................................................26
5.2 CAPITALIZATION............................................................................26
5.3 AUTHORITY; NO VIOLATION...................................................................27
5.4 CONSENTS AND APPROVALS....................................................................28
5.5 SEC REPORTS...............................................................................29
5.6 REGULATORY REPORTS........................................................................29
5.7 FINANCIAL STATEMENTS......................................................................29
5.8 BROKER'S FEES.............................................................................30
5.9 ABSENCE OF CERTAIN CHANGES OR EVENTS......................................................30
5.10 LEGAL PROCEEDINGS.........................................................................30
5.11 TAXES.....................................................................................31
5.12 EMPLOYEES.................................................................................31
5.13 PARENT INFORMATION........................................................................32
5.14 COMPLIANCE WITH APPLICABLE LAW............................................................32
5.15 OWNERSHIP OF COMPANY COMMON STOCK; AFFILIATES AND ASSOCIATES..............................32
5.16 AGREEMENTS WITH REGULATORY AGENCIES.......................................................32
5.17 OPINION...................................................................................33
5.18 APPROVALS.................................................................................33
5.19 LOAN PORTFOLIO............................................................................33
5.20 PROPERTY..................................................................................34
5.21 REORGANIZATION............................................................................34
5.22 CERTAIN CONTRACTS.........................................................................34
5.23 FINANCING.................................................................................35
5.24 PREPARATION OF REPRESENTATIONS AND WARRANTIES.............................................35
ARTICLE VI - COVENANTS RELATING TO CONDUCT OF BUSINESS..................................................36
6.1 COVENANTS OF THE COMPANY..................................................................36
6.2 COVENANTS OF PARENT.......................................................................38
ARTICLE VII - ADDITIONAL AGREEMENTS.....................................................................39
7.1 REGULATORY MATTERS........................................................................39
7.2 ACCESS TO INFORMATION.....................................................................40
7.3 EXCLUSIVE DEALING.........................................................................40
ii
7.4 STOCKHOLDER MEETINGS......................................................................44
7.5 LEGAL CONDITIONS TO MERGER................................................................44
7.6 AFFILIATES................................................................................44
7.7 STOCK EXCHANGE LISTING....................................................................44
7.8 EMPLOYEE BENEFIT PLANS; EXISTING AGREEMENTS...............................................44
7.9 INDEMNIFICATION...........................................................................46
7.10 ADDITIONAL AGREEMENTS.....................................................................48
7.11 COORDINATION OF DIVIDENDS.................................................................48
7.12 EMPLOYEE STOCK PURCHASE PLAN..............................................................48
7.13 APPOINTMENT OF DIRECTORS..................................................................48
7.14 EXECUTION AND AUTHORIZATION OF BANK MERGER AGREEMENT......................................49
7.15 ADVISORY BOARD AND AFFILIATE BOARDS.......................................................49
ARTICLE VIII - CONDITIONS PRECEDENT.....................................................................51
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER................................51
8.2 CONDITIONS TO OBLIGATIONS OF PARENT.......................................................51
8.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY..................................................52
ARTICLE IX - TERMINATION AND AMENDMENT..................................................................54
9.1 TERMINATION...............................................................................54
9.2 EFFECT OF TERMINATION.....................................................................56
9.3 AMENDMENT.................................................................................56
9.4 EXTENSION; WAIVER.........................................................................57
ARTICLE X - GENERAL PROVISIONS..........................................................................58
10.1 CLOSING...................................................................................58
10.2 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.................................58
10.3 EXPENSES..................................................................................58
10.4 NOTICES...................................................................................59
10.5 INTERPRETATION............................................................................59
10.6 COUNTERPARTS..............................................................................59
10.7 ENTIRE AGREEMENT..........................................................................59
10.8 GOVERNING LAW.............................................................................59
10.9 ENFORCEMENT OF AGREEMENT..................................................................59
10.10 SEVERABILITY..............................................................................59
10.11 PUBLICITY.................................................................................59
10.12 ASSIGNMENT; NO THIRD PARTY BENEFICIARIES..................................................59
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
1
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 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.
2
"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.
(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
3
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.
4
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 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,
5
(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.
(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
6
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 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.
7
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.
8
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 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
9
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 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.
10
(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.
11
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
12
contemplated hereby or (ii) the ability of such party and its Subsidiaries to
consummate the transactions contemplated hereby.
13
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).
14
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 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
15
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.
(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
16
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 for normal examinations conducted by a Regulatory Agency in
the regular course of the business of the Company and its Subsidiaries, and
17
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
18
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.
(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
19
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, 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.
20
(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 (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)
21
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
22
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
(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.
23
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 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
24
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.
25
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
26
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.
(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
27
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, 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
28
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
29
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 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
30
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.
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
31
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 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
32
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.
(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.
33
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
34
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.
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.
35
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;
36
(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;
(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
37
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));
(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.
38
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)
39
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, 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
40
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 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
41
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 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
42
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
43
of Directors of the Company determines in its good faith judgment (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
44
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.
(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
45
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.
(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,
46
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 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.
47
(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.
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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.
(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
49
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.
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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
51
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.
(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:
52
(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 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.
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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,
54
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 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
55
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.
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
56
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.
57
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 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
58
(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.
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
59
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.
60
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.
61
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
62
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 Prices1 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.
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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
C-1
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 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,
C-2
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-3
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)* Form of Tax Opinion of Venable, Baetjer and Howard, 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.
(24) Power of Attorney of Mercantile Board of Directors
(99) Form of Proxy Card for F&M Bancorp Special Meeting of Stockholders
--------------
* To be filed by amendment.
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 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
II-2
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:
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(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 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.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Baltimore, State of
Maryland on April 25, 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
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ EDWARD J. KELLY , III Chairman of the Board, President and Chief Executive April 25, 2003
-------------------------------- Officer (Principal Executive Officer)
Edward J. Kelly, III
/s/ TERRY L. TROUPE Chief Financial Officer and Treasurer (Principal April 25, 2003
-------------------------------- Financial Officer)
Terry L. Troupe
/s/ WILLIAM T. SKINNER, JR. Controller (Principal Accounting Officer) April 25, 2003
--------------------------------
William T. Skinner, Jr.
A majority of the Board of Directors:
Clayton S. Rose, Richard O. Berndt, Darrell D. Friedman,
Freeman A. Hrabowski, Cynthia A. Archer, Morton P. Plant, Christian H.
Poindexter, George L. Bunting, Jr., Wallace Mathai-Davis, Donald L. Shepard,
William R. Brody, Robert A. Kinsley, and James L. Shea.
Date: April 25, 2003 By: /S/: EDWARD J. KELLY, III
--------------------------------------
Edward J. Kelly, III
for himself and as attorney-in-fact
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT INDEX DESCRIPTION
----------- -------------------------
2 Agreement and Plan of Merger dated as
of March 13, 2003 by and between Registrant and F&M Bancorp
(included as Appendix A to the Prospectus and Proxy Statement)
5 Opinion of Venable, Baetjer and Howard, LLP regarding legality
23(A) Consent of PricewaterhouseCoopers, LLP as to Registrant
23(B) Consent of Deloitte & Touche LLP as to F&M Bancorp
23(C) Consent of Venable, Baetjer and Howard, LLP (Included in the opinion filed as Exhibit 5)
23(D) Consent of Keefe, Bruyette & Woods, Inc.
24 Power of Attorney of Mercantile Board of Directors
99 Form of Proxy Card for F&M Bancorp Special Meeting of Stockholders
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