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As filed with the Securities and Exchange Commission on August 22, 1994
Registration No. 33-________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRST TENNESSEE NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
TENNESSEE 6021
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
165 MADISON AVENUE
MEMPHIS, TENNESSEE 38103
(901) 523-4444
(Address, including zip code, and telephone number,including area code, of
registrant's principalexecutive offices)
HARRY A. JOHNSON, III
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
FIRST TENNESSEE NATIONAL CORPORATION
165 MADISON AVENUE
MEMPHIS, TENNESSEE 38103
(901) 523-5624
(Name, address, including zip code, and telephone number,including area code,
of agent for service)
With Copies to:
CLYDE A. BILLINGS, JR. FREDRIC D. REED
Vice President & Counsel Maltman, Reed, North,
First Tennessee National Corporation Ahrens & Malnati, P.S.
165 Madison Avenue 1415 Norton Building
Memphis, Tennessee 38103 801 Second Avenue
(901) 523-5679 Seattle, WA 98104
(206) 624-6271
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after this Registration Statement becomes
effective and after conditions contained in the Exchange Agreement have been
satisfied.
If any of the securities being registered on this Form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box: / /
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CALCULATION OF REGISTRATION FEE
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Title of each Amount Proposed Maximum Proposed Maximum Amount
class of to be Offering Price Aggregate of
securities Registered(1) per Unit(2) Offering Price(2) Registration Fee
to be registered
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Common Stock and
Associated Rights 244,000 $4.83 $1,178,908 $407
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(1) Based upon the assumed number of shares that may be issued in the Exchange
described herein. Such assumed number is based on the number of shares of
Emerald Mortgage Company Common Stock that may be outstanding immediately prior
to the Exchange and the assumed minimum price per share for Registrant's Common
Stock under Section 2.2(c) of the Stock Exchange Agreement.
(2) Estimated solely for purpose of computing the registration fee pursuant to
Rule 457(f)(2) on the basis of the book value of a share of Emerald Mortgage
Company Common Stock on April 30, 1994, divided by 256.8, the maximum number
of shares of the Registrant's Common Stock to be exchanged for each share of
Emerald Mortgage Company Common Stock in the proposed Exchange to which this
Registration Statement relates, based on the assumed value for Registrant's
Common Stock used in Note (1).
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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FIRST TENNESSEE NATIONAL CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B)
FORMS S-4 ITEM AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
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A. Information About the Transaction
1. Forepart of the Registration Statement and Facing page of Registration Statement; Outside Front Cover
Outside Front Cover Page of Prospectus Page
2. Inside Front and Outside Back Cover Pages Available Information; Table of Contents
of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges Summary; The Special Meeting; The Exchange
and Other Information
4. Terms of the Transaction Summary; The Exchange; Incorporation of Certain Documents
by Reference; Certain Regulatory Considerations; Effect of
the Exchange on Rights of Shareholders; Description of FTNC
Capital Stock
5. Pro Forma Financial Information Index to Pro Forma Financial Information
6. Material Contacts with the Company Being The Exchange
Acquired
7. Additional Information Required for Reoffering Not Applicable
by Persons and Parties Deemed to Be Underwriters
8. Interests of Named Experts and Counsel Validity of Common Stock; Experts
9. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
B. Information About the Registrant
10. Information with Respect to S-3 Registrants Incorporation of Certain Documents by Reference
11. Incorporation of Certain Information by Incorporation of Certain Documents by Reference
Reference
12. Information with Respect to S-2 or S-3 Not Applicable
Registrants
13. Incorporation of Certain Information by Not Applicable
Reference
14. Information with Respect to Registrants Other Not Applicable
Than S-3 or S-2 Registrants
C. Information About the Company Being Acquired
15. Information with Respect to S-3 Companies Not Applicable
16. Information with Respect to S-2 or S-3 Not Applicable
Companies
17. Information with Respect to Companies Other Summary; Information concerning Emerald; Index to Emerald
Than S-2 or S-3 Companies Financial Information
D. Voting and Management Information
18. Information if Proxies, Consents or Incorporation of Certain Documents by Reference; Summary;
Authorizations are to be Solicited The Special Meeting; Experts; The Exchange; Cover Page of
Proxy Statement-Prospectus
19. Information if Proxies, Consents or The Exchange
Authorizations are not to be Solicited or in
an Exchange Offer
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________ ___, 1994
Dear Emerald Mortgage Company Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
of Emerald Mortgage Company ("Emerald") to be held at the main office of
Emerald, 3500 188th Street, S.W., Suite 502, Lynnwood, Washington on
______________, 1994 at 10:00 a.m., local time.
At this meeting, you will have an opportunity to consider and vote on
the terms of a Stock Exchange Agreement, as amended, (the "Agreement") that
provides for the acquisition of all of the common stock of Emerald by First
Tennessee Bank National Association, a wholly-owned subsidiary of First
Tennessee National Corporation (the "Acquisition").
The Agreement generally provides for a tax-free exchange in which
Emerald shareholders will receive shares of First Tennessee National
Corporation common stock in exchange for shares of Emerald common stock.
The proposed Acquisition has been unanimously approved by the Boards
of Directors of both First Tennessee National Corporation and Emerald.
The enclosed Notice of Special Meeting of Shareholders and Proxy
Statement-Prospectus explain the Acquisition and provide specific information
relative to the Special Meeting. Please carefully read these materials and
thoughtfully consider the information contained in them. Your vote is of great
importance, as the approval of Emerald shareholders is required to consummate
the Acquisition.
Whether or not you plan to attend the Special Meeting, you are urged
to complete, date, sign and promptly return the enclosed proxy card to assure
that your shares will be voted at the Special Meeting. For your convenience,
there is included a postage-paid, addressed envelope for your proxy card. No
additional postage is required if mailed in the United States.
The acquisition is an important step for Emerald Mortgage Company and
its shareholders. The Board of Directors unanimously recommends that you vote
FOR the Acquisition.
Sincerely,
Pamela DeLong, President
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EMERALD MORTGAGE COMPANY
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ________________, 1994
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Notice is hereby given that a Special Meeting of Shareholders of
Emerald Mortgage Company ("Emerald") has been called by the Board of Directors
and will be held at the main office of Emerald, 3500 188th Street, S.W., Suite
502, Lynnwood, Washington, on ____________, 1994 at 10:00 a.m., local time, for
the following purposes:
1. To consider and vote upon a proposal to approve a Stock Exchange
Agreement dated as of June 15, 1994, as amended, (the "Agreement") by and among
First Tennessee National Corporation ("FTNC"), First Tennessee Bank National
Association, a wholly-owned subsidiary of FTNC ("FTB"), Emerald, and all of the
Emerald shareholders. The Agreement provides for the acquisition by FTB of all
of the common stock of Emerald, as a result of which Emerald will become a
wholly-owned subsidiary of FTB, all as more fully described in the accompanying
Proxy Statement-Prospectus.
2. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors is not aware of any other business to come
before the meeting.
Whether or not you plan to attend, please complete, date and sign the
enclosed proxy card and return it at once in the stamped return envelope in
order to insure that your shares will be represented at the meeting. If you
attend in person, the proxy can be disregarded, if you wish, and you may vote
your own shares.
Only shareholders of record at the close of business on _____________,
1994 will be entitled to receive notice of and to vote at the meeting and any
adjournments or postponements thereof.
By Order of the Board of Directors,
Stephen M. Frison, Secretary
Lynnwood, Washington
Dated: ______________, 1994
THE BOARD OF DIRECTORS OF EMERALD UNANIMOUSLY RECOMMENDS THAT THE
HOLDERS OF EMERALD COMMON STOCK VOTE TO APPROVE THE PROPOSAL.
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PROXY STATEMENT
EMERALD MORTGAGE COMPANY
SPECIAL MEETING TO BE HELD ON ________________, 1994
PROSPECTUS
FIRST TENNESSEE NATIONAL CORPORATION
OFFER TO EXCHANGE UP TO 244,000 SHARES OF COMMON STOCK OF
FIRST TENNESSEE NATIONAL CORPORATION FOR SHARES OF EMERALD MORTGAGE COMPANY
This Proxy Statement-Prospectus is being furnished to the five individuals who
are all of the shareholders of common stock, par value $10.00 per share (the
"Emerald Common Stock"), of Emerald Mortgage Company, a Washington corporation,
in connection with the solicitation of proxies by the Emerald Board of
Directors (the "Emerald Board") for use at the Special Meeting of Emerald
shareholders to be held at 10:00 a.m., local time, on _____________, 1994,
at the main office of Emerald, 3500 188th Street, S.W., Suite 502, Lynnwood,
Washington, and at any adjournments or postponements thereof (the "Special
Meeting").
At the Special Meeting, the five shareholders of record of Emerald
Common Stock as of the close of business on _______________, 1994 will
consider and vote upon a proposal to approve the Stock Exchange Agreement dated
as of June 15, 1994, as amended by the First Amendment thereto dated as of July
6, 1994, and the Second Amendment thereto dated as of July 26, 1994, (the
"Agreement") by and among First Tennessee National Corporation ("FTNC"), a
Tennessee corporation registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended, First Tennessee Bank National
Association, a wholly-owned subsidiary of FTNC ("FTB"), Emerald, and the five
Emerald shareholders. Pursuant to the Agreement, all of the Emerald Common
Stock will be acquired by FTB in exchange for FTNC Common Stock (the
"Exchange"), as a result of which Emerald will become a wholly-owned subsidiary
of FTB. For a description of the Agreement, which is included herein in its
entirety as Appendix "A" to this Proxy Statement-Prospectus, see "The
Exchange."
This Proxy Statement-Prospectus also constitutes a prospectus of FTNC
in respect of up to 244,000 shares of FTNC Common Stock offered to the
shareholders of Emerald in connection with the Exchange, upon the terms and
subject to the conditions described in this Proxy Statement-Prospectus. The
shares of FTNC Common Stock to be issued in connection with the Exchange are
based upon an exchange of each outstanding share of Emerald Common Stock into
shares of FTNC Common Stock as described herein. Subject to satisfaction of
the conditions contained in the Agreement, the rights of the parties to the
Agreement to terminate the Agreement in certain situations and the other
provisions of the Agreement (all as described in the Proxy
Statement-Prospectus), FTNC will accept for exchange all shares of Emerald
Common Stock tendered by the Emerald shareholders. See "The Exchange -- Terms
of the Exchange," " -- Conditions to Consummation of the Exchange," and "--
Termination; Waiver and Amendment."
The outstanding shares of FTNC Common Stock are, and the shares hereby
will be, included for quotation on the Nasdaq Stock Market on its National
Market. The last reported sale price of FTNC Common Stock on the Nasdaq Stock
Market on _______________, 1994 was $__.__ per share.
All information contained in this Proxy Statement-Prospectus relating
to FTNC and its subsidiaries has been supplied by FTNC and all information
relating to Emerald has been supplied by Emerald. This Proxy
Statement-Prospectus and the accompanying proxy card are first being mailed to
shareholders of Emerald on or about ________________, 1994.
The shares of FTNC common stock offered hereby are not savings accounts,
deposits or other obligations of a bank or savings association and are not
insured by the Bank Insurance Fund or the Savings Association Insurance Fund
of the Federal Deposit Insurance Corporation or by any other governmental
agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement-Prospectus is _____________________, 1994
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TABLE OF CONTENTS
Page
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AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
THE EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Background of and Reasons for the Exchange . . . . . . . . . . . . . . . . . . . . . . 14
Opinion of Financial Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Determination of Closing Exchange Price . . . . . . . . . . . . . . . . . . . . . . . 16
Exchange; Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Post-Closing Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Surrender of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Conditions to Consummation of the Exchange . . . . . . . . . . . . . . . . . . . . . . 19
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Conduct of Business Pending Exchange . . . . . . . . . . . . . . . . . . . . . . . . . 22
No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Termination; Waiver and Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Additional Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Interests of Certain Persons in the Exchange . . . . . . . . . . . . . . . . . . . . . 25
No Shareholders' Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . 25
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . 25
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Resale of FTNC Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
The Nasdaq Stock Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
CERTAIN REGULATORY CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Payment of Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Holding Company Structure and Support of Subsidiary Banks . . . . . . . . . . . . . . 30
FDICIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Brokered Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
FDIC Insurance Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Depositor Preference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
INFORMATION CONCERNING EMERALD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Management's Discussion & Analysis of Financial Condition & Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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Ownership of Emerald Common Stock and Dividends . . . . . . . . . . . . . . . . . . 41
DESCRIPTION OF FTNC CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Authorized Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
FTNC Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Shareholder Protection Rights Plan . . . . . . . . . . . . . . . . . . . . . . . . . 43
Subordinated Capital Notes due 1999 . . . . . . . . . . . . . . . . . . . . . . . . 44
EFFECT OF THE EXCHANGE ON RIGHTS OF SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . 44
Conflict-of-Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Removal of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Vacancies on Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Required Vote for Authorization of Certain Actions . . . . . . . . . . . . . . . . . 45
Shareholder Proposals and Nominations . . . . . . . . . . . . . . . . . . . . . . . 45
Action by Written Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Amendment of Articles of Incorporation or Charter and Bylaws . . . . . . . . . . . . 46
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Acquisitions of Issuer's Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Voluntary Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Business Combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Authorized Corporation Protection Act . . . . . . . . . . . . . . . . . . . . . . . 48
Control Share Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Tender Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Greenmail Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Rights of Holders of Capital Notes . . . . . . . . . . . . . . . . . . . . . . . . . 49
Shareholder Rights Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
VALIDITY OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
INDEX TO PRO FORMA FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 51
INDEX TO EMERALD FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
APPENDIX "A" - Stock Exchange Agreement, as amended
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AVAILABLE INFORMATION
FTNC is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). The reports, proxy statements
and other information filed by FTNC with the SEC can be inspected and copied at
the public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such reports,
proxy statements and other information can be inspected and copied at the SEC's
Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60621-2511. Copies of such material can be obtained from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C., at prescribed
rates. The FTNC Common Stock is included for quotation on the Nasdaq Stock
Market and such reports, proxy statements and other information concerning FTNC
should be available for inspection and copying at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. FTNC has filed with the SEC a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of FTNC Common Stock and associated rights to be issued pursuant to the
Agreement. As permitted by the rules and regulations of the SEC, this Proxy
Statement-Prospectus does not contain all the information set forth in the
Registration Statement. Such additional information may be obtained from the
SEC's principal office in Washington, D.C. Statements contained in this Proxy
Statement-Prospectus or in any document incorporated by reference in this Proxy
Statement- Prospectus as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC are hereby incorporated by
reference in this Proxy Statement-Prospectus and made a part hereof: (a)
FTNC's Current Report on Form 8-K, dated October 1, 1993, filed October 18,
1993; (b) FTNC's Annual Report on Form 10-K for the fiscal year ended December
31, 1993, and its Forms 10-K/A filed on April 27 and June 29, 1994, amending
its Annual Report on Form 10-K; (c) FTNC's Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1994 and June 30, 1994 and its Form 10-Q/A filed
on August 19, 1994, amending its Form 10-Q for the quarter ended March 31,
1994; (d) FTNC's proxy statement dated March 14, 1994, exclusive of the Board
Compensation Committee Report and the Total Shareholder Return Performance
Graph on pages 11- 16 thereof; (e) the description of FTNC Common Stock
contained in FTNC's registration statement on Form 10 (File No. 0-4491), filed
April 14, 1970, pursuant to Section 12 of the Exchange Act (and any amendments
or reports filed for the purpose of updating the description); and (f) the
description of the FTNC's rights to purchase Participating Preferred Stock
included in FTNC's registration statement on Form 8-A (File No. 0-4491), filed
September 8, 1989, pursuant to Section 12 of the Exchange Act pursuant to which
FTNC registered the Shareholder Protection Rights under the Exchange Act.
All documents filed by FTNC pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement-Prospectus and
prior to the Special Meeting shall be deemed to be incorporated by reference in
this Proxy Statement- Prospectus and to be a part hereof from the date of
filing of such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated herein by reference will be deemed to
be modified or superseded for the purpose of this Proxy Statement-Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is, or is deemed to be, incorporated herein by reference
modifies or supersedes such statement. Any such statement so modified or
superseded will not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement-Prospectus.
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS RELATING TO
FTNC BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH
DOCUMENTS, OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS,
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UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH
DOCUMENTS, ARE AVAILABLE WITHOUT CHARGE UPON REQUEST TO THE TREASURER, FIRST
TENNESSEE NATIONAL CORPORATION, P.O. BOX 84, MEMPHIS, TENNESSEE 38101,
TELEPHONE NUMBER (901) 523-5630. COPIES OF EXHIBITS THAT ARE NOT SPECIFICALLY
INCORPORATED BY REFERENCE IN SUCH DOCUMENTS MAY BE OBTAINED FOR A CHARGE
COVERING THE COST OF REPRODUCTION AND MAILING. IN ORDER TO INSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY __________________,
1994.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS DOCUMENT NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FTNC OR EMERALD SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
- 5 -
10
SUMMARY
The following summary is not intended to be a complete description of
all material facts regarding FTNC, Emerald and the matters to be considered at
the Special Meeting and is qualified in all respects by the information
appearing elsewhere and incorporated by reference in this Proxy
Statement-Prospectus, the Appendix hereto and the documents referred to herein.
PARTIES TO THE MERGER
FTNC. FTNC is a regional bank holding company incorporated under the
laws of Tennessee, which, through First Tennessee Bank National Association,
Memphis, Tennessee ("FTB") and its other banking and banking-related
subsidiaries, provides a broad range of financial services. FTNC was
incorporated in Tennessee in 1968. At June 30, 1994, FTNC had consolidated
total assets of approximately $10.2 billion, consolidated total deposits of
approximately $7.4 billion and equity capital of approximately $725.7 million.
At December 31, 1993, FTNC ranked 63rd among bank holding companies in the
United States and first among bank holding companies headquartered in Tennessee
in terms of total assets.
FTNC coordinates the financial resources of the consolidated
enterprise and maintains systems of financial, operational and administrative
control that allow coordination of selected policies and activities. FTNC
operates principally through FTB, which was chartered as a national banking
association in 1864. As of June 30, 1994, FTB was the largest commercial bank
headquartered in Tennessee both in terms of total assets and deposits. At June
30, 1994, FTB had total assets of approximately $9.8 billion, total
deposits of approximately $7.0 billion and equity capital of approximately
$642.0 million. FTB conducts a broad range of retail and commercial banking
and fiduciary services and had 211 banking locations at June 30, 1994. FTB
also offers a comprehensive range of financial services, including bond
broker/agency services, mortgage banking and check clearing, to companies
nationally. Bond broker/agency services provided by FTB consist primarily of
the sale of bank-eligible securities to other financial institutions.
Subsidiaries of FTNC and FTB are engaged primarily in providing mortgage
banking, integrated check processing solutions, discount brokerage, equipment
finance, venture capital, investment management and credit life insurance.
The principal executive offices of FTNC are located at 165 Madison
Avenue, Memphis, Tennessee 38103, and its telephone number is (901) 523-4444.
Emerald. Emerald is a Washington corporation, which was incorporated
in 1982, and is presently owned by five individuals. It is a full service
mortgage banking company that originates, acquires, markets and services first
mortgage loans and is approved as an Federal Housing Association ("FHA") Direct
Endorsement Lender, a Veterans Administration ("VA") Automatic Approval Lender
and a seller-servicer for the Federal Home Loan Mortgage Corporation ("FHLMC")
and the Federal National Mortgage Association ("FNMA"). At April 30, 1994,
Emerald had total assets of approximately $7.3 million and equity capital of
approximately $1.2 million.
The executive offices of Emerald are located at 3500 188th Street,
S.W., Suite 502, Lynnwood, Washington 98037 and the telephone number is (206)
771-7108.
Additional information about FTNC and its subsidiaries is included in
documents incorporated by reference in this Proxy Statement-Prospectus. See
"Incorporation of Certain Documents by Reference."
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11
SPECIAL MEETING OF SHAREHOLDERS
The Special Meeting will be held on ___________________, 1994 at 10:00
a.m., local time, at the main office of Emerald, 3500 188th Street, S.W., Suite
502, Lynnwood, Washington. The purpose of the Special Meeting is to consider
and vote upon a proposal to approve the Agreement.
VOTE REQUIRED; RECORD DATE
Only Emerald shareholders of record at the close of business on
_______________, 1994, (the "Emerald Record Date") will be entitled to vote at
the Special Meeting. If a quorum exists at the Special Meeting, to approve the
Agreement the votes cast in favor of the Agreement must exceed the votes cast
against it. "Abstentions" will be considered present for quorum purposes,
while broker "non votes" will not be considered present, and neither will
otherwise have any effect on the vote. See "The Special Meeting-Vote
Required." As of the Emerald Record Date, there were 950 shares of Emerald
Common Stock entitled to be voted.
The five Emerald shareholders constitute the Emerald Board and its
executive officers. As of the Emerald Record Date, they owned 950 shares, or
100%, of the outstanding shares of Emerald Common Stock. All five shareholders
are parties to the Agreement.
As of the Emerald Record Date, FTNC, its subsidiaries and its
directors and executive officers owned no shares of Emerald Common Stock.
TERMS OF THE EXCHANGE
On the Closing Date (defined below), each share of Emerald Common
Stock outstanding will be exchanged for the number of shares of FTNC Common
Stock equal to the Base Exchange Price (defined below), subject to adjustment
(the "Closing Exchange Price"), divided by the Closing Measurement Price
(defined below) divided by 950 (the "exchange ratio").
The Closing Exchange Price equals the Base Exchange Price ($7.8
million) subject to (i) an adjustment increasing or decreasing such
amount by the amount by which the unpaid principal balance of Emerald's
mortgage Servicing Portfolio (as defined below) plus Current Production Loans
(defined below at "The Exchange -- Determination of Closing Exchange Price")
exceeds or is less than $364 million, respectively, multiplied by 1.15% (the
"Portfolio Adjustment"); (ii) an adjustment increasing or decreasing such
amount by the amount by which Emerald's Tangible Net Assets (as defined below)
exceed or are less than $856,000, respectively (the "Tangible Asset
Adjustment"); and (iii) an adjustment increasing or decreasing such amount by
the amount by which the Pipeline Loans (as defined below) exceeds or is less
than $60 million, respectively, multiplied by 0.37% ("Pipeline Loans
Adjustment"). Such dollar amount as adjusted under (i), (ii) and (iii) above
is hereinafter referred to as the "Closing Exchange Price." See "The Exchange
- -- Determination of Closing Exchange Price. For purposes of the Tangible Asset
Adjustment, Tangible Net Assets is defined as Emerald's assets (less
capitalized servicing rights and capitalized costs and other intangible assets)
minus liabilities of Emerald. For purposes of the Portfolio Adjustment,
Emerald's mortgage "Servicing Portfolio" are those mortgage loans serviced or
master serviced by Emerald pursuant to mortgage servicing agreements, together
with loans held in the warehouse. The Base Exchange Price was determined based
on estimates of amounts as of March 31, 1994. The Closing Exchange Price will
be adjusted after the Closing Date in the manner described under "The Exchange
- -- Post-Closing Adjustments."
The Closing Measurement Price is the average of the closing prices of
FTNC Common Stock as quoted on the Nasdaq Stock Market during the twenty (20)
trading days ending on the fifth (5th) trading day prior to the Closing Date,
subject to certain adjustments. If the Closing Measurement Price is equal to
or less than $35 per share, the parties have certain additional rights. See
"The Exchange -- Exchange; Fractional Shares."
- 7 -
12
If the Closing Date had been _______________, 1994, and assuming the
Closing Exchange Price equals the Base Exchange Price, the exchange ratio would
have been ___________________.
CLOSING DATE
The Closing Date for the Exchange is expected to be September 28,
1994, or such other date as is mutually agreeable to the parties to the
Agreement.
REASONS FOR THE EXCHANGE; RECOMMENDATION OF EMERALD BOARD OF DIRECTORS
The Emerald Board believes the Exchange is fair to and in the best
interest of Emerald and its five shareholders and recommends that Emerald's
shareholders vote FOR approval of the Agreement. The Emerald Board believes
that the Exchange will provide significant value to all five Emerald
shareholders and also enable them to participate in opportunities for growth
that the Emerald Board believes that the Exchange makes possible. See "The
Exchange -- Background of and Reasons for the Exchange." For information on
the interests of certain officers and directors of Emerald in the Exchange, see
"The Exchange -- Interests of Certain Persons in the Exchange."
OPINION OF FINANCIAL ADVISER
No financial adviser was retained by Emerald to render an opinion on
the fairness of the terms of the Exchange to the Emerald shareholders from a
financial point of view.
CONDITIONS; REGULATORY APPROVALS
Consummation of the Exchange is subject to various conditions,
including receipt of various consents from parties to material contracts with
Emerald, receipt by FTNC of certain agreements, tendering of all of the Emerald
Common Stock and satisfaction of customary closing conditions. See "The
Exchange -- Conditions to Consummation of the Exchange, "-- Conduct of Business
Pending Exchange," and " -- Additional Agreements." No regulatory approvals
are required prior to consummation of the Exchange.
TERMINATION OF THE AGREEMENT
The Agreement may be terminated at any time prior to the Closing Date
by the mutual consent of FTNC, FTB, Emerald and Stephen M. Frison as
representative of the Emerald shareholders ("Sellers' Representative") and by
FTNC and FTB or Emerald and the Emerald shareholders in certain specified
situations. See "The Exchange -- Termination; Waiver and Amendment."
INTERESTS OF CERTAIN PERSONS IN THE EXCHANGE
Certain members of Emerald's management and the Emerald Board have
certain interests in the Exchange that are in addition to their interests as
shareholders of Emerald generally. These consist of employment agreements for
Craig Van Skaik and Michael Van Skaik, non-competition agreements for Stephen
M. Frison and Donald P. Balke, and a non-solicitation agreement for Pamela
DeLong. See "The Exchange -- Interests of Certain Persons in the Exchange."
With respect to certain contracts between Emerald and certain of Emerald's
shareholders, see "Description of Business -- General."
ADDITIONAL AGREEMENTS
Certain additional agreements, including an Escrow Agreement, a
Sellers Agreement, and a Sellers' Representative and Paying Agent Agreement,
are contemplated by the Agreement and are described in the subsection entitled
"The Exchange -- Additional Agreements."
- 8 -
13
CERTAIN DIFFERENCES IN SHAREHOLDERS' RIGHTS
At the Closing Date, shareholders of Emerald automatically will become
shareholders of FTNC, and their rights as shareholders of FTNC will be
determined by the Tennessee Business Corporation Act ("TBCA") and by FTNC's
Charter and Bylaws. The rights of shareholders of FTNC differ from rights of
the shareholders of Emerald with respect to certain important matters,
including, but not limited to, their rights to acquire issuer stock, act by
written consent, dissolve the corporation, amend the charter and bylaws, submit
shareholder proposals or nominations of director candidates, dissent with
respect to their shares, and exercise preemptive rights, the rights of the
holders of debt securities, the required shareholder vote as to certain matters,
indemnification provisions, and statutory and other restrictions on certain
share acquisitions. For a summary of these differences, see "Effect of the
Exchange on Rights of Shareholders."
NO SHAREHOLDERS' DISSENTERS' RIGHTS
Under applicable Washington law, no dissenters' rights of appraisal
exist for the five shareholders of Emerald Common Stock. See "The Exchange --
No Shareholders' Dissenters' Rights."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that for federal income tax purposes the Exchange will
be treated as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and, accordingly, for
federal income tax purposes, no gain or loss will be recognized by either
Emerald or FTNC as a result of the Exchange and Emerald's shareholders will not
recognize gain or loss upon the receipt of FTNC Common Stock in exchange for
Emerald Common Stock, except to the extent of any cash received in lieu of
fractional shares. Consummation of the Exchange is dependent upon, among other
conditions, receipt by each of FTNC and Emerald of an opinion of counsel, dated
as of the Effective Date, substantially to this effect. See "The Exchange --
Certain Federal Income Tax Consequences."
ACCOUNTING TREATMENT
It is intended that the Exchange will be accounted for as a
pooling-of-interests of FTNC and Emerald under generally accepted accounting
principles ("GAAP"). Consummation of the Exchange is conditioned upon receipt
by FTNC of a letter from its independent public accountants to the effect that
the Exchange should be accounted for in such manner. See "The Exchange --
Accounting Treatment."
MARKET PRICES OF COMMON STOCK
The FTNC Common Stock is included for quotation on the Nasdaq Stock
Market (symbol: FTEN). The following table sets forth the high and low
closing price of FTNC Common Stock as reported on the Nasdaq Stock Market for
the first, second and third quarters of 1994 through ___, 1994, and on a
quarterly basis for the two years ended December 31, 1993 and 1992. The price
of FTNC Common Stock has been adjusted for a 3-for-2 stock split effected in
the form of a 50% stock dividend, which was distributed on May 22, 1992.
1994 1993 1992
-------------------------- --------------------------------------- ------------------------------------
3rd 2nd 1st 4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
--- --- --- --- --- --- --- --- --- --- ---
45 1/4 39 3/4 40 1/2 43 1/2 47 43 1/4 37 1/4 38 36 3/4 34 7/8
37 3/4 37 3/8 36 1/4 38 7/8 37 3/4 36 1/8 35 33 1/8 32 7/8 26 3/8
- 9 -
14
There is no established public trading market for Emerald Common
Stock, and trading in such shares is extremely sporadic. Since January 1, 1992
through the date of this Proxy Statement-Prospectus, management of Emerald is
aware of the following transactions: redemptions of 25 shares on October 6,
1992 at $1,600.00 per share and of 25 shares on February 5, 1993 at $1,428.44
per share.
The following table sets forth the closing price per share of FTNC
Common Stock and the equivalent per share price for Emerald Common Stock, using
the Base Exchange Price of $7.8 million (see "The Exchange -- Determination of
Closing Exchange Price;" "-- Post-Closing Adjustments.") and giving effect to
the Exchange as of June 14, 1994, the last business day preceding public
announcement of the execution of the Agreement; and as of ____________________,
1994, the last practicable date prior to the mailing of this Proxy
Statement-Prospectus. The equivalent price per share of Emerald Common Stock
at each specified date represents the closing price of a share of FTNC Common
Stock on such date multiplied by 195.9085 and _.___, respectively, assuming
that to be the exchange ratio provided for in the Agreement. The most recent
sale price known to management of Emerald in a transaction on or before June
14, 1994, for a sale of Emerald Common Stock was $1,428.44 per share on
February 5, 1993.
FTNC Equivalent Price
Common Stock Per Emerald Bank Shares
------------ ------------------------
June 14, 1994 $44.63 $8,743.40
________________, 1994 __.__ ___.__
Emerald shareholders are advised to obtain current market quotations
for FTNC Common Stock. The market price of FTNC Common Stock at the Closing
Date may be higher or lower than the market price at the time the Agreement was
executed, at the date of mailing of this Proxy Statement-Prospectus, at the
time of the Special Meeting, or at the time of calculation of the exchange
ratio.
EQUIVALENT AND PRO FORMA SHARE DATA
The following table presents selected comparative unaudited per share
data for FTNC Common Stock and Emerald Common Stock on a historical basis and
for FTNC Common Stock on a pro forma combined basis and Emerald Common Stock on
a pro forma equivalent basis giving effect to the Exchange on a
pooling-of-interests accounting basis. Per share amounts have been adjusted
for FTNC's 3- for-2 stock split effected May 22, 1992. The data is not
necessarily indicative of the results of the future operations of the combined
entity or the actual results that would have occurred had the Exchange been
consummated prior to the periods indicated. For a description of the
pooling-of-interests accounting basis with respect to the Exchange and the
related effects on the historical financial statements of FTNC, see "The
Exchange -- Accounting Treatment." The information is derived from and should
be read in conjunction with the consolidated historical financial statements of
FTNC and Emerald, including the related notes thereto, contained herein or
incorporated herein by reference. See "Incorporation of Certain Documents by
Reference," "Index to Pro Forma Financial Information," and "Index to Emerald
Financial Information."
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FIRST TENNESSEE NATIONAL CORPORATION
EQUIVALENT AND PRO FORMA SHARE DATA (UNAUDITED)
Six Months Ended (4) Twelve Months Ended (5)
---------------------- ---------------------------------
1994 1993 1993 1992 (6) 1991
-------- -------- -------- -------- --------
Income Per Common Share: (1)
FTNC $ 2.27 $ 1.76 $ 3.33 $ 3.00 $ 2.54
Emerald (5.68) 539.37 (73.33) 682.35 206.97
FTNC pro forma 2.26 1.76 3.30 3.01 2.53
Emerald pro forma equivalent 430.97 335.62 629.29 573.98 482.45
Fully Diluted Income Per Common Share: (1)
FTNC $ 2.23 $ 1.73 $ 3.27 $ 2.81 $ 2.51
Emerald (5.68) 539.37 (73.33) 682.35 206.97
FTNC pro forma 2.22 1.73 3.25 2.82 2.50
Emerald pro forma equivalent 423.34 329.90 619.75 537.75 476.73
Dividends Declared Per Common Share: (2)
FTNC $ 0.84 $ 0.72 $ 1.50 $ 1.26 $ 1.14
Emerald -- -- -- -- --
FTNC pro forma 0.84 0.72 1.50 1.26 1.14
Emerald pro forma equivalent 160.18 137.30 286.04 240.27 217.39
Book Value Per Common Share (end of period): (3)
FTNC $ 22.77 $ 20.75 $ 21.67 $ 19.73 $ 18.98
Emerald 1,240.96 1,867.44 1,246.63 1,328.13 641.52
FTNC pro forma 22.68 20.69 21.58 19.65 18.88
Emerald pro forma equivalent 4,324.91 3,945.43 4,115.15 3,747.11 3,600.28
(1) Pro forma income per share is calculated using combined historical income
for FTNC and Emerald divided by the average pro forma common shares of the
combined entity. The average pro forma common shares of the combined
entity have been calculated by combining FTNC's historical average shares
with the historical average shares of Emerald as adjusted by an exchange
ratio of 190.6926. The exchange ratio of 190.6926 is based on a price of
approximately $43.00 for FTNC's Common Stock and assumes that the Final
Exchange Price equals the Base Exchange Price. The Pro forma equivalent
income per share amount is computed by multiplying the FTNC pro forma
amount by the exchange ratio.
(2) FTNC pro forma dividends per share represent historical dividends paid by
FTNC.
(3) FTNC pro forma book value per common share is based upon the historical
total common equity of the combined entity divided by the total pro forma
common shares of the combined entity assuming conversion of Emerald's
common stock at an exchange ratio of 190.6926. Emerald's pro forma
equivalent book value per common share is based on the exchange ratio.
(4) Six months ended periods for FTNC and Emerald are as of June 30 and April
30, respectively.
(5) Twelve months ended periods for FTNC and Emerald are as of December 31 and
October 31, respectively.
(6) SNMC Management Corporation (SNMC) was acquired by FTNC in 1994 and was
accounted for as a pooling of interests. Therefore, the results of
operations and statement of condition for SNMC is included from the
inception of the company, which was November 1, 1992.
SELECTED FINANCIAL DATA AND RATIOS
The following tables present for FTNC and Emerald, on a historical
basis, selected unaudited consolidated financial data and ratios. This
information is based on the consolidated financial statements of FTNC and
Emerald included herein or incorporated herein by reference and should be read
in conjunction therewith and with the notes thereto. Per share amounts have
been adjusted for FTNC's 3-for-2 stock split effected May 22, 1992. See
"Incorporation of Certain Documents by Reference," "Index to Pro Forma
Financial Information," and "Index to Emerald Financial Information."
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16
First Tennessee National Corporation
Selected Financial Data and Ratios (Unaudited)
(Thousands, except per share data)
Six Months Ended (3) Twelve Months Ended (4)
----------------------- -----------------------------------------------------------
1994 1993 1993 1992 (5) 1991 1990 1989
----------- ---------- ----------- ---------- ---------- ---------- ----------
Total Interest Income and Other Income:
FTNC $ 526,513 $ 452,398 $ 955,915 $ 852,889 $ 853,524 $ 836,565 $ 802,576
Emerald 3,520 4,345 10,480 10,531 5,394 2,014 1,422
FTNC pro forma 530,033 456,743 966,395 863,420 858,918 838,579 803,998
Net Income Applicable to Common Stock:
FTNC $ 72,218 $ 55,541 $ 105,576 $ 89,820 $ 74,500 $ 58,507 $ 39,115
Emerald (5) 519 (71) 674 207 21 53
FTNC pro forma 72,213 56,060 105,505 90,494 74,707 58,528 39,168
Net Income per Common Share:
FTNC $ 2.27 $ 1.76 $ 3.33 $ 3.00 $ 2.54 $ 1.96 $ 1.31
Emerald (5.68) 539.37 (73.33) 682.35 206.97 21.14 55.98
FTNC pro forma (1) 2.26 1.76 3.30 3.01 2.53 1.95 1.31
Dividends Declared per Common Share:
FTNC $ 0.84 $ 0.72 $ 1.50 $ 1.26 $ 1.14 $ 1.09 $ 0.96
Emerald -- -- -- -- -- -- --
FTNC pro forma (2) 0.84 0.72 1.50 1.26 1.14 1.09 0.96
Total Assets (end of period):
FTNC $10,228,733 $9,600,723 $10,301,019 $9,348,286 $8,962,574 $7,676,159 $7,335,260
Emerald 7,264 15,793 22,452 21,341 7,950 3,448 3,219
FTNC pro forma 10,235,997 9,616,516 10,323,471 9,369,627 8,970,524 7,679,607 7,338,479
Long-Term Debt and Capital Leases:
(end of period):
FTNC $ 92,398 $ 93,742 $ 92,723 $ 130,063 $ 131,443 $ 132,174 $ 133,418
Emerald 195 247 225 242 211 96 21
FTNC pro forma 92,593 93,989 92,948 130,305 131,654 132,270 133,439
Performance Ratios:
Return on Average Assets
FTNC 1.46% 1.23% 1.11% 1.05% 0.95% 0.79% 0.55%
Emerald (0.07) 5.64 (0.32) 4.60 3.63 0.62 2.16
FTNC pro forma 1.46 1.23 1.10 1.06 0.95 0.79 0.56
Return on Average Shareholders' Equity
FTNC 20.38% 17.49% 16.13% 15.01% 13.92% 11.60% 8.05%
Emerald (0.85) 68.21 (5.70) 69.63 38.47 4.96 14.34
FTNC pro forma 20.35 17.61 16.08 15.10 13.94 11.60 8.05
Shareholders' Equity to Total Assets
(end of period)
FTNC 7.10 6.82 6.68 6.66 6.22 6.71 6.75
Emerald 16.23 11.23 5.27 6.07 8.07 12.60 12.28
FTNC pro forma 7.10 6.83 6.67 6.66 6.23 6.72 6.76
(1) Pro forma income per share is calculated using combined historical income
for FTNC and Emerald divided by the average pro forma common shares of
the combined entity. The average pro forma common shares of the combined
entity have been calculated by combining FTNC's historical average shares
with the historical average shares of Emerald as adjusted by an exchange
ratio of 190.6926. The exchange ratio of 190.6926 is based on
approximately $43.00 for FTNC's Common Stock and assumes that the Final
Exchange Price equals the Base Exchange Price.
(2) FTNC pro forma dividends per share represent historical dividends paid
by FTNC.
(3) Six months ended periods for FTNC and Emerald are as of June 30 and April
30, respectively.
(4) Twelve months ended periods for FTNC and Emerald are as of December 31
and October 31, respectively.
(5) SNMC Management Corporation (SNMC) was acquired by FTNC in 1994 and was
accounted for as a pooling of interests. Therefore, the results of
operations and statement of condition for SNMC is included from the
inception of the company, which was November 1, 1992.
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THE SPECIAL MEETING
Each copy of this Proxy Statement-Prospectus mailed to holders of
Emerald Common Stock is accompanied by a proxy card furnished in connection
with the Emerald Board's solicitation of proxies for use at the Special Meeting
and at any adjournments or postponements thereof. The Special Meeting is
scheduled to be held at 10:00 a.m., local time, on __________________, 1994, at
the main office of Emerald, 3500 188th Street, S.W., Suite 502, Lynnwood,
Washington. Only holders of record of Emerald Common Stock at the close of
business on _________________, 1994 are entitled to receive notice of and to
vote at the Special Meeting. At the Special Meeting, the five Emerald
shareholders will consider and vote upon (a) a proposal to approve the
Agreement and (b) such other matters as may properly be brought before the
Special Meeting or any adjournments or postponements thereof.
HOLDERS OF EMERALD COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND
SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY TO EMERALD IN THE
ENCLOSED, POSTAGE PAID ENVELOPE.
Any holder of Emerald Common Stock who has delivered a proxy may
revoke it any time before it is voted by attending the Special Meeting and
voting in person at the meeting or by giving notice of revocation in writing or
submitting a signed proxy card bearing a later date to Emerald, at the main
office, 3500 188th Street, S.W., Suite 502, Lynnwood, Washington 98037,
Attention: Secretary, provided such notice or proxy is actually received by
Emerald before the vote of shareholders. The shares of Emerald Common Stock
represented by properly executed proxy cards received at or prior to the
Special Meeting and not subsequently revoked will be voted as directed by the
shareholders submitting such proxies. If instructions are not given, proxy
cards received will be voted FOR approval of the Agreement. If any other
matters are properly presented at the Special Meeting for consideration, the
persons named in the Emerald proxy card enclosed herewith will have
discretionary authority to vote on such matters in accordance with their best
judgment. The Emerald Board is unaware of any matter to be presented at the
Special Meeting other than the proposal to approve the Agreement.
The cost of soliciting proxies from holders of Emerald Common Stock
will be borne by Emerald. Such solicitation will be made by mail but also may
be made by telephone or in person by the directors, officers and employees of
Emerald (who will receive no additional compensation for doing so). In
addition, if necessary, Emerald will make arrangements with brokerage firms and
other custodians, nominees and fiduciaries to send proxy materials to their
principals.
EMERALD SHAREHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH
THEIR PROXY CARDS.
VOTE REQUIRED
If a quorum (defined below) exists at the Special Meeting, in order to
approve the Agreement the votes cast in favor of the Agreement must exceed the
votes against the Agreement. A failure to return a properly executed proxy
card or to vote in person at the Special Meeting can affect the ability to
obtain a quorum at the Special Meeting and could affect the outcome of the
vote. As of the Emerald Record Date, there were 950 shares of Emerald Common
Stock outstanding and entitled to vote at the Special Meeting, with each share
being entitled to one vote.
A majority of the outstanding shares entitled to vote at the Special
Meeting represented in person or by proxy constitutes a quorum for purposes of
that meeting. An "abstention" will be considered present for quorum purposes,
but will not otherwise have any effect on the vote. Broker "non votes", if
any, will not be considered present for quorum purposes, but will not otherwise
have any effect on the vote.
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18
As of the Emerald Record Date, the directors and executive officers of
Emerald and their affiliates beneficially owned a total of 950 shares or 100%
of the outstanding shares of Emerald Common Stock. Each of the five Emerald
shareholders is a party to the Agreement.
As of the Emerald Record Date, FTNC, its subsidiaries, and its
directors and executive officers owned no shares of Emerald Common Stock.
RECOMMENDATION
FOR THE REASONS DESCRIBED BELOW, THE EMERALD BOARD HAS UNANIMOUSLY
APPROVED THE AGREEMENT, BELIEVES THE EXCHANGE IS IN THE BEST INTEREST OF
EMERALD AND ITS FIVE SHAREHOLDERS AND RECOMMENDS THAT SHAREHOLDERS OF EMERALD
VOTE FOR APPROVAL OF THE AGREEMENT. SEE "THE EXCHANGE -- BACKGROUND OF AND
REASONS FOR THE EXCHANGE."
THE EXCHANGE
The following information concerning the Exchange, insofar as it
relates to matters contained in the Agreement, is qualified in its entirety by
reference to the Agreement, which is incorporated herein by reference and
attached hereto as Appendix "A," and which has been executed by all of the
five shareholders of Emerald.
BACKGROUND OF AND REASONS FOR THE EXCHANGE
Background. In April, 1990 all of the capital stock of Emerald was
owned by three persons, Pamela DeLong, Stephen Frison and Donald Balke. At
that time, to expand further its mortgage business, Emerald hired Michael Van
Skaik and Craig Van Skaik as production managers for Emerald, and the Van
Skaiks became minority shareholders in Emerald with an option to purchase a
majority interest in Emerald. Prior to joining Emerald, both of the Van Skaiks
were experienced branch managers for a national mortgage company.
Promptly following the Van Skaiks joining Emerald, Emerald opened an
office at Carillon Point in Kirkland, Washington. Craig Van Skaik became the
branch manager of the Kirkland office and Michael Van Skaik became the branch
manager of the Lynnwood office. The two offices are located in suburban areas
of metropolitan Seattle which have and continue to experience strong growth in
single family residence development. The Van Skaiks have been able to attract
and hire experienced loan representatives with high production capability.
In January, 1992, the Van Skaiks exercised their option to increase
the size of their minority ownership and purchase additional shares of Emerald
from Donald Balke and Stephen Frison. All Emerald stock is now held by the
five shareholders named above, all of whom are the sole officers and directors
of Emerald.
In late 1993 and early 1994, the Van Skaiks expressed to the other
shareholders their desire to exercise their option to acquire a majority
interest in the company and their desire to expand the operations of Emerald
into other markets in the Northwest. The majority shareholders (Donald Balke
and Stephen Frison) expressed their desire to disengage themselves from the
day-to-day work of the mortgage business and to realize upon their equity in
Emerald. The Van Skaiks' attempt to acquire a majority interest in Emerald was
put into abeyance because of financing limitations and unresolved contract
negotiation issues. The shareholders and directors unanimously concluded that
to accommodate the shareholders' respective desires, Emerald would engage a
broker to market Emerald to a national bank or other financial institution with
substantial capital resources, extensive residential loan products and
preferably a desire to expand in residential loan markets in the Northwest.
Emerald engaged Financial Capital Resources, Inc. of Atlanta, Georgia,
as its exclusive agent to market the company. Financial Capital Resources,
Inc. prepared an offering prospectus for Emerald and a Descriptive Memorandum
and Sales Offering for Emerald. The agent placed appropriate advertisements in
trade journals and
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made other marketing efforts. An offering procedure was established by which
the initial prospectus was provided upon request, and thereafter the
Descriptive Memorandum and Sale Offering was provided upon execution of a
Confidentiality Agreement by the prospective acquirer.
Over 100 prospectuses were requested and over 45 potential acquirers
signed Confidentiality Agreements and were provided the Descriptive Memorandum
and Sale Offering. Elbert L. Thomas, Jr., a senior vice president of FTNC, was
contacted on March 31, 1994. A bid deadline of April 14, 1994 was established.
A total of nine bids were received including four bids from banks or bank-
owned mortgage companies, including FTNC.
Of the nine bidders, five were selected to meet with the officers and
directors of Emerald, physically inspect Emerald's operation and conduct
further investigation and due diligence. Four of these prospective acquirers,
including FTNC, availed themselves of this opportunity. A further deadline of
May 18, 1994 was set for final bids for Emerald. After consideration of the
final bids for Emerald and based upon its pre-established criteria for
evaluation, the Emerald Board directed its officers and counsel to pursue
negotiation of a definitive agreement with FTNC. An exchange of information
and discussions between FTNC and Emerald then followed.
After consultation with the accountant and counsel for Emerald on June
14, 1994, the Emerald Board unanimously approved the Agreement by action by
written consent.
At a special meeting held on June 15, 1994, the FTNC and FTB Boards
unanimously approved the Agreement.
Reasons for the Acquisition. In reaching its determination that the
acquisition and Agreement are fair to, and in the best interest of Emerald and
its five shareholders, the Emerald Board consulted with its advisors as well as
Emerald's management and considered a number of factors, including, without
limitation the following:
A. The familiarity of the Emerald Board, consisting of all of the
officers and the five shareholders of Emerald, with Emerald's business,
operations, earnings and financial condition and future capital requirements;
B. The belief of Emerald's Board that the price offered by FTNC
is a favorable price, particularly in light of the financial planning
flexibility for individual shareholders provided by the structure of the
transaction as an exchange of stock;
C. The belief of Emerald's Board that the terms of the Agreement
are attractive in that the Agreement allows Emerald's shareholders to become
shareholders in FTNC, a bank holding company whose stock is traded on the
Nasdaq Stock Market, and the recent earnings performance of FTNC;
D. FTNC's wide range of banking and mortgage products and its
dividend payment history;
E. The Emerald Board's belief, based upon analysis of the
anticipated financial effects of the transaction that FTNC and its banking and
mortgage company subsidiaries would be well capitalized institutions, the
financial positions of which would be well in excess of all applicable
regulatory capital requirements;
F. The current and prospective economic and regulatory
environment and competitive constraints facing the mortgage banking industry in
Emerald's market area;
G. The recent business combinations involving financial
institutions, and particularly mortgage bankers in the State of Washington and
contiguous states and the effect of such combinations on competitive conditions
in Emerald's market area;
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20
H. The opportunity presented to two of the five Emerald
shareholders to participate as employees of FTNC or one of its operating
subsidiaries, which may further present an opportunity to expand or further
develop residential mortgage banking opportunities in Washington and its
contiguous states;
I. The Emerald Board's belief that, in light of the reasons
discussed above, FTNC was the most attractive choice as an acquirer of Emerald;
and
J. The expectation that the Exchange will generally be a tax-free
transaction to Emerald and its five shareholders. (See "Certain Federal Income
Tax Consequences").
The Emerald Board did not assign any specific or relative weight to
the foregoing factors in their considerations.
OPINION OF FINANCIAL ADVISER
Emerald has not obtained an opinion from a financial adviser as to the
fairness of the terms of the Exchange to the Emerald shareholders from a
financial point of view.
DETERMINATION OF CLOSING EXCHANGE PRICE
On the Closing Date (defined below), each share of Emerald Common
Stock outstanding will be exchanged for the number of shares of FTNC Common
Stock equal to the Base Exchange Price (defined below), subject to adjustment
(the "Closing Exchange Price"), divided by the Closing Measurement Price
(defined below) divided by 950 (the "exchange ratio").
The Closing Exchange Price equals the Base Exchange Price ($7.8
million) subject to (i) an adjustment increasing or decreasing such amount by
the amount by which the unpaid principal balance of Emerald's mortgage
Servicing Portfolio (as defined below) plus Current Production Loans (defined
below) exceeds or is less than $364 million, respectively, multiplied by 1.15%
(the "Portfolio Adjustment"); (ii) an adjustment increasing or decreasing such
amount by the amount by which Emerald's Tangible Net Assets (as defined below)
exceed or are less than $856,000, respectively (the "Tangible Asset
Adjustment"); and (iii) an adjustment increasing or decreasing such amount by
the amount by which the Pipeline Loans (as defined below) exceeds or is less
than $60 million, respectively, multiplied by 0.37% ("Pipeline Loans
Adjustment"). Such dollar amount as adjusted under (i), (ii) and (iii) above
is hereinafter referred to as the "Closing Exchange Price." For purposes of
the Tangible Asset Adjustment, Tangible Net Assets is defined as Emerald's
assets (less capitalized servicing rights and capitalized costs and other
intangible assets) minus liabilities of Emerald. For purposes of the Portfolio
Adjustment, Emerald's mortgage "Servicing Portfolio" are those mortgage loans
serviced or master serviced by Emerald pursuant to mortgage servicing
agreements, together with loans held in the warehouse, and Current Production
Loans is defined as any mortgage loans closed by Emerald on and after June 15,
1994, and prior to the Closing Date, which are sold servicing released or
brokered prior to the Closing Date to any affiliate or subsidiary of FTB, and
which are acceptable to FTB or comply with Regulations, as that term is defined
in the Agreement. The Base Exchange Price was determined based on estimates of
amounts as of March 31, 1994. The Closing Exchange Price will be adjusted
after the Closing Date in the manner described under "The Exchange --
Post-Closing Adjustments."
The Closing Measurement Price is defined in the following subsection
"-- Exchange; Fractional Shares."
If the Closing Date had been _______________, 1994, and assuming the
Closing Exchange Price equals the Base Exchange Price, the exchange ratio would
have been ___________________.
THE CLOSING EXCHANGE PRICE AND THE FINAL EXCHANGE PRICE (DEFINED
BELOW) MAY BE HIGHER OR LOWER THAN THE BASE EXCHANGE PRICE, AND THE AMOUNT OF
THE DIFFERENCE COULD BE MATERIAL. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT
THE BASE EXCHANGE PRICE WILL BE THE AMOUNT OF CONSIDERATION ACTUALLY RECEIVED
BY THE EMERALD SHAREHOLDERS.
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EXCHANGE; FRACTIONAL SHARES
Exchange of Emerald Common Stock. At the Closing Date, holders of
the Emerald Common Stock outstanding immediately prior to the Closing Date will
exchange their shares for an amount of shares of FTNC Common Stock equal to the
Closing Exchange Price divided by the Closing Measurement Price subject to
certain adjustments. This amount of FTNC Common Stock divided by 950 equals
the exchange ratio. The Closing Measurement Price is the average of the
closing price of the shares of FTNC Common Stock as quoted on the Nasdaq Stock
Market during the 20 trading days ending on the fifth trading day prior to the
Closing Date. The Closing Measurement Price is subject to adjustments for
certain dividends, stock splits, and combinations, mergers, reorganizations and
other similar transactions.
If the Closing Measurement Price is less than or equal to $35 per
share, either FTNC or Emerald shall have the right to terminate the Agreement;
provided, however, that (i) FTNC shall have the right to require the Emerald
shareholders to consummate the transaction using the actual Closing Measurement
Price (equal to or less than $35 per share) to calculate the aggregate number
of shares of FTNC Common Stock to be issued and (ii) the Emerald shareholders
shall have the right to require FTNC to consummate the transaction using $35
per share as the Closing Measurement Price.
Fractional Shares. No fractional shares of FTNC Common Stock will be
issued in connection with the transaction. In lieu of fractional shares, FTNC
will make a cash payment equal to the fractional interest which an Emerald
Shareholder would otherwise receive multiplied by the Closing Measurement
Price. Each outstanding share of FTNC Common Stock will remain outstanding and
unchanged as a result of the transaction.
POST-CLOSING ADJUSTMENTS
Adjustments. The Closing Exchange Price payable at the Closing will be
determined using Servicing Portfolio, Tangible Net Asset and Pipeline Loans
figures determined as of the Estimation Date. As soon as practicable after the
Closing Date, and no later than 60 days thereafter, FTNC will deliver to the
Sellers' Representative (Stephen M. Frison) the following information in order
to calculate the "Final Exchange Price": (i) the Closing Date balance sheet
prepared in accordance with GAAP; (ii) schedules calculating the Tangible Net
Assets as of the Closing Date Balance Sheet Date (the last day of the month
immediately preceding the Closing Date), (iii) a schedule of the Servicing
Portfolio as of the Closing Date Balance Sheet Date; (iv) a schedule of
Pipeline Loans as of the Closing Date Balance Sheet Date and (v) a schedule
calculating the Tangible Asset Adjustment, the Portfolio Adjustment and the
Pipeline Loans Adjustment (collectively, the "Closing Adjustment Documents").
The Final Exchange Price will be calculated according to the same formula used
to calculate the Closing Exchange Price with an additional adjustment
increasing the Closing Exchange Price (i) by the product of the number of
shares of FTNC Common Stock issued to Sellers on the Closing Date and 0.42 and
(ii) by the amount of any bonuses to employees and compensation to temporary
personnel paid or accrued by Emerald in connection with services performed from
August 15, 1994, to the Closing Date and agreed to by FTB and (iii) by any fees
paid (or accrued) by Emerald to its independent accountants for certain
services performed after July 17, 1994 and related to the registration
statement of which this document is a part. Within 20 days after delivery of
the Closing Adjustment Documents to the Sellers' Representative, the Sellers'
Representative may dispute the Closing Adjustment Documents. If the Sellers'
Representative disputes FTNC's calculations contained in the Closing Adjustment
Documents and provides notice to FTNC within such 20 day period, the parties
will negotiate in good faith to resolve such dispute. If FTNC and the Sellers'
Representative are unable to resolve the dispute within 10 days after FTNC
receives notice from the Sellers' Representative, such dispute shall be
submitted to an independent accounting firm, whose resolution shall be final
and binding upon the parties. If (i) the Closing Exchange Price exceeds the
Final Exchange Price then the Emerald shareholders will be required to refund
such excess to FTNC in cash or FTNC Common Stock (valued at the Closing
Measurement Price), and (ii) the Final Exchange Price exceeds the Closing
Exchange Price, then FTNC shall deliver to the Emerald shareholders additional
FTNC Common Stock valued at the Closing Measurement Price in the amount of such
excess.
Additional Adjustments. The Final Exchange Price will be reduced by
an amount equal to the amount by which (i) 1.15% of the aggregate unpaid
principal balance of mortgage loans included in the Closing Portfolio, the
servicing or master servicing of which by Emerald shall have been terminated
(subject to various conditions and exceptions) and not reinstated within 180
days following the Closing exceeds (ii) the aggregate amount of all
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termination fees or charges paid or payable to Emerald in connection with the
termination. Such amounts, not payable upon adjustment of the Closing Exchange
Price, shall be payable monthly, but not later than 195 days after the Closing
Date.
CLOSING DATE
The Closing Date of the transaction is expected to be Sepetember 28,
1994 or such other date as is mutually agreeable to the parties.
SURRENDER OF CERTIFICATES
Not later than ten days prior to the Closing Date, FTNC will send to
each holder of record of shares of Emerald Common Stock transmittal materials
for use in exchanging the Emerald certificates for shares of Emerald Common
Stock for FTNC certificates for shares of the FTNC Common Stock. Except for
those shares of FTNC Common Stock to be placed into escrow pursuant to the
terms of the Escrow Agreement, Emerald shareholders, upon surrender of an
Emerald certificate to the Sellers' Representative, together with a duly
executed and completed letter of transmittal and a duly executed stock power,
will receive in exchange therefor as soon as practicable following the Closing
Date a certificate for the number of shares of FTNC Common Stock to which such
holder is entitled.
HOLDERS OF EMERALD COMMON STOCK SHOULD NOT SEND IN THEIR CERTIFICATES
UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FROM FTNC.
No dividend or other distribution payable after the Closing Date with
respect to FTNC Common Stock will be paid to the holder of any unsurrendered
Emerald certificate until the holder surrenders such certificate(s), at which
time the holder will be entitled to receive all previously withheld dividends
and distributions, without interest.
After the Closing Date, there will be no transfers on Emerald's stock
transfer books of shares of Emerald Common Stock issued and outstanding at the
Closing Date. If certificates representing shares of Emerald Common Stock are
presented for transfer after the Closing Date, they will be returned to the
presenter together with a form of letter of transmittal and exchange
instructions.
Neither FTNC nor Emerald nor any other person will be liable to any
former holder of Emerald Common Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
If a certificate for Emerald Common Stock has been lost, stolen or
destroyed, FTNC will issue the consideration properly payable in accordance
with the Agreement upon receipt of appropriate evidence as to such loss, theft
or destruction, appropriate evidence as to the ownership of such certificate by
the claimant, and appropriate and customary indemnification, including when
appropriate the posting of a bond.
REPRESENTATIONS AND WARRANTIES
The Agreement contains various customary representations and
warranties by Emerald relating to, among other things: (i) organization; (ii)
capitalization; (iii) subsidiaries of Emerald; (iv) due authorization,
execution and delivery, and enforceability of, the Agreement, and related
agreements; (v) conflicts under charters or bylaws, required consents or
approvals and violations of any instruments or law; (vi) no material
information provided to FTNC contains an untrue statement of material fact or
omits a material fact; (vii) required third party and governmental consents;
(viii) financial statements and financial information; (ix) the absence of
undisclosed liabilities; (x) the absence since October 31, 1993, of certain
material changes relating to Emerald's business, condition or results of
operations; (xi) legal proceedings; (xii) material contracts and defaults;
(xiii) taxes; (xiv) employees; (xv) employee benefit plans and matters relating
to the Employee Retirement Income Security Act of
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1974; (xvi) ownership of and sufficiency and condition of assets; (xvii) the
absence of broker's or finder's fees except for Financial Capital Resources,
Inc.; (xviii) insurance; (xix) compliance with environmental laws; (xx)
accurate information supplied by Emerald for use in the Registration Statement;
and (xxi) cooperation regarding blue sky securities filings.
The Agreement also contains various customary representations and
warranties of the Emerald shareholders and Emerald relating to the mortgage
banking business, including, among other things, (i) mortgage banking licenses
and qualifications; (ii) status of Emerald's loan portfolio; (iii) title to
mortgage loans and mortgage servicing agreements; (iv) obligations to
repurchase mortgage loans from investors; (v) validity of mortgage servicing
agreements; (vi) compliance with law, including federal and state mortgage
banking agency regulations; (vii) list of investor commitments; (viii) proper
maintenance of custodial accounts; (ix) audits and investigations by federal
and state mortgage banking agencies; (x) advances pursuant to mortgage
servicing agreements; (xi) physical damage to collateral securing mortgage
loans; (xii) proper certification of all mortgage loan pools; (xiii) proper
disbursement of all loan proceeds; (xiv) proper application of taxes and
insurance payments; (xv) correct and complete tax identification numbers; (xvi)
proper accounting for and application of all monies received in connection with
mortgage loans; and (xvii) complete and accurate payoff statements.
The Agreement also contains various customary representations and
warranties by FTNC and FTB relating to, among other things: (i) organization
and FTNC Common Stock; (ii) due authorization, execution and delivery, and
enforceability of, the Agreement, and related agreements; (iii) conflicts under
charters or bylaws, required consents or approvals and violations of any
instruments or law; (iv) capitalization; (v) financial statements and financial
information; (vi) required third party and governmental consents; (vii) absence
of broker's or finder's fees; (viii) financing; (ix) no material information
provided to Emerald contains any untrue statement of material fact or omits a
material fact; (x) legal proceedings (xi) absence of undisclosed liabilities;
(xii) the absence since December 31, 1993 of any material change to the
business, condition or results of operations of FTNC or FTB; (xiii)
examinations and inquiries of bank and bank holding company regulators; (xiv)
blue sky compliance; and (xv) accurate information supplied by FTNC and FTB for
use in the registration statement.
Except as otherwise set forth in the Agreement with respect to tax
matters and with respect to claims arising prior to the expiration of the 180
day period provided for in the Escrow Agreement, the representations and
warranties shall survive until 180 days after the Closing Date.
CONDITIONS TO CONSUMMATION OF THE EXCHANGE
Conditions to Each Party's Obligations. The respective obligations of
each party to effect the Exchange are subject to the satisfaction of the
following conditions at or prior to the Closing Date: (a) all regulatory
approvals required to be obtained in connection with the transactions
contemplated by the Agreement or the operation of Emerald by FTB or its
subsidiaries shall have been obtained, all notices required to be filed with
any governmental agency in connection with the transactions contemplated by the
Agreement or the operation of Emerald by FTB or its subsidiaries shall have
been filed, all such regulatory approvals shall be in full force and effect,
and all notice periods and waiting periods required by law or regulation
applicable to the transactions contemplated by the Agreement shall have expired
or been terminated and no adverse action shall have been taken or threatened;
(b) none of the shareholders of Emerald, Emerald, FTNC or FTB shall be subject
to any order, decree or injunction ("Injunction") of a court or agency of
competent jurisdiction which enjoins or prohibits the consummation of the
transactions contemplated by the Agreement, and no proceeding initiated by a
governmental agency or similar authority seeking an Injunction shall be
threatened; provided, that if such an Injunction is in effect or any proceeding
is commenced or threatened pursuant to which an Injunction is sought, the
parties shall cooperate and use reasonable best efforts expeditiously to remove
the impediment prohibiting the Closing of the Exchange; (c) the Closing
Measurement Price for the FTNC Common Stock shall not be less than $35.00 per
share; provided, that if the Closing Measurement Price for the FTNC Common
Stock is less than $35.00 per share, the parties shall have the rights set
forth in Section 2.2(c) of the Agreement; (d) no statute, rule, regulation,
order, injunction or decree shall
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have been enacted, entered, promulgated or enforced by any governmental
authority which prohibits, makes illegal or materially restricts consummation
of the acquisition; (e) FTNC shall have received all state securities laws and
"Blue Sky" permits and other authorizations necessary to consummate the
transactions contemplated by the Agreement; and (f) the SEC shall have declared
effective the S-4 Registration Statement of which this Proxy
Statement-Prospectus is a part and no stop order suspending the effectiveness
of the S-4 Registration Statement shall have been issued and no proceedings for
that purpose shall have been initiated or threatened by the SEC.
Additional Conditions to FTNC's and FTB's Obligations. The obligations
of FTNC and FTB are subject to, among other things, the satisfaction at or
prior to the Closing Date of each of the following conditions unless waived by
FTNC: (a) the respective obligations of the Emerald shareholders and Emerald
required to be performed at or prior to the Closing Date pursuant to the terms
of the Agreement shall have been duly performed and complied with in all
material respects and the respective representations and warranties of the
Emerald shareholders and Emerald set forth in the Agreement shall be true and
correct in all material respects; (b) the Emerald shareholders and Emerald
shall have received from all parties to any material contract to which Emerald
is a party all consents required as a result of the Exchange and shall have
properly filed all notices which are required as a result of such Exchange; (c)
each director, executive officer and other person who is an "affiliate" (for
purposes of Rule 145 under the Securities Act) of Emerald shall have delivered
to FTNC a written agreement satisfactory to FTNC providing, among other
matters, that such person will not sell, pledge, transfer or otherwise dispose
of or take any action which would reduce that person's risk with respect to any
shares of Emerald Common Stock held by such "affiliate" or the shares of FTNC
Common Stock to be received by such "affiliate" in the Exchange (i) in the case
of shares of FTNC Common Stock only, except in compliance with the applicable
provisions of the Securities Act and the rules and regulations thereunder, and
(ii) during the periods during which any such sale, pledge, transfer,
disposition or other action would, under GAAP or the rules, regulations or
interpretations of the SEC, disqualify the Exchange for pooling-of-interests
accounting treatment; (d) the duly executed Escrow Agreement as described in
the Agreement shall have been delivered to FTB (see "-- Additional Agreements
- -- Escrow Agreement"; (e) FTNC shall have received a legal opinion of Emerald's
counsel dated as of the Closing Date, addressing matters customary in similar
transactions; (f) on the Closing Date, commissioned loan officers who
originated a specified percentage of retail loan production during a specified
period in 1994 shall be full-time employees of Emerald; (g) there shall not
have been any material adverse change in the business, condition, financial or
otherwise, or results of operations of Emerald taken as a whole; (h) FTNC
shall have received from Emerald's independent certified public accountants
"cold comfort" letters, dated (i) the date of the mailing of the Proxy
Statement-Prospectus and (ii) shortly prior to the Closing Date, with respect
to certain financial information regarding Emerald in the form customarily
issued by such accountants at such time in transactions of this type; (i) FTNC
shall have received certain agreements from the Emerald shareholders (see "--
Additional Agreements -- Sellers Agreement"); (j) FTNC shall have received
evidence satisfactory to FTNC of the termination of the subservicing agreement
between Emerald and Western Mortgage Loan Corporation ("Western") and Emerald
shall have either paid or accrued on its books costs related to the termination
of the Western agreement and termination benefits or expenses related to any
employee of Emerald to whom employment for more than six months following
Closing is not offered; (k) FTNC and FTB shall have received an opinion from
Arthur Andersen & Co. permitting the pooling-of-interests accounting treatment
of the Exchange; (l) FTNC shall have received evidence of the termination of
that certain Employment, Stock Purchase and Stock Option Agreement dated March
20, 1990, as amended, and that certain Stock Transfer and Purchase Agreement
dated August 5, 1990 and no party thereto shall have exercised any options or
warrants granted thereunder on or after February 1, 1992; (m) approval of and
consent to the Exchange by the Emerald shareholders; (n) delivery on the
Closing Date of all of the issued and outstanding Emerald Common Stock duly
endorsed for transfer, evidencing good and marketable title to the Emerald
Common Stock free and clear of any and all encumbrances and (o) FTNC shall have
received written confirmation that the agreements described in the last three
paragraphs of "-- Interests of Certain Persons in the Exchange" are in full
force and not modified.
Additional Conditions of Emerald Shareholders' and Emerald's
Obligations. The obligations of the Emerald shareholders and Emerald are
subject to the satisfaction at or prior to the Closing Date of each of the
following
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additional conditions unless waived by Sellers' Representative: (a) the
obligations of FTNC or FTB required to be performed by either or both at or
prior to the Closing Date shall have been duly performed and complied with in
all material respects and the representations and warranties of FTNC and FTB
set forth in the Agreement shall be true and correct in all material respects;
(b) the Emerald shareholders shall have received a legal opinion of Heiskell,
Donelson, Bearman, Adams, Williams & Caldwell dated as of the Closing Date,
addressing matters customary in similar transactions; (c) there shall not have
been any material adverse change in the business, condition, financial or
otherwise, or results of operations of FTNC and FTB, taken as a whole; (d) the
FTNC Common Stock shall be approved for quotation on the Nasdaq Stock Market
and be registered securities, subject to no restrictions regarding sale, resale
or other transfer other than those arising pursuant to Rule 145 under the
Securities Act and the S-4 Registration Statement relating to the shares of
FTNC Common Stock to be issued shall have been filed with the SEC and become
effective. For further information regarding the restrictions on the resale of
FTNC Common Stock see "-- Resale of FTNC Common Stock."
INDEMNIFICATION
Indemnification by the Emerald Shareholders and Emerald. The
Agreement provides that the Emerald shareholders and Emerald (through credit
for payments made from the Escrow Agreement except for payments made in respect
of tax matters for which the Emerald shareholders are personally liable) (see
"Additional Agreements -- Escrow Agreement") will indemnify and hold harmless
FTNC and FTB and each of their affiliates, from and against any and all
liabilities, losses, costs, damages, penalties, fines, interest, obligations or
expenses of any kind whatsoever actually incurred (collectively "Losses") and
all taxes, charges, fees, levies, penalties, or other assessments imposed by
any United States federal, state, local or foreign taxing authority, including,
but not limited to, income, expense, property, sales, transfer, franchise,
payroll, gains, withholding, ad valorem, social security or other taxes,
including any interest, penalties or additions attributable to taxes
(collectively "Taxes") incurred by FTNC, FTB or any other indemnified person in
connection with any of the following: (i) any breach of any representation or
warranty made by the Emerald shareholders or Emerald in the Agreement, (ii) any
breach of any covenant made by any Emerald shareholder or Emerald pursuant to
the Agreement, (iii) Buydowns (as defined in the Agreement) effected as a
result of VA No-Bids (as defined in the Agreement) to the extent that any
Losses relating thereto are not indemnifiable by the Emerald shareholders
pursuant to (i) above; (iv) certain matters described in Section 7.1 of the
Agreement relating to income tax matters, (v) any Loss related to legal
proceedings; (vi) the inability as a practical matter to foreclose on
properties as a result of a breach of environmental laws with respect to such
property; and (vii) certain other matters as described in the Agreement.
No indemnifying Emerald Shareholder will have any obligation for
indemnity claims in excess of his pro rata proportionate interest in the Escrow
Shares (as defined below) except for proportionate personal unlimited liability
with respect to certain tax matters described in the Agreement. The
indemnification obligations of the Emerald shareholders and Emerald and the
right of FTNC or FTB to draw against the Escrow Shares are subject to the
limitations, conditions and procedures described below and in the Agreement,
the Escrow Agreement and the Sellers Agreement (as defined below). Under the
Agreement except in certain cases described therein, neither the Emerald
shareholders nor Emerald have any indemnification liability for Losses unless
written notice of an indemnity claim is given prior to 180 days after the
Closing Date and with respect Taxes unless written notice of an indemnity claim
is given prior to the expiration of the three-year statute of limitations,
giving effect to any extensions thereof.
Indemnification by FTNC and FTB. The Agreement provides, among other
things, that FTNC and FTB shall indemnify and hold harmless the Emerald
shareholders from any and all losses incurred in connection with the following:
(i) any breach of any representation or warranty made by FTB or FTNC in the
Agreement, (ii) any breach of any covenant to be performed by FTB or FTNC in
the Agreement and (iii) any act or omission of FTB and FTNC following the
Closing Date with respect to the processing, handling or servicing of any
assets, including mortgage loans of Emerald, subject to certain exceptions.
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REGULATORY APPROVALS
Because of the size of the transaction and an approval previously
received by FTB on an earlier acquisition, no regulatory approval is required
prior to consummation of the Exchange.
CONDUCT OF BUSINESS PENDING EXCHANGE
The Agreement contains certain restrictions on the conduct of
Emerald's business pending consummation of the transaction. In particular, the
Agreement provides that, prior to Closing, without the prior written consent of
FTNC, Emerald may not, among other things, (a) issue, sell, redeem, repurchase
or deliver any shares of its capital stock or declare or pay a dividend or
issue or sell any securities convertible into, or options with respect to, or
warrants to purchase or rights to subscribe to, any shares of its capital
stock; (b) effect any recapitalization, reclassification, stock dividend, stock
split or like change in capitalization; (c) amend its articles of
incorporation, bylaws or similar governing documents; (d) merge or consolidate
with, or, except as a result of foreclosure or repossession in the ordinary
course of its mortgage banking business, acquire substantially all of the
assets of or make any investment in the equity securities of, any other entity;
(e) sell, transfer, lease or encumber any Servicing Rights (as defined in the
Agreement) or other assets, except for mortgage loans and related Servicing
Rights in the ordinary course of business or as specifically provided in the
Agreement or purchase any assets, except for mortgage loans and Servicing
Rights related thereto from third party loan originators; (f) materially alter
or vary Emerald's methods or policies of (1) underwriting, pricing,
originating, warehousing, selling and servicing, or buying or selling rights to
service mortgage loans, (2) hedging (which term includes both buying futures
and forward commitments from financial institutions) its mortgage loan
positions or commitments, and (3) obtaining financing and credit; (g) grant to
any director, officer, employee or consultant any material increase in
compensation or benefits (other than as may be required under the terms of
prior written agreements and other than normal increases in compensation or
benefits made in the ordinary course of business to officers or employees in
accordance with existing personnel policies); (h) grant any severance or
termination pay (other than as may be required under the terms of prior
agreements) to, or enter into or amend any employment or severance agreement
with, any person, other than termination pay paid in accordance with existing
personnel policies to officers or employees; (i) adopt any new or amend any
existing director, officer or employee benefit plans (including, without
limitation, profit sharing, bonus, director and officer incentive compensation,
retirement, medical, hospitalization, life or other insurance plans,
arrangements and commitments); (j) enter into any collective bargaining
agreement; (k) incur any debt, other than (1) debt incurred to fund or purchase
mortgage loans, (2) otherwise in the ordinary course of business or (3) to pay
obligations on existing debt agreements; (l) make any change in accounting
principles or methods, except as required by GAAP or by applicable regulatory
requirements; (m) grant any mortgage or security interest in, or make any
pledge of, or permit any lien or encumbrance to be placed on, any of its assets
or properties other than as permitted by the Agreement; (n) make any capital
expenditures other than in the ordinary course of business or as necessary to
maintain existing assets in good repair which expenditures will in no event
exceed $10,000 on a per occurrence basis and $25,000 in the aggregate; (o) take
any action, or fail to take any action, that is intended or may reasonably be
expected to result in a breach or violation of any of the respective
representations and warranties of Emerald or Sellers contained in the Agreement
or would cause any condition to the transactions contemplated hereby not to be
satisfied, except, in every case, as may be required by law; (p) accelerate,
terminate, or cancel any material contract, lease or license to which it is a
party other than in the ordinary course of business or enter into any material
contract, lease or license that is not terminable without penalty by Emerald
upon 60 days or less notice; (q) enter into mortgage loan subservicing
agreements; or (r) agree to do any of the foregoing.
The Agreement also contains various customary covenants and
agreements, including agreement to cooperate, use best efforts and obtain
appropriate consents. In addition, prior to the Closing Date Emerald will
increase its foreclosure loss reserves and decrease its capitalized Servicing
Rights valuation to the extent necessary to be consistent with methodologies
used by FTB, and it will terminate automobile leases, insurance policies,
memberships and the JDS, Inc. leases, as specified in the Agreement.
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The Agreement also requires FTB to pay in full all Emerald warehouse
and operating lines of credit on the Closing Date.
NO SOLICITATION
Sellers and Emerald have agreed with FTNC that until the Closing Date
or termination of the Agreement, neither will nor will they authorize or permit
any of the respective officers, directors, employees, representatives, agents
or other persons controlled by any of them to solicit or encourage inquiries
or proposals with respect to or participate in any negotiations or discussions
concerning, any merger, consolidation, sale of substantially all assets, sale
of shares of capital stock or similar transaction involving Emerald or
entertain, agree to, endorse, or participate in any discussions or negotiations
or provide third parties with nonpublic information relating to any such
inquiry or proposal. Sellers and Emerald will notify FTNC promptly if any such
inquiries or proposals are received by any them.
TERMINATION; WAIVER AND AMENDMENT
Termination. The Agreement may be terminated at any time prior to the
Closing Date as follows: (a) by the mutual written consent of FTB, FTNC,
Sellers' Representative, and Emerald; (b) by Emerald shareholders and Emerald,
if there shall have been any material breach of any obligation of FTNC or FTB
and such breach shall not have been remedied within 20 days after receipt by
FTNC or FTB of notice in writing specifying the nature of such breach and
requesting that it be remedied; (c) by FTNC and FTB, if there shall have been
any material (quantified as to Emerald as an amount or amounts aggregating more
than $300,000) breach of any obligation of Emerald shareholders or Emerald and
such breach shall not have been remedied within 20 days after receipt by
Sellers' Representative or Emerald of notice in writing specifying the nature
of such breach and requesting that it be remedied; (d) by FTNC and FTB or the
Emerald shareholders and Emerald, if the Closing Date shall not have occurred
on or prior to February 15, 1995, unless the failure of such occurrence shall
be due to the failure of the party seeking to terminate the Agreement to
perform or observe its agreements required to be performed or observed by such
party on or before the Closing Date; (e) by FTNC and FTB or the Emerald
shareholders and Emerald as a result of FTNC's or FTB's inability to obtain
necessary approvals and consents; and (f) by FTNC and FTB or the Emerald
shareholders and Emerald if the Closing Measurement Price is less than or equal
to $35 per share, subject to the rights of the parties specified in the
Agreement to require consummation of the Exchange in certain situations (see
Section 2.2(c) of the Agreement).
In the event of a termination of the Agreement as provided above, the
Agreement will become void and have no effect, except that the certain
provisions relating to confidentiality and expenses shall survive any such
termination provided, however, that no such termination shall relieve any party
from liability for any willful breach of the Agreement.
Amendment, Extension and Waiver. Subject to applicable law, Emerald,
Sellers' Representative, FTNC and FTB may (i) amend the Agreement; (ii) extend
the time for performance of any acts or obligations; (iii) waive inaccuracies
in any representations and warranties contained in the Agreement or related
documents; or (iv) waive compliance with any agreements or conditions set forth
in certain sections of the Agreement. Any amendmentshall be in writing signed
by each of the parties to the Agreement, and any waiver or extension shall be
in writing signed by the party making the waiver or extension.
ADDITIONAL AGREEMENTS
The following summary of certain additional agreements contemplated by
the Agreement does not purport to be complete and is qualified in its entirety
by reference to the form of such agreements attached as Exhibits "C," "E" and
"G" to the Agreement included as Appendix A.
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Escrow Agreement. Pursuant to the terms of the Escrow Agreement, at
Closing, shares of FTNC Common Stock equal to $250,000 calculated at the
Closing Measurement Price, (the "Escrow Shares") will be deposited by FTNC
directly with FTB as Escrow Agent and will not then be distributed to the
Emerald shareholders. The Escrow Shares will serve as an escrow fund and will
be available to fulfill any claims made by FTNC, FTB, the Emerald shareholders
or Emerald for indemnification for certain losses pursuant to Articles VII and
IX of the Agreement. The escrowed shares or Reserves will be distributed to
Emerald shareholders 180 days after the Closing Date; provided, however, if any
Unresolved Claims (as defined in the Agreement) remain outstanding at that
time, then escrowed shares or Reserves in the amount of such Unresolved Claims
shall remain in the escrow fund until such Claims are resolved. See "--
Indemnification."
Commencing at any time after the publication of financial results
covering at least 30 days of combined operations of FTNC and Emerald within the
meaning of Section 201-01 of the SEC's Codification of Financial Reporting
Policies, and subject to applicable securities laws, an Emerald shareholder may
direct the Escrow Agent to sell all or any portion of the Escrow Shares
allocable to such Emerald shareholder not previously sold, distributed or
withdrawn. The proceeds of a sale shall be held by the Escrow Agent as a
reserve (the "Reserve").
If FTNC or FTB makes a claim for indemnification under the Agreement,
the claiming entity will be entitled to a distribution from the Escrow Fund if
the Sellers' Representative consents thereto or fails to object within five
business days of receipt of notice of a claim for indemnification. If Sellers'
Representative disputes an indemnification claim, no distribution will be made
from the Escrow Fund until such dispute is resolved. The Escrow Agreement
provides for binding arbitration if the parties are unable to reach agreement
on a claim for indemnification.
Expenses of the Escrow Agent and the Sellers' Representative will be
paid subsequent to the payment of all indemnity claims at the end of the escrow
period by withdrawals of Escrow Shares or distributions of Reserves
proportionately as to each Emerald shareholder.
Sellers Agreement. The Sellers Agreement contains representations and
warranties from each Emerald shareholder that such Emerald shareholder has and
will convey good and marketable title to the Emerald Common Stock exchanged by
such Emerald shareholder for FTNC Common Stock, and that with limited specific
exceptions, the Emerald Common Stock is free and clear of all encumbrances.
If the Final Exchange Price is less than the Closing Exchange Price or
if the Emerald shareholders are required to make payments to FTNC, each Emerald
shareholder shall refund or pay to FTNC, either (i) cash or (ii) FTNC Common
Stock proportionate to the amount of FTNC Common Stock received by such Seller
at Closing valued at the Closing Measurement Price equal to the difference
between the Final Exchange Price and the Closing Exchange Price and/or equal to
payments required to be made for servicing run-off. See "-- Post Closing
Adjustments."
Sellers' Representative. Pursuant to the Sellers' Representative and
Paying Agent Agreement ("Representative Agreement"), each Emerald shareholder
will appoint Stephen M. Frison ("Frison") to serve as his representative with
respect to the matters set forth in the Agreement and the Escrow Agreement.
Upon execution and delivery of the Representative Agreement, an Emerald
shareholder will have (i) appointed Frison as his sole representative, agent,
proxy and attorney-in-fact for all purposes of the Agreement and the Escrow
Agreement and (ii) agreed that such agency and proxy are coupled with an
interest, and are therefore irrevocable without the consent of Frison and shall
survive the death, incapacity, bankruptcy, dissolution or liquidation of any
Emerald shareholder.
Frison will have the power and authority to act on each Emerald
shareholders' behalf to do, among other things, the following (in each case in
accordance with the Agreement and the Escrow Agreement): (i) to take all
actions which Frison considers necessary or desirable in connection with the
defense, pursuit or settlement of any adjustments to the Closing Exchange Price
and any claims for indemnification pursuant to the Agreement, Escrow
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Agreement or any of the agreements or transactions contemplated thereby and
(ii) to direct the Escrow Agent to disburse remaining Escrow Shares and any
Reserves in the Escrow Fund upon termination of the Escrow Agreement.
INTERESTS OF CERTAIN PERSONS IN THE EXCHANGE
Certain members of Emerald's management and the Emerald Board have
certain interests in the Exchange that are in addition to their interests as
shareholders of Emerald generally. The Emerald Board was aware of these
interests and considered them, among other matters, in approving the Agreement
and the transactions contemplated thereby. With respect to existing contracts
between Emerald and companies controlled by certain of Emerald's shareholders,
see "Description of Business -- General."
Employment After The Exchange. Emerald has entered into three-year
employment agreements with Craig Van Skaik and Michael Van Skaik which provide
to each an annual base salary of $60,000, bonus and incentive pay and customary
fringe benefits. The agreements contain covenants not to compete.
Covenants not to Compete. Donald P. Balke and Stephen M. Frison have
entered into covenants not to compete with Emerald. With certain exceptions,
these covenants prohibit competition by Messrs. Balke and Frison in the States
of Oregon and Washington until January 1, 1999 and, for a five year period from
the Closing Date, prohibit Messrs. Balke and Frison from soliciting current
officers or employees of Emerald to engage in a competing business.
Covenant not to Solicit. Pamela DeLong has entered into a
non-solicitation agreement that provides that for a five year period from the
Closing Date, Ms. DeLong will not solicit current officers or employees of
Emerald to engage in a competing business.
NO SHAREHOLDERS' DISSENTERS' RIGHTS
Under applicable Washington law, no dissenters' rights of appraisal
exist for the five shareholders of Emerald Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The federal income tax discussion set forth below represents a summary
of the opinion of Heiskell, Donelson, Bearman, Adams, Williams & Caldwell, a
Professional Corporation, counsel to FTNC. It may not be applicable to a
shareholder who acquired his shares of Emerald Common Stock pursuant to the
exercise of employee stock options or rights or otherwise as compensation.
Emerald shareholders are urged to consult their own tax advisers as to the
specific tax consequences to them of the Exchange, including the applicability
and effect of federal, state, local and other tax laws.
General. It is intended that for federal income tax purposes the
Exchange will be treated as a reorganization within the meaning of Section
368(a) of the Code, and that, accordingly, (a) no gain or loss will be
recognized by either FTNC or Emerald as a result of the Exchange, (b) no gain
or loss will be recognized by the Emerald shareholders upon the receipt of FTNC
Common Stock in exchange for Emerald Common Stock in connection with the
Exchange (except as discussed below with respect to cash received in lieu of a
fractional share interest in FTNC Common Stock); (c) the tax basis of the FTNC
Common Stock to be received by the Emerald shareholders in connection with the
Exchange will be the same as the basis in the Emerald Common Stock surrendered
in exchange therefor (reduced by any amount allocable to a fractional share
interest in which cash is received); and (d) the holding period of the FTNC
Common Stock to be received by the Emerald shareholders in connection with the
Exchange will include the holding period of the Emerald Common Stock
surrendered in exchange therefor, provided that the Emerald Common Stock is
held as a capital asset at the Closing Date.
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Consummation of the Exchange is dependent upon, among other conditions, receipt
by FTNC and Emerald of an opinion of counsel to FTNC, dated as of the Closing
Date, substantially to this effect.
Consequences of Receipt of Cash in Lieu of Fractional Shares. An
Emerald shareholder who is entitled to receive cash in lieu of a fractional
share interest of FTNC Common Stock in connection with the Exchange will
recognize, as of the Closing Date, gain (or loss) equal to the difference
between such cash amount and the shareholder's basis in the fractional share
interest. Any gain (or loss) recognized will be capital gain (or loss) if the
Emerald Common Stock is held by such shareholder as a capital asset at the
Closing Date.
No IRS Rulings. The parties do not intend to request a ruling from
the IRS regarding the federal income tax consequences of the Exchange. An
opinion of counsel will be furnished to the Emerald Shareholders stating that
the Exchange should qualify as a "reorganization" within the meaning of Section
368(a) of the Code, but any such opinion of counsel is not binding on the IRS.
Consequences of Escrow and Stock Deliverable at Supplemental Closing.
If the Exchange qualifies as a tax-free reorganization for federal income tax
purposes, Emerald Shareholders who are to receive FTNC Common Stock should not
recognize taxable gain or loss upon the deposit of the FTNC Common Stock in
escrow. However, the IRS may take the position that a portion of the FTNC
Common Stock that is ultimately received from escrow must be treated as a
payment of interest. In addition, the IRS may take a similar position that a
portion of any FTNC Common Stock that is delivered at the Supplemental Closing
must be treated as a payment of interest. If the Exchange does not qualify as
a tax-free reorganization for federal income tax purposes, it is unclear under
current law whether the portion of an Emerald Shareholder's gain that is
attributable to FTNC Common Stock received after the Closing Date is taxable to
the Emerald Shareholder at the time of the Exchange or at the later time or
times when the stock is received from escrow or at the Supplemental Closing.
ACCOUNTING TREATMENT
Consummation of the Exchange is conditioned upon the receipt by FTNC
of a letter from FTNC's independent public accountants to the effect that the
Exchange qualifies for pooling-of-interests accounting treatment if closed and
consummated in accordance with the terms of the Agreement. Under the
pooling-of-interests method of accounting, the historical basis of the assets
and liabilities of FTNC and Emerald will be combined at the Closing Date and
carried forward at their previously recorded amounts and the shareholders'
equity accounts of Emerald and FTNC will be combined on FTNC's consolidated
balance sheet. FTNC intends to restate retroactively income and other
financial statements of FTNC issued after consummation of the Exchange to
reflect the consolidated operations of FTNC and Emerald as if the Exchange had
taken place prior to the periods covered by such financial statements.
In order for the Exchange to qualify for pooling-of-interests
accounting treatment, substantially all (90% or more) of the outstanding shares
of Emerald Common Stock must be exchanged for FTNC Common Stock. Emerald has
agreed to use its best efforts to cause the Exchange to qualify for
pooling-of-interests treatment. See "Resale of FTNC Common Stock."
The unaudited pro forma financial information contained in this Proxy
Statement-Prospectus has been prepared using the pooling-of-interests
accounting method to account for the Exchange. See "Summary -- Equivalent and
Pro Forma Share Data," "-- Selected Financial Data and Ratios" and "Index to
Pro Forma Financial Information."
EXPENSES
The Agreement provides, in general, that each party will each pay its
own expenses in connection with the Agreement and the transactions contemplated
thereby, including fees and expenses of brokers, finders, financial
consultants, accountants and counsel. See "Termination; Waiver and Amendment."
RESALE OF FTNC COMMON STOCK
The shares of FTNC Common Stock issued pursuant to the Agreement will
be freely transferable under the Securities Act except for shares issued to any
shareholder who may be deemed to be an "affiliate" of Emerald for purposes of
Rule 145 under the Securities Act as of the date of the Special Meeting.
Affiliates may not sell their shares of Emerald Common Stock acquired in
connection with the Exchange except pursuant to an effective registration
statement under the Securities Act covering such shares or in compliance with
Rule 145 promulgated under the Securities Act or another applicable exemption
from the registration requirements of the Securities Act. Persons who may be
deemed to be affiliates of Emerald generally include individuals or entities
that control, are controlled by or are under common control with Emerald and
include all five of the shareholders of Emerald who are its directors and
executive officers.
It is a condition to FTNC's obligations under the Agreement that each
director, executive officer and other person who is an affiliate of Emerald has
entered into and delivered to FTNC an agreement satisfactory to FTNC providing
that such person will not, directly or indirectly, (a) sell, pledge, transfer
or otherwise dispose of or take any action which would reduce such person's
risk with respect to shares of FTNC Common Stock to be received
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by such person in the Exchange except in compliance with the applicable
provisions of the Securities Act and rules and regulations thereunder, or (b)
sell, pledge, transfer or otherwise dispose of or take any action which would
reduce such person's risk with respect to shares of Emerald Common Stock owned
by such person or shares of FTNC Common Stock to be received by such person in
the Exchange during the periods when any such sale, pledge, transfer,
disposition or action would, under GAAP or the rules, regulations or
interpretations of the SEC, disqualify the Exchange for pooling-of-interests
accounting treatment. Such periods in general encompass the period commencing
30 days prior to the Exchange and ending at the time of the publication of
financial results covering at least 30 days of combined operations of FTNC and
Emerald.
In addition, the five shareholders of Emerald have represented that
they have no present plan or intention to sell, exchange or otherwise dispose
of more than 50% of the FTNC Common Stock they receive in connection with the
Exchange within two years of the Closing Date.
THE NASDAQ STOCK MARKET
FTNC Common Stock is included for quotation on the Nasdaq Stock
Market on its National Market. The FTNC Common Stock issued to the
shareholders of Emeraldpursuant to the Agreement will be included for quotation
on the Nasdaq Stock Market.
CERTAIN REGULATORY CONSIDERATIONS
GENERAL
As a bank holding company, FTNC is subject to the regulation and
supervision of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended
(the "BHCA"). Under the BHCA, bank holding companies may not in general
directly or indirectly acquire the ownership or control of more than 5% of the
voting shares or substantially all of the assets of any company, including a
bank, without the prior approval of the Federal Reserve Board. The BHCA also
restricts the types of activities in which a bank holding company and its
subsidiaries may engage. Generally, activities are limited to banking and
activities found by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto.
In addition, the BHCA prohibits the Federal Reserve Board from
approving an application by a bank holding company to acquire shares of a bank
or bank holding company located outside the acquiror's principal state of
operations unless such an acquisition is specifically authorized by statute in
the state in which the bank or bank holding company whose shares are to be
acquired is located. Tennessee has adopted legislation that authorizes
nationwide interstate bank acquisitions, subject to certain state law
reciprocity requirements, including the filing of an application with and
approval of the Tennessee Commissioner of Financial Institutions. The
Tennessee Bank Structure Act of 1974 restricts the acquisition by bank holding
companies of banks in Tennessee. A bank holding company is prohibited from
acquiring any bank in Tennessee as long as banks that it controls retain 16
1/2% or more of the total deposits in individual, partnership and corporate
demand and other transaction accounts and in savings accounts and time deposits
in all federally insured financial institutions in Tennessee, subject to
certain limitations and exclusions. As of December 31, 1993, FTNC estimates
that it held approximately 12% of such deposits. Also, under this act, no bank
holding company may acquire any bank in operation for less than five years or
begin a de novo bank in any county in Tennessee with a population, in 1970, of
200,000 or less, subject to certain exceptions. Under Tennessee law, branch
banking is permitted in any county in the state.
FTNC's subsidiary banks (the "Subsidiary Banks") are subject to
supervision and examination by applicable federal and state banking agencies.
FTB is a national banking association subject to regulation and supervision by
the Comptroller of the Currency (the "Comptroller"), as is First Tennessee Bank
National Association Mississippi, which is headquartered in Southaven,
Mississippi. The remaining Subsidiary Banks, Cleveland Bank & Trust Company,
which was acquired on March 16, 1994, and Peoples and Union Bank, are Tennessee
state-chartered
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banks that are not members of the Federal Reserve System, and therefore are
subject to the regulations of and supervision by the Federal Deposit Insurance
Corporation (the "FDIC") as well as state banking authorities. The Subsidiary
Banks are also subject to various requirements and restrictions under federal
and state law, including requirements to maintain reserves against deposits,
restrictions on the types and amounts of loans that may be granted and the
interest that may be charged thereon and limitations on the types of
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of the
Subsidiary Banks. In addition to the impact of regulation, commercial banks
are affected significantly by the actions of the Federal Reserve Board as it
attempts to control the money supply and credit availability in order to
influence the economy.
PAYMENT OF DIVIDENDS
FTNC is a legal entity separate and distinct from its banking and
other subsidiaries. The principal source of cash flow of FTNC, including cash
flow to pay dividends on its stock or principal (premium, if any) and interest
on debt securities, is dividends from the Subsidiary Banks. There are
statutory and regulatory limitations on the payment of dividends by the
Subsidiary Banks to FTNC, as well as by FTNC to its shareholders.
Each Subsidiary Bank that is a national bank is required by federal
law to obtain the prior approval of the Comptroller for the payment of
dividends if the total of all dividends declared by the board of directors of
such Subsidiary Bank in any year will exceed the total of (i) its net profits
(as defined and interpreted by regulation) for that year plus (ii) the retained
net profits (as defined and interpreted by regulation) for the preceding two
years, less any required transfers to surplus. A national bank also can pay
dividends only to the extent that retained net profits (including the portion
transferred to surplus) exceed bad debts (as defined by regulation).
State-chartered banks are subject to varying restrictions on the
payment of dividends under applicable state laws. With respect to Cleveland
Bank & Trust Company and Peoples and Union Bank, Tennessee law imposes dividend
restrictions substantially similar to those imposed under federal law on
national banks, as described above.
If, in the opinion of the applicable federal bank regulatory
authority, a depository institution or a holding company is engaged in or is
about to engage in an unsafe or unsound practice (which, depending on the
financial condition of the depository institution or holding company, could
include the payment of dividends), such authority may require that such
institution or holding company cease and desist from such practice. The
federal banking agencies have indicated that paying dividends that deplete a
depository institution's or holding company's capital base to an inadequate
level would be such an unsafe and unsound banking practice. Moreover, the
Federal Reserve Board, the Comptroller and the FDIC have issued policy
statements which provide that bank holding companies and insured depository
institutions generally should only pay dividends out of current operating
earnings.
In addition, under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), a FDIC-insured depository institution may
not pay any dividend if payment would cause it to become undercapitalized or
once it is under capitalized. See "-- FDICIA."
At June 30, 1994, under dividend restrictions imposed under
applicable federal and state laws, the Subsidiary Banks, without obtaining
regulatory approvals, could legally declare aggregate dividends of
approximately $225.3 million.
The payment of dividends by FTNC and the Subsidiary Banks may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
TRANSACTIONS WITH AFFILIATES
There are various legal restrictions on the extent to which FTNC and
its nonbank subsidiaries can borrow or otherwise obtain credit from the
Subsidiary Banks. There are also legal restrictions on the Subsidiary Banks'
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purchases of or investments in the securities of and purchases of assets from
FTNC and its nonbank subsidiaries, a bank's loans or extensions of credit to
third parties, collateralized by the securities or obligations of FTNC and its
nonbank subsidiaries, the issuance of guaranties, acceptances and letters of
credit on behalf of FTNC and its nonbank subsidiaries, and certain bank
transactions with FTNC and its nonbank subsidiaries, or with respect to which
FTNC and it nonbank subsidiaries, act as agent, participates or has a financial
interest. Subject to certain limited exceptions, a Subsidiary Bank (including
for purposes of this paragraph all subsidiaries of such Subsidiary Bank) may
not extend credit to FTNC or to any other affiliate (other than another
Subsidiary Bank) in an amount which exceeds 10% of the Subsidiary Bank's
capital stock and surplus and may not extend credit in the aggregate to such
affiliates in an amount which exceeds 20% of its capital stock and surplus.
Further, there are legal requirements as to the type, amount and quality of
collateral which must secure such extensions of credit by these banks to FTNC
or to such other affiliates. Also, extensions of credit and other transactions
between the Subsidiary Bank and FTNC or such other affiliates must be on terms
and under circumstances, including credit standards, that are substantially the
same or at least as favorable to such Subsidiary Bank as those prevailing at
the time for comparable transactions with non-affiliated companies. Also, FTNC
and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
CAPITAL ADEQUACY
The Federal Reserve Board has adopted risk-based capital guidelines
for bank holding companies. The minimum guideline for the ratio of total
capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8%, and the
minimum ratio of Tier I Capital defined below) to risk--weighted assets is 4%.
At least half of the Total Capital must be composed of common stock, minority
interests in the equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock and a limited amount of cumulative perpetual
preferred stock, less goodwill and certain other intangible assets ("Tier 1
Capital"). The remainder may consist of subordinated debt, other preferred
stock and a limited amount of loan loss reserves. At June 30, 1994, FTNC's
consolidated Tier 1 Capital and Total Capital ratios were 9.73% and 12.18%,
respectively.
In addition, the Federal Reserve Board has established minimum
leverage ratio guidelines for bank holding companies. These guidelines provide
for a minimum ratio of Tier 1 Capital to average assets, less goodwill and
certain other intangible assets (the "Leverage Ratio"), of 3% for bank holding
companies that meet certain specific criteria, including having the highest
regulatory rating. All other bank holding companies generally are required to
maintain a Leverage Ratio of at least 3%, plus an additional cushion of 100 to
200 basis points. FTNC's Leverage Ratio at June 30, 1994 was 6.84%. The
guidelines also provide that bank holding companies experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the Federal Reserve
Board has indicated that it will consider a "tangible Tier 1 Capital leverage
ratio" (deducting all intangibles) and other indicia of capital strength in
evaluating proposals for expansion or new activities.
Each of the Subsidiary Banks is subject to risk-based and leverage
capital requirements similar to those described above adopted by the
Comptroller or the FDIC, as the case may be. FTNC believes that each of the
Subsidiary Banks was in compliance with applicable minimum capital requirements
as of June 30, 1994. Neither FTNC nor any of the Subsidiary Banks has been
advised by any federal banking agency of any specific minimum Leverage Ratio
requirement applicable to it.
Failure to meet capital guidelines could subject a bank to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "-- FDICIA."
All of the federal banking agencies have proposed regulations that
would add an additional risk-based capital requirement based upon the amount of
an institution's exposure to interest rate risk. In addition, bank regulators
continue to indicate their desire generally to raise capital requirements
applicable to banking organizations
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beyond their current levels. However, the management of FTNC is unable to
predict whether and when higher capital requirements would be imposed and, if
so, at what levels and on what schedule.
HOLDING COMPANY STRUCTURE AND SUPPORT OF SUBSIDIARY BANKS
Because FTNC is a holding company, its right to participate in the
assets of any subsidiary upon the latter's liquidation or reorganization will
be subject to the prior claims of the subsidiary's creditors (including
depositors in the case of bank subsidiaries) except to the extent that FTNC may
itself be a creditor with recognized claims against the subsidiary.
Under Federal Reserve Board policy, FTNC is expected to act as a
source of financial strength to, and commit resources to support, each of the
Subsidiary Banks. This support may be required at times when, absent such
Federal Reserve Board policy, FTNC may not be inclined to provide it. In
addition, any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to any
commonly controlled FDIC-insured depository institution "in danger of default."
"Default" is defined generally as the appointment of a conservator or receiver
and "in danger of default" is defined generally as the existence of certain
conditions indicating that a default is likely to occur in the absence of
regulatory assistance. The FDIC's claim for damages is superior to claims of
shareholders of the insured depository institution or its holding company but
is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution. The Subsidiary Banks are subject to these
cross-guarantee provisions. As a result, any loss suffered by the FDIC in
respect of any of the Subsidiary Banks would likely result in assertion of the
cross-guarantee provisions, the assessment of such estimated losses against
FTNC's other Subsidiary Banks and a potential loss of FTNC's investment in such
Subsidiary Banks.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") which was enacted on December 19, 1991, substantially revised the
depository institution regulatory and funding provisions of the FDIA and made
revisions to several other federal banking statutes. Among other things,
FDICIA requires the federal banking regulators to take "prompt corrective
action" in respect of FDIC-insured depository institutions that do not meet
minimum capital requirements . FDICIA establishes five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under applicable
regulations, a FDIC-insured depository institution is defined to be well
capitalized if it maintains a Leverage Ratio of at least 5%, a risk adjusted
Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of at least 10%
and is not subject to a directive, order or written agreement to meet and
maintain specific capital levels. An insured depository institution is defined
to be adequately capitalized if it meets all of its minimum capital
requirements as described above. In addition, an insured depository
institution will be considered undercapitalized it fails to meet any minimum
required measure, significantly undercapitalized if it is significantly below
such measure and critically undercapitalized if it fails to maintain a level of
tangible equity equal to not less than 2% of total assets. An insured
depository institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating.
The capital-based prompt corrective action provisions of FDICIA and
their implementing regulations apply to FDIC-insured depository institutions
and are not directly applicable to holding companies which control such
institutions. However, the Federal Reserve Board has indicated that, in
regulating bank holding companies, it will
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35
take appropriate action at the holding company level based on an assessment of
the effectiveness of supervisory actions imposed upon subsidiary depository
institutions pursuant to such provisions and regulations. Although the capital
categories defined under the prompt corrective action regulations are not
directly applicable to FTNC under existing law and regulations, if FTNC were
placed in a capital category FTNC believes that it would qualify as
well-capitalized as of March 31, 1994.
FDICIA generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of dividends) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to restrictions on borrowing from the Federal Reserve System. In
addition, undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. A depository
institution's holding company must guarantee the capital plan, up to an amount
equal to the lesser of 5% of the depository institution's assets at the time it
becomes undercapitalized or the amount of the capital deficiency when the
institution fails to comply with the plan. The federal banking agencies may
not accept a capital plan without determining, among other things, that the
plan is based on realistic assumptions and is likely to succeed in restoring
the depository institution's capital. If a depository institution fails to
submit an acceptable plan, it is treated as if it is significantly
undercapitalized.
Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to
reduce total assets and cessation of receipt of deposits from correspondent
banks. Critically undercapitalized depository institutions are subject to
appointment of a receiver or conservator.
FTNC believes that at June 30, 1994 all of the Subsidiary Banks were
well capitalized under the criteria discussed above.
FDICIA contain numerous other provisions, including new accounting,
audit and reporting requirements, beginning in 1995 termination of the "too big
to fail" doctrine except in special cases, limitations on the FDIC's payment of
deposits at foreign branches, new regulatory standards in such areas as asset
quality, earnings and compensation and revised regulatory standards for, among
other things, powers of state banks, real estate lending and capital adequacy.
FDICIA also requires that a depository institution provide 90 days prior notice
of the closing of any branches. Complete regulations have not yet been issued
under FDICIA.
Various other legislation, including proposals to revise the bank
regulatory system and to limit the investments that a depository institution
may make with insured funds, is from time to time introduced in Congress.
BROKERED DEPOSITS
The FDIC has adopted regulations under FDICIA governing the receipt of
brokered deposits. Under the regulations, a bank cannot accept a rollover or
renew brokered deposits unless (i) it is well capitalized or (ii) it is
adequately capitalized and receives a waiver from the FDICIA. A bank that
cannot receive brokered deposits also cannot offer "pass-through" insurance on
certain employee benefit accounts. Whether or not it has obtained such a
waiver, an adequately capitalized bank may not pay an interest rate on any
deposits in excess of 75 basis points over certain prevailing market rates
specified by regulation. There are no such restrictions on a bank that is well
capitalized. Because it believes that all the Subsidiary Banks were well
capitalized as of June 30, 1994, FTNC believes the brokered deposits
regulation will have no material effect on the funding or liquidity of any of
the Subsidiary Banks.
FDIC INSURANCE PREMIUMS
The Subsidiary Banks are required to pay semiannual FDIC deposit
insurance assessments. As required by FDICIA, the FDIC recently adopted a
risk-based premium schedule which has increased the assessment rates for most
FDIC-insured depository institutions. Under the new schedule, the premiums
initially range from $.23
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36
to $.31 for every $100 of deposits. Each financial institution is assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- and further assigned to one of three subgroups within a
capital group, on the basis of supervisory evaluations by the institution's
primary federal and, if applicable, state supervisors and other information
relevant to the institution's financial condition and the risk posed to the
applicable FDIC deposit insurance fund. The actual assessment rate applicable
to a particular institution will, therefore, depend in part upon the risk
assessment classification so assigned to the institution by the FDIC.
The FDIC is authorized by federal law to raise insurance premiums in
certain circumstances. Any increase in premiums would have an adverse effect
on the Subsidiary Banks' and FTNC's earnings.
Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by a
federal bank regulatory agency.
DEPOSITOR PREFERENCE
The recently adopted Omnibus Budget Reconciliation Act of 1993
provides that deposits and certain claims for administrative expenses and
employee compensation against an insured depositary institution would be
afforded a priority over other general unsecured claims against such an
institution, including federal funds and letters of credit, in the "liquidation
or other resolution" of such an institution by any receiver.
INFORMATION CONCERNING EMERALD
INDUSTRY OVERVIEW
General. Mortgage banking is the business of (i) making mortgage
loans as a direct lender or purchasing mortgage loans from other lenders, (ii)
warehousing mortgage loans pending delivery to third-party investors, (iii)
selling mortgage loans in the secondary mortgage market to third-party
investors either directly or through mortgage pools, (iv) purchasing and
selling the right to service mortgage loans and (v) servicing mortgage loans.
The following descriptions summarize the various phases of the mortgage banking
business; however, practices vary among industry participants according to the
sources and the relative importance of the various phases of business.
History. The primary financial intermediaries that participate in the
mortgage banking market include mortgage bankers, commercial banks, savings and
loan associations and credit unions. Mortgage bankers accounted for
approximately 47% of the mortgage loan originations in the United States in
1991. Mortgage bankers, including Emerald, traditionally differ from the other
participants in the mortgage banking industry in that they do not operate as
depository institutions, use only a limited amount of their own capital to fund
mortgage loans and do not originate mortgage loans to hold in their own asset
portfolios. Mortgage bankers finance their loan origination activities by
drawing on revolving lines of credit (often referred to as "warehouse" lines)
at financial institutions and then selling the loans to investors either
directly or through the secondary market, using the proceeds of such sales to
repay lines of credit. Mortgage bankers typically enter into commitments to
sell loans to third party investors at predetermined prices prior to actually
closing the loans. It is this practice of using short-term credit to fund
loans and then marketing and selling such loans to third-party investors that
distinguishes mortgage bankers from other types of mortgage lenders.
Mortgage loan origination is a highly competitive business. Mortgage
bankers, as a group, have dramatically increased their market share during the
last three years and now dominate this business: in 1991, they accounted for
approximately 48% of mortgage loan total origination volume, as compared to 31%
in 1988. The remaining mortgage loan origination volume is shared in varying
percentages among commercial banks, savings associations, credit unions and
other lenders. Previously, thrifts held the largest share of residential
mortgage loan
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origination volume. As a result of the significant financial difficulties
experienced by the thrift industry and the more stringent capital requirements
imposed by The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), thrifts' competitive advantage has been reduced and, as a
result, their percentage of total mortgage loan origination volume has declined
significantly.
Mortgage Loan Production. Mortgage loan production generally occurs
in three ways: retail, wholesale and correspondent origination. The making of
mortgage loans directly to homeowners is referred to herein as "retail
origination." The retail origination process involves offering mortgage loan
products directly to customers at specified rates and fees; processing and
verifying loan applications; reviewing borrower creditworthiness and appraised
value (collectively referred to as "underwriting"); reviewing mortgaged
property title; and funding loans at closing. Retail origination produces
revenue through loan application fees payable by the borrower when an
application is made and through loan origination and other fees. The referral
for underwriting, closing and funding of mortgage loans from mortgage brokers
and other third party originators is referred to herein as "wholesale
production." Correspondent production generally involves the acquisition of
fully funded and closed loans from third party originators such as banks,
savings associations or other mortgage banks. After producing mortgage loans
in one of these ways, depending on a particular mortgage banker's strategy, the
mortgage banker generally markets the loans in the secondary market and either
(i) retains the servicing rights with respect to the originated loans by
selling the mortgage loans "servicing retained" or (ii) sells such servicing
rights by selling the mortgage loans "servicing released."
Warehousing. Once a loan is originated, it is typically sold forward
for future delivery by the mortgage bank and held by the mortgage bank for a
period of time pending delivery to the secondary market. During the period of
time in which mortgage loans are held prior to delivery to the secondary
market, known as warehousing, mortgage bankers typically pledge funded loans as
security for short-term credit advances from banks or other lenders which are
used to fund new mortgage loans. When interest rates charged by mortgage
bankers on mortgage loans exceed interest rates charged by banks or other
lenders on short-term borrowings, as is generally the case, the warehousing of
mortgage loans generates net interest income. The net interest spread on
mortgage loans held in warehouse is generally positive because interest income
earned on long-term mortgages held in warehouse generally exceeds interest
expense incurred on short-term borrowings.
Secondary Marketing of Loans. Marketing, or the packaging, offering,
sale and delivery of closed mortgage loans to investors, is the activity which
distinguishes a mortgage banker as a financial intermediary from a long-term
portfolio lender or investor. Mortgage loans are packaged and sold in pools as
mortgage-backed securities, or separately as whole loans. Mortgage bankers can
package and sell loans guaranteed by the VA or insured by the FHA in pools
which collateralize modified pass-through mortgage-backed securities issued by
the mortgage bankers and guaranteed by the GNMA. Conventional loans that meet
the FNMA or the FHLMC requirements ("conforming conventional loans") can be
sold directly to FNMA or FHLMC or packaged in pools and exchanged for
mortgage-backed securities issued by such agencies which are in turn sold to
securities dealers. Conventional mortgage loans not eligible for sale to FNMA
and FHLMC and which generally exceed the maximum principal amount (which, for a
single family residence within the continental United States is currently
$203,150) or that do not otherwise conform to agency underwriting guidelines
(referred to as "nonconforming conventional loans" or "jumbos"), can be sold as
whole loans or packaged into credit-enhanced mortgage-backed securities.
Exchanges of loans into agency securities and sales of loans are generally made
without recourse to the mortgage banker in the event of default by the
borrower, subject, in the case of VA loans used to form GNMA pools, to
limitations on the VA's loan guarantees.
Mortgage loans are sold in the secondary market "servicing retained"
or "servicing released." Mortgage loans sold to private investors are often
sold servicing retained, although some investors seek to acquire servicing
rights with the purchased loans. Loans sold to FNMA, FHLMC or delivered into a
security guaranteed by FNMA, FHLMC or GNMA are sold servicing-retained,
although the mortgage banker may elect to sell the servicing rights to another
mortgage servicer at the time of the sale of the loan or the issuance of the
mortgage-backed security.
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These government sponsored investors, together with private investors who pool
and issue their own mortgage-backed securities, have become the primary outlets
for the sale of loans by mortgage bankers, as in 1992, when $822.2 billion of
mortgage-backed securities were issued, an increase of 56% over 1991. As a
result of the increased liquidity and rapid growth in the market for
mortgage-backed securities, mortgage bankers are able to sell their loan
originations into an active and liquid market.
A mortgage banker may generate marketing gains or losses through the
direct sale of the mortgage loans or mortgage-backed securities that are
originated. Such gains or losses result primarily from two factors. First, a
mortgage banker may make a loan to a borrower at a price (interest rate plus
discount points) that is higher or lower than the mortgage lender would receive
if it immediately sold the loan in the secondary market. Such pricing
differences most often occur as a result of competitive conditions in a
marketplace. Second, gains or losses may result from changes in interest rates
that affect the market value of the loan from the time a price commitment is
given to a borrower until the loan is committed to an investor.
During the period of time when loans originated or purchased by a
mortgage banker are warehoused, a mortgage banker can be exposed to interest
rate risk. In order to minimize interest rate risk, a mortgage banker
generally sells the loans forward for future delivery. Mortgage bankers are
also exposed to interest rate risk with respect to mortgages that have not been
funded but for which commitments have been extended (referred to as the
"mortgage pipeline"). Mortgage pipeline hedging may be accomplished by selling
forward for future delivery that percentage of the loans the mortgage banker
expects will close or by other appropriate methods.
Purchase and Sale of Servicing Rights. Many mortgage bankers focus on
achieving the economies of scale that arise from servicing a large loan
portfolio. Purchases and sales of servicing rights bv mortgage servicers have
become common with the evolution of a highly liquid, active market for such
transactions. The market value of servicing rights is based principally on the
estimated net present value of the future servicing income expected from the
mortgage loans within the servicing portfolio.
Mortgage bankers employ several methods to acquire servicing rights.
First, bulk acquisitions entail the purchase of servicing rights to existing
loan portfolios. In most cases, loans associated with servicing rights
acquired through a bulk acquisition have already been sold to investors and
have been serviced by another mortgage servicer for a period of time. Second,
under flow acquisition programs, mortgage bankers enter into on-going
agreements with other mortgage loan originators to purchase specific volumes
and types of mortgage loans and the associated servicing rights over a
specified period at particular servicing premiums. Finally, mortgage bankers
acquire loans and the associated servicing rights from correspondent lenders,
who generally do not originate a sufficient volume of mortgage loans to be able
to create pools, fill an investor's minimum commitment requirement or who may
choose not to maintain a servicing portfolio.
The decision to acquire or sell servicing rights provides a mortgage
banker with an opportunity to control the timing of its cash flow in order to
meet its operational objectives and liquidity requirements. Acquisitions of
mortgage servicing assets and the origination of new mortgage loans (and their
associated servicing rights) each represent investments that yield future cash
flow, as servicing and related fees are received over the life of the mortgage
loans being serviced. Because there is an active and highly liquid market for
the purchase and sale of mortgage servicing rights, mortgage bankers have the
option of selling for cash a portion of a servicing portfolio or the servicing
rights associated with warehouse loans, thereby realizing immediately the
market's assessment of the present value of the future cash flow stream that
the servicing assets are expected to yield.
Servicing. Mortgage servicing involves collecting monthly mortgage
payments, maintaining escrow accounts for the payment of taxes, hazard
insurance and mortgage insurance premiums on behalf of homeowners, remitting
payments of principal and interest promptly to investors on the underlying
mortgages, reporting to those investors on financial transactions related to
such mortgages, and generally administering the loans. Servicing revenue is
generated by fees that are based upon a percentage of the declining principal
amount of the serviced loans
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and are collected out of each mortgage loan payment received, plus any
ancillary charges. Prepayment and scheduled loan amortization reduce servicing
income.
DESCRIPTION OF BUSINESS
General. Emerald was founded in December 1982 and currently operates
generally in the greater Seattle, Washington area. It is a full service
mortgage banking company that originates, acquires, markets and services first
mortgage loans and is approved as an FHA Direct Endorsement Lender, a VA
Automatic Approval Lender, and a seller-servicer for FHLMC and FNMA. Emerald
currently employs 72 persons.
Diversification of Loan Production. Emerald, like most mortgage
banking companies, employs a two-prong approach to the origination of mortgages
in order to position itself to benefit from, as well as protect against,
cyclical changes in the marketplace. Approximately 90% of originations have
been retail originations with the remaining 10% provided through a
correspondent network.
Retail Originations. The retail branch network is currently made up
of four production offices, two full service branches and two satellites, all
located in the metropolitan Seattle area. The existence of these offices is a
result of Emerald's experience in this market and careful consideration of each
branch location. These offices produced $355 million in loans during the 1993
fiscal year.
Correspondent Lending. Emerald has developed a small network of
correspondent originators who supplement retail originations. Emerald
maintains a very high level of quality control over each of the correspondents
and each correspondent must pass stringent requirements in order to be approved
to do business with Emerald. This source produced $50 million in loans during
the 1993 fiscal year.
Product Mix. Emerald originates only one to four family residential
home loans and does not originate or purchase any construction, multifamily,
commercial or other loans.
Servicing Portfolio. Emerald's current servicing portfolio, as of
December 31, 1993, totals 3,195 loans with a principal amount of approximately
$368 million, having an average loan amount of $115,188. The delinquency rate
for this portfolio, was .72% as of December 31, 1993. The weighted average
servicing fee is .31%. The servicing portfolio is being sub-serviced by
Western Mortgage Loan Corporation of Ogden, Utah.
Escrow Balances. The average tax and insurance escrow balance over
the past fiscal year was approximately .73% of the principal balance of the
portfolio. Escrow advances have been very low, minimizing demand for working
capital.
Mortgage Origination System. Emerald uses the Interlinq Mortgage Ware
("Interlinq") system, which manages all data related to loan originations, from
the point of application through the secondary marketing pipeline management
system to the creation of closing documents and to shipping the loans to
investors for purchase. This system is fully integrated with all of Emerald's
branches (except the satellites) and therefore, Emerald generally has access to
update information on an as needed basis.
The Interlinq software package, as well as all of Emerald's computer
hardware, is leased to Emerald by JDS, Inc., one of two companies owned by Mr.
Balke and Mr. Frison which provide services to Emerald. The other company is
Leo Palmer Escrow, Inc. and it provides escrow services to Emerald and other
parties in the Seattle area. After the Exchange, these companies will operate
independently and will provide leases and services to Emerald on a
month-to-month basis.
Competitive Conditions. The business of mortgage banking is highly
competitive. Emerald competes with other financial institutions, such as state
and national commercial banks, savings and loan associations, credit unions,
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and mortgage bankers and insurance companies for loan originations. Many of
Emerald's competitors have financial resources that are substantially greater
than those of Emerald. Emerald competes by providing competitive pricing,
motivating its sales force through incentive compensation based on volume of
loan origination and by providing high-quality service to borrowers, builders,
real estate brokers and agents and mortgage brokers.
Supervision and Regulation. Mortgage banking is a regulated industry.
Emerald is subject to the rules and regulations of, and examination by, FNMA,
FHLMC, FHA, and VA, with respect to originating, processing, underwriting,
making, selling, securitizing and servicing residential mortgage loans. In
addition, Emerald is subject to regulation at the state and federal level from
agencies like the Department of Housing and Urban Development ("HUD") and the
Federal Trade Commission ("FTC") with respect to specific origination, selling
and servicing practices. These rules and regulations among other things,
impose licensing obligations on Emerald, establish eligibility criteria for
mortgage loans, prohibit discrimination, provide for inspection and appraisals
of properties, require credit reports on prospective borrowers, regulate
payment features and, in some cases, fix maximum interest rates, fees and loan
amounts. FHA lenders such as Emerald are required annually to submit to the
Federal Housing Commissioner audited financial statements, and FNMA, FHLMC, and
FHA require the maintenance of specified net worth levels. Emerald's affairs
are also subject to examination by the Federal Housing Commissioner at all
times to assure compliance with FHA regulations, policies and procedures.
Among other federal consumer credit laws, mortgage origination activities are
subject to the Equal Credit Opportunity Act, Federal Truth-In-Lending Act, Real
Estate Settlement Procedures Act and the regulations promulgated thereunder
which prohibit discrimination, kickbacks and referral fees, and require the
disclosure of certain information to borrowers concerning credit and settlement
costs. Many of the aforementioned regulatory requirements are designed to
protect the interests of consumers, while others protect the owners or insurers
of mortgage loans. Failure to comply with these requirements can lead to loss
of approved status, termination of servicing contracts without compensation to
the servicer, demands for indemnification or loan repurchases, class action
lawsuits and administrative enforcement actions.
Certain states require that interest must be paid to mortgagors on
funds deposited by them in escrow to cover mortgage-related payments such as
property taxes and insurance premiums. Proposed federal legislation, if
enacted, would establish a uniform interest payment requirement in all states,
and may therefore impact Emerald's current practices with respect to the use of
compensating balances and interest payments, as well as Emerald's future net
income. Prior to the enactment of definitive legislation and promulgation of
any related regulations, Emerald cannot determine the impact of any such
requirement on its business.
Certain conventional mortgage loans are subject to state usury
statutes. Federally insured or guaranteed loans are exempt from the effect of
such statutes.
Various state laws affect Emerald's mortgage banking operations.
Emerald is licensed to do business in those states where its operations require
such licensing.
Property. Emerald's corporate and administrative headquarters is
located in its facilities in Lynnwood, Washington. Emerald has three other
offices, all of which are leased.
Seasonality. The mortgage banking business is generally subject to
seasonal trends which reflect the pattern of home sales. These sales typically
peak during the spring and summer and decline to lower levels from November
through February. As a result, Emerald's mortgage origination revenues and
earnings typically have been higher in the second and third quarters of each
year than in the first and fourth quarters. Other aspects of Emerald's
business, such as servicing and acquisitions, are less affected by seasonality,
except to the extent that the growth of the servicing portfolio is generally
higher in periods of higher production.
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Directors and Executive Officers. The members of the Board of
Directors of Emerald are elected by its shareholders at the annual meeting to
serve until the next annual meeting and until their successors are duly elected
and qualified.
The name of each director, his or her age and current principal
occupation (which has continued for at least five years unless otherwise
indicated), the name and principal business of the organization in which his or
her occupation is carried on (which organization is not an affiliate of Emerald
unless indicated), his directorships, if any, in publicly held companies, and
the year he or she was first elected to a position with Emerald are as follows:
Donald P. Balke, 42, has been a Vice President of Emerald since 1982.
He became a director in December 1982.
Pamela DeLong, 41, has been President of Emerald since January of
1988. She became a director in January 1988.
Stephen M. Frison, 44, has been Vice President and Secretary of
Emerald since December of 1982. He became a director in December 1982.
Craig Van Skaik, 32, has been a Vice President of Emerald since May
1990. Prior to that time, Mr. Van Skaik served as a manager for a national
mortgage company. He became a director in May 1990.
Michael Van Skaik, 33, has been a Vice President of Emerald since May
1990. Prior to that time, Mr. Van Skaik served as a manager for a national
mortgage company. He became a director in May 1990.
The five directors are the only executive officers of Emerald.
No family relationships exist among the individuals listed above,
except for the Van Skaiks who are brothers.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
The following discussion provides certain information concerning
Emerald's financial condition and results of operations. For a more complete
understanding of the following discussion, reference should be made to the
financial statements of Emerald and related notes thereto presented elsewhere
in this Proxy Statement-Prospectus.
Results of Operations Six Months Ended April 30, 1994 v. April 30,
1993.
Emerald realized a $524,536 decline in net income in the six months
ending April 30, 1994 compared to the six months ending April 30, 1993. The
decline was a result of the recent general down-turn in the mortgage industry
and a rise in interest rates.
Interest Expense. Loan funding and servicing increased by
approximately $9,000 the six months ending April 30, 1994 versus the six months
ending April 30, 1993. This was due to the addition of a second warehouse line
of credit, in the amount of $7 million, in May 1993.
Mortgage Loan Expense. An increase of approximately $3,000 in
mortgage loan expense was due to infusion of cash by Emerald to the Kirkland
processing account attributed mostly to the "no cost and "streamlined"
refinances.
Office Operations. Costs associated with office operations increased
approximately $59,000 for the six months ended April 30, 1994 as compared to
the the six months ended April 30, 1993. The increase is due to higher
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professional fees paid in connection with the pending exercise of stock options
during 1994 and an increase in the costs associated with quality control due to
the decision to use outside quality control services during the fiscal year
ended October 31, 1993.
Amortization of Excess Mortgage Servicing Rights. Amoritization of
capitalized excess mortgage servicing rights was $106,452 for the six months
ended April 30, 1994 compared to $197,390 for the six months ended April 30,
1993. Amortization of excess mortgage servicing rights for the six months
ended April 30, 1993 reflects adjustments to the expected lives of the
components of the servicing portfolio resulting from the expectation of
continuing high level of prepayments due to the low interest rate environment.
In addition, there were no additions excess mortgage servicing rights
capitalized subsequent to October 31, 1992, resulting in a decreasing
amortization of the remaining balance of capitalized excess mortgage servicing
rights.
The effective income tax rate for both periods was 34%.
Results of Operations Fiscal Year 1993 Compared to Fiscal Year 1992.
Overview. The results of operations for the fiscal year ended October
31, 1993 are comparable to the fiscal year ended October 31, 1992, reflecting
no significant changes, except as discussed below. Emerald continued to
operate at a high volume due to the continuing low interest rates. However,
net earnings for fiscal year 1993 were negatively impacted by increased
personnel costs as discussed below.
Loan Origination and Broker Fees. Fee income represents origination
and other fees related to the origination of mortgage loans. Loan origination
and broker fees increased 1.3% as compared to fiscal year 1992 reflecting the
continued high rate of loan activity due to low interest rates.
Loan Servicing Fees, Net. Loan servicing fees represent revenues
generated from the servicing of loans on behalf of FHLMC and FNMA, net of
subservicing costs. In addition, fiscal year 1992 loan servicing fees includes
amounts capitalized during the year for excess mortgage servicing rights.
There were no additional excess mortgage servicing rights capitalized during
fiscal year 1993. Net revenues generated from the servicing of loans in fiscal
year 1993 decreased 19.7% as compared to fiscal year 1992 related to the
increased financing activity, resulting in a higher than normal level of
prepayments and the amount of current year capitalization of excess mortgage
servicing rights. The increase in loan prepayments reflects the continued
decline in mortgage interest rates.
Net Gain of Sale of Loans. Net gain on sale of loans for fiscal year
1993 was $3,051,881, compared to $2,989,105 for fiscal 1992, or a 2.1%
increase. The increase in net gain on sale of loans is comparable to the
increase in loan origination and broker fee income, related to the increased
volume of loans originated.
Interest Income. Interest income on loans increased 3.0% for fiscal
1993 compared to fiscal 1992 as a result of increased loan origination
activity.
Personnel Costs. Corporate officers of Emerald received bonuses based
on job performance over the past year. Total bonuses for fiscal 1993 were
$2,300,000 compared to $1,352,823 for fiscal 1992. Officers salaries paid
reflect the efforts made by all officers in recruiting high quality staff,
maintaining a level of service necessary to continue high volume originations
and training new loan officers.
Occupancy. There was a slight increase in occupancy expense due to
higher costs of maintenance on office facilities.
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Office Operations. The costs associated with office operations for
fiscal year 1993 are comparable to fiscal year 1992. A slight decrease of 2.2%
is due primarily to an adjustment in fiscal year 1993 to decrease insurance
costs related to recording accumulated cash surrender value of officer's life
insurance of $61,739.
Telephone and Utilities. Expenses for telephone and utilities
increased approximately $18,000 for fiscal 1993 as compared to 1992. The
increase is a result of the increased loan origination activity as well as
increases during the year to the loan servicing portfolio.
Equipment and Maintenance. Equipment and maintenance costs increased
15.3% for fiscal 1993 as compared to fiscal 1992 due primarily to higher than
normal costs associated with the maintenance of the telephone system. In
addition, additional office equipment was rented during the year to accommodate
the increased loan origination volume.
Interest Expense. A decline in interest expense of $26,261 was due
primarily to changes in rates and the amount of time loans were held in
warehouse banks.
Mortgage Loan Expense. The substantial increase in mortgage loan
expense was due in part to a FHA loan indemnity in which Emerald paid a claim
of $62,685, infusion of cash by Emerald into the Kirland processing account of
approximately $19,000, various "pair off" fees for undelivered loans to the
secondary market and mortgage insurance premiums on 11 FHA streamlines
refinance loans in which the initial MIP was incorrectly calculated. This
accounted for approximately $23,000.
Amortization of Excess Mortgage Servicing Rights. Amortization of
excess mortgage servicing rights was $394,779 for the year ended October 31,
1993 compared to $194,572 for the year ended October 31, 1992. Amortization of
excess mortgage servicing rights for the fiscal year ended October 31, 1993
reflects adjustments to the expected lives of the components of the servicing
portfolio resulting from the expectation of continuing high level of
prepayments due to the low interest rate environment.
Income Taxes. The effective tax rate for financial reporting purposes
for both fiscal years ended 1993 and 1992 was approximately 34%. The net
operating loss for fiscal 1993 was carried back to generate a tax benefit of
$33,320.
Results of Operations Fiscal Year 1992 Compared to Fiscal Year 1991.
Overview. The fiscal year ended October 31, 1992 saw significant
growth of Emerald in terms of revenue, profitability and size. Interest rates
continued to decline resulting in large increases in the number of
refinancings, as well as mortgages on new home purchases. Revenues from loan
fees nearly doubled, and servicing fees increased significantly as the loan
servicing portfolio of new loans grew. Production increases were also
attributable to the addition of several successful new loan officers.
Loan Origination and Broker Fees. Loan origination and broker fees
increased 75% as compared to fiscal year 1991, reflecting the high rate of loan
activity due to decreasing interest rates. In addition, the Puget Sound region
experienced a period of rapid inflation in home prices during 1990-1991 and
into early 1992, resulting in increasing loan origination activity as home
buyers attempted to buy before being priced out of the market.
Loan Servicing Fees, Net. Net revenues generated from the servicing of
loans in fiscal year 1992 increased 88.4% as compared to fiscal year 1991
related to the increase in the loan servicing portfolio. As of October 31,
1992 the company was servicing 2,362 loans with a principal balance of
approximately $278,643,000 as compared to 943 loans with a principal balance of
$111,725,000 as of October 31, 1991.
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Net Gain of Sale of Loans. Net gain on sale of loans for fiscal year
1992 was $2,989,105, compared to $1,182,694 for fiscal 1991, or a 150%
increase. The increase in net gain on sale of loans is due to the increase in
loan origination and broker fee income, related to the increased volume of
loans originated.
Interest Income. Interest income on loans increased 90% for fiscal
1992 compared to fiscal 1991 as a result of increased loan origination
activity.
Personnel Costs. Additional staff were hired to accommodate the rapid
growth in production. Facilities were expanded and a new branch office was
opened. As a result, office payroll related expenses increased
proportionately. Officers salaries that were paid reflect the efforts made in
bringing new business to Emerald in 1992 and for prior years when they received
below market compensation.
Occupancy. Occupancy costs for fiscal 1992 increased $31,141 or 11.6%
as compared to fiscal 1991 primarily due to the costs associated with new
branch offices.
Office Operations. The costs associated with office operations for
fiscal year 1992 were higher when compared to fiscal year 1991 due to the costs
associated with the higher loan origination volume.
Telephone and Utilities. Expenses for telephone and utilities
increased approximately $26,000 for fiscal 1992 as compared to 1991. The
increase is a result of the increased loan origination activity as well as
increases during the year to the loan servicing portfolio.
Equipment and Maintenance. Equipment and maintenance costs increased
69% for fiscal 1992 as compared to fiscal 1991 due primarily to additional
computer equipment leased on a month-to-month basis from a related party and
increasing costs associated with the computer system.
Interest Expenses. The substantial increase of $497,093 in fiscal 1992
compared to fiscal 1991 was a direct result of the increased volume stated
above and the amount of time loans were held in the warehouse banks.
Mortgage Loan Expense. Mortgage loan expense increased substantially
due primarily to the increased volume and expenses associated with "no cost"
refinances, pair-off fees for undelivered loans, recordations of assignments
and related post-closing expenses.
Amortization of Excess Mortgage Servicing Rights. Amortization of
capitalized excess mortgage servicing rights was $194,572 for the year ended
October 31, 1992 compared to $44,684 for the year ended October 31, 1991. The
increase is due to significant increases to the mortgage servicing portfolio
during 1992 as compared to 1991 with an excess servicing fee attached.
Income Taxes. The effective tax rate for financial reporting purposes
for both fiscal years ended 1992 and 1991 was approximately 34%.
Inflation. Emerald is affected by inflation primarily through its
impact on interest rates. During periods of rising inflation, interest rates
generally tend to increase, causing mortgage loan origination volumes,
particularly loan refinancing activity, to decline. However, during such
periods, mortgage loan prepayment rates tend to slow, extending the average
life of Emerald's servicing portfolio and generally enhancing its market and/or
economic value. Conversely, during periods of declining inflation, interest
rates generally tend to decline, resulting in increased mortgage loan
refinancing activity which in turn generates increased mortgage loan
origination volume, which offsets, at least partially, an acceleration of loan
prepayment rates which decreases the average life of Emerald's servicing
portfolio.
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Liquidity and Capital Resources.
Emerald's primary short-term liquidity requirements are its two
warehouse lines of credit used to fund individual mortgage loan transactions
closed through Emerald. The warehouse line of credit agreements provide for
various financial covenants, including minimum working capital and tangible net
worth requirements, and restrictions on debt.
Typically, a commitment to sell an individual mortgage transaction to
an investor in the secondary market is arranged prior to the closing of the
loan and the warehouse line of credit is repaid in less than ten days. Changes
in the balances of trade accounts receivable and mortgage loans held for sale
and the related warehouse line of credit debt reflect, among other factors, the
general level of, and trends in, mortgage interest rates and the seasonality of
home purchase activity.
Emerald also has longer term requirements related to long term debt
and obligations under capital leases related to the acquisition of automobiles
and office equipment.
During the six months ended April 30, 1994, Emerald had a net decrease
in cash of $2,267,328 primarily due to net cash used in operating activities.
For fiscal year ended 1993, Emerald had a net increase of cash and
cash equivalents of $411,956 primarily due to net cash provided by operating
activities. Net cash used in investing activities was $85,592, including
$59,408 for the purchase of property and equipment. Net cash used in financing
activities was $57,487, represented by the net repayments of long-term debt and
obligations under capital lease.
For fiscal year ended 1992, Emerald had a net increase of cash and
cash equivalents of $1,353,910 primarily due to net cash provided by operating
activities of $1,489,243. Net cash used in investing activities was $131,272,
including $144,693 for the purchase of property and equipment. Net cash used
in financing activities was $4,061 represented by net repayments of long-term
debt of $31,705 and amounts paid for the repurchase of common stock of $35,766.
A source of liquidity and cash flow available to Emerald is the
portfolio of mortgage servicing rights aggregating approximately $384,000,000
as of October 31, 1993 and $362,000,000 as of April 30, 1994. Currently, there
is a highly liquid, active market for the sale of servicing rights. Emerald
may, from time to time, periodically sell a portion of its servicing portfolio
to generate cash flow and income. Results of operations for the year ended
October 31, 1992 included $246,335 from the sale of a portion of the servicing
portfolio. There were no sales of existing servicing rights during the year
ended October 31, 1993.
OWNERSHIP OF EMERALD COMMON STOCK AND DIVIDENDS
Ownership of Principal Shareholders, Directors and Executive Officers.
As of July 31, 1994, there were 950 shares of Emerald Common Stock, its only
class of voting securities, outstanding and five shareholders of record of such
shares. The five shareholders are all of the Emerald directors and its only
executive officers. The following table provides information concerning the
number of shares of Emerald Common Stock beneficially owned, directly or
indirectly, by the five shareholders of Emerald Common Stock as of July 31,
1994, and the number of shares of FTNC Common Stock to be owned by such persons
on the Closing Date of the Exchange. Except as set forth below, no person is
known by Emerald to be the beneficial owner of more than 5% of the outstanding
shares of Emerald Common Stock. The number and percentage of shares of FTNC
Common Stock beneficially owned on the Effective Date of the Exchange in the
table are based upon a conversion ratio of 190.6926 FTNC Common Shares for
each Emerald Common Share and assuming 31,876,357 FTNC Common
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46
Shares will be outstanding immediately prior to the Exchange. Unless otherwise
noted, the named person has sole voting and investment power with respect to
the shares indicated.
Number of Share of
Number of Share of Percent of Total
Number of FTNC Common Stock to FTNC Common
Shares of Percent of be Beneficially Shares to be
Emerald Common Total Emerald Owned Outstanding on
Beneficial Owner Stock Owned Shares Outstanding on Effective Date Effective Date
---------------- ------------ ------------------ ------------------- -------------------
Donald P. Balke 250.5 26.3684 47,768 *
Pamela DeLong 150.0 15.7894 28,603 *
Stephen M. Frison 250.5 26.3684 47,768 *
Craig Van Skaik 149.5 15.7369 28,508 *
Michael Van Skaik 149.5 15.7369 28,508 *
All directors and executive officers as
a group (the 5 persons named above) 950 100.0% 181,155 *
* Less than 1%.
Dividends. The shareholders of Emerald Common Stock are entitled to
such dividends as may be declared from time to time by the Emerald Board. No
cash dividends have been declared or paid since its incorporation.
The Agreement restricts the ability of Emerald to declare and pay
dividends. See "The Exchange -- Conduct of Business Pending Exchange."
Emerald's ability to pay dividends also is dependent upon the earnings and
financial condition of Emerald. As of March 31, 1994, there were no funds
available for distribution to Emerald's shareholders as dividends.
DESCRIPTION OF FTNC CAPITAL STOCK
The following summaries of certain provisions of the Restated Charter,
as amended (the "Charter"), and Bylaws, as amended, of FTNC, the Rights Plan
(defined below) and the Indenture (defined below) do not purport to be
complete, are qualified in their entirety by reference to such instruments,
each of which is an exhibit to the Registration Statement of which this Proxy
Statement-Prospectus is a part, and are subject, in all respects, to
applicable Tennessee law.
AUTHORIZED CAPITAL STOCK
The authorized capital stock of FTNC currently consists of 5,000,000
shares of Preferred Stock, without par value ("Preferred Stock"), which may be
issued from time to time by resolution of the FTNC Board and 100,000,000 shares
of FTNC Common Stock. As of June 30, 1994, there were 31,876,357 shares of
FTNC Common Stock and no shares of Preferred Stock outstanding. Approximately
3.3 million shares of FTNC Common Stock are reserved for issuance under various
employee stock plans and FTNC's dividend reinvestment plan, approximately
468,000 shares are reserved for issuance in connection with another pending
acquisition (See page PF-1 herein), and 318,764 shares of Preferred Stock are
reserved for issuance under the Rights Plan. Also, FTNC has on file with the
SEC an effective shelf registration pursuant to which it may offer from time to
time, at its discretion, senior or subordinated debt securities, preferred
stock, including depository shares, and FTNC Common Stock at an aggregate
initial offering price not to exceed $300 million.
PREFERRED STOCK
The FTNC Board is authorized, without further action by the
shareholders, to provide for the issuance of up to 5,000,000 shares of
Preferred Stock, without par value, from time to time in one or more series
and, with respect to each such series, has the authority to fix the powers
(including voting power), designations, preferences and relative,
participating, optional or other special rights and the qualifications,
limitations or restrictions thereof. Currently, no shares of Preferred Stock
are outstanding.
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FTNC COMMON STOCK
The FTNC Board is authorized to issue a maximum of 100,000,000 shares
of Common Stock, $2.50 par value per share. The holders of the FTNC Common
Stock are entitled to receive, ratably, such dividends as may be declared by
the FTNC Board from funds legally available therefor. The holders of the
outstanding shares of FTNC Common Stock are entitled to one vote for each such
share on all matters presented to shareholders and are not entitled to cumulate
votes for the election of directors. Upon any dissolution, liquidation or
winding up of FTNC resulting in a distribution of assets to the shareholders,
the holders of FTNC Common Stock are entitled to receive such assets ratably
according to their respective holdings after payment of all liabilities and
obligations and satisfaction of the liquidation preferences of any shares of
Preferred Stock at the time outstanding. The shares of FTNC Common Stock have
no preemptive, redemption, subscription or conversion rights. The shares of
FTNC Common Stock will be, when issued in accordance with the Agreement, fully
paid and nonassessable. Under FTNC's Charter, the FTNC Board is authorized to
issue authorized shares of FTNC Common Stock without further action by FTNC's
shareholders. However, the FTNC Common Stock is traded in the over-the-counter
market and is quoted on the Nasdaq Stock Market, which requires shareholder
approval of the issuance of additional shares of FTNC Common Stock in certain
situations. The Transfer Agent for the Common Stock is The First National Bank
of Boston.
The FTNC Board is divided into three classes, which results in
approximately 1/3 of the directors being elected each year. In addition, the
Charter and the Bylaws, among other things, generally give to the FTNC Board
the authority to fix the number of directors on the FTNC Board and to remove
directors from and fill vacancies on the FTNC Board, other than removal for
cause and the filling of vacancies created thereby which are reserved to
shareholders exercising at least a majority of the voting power of all
outstanding voting stock of FTNC. To change these provisions of the Bylaws,
other than by action of the FTNC Board, and to amend these provisions of the
Charter or to adopt any provision of the Charter inconsistent with such Bylaw
provisions, would require approval by the holders of at least 80% of the voting
power of all outstanding voting stock. Such classification of the FTNC Board
and such other provisions of the Charter and the Bylaws may have a significant
effect on the ability of the shareholders of FTNC to change the composition of
an incumbent FTNC Board or to benefit from certain transactions which are
opposed by the FTNC Board.
SHAREHOLDER PROTECTION RIGHTS PLAN
Each share of FTNC Common Stock has, and each share of the FTNC Common
Stock issued in the Merger will have, attached to it one right (a "Right")
issued pursuant to a Shareholder Protection Rights Agreement dated as of
September 7, 1989 (the "Rights Plan"). Each Right entitles its holder to
purchase 1/100th of a share of Participating Preferred Stock, without par
value, for $76.67 (the "Exercise Price"), subject to adjustment, upon the
business day following the earlier of (i) the 10th day after commencement of a
tender or exchange offer which, if consummated, would result in a person's
becoming the beneficial owner of 10% or more of the outstanding shares of FTNC
Common Stock (an "Acquiring Person") and (ii) the first date (the "Flip-in
Date") of public announcement that a person has become an Acquiring Person.
The Rights will expire on the earliest of (i) the Exchange Time
(defined below), (ii) September 18, 1999 and (iii) the date on which the Rights
are redeemed as described below. The FTNC Board may, at its option, at any
time prior to the Flip-in Date, redeem all the Rights at a price of $.01 per
Right.
If a Flip-in Date occurs, each Right (other than Rights beneficially
owned by the Acquiring Person or its affiliates, associates or transferees,
which Rights will become void), to the extent permitted by applicable law, will
constitute the right to purchase shares of FTNC Common Stock or Participating
Preferred Stock having an aggregate market price equal to twice the Exercise
Price for an amount in cash equal to the then-current Exercise Price. In
addition, the FTNC Board may, at its option, at any time after a Flip-in Date
and prior to the time that an Acquiring Person becomes the beneficial owner of
more than 50% of the outstanding shares of FTNC Common Stock, elect to exchange
the Rights (other than Rights beneficially owned by the Acquiring Person or its
affiliates, associates
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48
or transferees) for shares of FTNC Common Stock or Participating Preferred
Stock at an exchange ratio of one share of FTNC Common Stock or 1/100th of a
share of Participating Preferred Stock per Right (the "Exchange Time").
FTNC may not agree to be acquired by an Acquiring Person without
providing that each Right, upon such acquisition, will constitute the right to
purchase common stock of the Acquiring Person having an aggregate market price
equal to twice the Exercise Price for an amount in cash equal to the
then-current Exercise Price.
The Rights will not prevent a takeover of FTNC. The Rights, however,
may have certain anti-takeover effects. The Rights may cause substantial
dilution to a person or group that acquires 10% or more of the outstanding FTNC
Common Stock unless the Rights are first redeemed by the FTNC Board.
SUBORDINATED CAPITAL NOTES DUE 1999
On June 10, 1987, FTNC issued $75,000,000 principal amount of 10 3/8%
Subordinated Capital Notes Due 1999 (the "Capital Notes"). The Capital Notes
currently constitute Tier 2 capital under the Federal Reserve Board's
risk-based capital guidelines. Pursuant to the Indenture, dated as of June 1,
1987 (the "Indenture"), between FTNC and BankAmerica National Trust Company,
formerly Security Pacific National Trust Company (New York), Trustee, at
maturity the Capital Notes are required to be exchanged for Common Stock,
Preferred Stock or certain other eligible capital securities to be issued by
FTNC ("Capital Securities") having a market value equal to the principal amount
of the Capital Notes, except to the extent that FTNC, at its option, shall
elect to pay in cash such principal amount from amounts representing proceeds
of other issuances of Capital Securities designated for such use.
EFFECT OF THE EXCHANGE ON RIGHTS OF SHAREHOLDERS
FTNC is a Tennessee corporation subject to the provisions of the TBCA.
Emerald is a Washington corporation subject to the provisions of the Washington
Business Corporation Act ("WBCA"). Shareholders of Emerald, whose rights are
governed by Emerald's Articles of Incorporation and Bylaws and by the WBCA,
will, upon consummation of the Exchange, become shareholders of FTNC whose
rights will then be governed by the Charter and Bylaws of FTNC and by the TBCA.
The following is a summary of the material differences in the rights of
shareholders of FTNC and Emerald and is qualified in its entirety by reference
to the governing law and the Articles of Incorporation or Charter and Bylaws of
each of Emerald and FTNC. Certain topics discussed below are also subject to
federal law and the regulations promulgated thereunder. See "Certain
Regulatory Considerations."
CONFLICT-OF-INTEREST
Emerald's Articles of Incorporation ("Articles") provide that a
contract or other transaction between the corporation and one of its directors
or an entity in which a director is interested is valid for all purposes
notwithstanding the presence of the director at the meeting of the board of
directors which acts upon the transaction and notwithstanding the director's
participation in such action even though his presence or vote might have been
necessary to obligate the corporation upon the transaction; provided, however,
that the fact of such interest must be disclosed to or known by the other
directors.
The TBCA generally permits transactions involving FTNC and an
interested director of FTNC if (i) the material facts are disclosed and a
majority of disinterested directors or a committee of the FTNC Board consents,
(ii) the material facts are disclosed and a majority of disinterested shares
entitled to vote thereon consents, (iii) the transaction is fair to FTNC. The
TBCA prohibits loans to directors by FTNC unless approved by a majority vote
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49
of disinterested shareholders or the FTNC Board determines that the loan
benefits FTNC and either approves the specific loan or a general plan of loans
by FTNC.
REMOVAL OF DIRECTORS
Emerald's Bylaws provide that one or more members of the Board may be
removed, with or without cause, by a vote of the holders of a majority of the
shares entitled to vote on the election of directors. If less than the entire
Board is to be removed, no one director may be removed if the votes cast
against his removal would be sufficient to elect him if then cumulatively voted
at an election of the entire Emerald Board. Emerald's Articles do not permit
the right to cumulate votes in the election of directors.
FTNC's Charter provides that any director is subject to removal by the
shareholders only for cause by the affirmative vote of the majority of the
shares entitled to vote.
VACANCIES ON BOARD OF DIRECTORS
Any vacancy occurring on the Emerald Board by reason of an increase in
the number of directors must be filed by election at an annual or special
shareholders meeting.
Under the FTNC Bylaws newly created directorships resulting from an
increase in the number of directors must be filled only by the Board of
Directors.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
The WBCA provides that the approval of the Emerald Board and of
two-thirds of the outstanding shares of Emerald entitled to vote thereon is
required to effect a merger or consolidation.
The TBCA provides that the approval of the FTNC Board and of a
majority of the outstanding shares of FTNC entitled to vote thereon would
generally be required to approve a merger or to sell, lease, exchange or
otherwise dispose of substantially all of the FTNC's assets.
Under both the WBCA and the TBCA, submission by the board of any such
action may be conditioned on any basis, including without limitation,
conditions regarding a super-majority voting requirement or that no more than a
certain number of shares indicate that they will seek dissenters' rights.
With respect to a merger, no vote of the shareholders of FTNC would be
required if FTNC were the surviving corporation and (i) FTNC's Charter would
remain unchanged after the merger, subject to certain exceptions, (ii) each
shareholder of FTNC immediately before the merger would hold an identical
number of shares, with identical rights and preferences, after the merger,
(iii) the number of voting shares outstanding immediately after the merger plus
the number of voting shares issuable as a result of the merger (either by
conversion or securities issued pursuant to the merger or the exercise of
rights and warrants isued pursuant to the merger), will not exceed by more than
20% the number of voting shares of the surviving corporation outstanding
immediately before the merger; and (iv) the number of participating shares
outstanding immediately after the merger, plus the number of participating
shares issuable as a result of the merger (either by conversion of securities
issued pursuant to the merger of the exercise of rights and warrants issued
pursuant to the merger) will not exceed by more than 20% the total number of
participating shares outstanding immediately before the merger.
The WBCA has generally the same provisions as the TBCA except that the
number of shares (in clauses (iii) and (iv) above) that cannot be exceeded is
the total number authorized by Emerald's Articles immediately before the
merger.
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50
With respect to a sale, lease, exchange or other disposition of
substantially all the assets of FTNC, no vote of the shareholders of FTNC would
be required if such transfer were conducted in the regular course of business
or if such transfer were made to a wholly-owned subsidiary of FTNC.
SHAREHOLDER PROPOSALS AND NOMINATIONS
Neither Emerald's Articles nor its Bylaws provide procedures for
shareholder proposals or nominations.
Pursuant to FTNC's Bylaws, shareholder proposals and director
nominations must be in writing and delivered or mailed to the Secretary of FTNC
not less than 30 nor more than 60 days prior to the date of a meeting of
shareholders; provided, however, that if fewer than 40 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder will be timely if it is delivered or received not
later than the close of business on the 10th day following the earlier of the
day on which such notice of the date of such meeting was mailed or the date on
which such public disclosure was made.
ACTION BY WRITTEN CONSENT
The WBCA provides for action by unanimous written consent by all of
the shareholders of Emerald without a meeting.
The TBCA provides that action may be taken without a shareholder
meeting. If all shareholders entitled to vote on the action consent to taking
such action without a meeting, then such action is passed if it receives the
affirmative vote of the number of shares necessary to take such action at a
meeting. Action by written consent of the FTNC shareholders is impracticable
given the number of holders of FTNC Common Stock.
PREEMPTIVE RIGHTS
Shares of Emerald Common Stock have preemptive rights (the right of a
shareholder to acquire proportional amounts of a corporation's unissued shares
upon a decision by the board of directors to issue such shares).
The Charter of FTNC provides that shareholders of FTNC have no
preemptive rights. If FTNC issues additional shares, a dilution of the equity
interest of each share could result.
AMENDMENT OF ARTICLES OF INCORPORATION OR CHARTER AND BYLAWS
Emerald's Articles require an amendment thereto to be approved by the
vote of two-thirds of all the outstanding voting shares. The Bylaws of Emerald
provide that the Emerald Board may alter, amend, repeal or add to the Bylaws,
and the WBCA grants such rights to Emerald's shareholders.
FTNC's Charter provides that any amendment to the Charter which is
inconsistent with any provision of the Bylaws may be adopted only by the
affirmative vote of the holders of at least 80% of the voting power of all
outstanding stock. FTNC's Bylaws may be amended or repealed by a vote of a
majority of all the directors of FTNC at any regular or special meeting of the
FTNC Board. In addition, the shareholders of FTNC may make, alter, amend or
repeal the Bylaws at any annual meeting or at a special meeting called for that
purpose, if at least 80% of the voting power of all outstanding voting stock
approves the amendment. The Charter also provides that at least 80% of the
voting power of all outstanding voting stock must approve an amendment to the
Charter and Bylaws to change the classification the FTNC's Board or the 80%
voting requirement for an amendment of the Bylaws.
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51
INDEMNIFICATION
Both the WBCA and the TBCA provide in certain situations for mandatory
and permissive indemnification of directors and officers. The WBCA and the
TBCA also provide that the statutory indemnification is not to be deemed
exclusive of any other rights to which a director seeking indemnification may
be entitled. The WBCA, however, requires indemnification to be consistent with
the provisions of the WBCA. No such indemnification may be made under the TBCA
if a final adjudication adverse to the director or officer establishes his
liability (i) for any breach of loyalty to the corporation or its shareholders;
(ii) for acts or ommissions not in good faith; (iii) for acts or ommissions
which involve intentional misconduct or a knowing violation of law; or (iv) for
unlawful distributions. No such indemnification may be made under the WCBA in
situation (iii) or (iv) or with respect to transactions in which the director
received a benefit to which he or she was legally entitled.
The Bylaws of Emerald expressly provide for the indemnification of
directors and officers to the fullest extent permitted by the WBCA.
FTNC has provided additional indemnification to its directors and
certain officers designated by the FTNC Board in a shareholder-approved bylaw
amendment and individual indemnity agreements which provide indemnification to
the maximum extent not prohibited by law.
ACQUISITIONS OF ISSUER'S STOCK
Under both the WBCA and the TBCA, a corporation may purchase, redeem
or acquire its own shares unless, after such distribution, it would not be able
to pay its debts as they became due in the usual course of business or its
total assets would be less than the sum of its total liabilities plus (unless
the Charter provides otherwise) the amount that would be needed on dissolution
to satisfy the claims of shareholders with greater rights than those receiving
the distribution. FTNC, however, must obtain the approval of the Federal
Reserve Board to redeem its shares if the gross consideration for the
redemption, when aggregated with the consideration paid for all redemptions
during the preceding 12 month period, equals or exceeds 10% of FTNC's
consolidated net worth.
VOLUNTARY DISSOLUTION
The WBCA provides that Emerald may be dissolved if the Emerald Board
proposes dissolution and the proposal is approved by two-thirds of the shares
entitled to vote thereon.
The TBCA provides that FTNC may be dissolved if the FTNC Board
proposes dissolution and a majority of the shares of FTNC entitled to vote
thereon approves the dissolution. In accordance with the TBCA, the FTNC Board
may condition its submission of a proposal for dissolution on any basis,
including a greater shareholder vote requirement.
BUSINESS COMBINATIONS
Tennessee's Business Combination Act ("BCA") provides that a party
owning 10% or more of stock in a "resident domestic corporation" (such party is
called an "interested shareholder") cannot engage in a business combination
with the resident domestic corporation unless the combination (i) takes place
at least 5 years after the interested shareholder first acquired 10% or more of
the resident domestic corporation, and (ii) either (A) is approved by at least
2/3 of the non-interested voting shares of the resident domestic corporation or
(B) satisfies certain fairness conditions specified in the BCA.
These provisions of the BCA apply unless one of two events occurs. A
business combination with an entity can proceed without delay when approved by
the target corporation's board of directors before that entity becomes an
interested shareholder, or the resident corporation may enact a charter
amendment or bylaw to remove itself entirely from the BCA. This charter
amendment or bylaw must be approved by a majority of the shareholders who
- 47 -
52
have held shares for more than one year prior to the vote. It may not take
effect for at least 2 years after the vote. FTNC has not adopted a charter or
bylaw amendment removing FTNC from coverage under the BCA.
The BCA further provides an exemption from liability for officers and
directors of resident domestic corporations who do not approve proposed
business combinations or charter amendments and bylaws removing their
corporations from the BCA's coverage as long as the officers and directors act
in "good faith belief" that the proposed business combination would adversely
affect their corporation's employees, customers, suppliers, or the communities
in which their corporation operates and such factors are permitted to be
considered by the board of directors under the charter.
The United States Court of Appeals for the Sixth Circuit has held that
the BCA is unconstitutional as it applies to target corporations organized
under the laws of states other than Tennessee (such as Emerald).
No statute similar to the BCA applies to Emerald under the WBCA.
AUTHORIZED CORPORATION PROTECTION ACT
The Tennessee Authorized Corporation Protection Act ("TACPA") is the
vehicle through which the Business Combination Act and the TCSAA can govern
foreign corporations. The TACPA provides that an authorized corporation can
adopt a bylaw or a charter provision electing to be subject to the operative
provisions of the Business Combination Act and the TCSAA, which then become
applicable "to the same extent as such provisions apply to a resident domestic
corporation." Authorized corporations are those that are required to obtain a
Certificate of Authority from the Tennessee Secretary of State and that satisfy
any two of ceertain tests including having its principal place of business
located in Tennessee; having a significant subsidiary located in Tennessee;
having a majority of such corporation's fixed assets located in Tennessee;
having more than 10% of the beneficial owners of the voting stock or more than
10% of such corporation's shares of voting stock beneficially owned by
residents of Tennessee; employing more than 250 individuals in Tennessee or
having an annual payroll paid to residents of Tennessee that is in excess of
$5,000,000; producing goods and/or services in Tennessee that result in annual
gross receipts in excess of $10,000,000; or having physical assets and/or
deposits located within Tennessee that exceed $10,000,000 in value.
The United States Court of Appeals for the Sixth Circuit, however, has
held the TACPA unconstitutional as it applies to target corporations organized
under the laws of states other than Tennessee (such as Emerald).
The WBCA contains no similar provisions with respect to authorized
corporation protection.
CONTROL SHARE ACQUISITIONS
The Tennessee Control Share Acquisition Act ("TCSAA") strips a
purchaser's shares of voting rights any time an acquisition of shares in a
covered corporation brings the purchaser's voting power to 1/5, 1/3 or a
majority of all voting power. The purchaser's voting rights can be established
only by a majority vote of the other shareholders. The purchaser may demand a
special meeting of shareholders to conduct such a vote if the purchaser
announces a good faith intention to make the control share acquisition. Under
the TCSAA, the purchaser can demand such a meeting before acquiring a control
share only if it holds at least 10% of the outstanding shares.
The TCSAA applies to corporations which have 100 or more shareholders
and its principal place of business or principal office in Tennessee and either
(i) more than 10% of its shareholders reside in Tennessee, (ii) more than 10%
of its shares are owned by shareholders who reside in Tennessee, or (iii)
10,000 or more shareholders reside in Tennessee, and the corporation elects to
be governed by the TCSAA. In addition, pursuant to the Tennessee Authorized
Corporation Protection Act certain other corporations which do not meet the
criteria of TCSAA may elect to be covered by the TCSAA. FTNC has not elected
to be governed by the TCSAA.
No statute similar to the TCSAA applies to Emerald under the WBCA.
- 48 -
53
TENDER OFFERS
Tennessee's Investor Protection Act ("TIPA") applies to tender offers
directed at corporations (called "offeree companies") that have "substantial
assets" in Tennessee and that are either incorporated in or have a principal
office in Tennessee. The TIPA requires an offeror making a tender offer for an
offeree company to file with the Commissioner of Commerce and Insurance (the
"Commissioner") a registration statement. When the offeror intends to gain
control of the offeree company, the registration statement must indicate any
plans the offeror has for the offeree. The Commissioner may require additional
information related to the takeover offer and may call for hearings. The TIPA
does not apply to an offer that the offeree company's board of directors
recommends to its shareholders.
No statute similar to the TIPA applies to Emerald under the WBCA.
GREENMAIL ACT
The Tennessee Greenmail Act ("TGA") applies to any corporation
chartered under the laws of Tennessee which has a class of voting stock
registered or traded on a national securities exchange or registered with the
SEC pursuant to Section 12(g) of the Exchange Act, such as FTNC. The TGA
provides that it is unlawful for any corporation or subsidiary to purchase,
either directly or indirectly, any of its shares at a price above the market
value as defined in the TGA, from any person who holds more than three percent
of the class of the securities purchased if such person has held such shares
for less than two years, unless either the purchase is first approved by the
affirmative vote of a majority of the outstanding shares of each class of
voting stock issued or the corporation makes an offer of at least equal value
per share to all holders of shares of such class.
The TGA is not applicable to Emerald.
DISSENTERS' RIGHTS
Both the WBCA and the TBCA generally provides dissenters' rights for
mergers and share exchanges that would require shareholder approval, sales of
substantially all the assets (other than sales that are in the usual and
regular course of business and certain liquidations and court-order sales), and
certain amendments to the charter that materially and adversely affect rights
in respect of a dissenter's shares. Under TBCA, however, dissenters' rights
are not available as to any shares which are listed on an exchange registered
under Section 6 of the Exchange Act or are "National Market System" securities
as defined in rules promulgated pursuant to the Exchange Act (such as FTNC
Common Stock).
RIGHTS OF HOLDERS OF CAPITAL NOTES
On June 10, 1987, FTNC issued Capital Notes due in 1999. At maturity,
the Capital Notes will be exchanged for Capital Securities having a market
value equal to the principal amount of the notes. See "Description of FTNC
Capital Stock -- Subordinated Capital Notes due 1999."
SHAREHOLDER RIGHTS PLAN
For a discussion of the FTNC Shareholder Rights Plan, see "Description
of FTNC Capital Stock -- Shareholder Rights Plan." The Emerald Board has not
adopted a shareholder rights plan.
- 49 -
54
VALIDITY OF COMMON STOCK
A legal opinion to the effect that the shares of FTNC Common Stock and
associated Rights offered hereby, when issued in accordance with the Agreement,
will be validly issued, fully paid and nonassessable, has been rendered by
Clyde A. Billings, Jr., Vice President and Counsel, First Tennessee National
Corporation. Mr. Billings beneficially owns approximately 10,400 shares of
FTNC Common Stock.
Heiskell, Donelson, Bearman, Adams, Williams & Caldwell, a
Professional Corporation, has rendered an opinion, summarized above in the
section entitled "The Exchange -- Certain Federal Income Tax Consequences."
Attorneys in the firm beneficially own approximately 25,000 shares of FTNC
Common Stock.
EXPERTS
The consolidated financial statements of FTNC and its subsidiaries
incorporated in this Proxy Statement-Prospectus by reference from FTNC's Annual
Report on Form 10-K for the year ended December 31, 1993 have been audited by
Arthur Andersen & Co., independent public accountants, as stated in their
report dated January 18, 1994, which is incorporated herein by reference, and
have been so incorporated in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of Emerald for the years ended October 31,
1993, 1992 and 1991 included in this Proxy Statement-Prospectus have been
audited by Benson & McLaughlin, P.S., as set forth in their reports dated
December 14, 1993, December 16, 1992, and December 5, 1991, respectively,
included herein. These financial statements are included herein in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
With respect to the 1991 financial statements of Home Financial
Corporation, a company acquired by FTNC during 1992 in a transaction accounted
for as a pooling-of-interests, Arthur Andersen & Co. relied upon the report of
Baylor and Backus, independent accountants, whose report dated February 21,
1992, except with respect to the information discussed in Note 27, as to which
the date is October 21, 1992, was incorporated by reference in FTNC's Form 10-K
for 1993 and is incorporated herein by reference.
The consolidated financial statements of Maryland National Mortgage
Corporation and subsidiaries, appearing in First Tennessee National
Corporation's Current Report on Form 8-K, dated October 1, 1993, for the year
ended December 31, 1992, have been audited by Ernst & Young, independent
auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements
referred to above are incorporated herein in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
- 50 -
55
INDEX TO PRO FORMA FINANCIAL INFORMATION Page
------
Pro Forma Combined Condensed Statements of Condition as of June 30, 1994 for FTNC
and April 30, 1994 for Emerald . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PF - 2
Pro Forma Combined Condensed Statements of Condition as of December 31, 1993 for FTNC
and October 31, 1993 for Emerald . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PF - 3
Pro Forma Combined Condensed Statements of Income for the Six Months Ended
June 30, 1994 for FTNC and April 30, 1994 for Emerald . . . . . . . . . . . . . . . . . . . . . . PF - 4
Pro Forma Combined Condensed Statements of Income for the Year Ended
December 31, 1993 for FTNC and October 31, 1993 for Emerald . . . . . . . . . . . . . . . . . . . . PF - 5
INDEX TO EMERALD FINANCIAL INFORMATION
As of and for the Year Ended October 31, 1993
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheet as of October 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Statement of Operations for the Year Ended
October 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statement of Stockholders' Equity for the Year
Ended October 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statement of Cash Flows for the Year
Ended October 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
As of and for the Year Ended October 31, 1992
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13
Balance Sheet as of October 31, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-14
Statement of Income for the Year Ended October 31, 1992 . . . . . . . . . . . . . . . . . . . . . . . F-15
Statement of Stockholders' Equity for the Year Ended
October 31, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-16
Statement of Cash Flows for the Year Ended October 31, 1992 . . . . . . . . . . . . . . . . . . . . . F-17
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-18
As of and for the Year Ended October 31, 1991
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-24
Balance Sheet as of October 31, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25
Statement of Income and Retained Earnings for the Year Ended October 31, 1991 . . . . . . . . . . . . F-26
Statement of Cash Flows for the Year Ended October 31, 1991 . . . . . . . . . . . . . . . . . . . . . F-27
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-28
As of and for the Six Months Ended April 30, 1994 and 1993 (Unaudited)
Accountants' Compilation Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-34
Balance Sheet as of April 30, 1994 and 1993 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . F-35
Statement of Operations for the Six Months Ended April 30, 1994 and 1993 (Unaudited) . . . . . . . . . F-36
Statements of Stockholders' Equity for the Six Months Ended April 30, 1994 and 1993 (Unaudited). . . . F-37
Statement of Cash Flows for the Six Months Ended April 30, 1994 and 1993 (Unaudited) . . . . . . . . . F-38
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-40
- 51 -
56
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed statements of
condition and statements of income for the six months reflect the historical
condensed statements of condition and statements of income for the six months
ended June 30, 1994, of FTNC and the historical condensed statements of
condition and statements of income for the six months ended April 30, 1994, of
Emerald, giving effect to the Acquisition on a pooling-of-interests accounting
basis.
The following unaudited pro forma combined condensed statements of
condition and statements of income for the year ended, reflect the historical
consolidated condensed statements of condition and statements of income of FTNC
for the year ended December 31, 1993, adjusted for the completed acquisitions
of Cleveland Bank and Trust Company (CBT), Highland Capital Management Corp.
(HCMC), and SNMC Management Corporation (SNMC), which were accounted for as
poolings-of-interest, and accordingly, reflect the financial position and
results of operations of all companies on a combined basis, and the historical
statement of condition and statement of income of Emerald, as of October 31,
1993, giving effect to the Acquisition on a pooling-of-interests accounting
basis. Pro forma results presented for the six month period and for the year
are not necessarily indicative of the results which may be expected for any
interim period or for the year as a whole.
On August 9, 1994, FTNC acquired Planters Bank, Tunica, Mississippi
("Planters"), for approximately 334,000 shares of FTNC Common Stock. At June
30, 1994, Planters had approximately $63 million in assets and $5 million in
capital. The transaction is not included in the following pro forma combined
condensed statements of condition and income.
PF - 1
57
FIRST TENNESSEE NATIONAL CORPORATION
PRO FORMA COMBINED
STATEMENT OF CONDITION
AS OF
Emerald
FTNC Mortgage Co. Adjust- 2nd Quarter
(Thousands) June 30, 1994 April 30, 1994 ment (1) Pro Forma
- ----------- --------------- -------------- -------- --------------
ASSETS
Cash and cash equivalents $ 852,123 $ 313 $ $ 852,436
Investments in bank time deposits 5,978 5,978
Trading account securities inventory 227,447 227,447
Assets available for sale 1,721,327 5,849 1,727,176
Investment securities held to maturity 843,003 843,003
Net loans 5,729,756 5,729,756
Premises and equipment, net 140,179 354 140,533
Real estate acquired by foreclosure 29,468 29,468
Mortgage servicing rights 73,631 73,631
Other identifiable intangible assets 27,266 27,266
Goodwill 61,244 61,244
Customers' acceptances 4,972 4,972
Other assets 512,339 748 513,087
--------------- -------- ----- --------------
Total assets $ 10,228,733 $ 7,264 $ -- $ 10,235,997
=============== ======== ===== ==============
LIABILITIES
Deposits $ 7,357,218 $ $ $ 7,357,218
Federal funds purchased and securities
sold under agreements to repurchase 1,066,687 1,066,687
Other borrowings 513,514 5,711 519,225
Long term debt 91,765 135 91,900
Acceptances outstanding 4,972 4,972
Other liabilities 468,840 239 469,079
--------------- -------- ----- --------------
Total liabilities 9,502,996 6,085 -- 9,509,081
SHAREHOLDERS' EQUITY
Common stock 79,691 453 80,144
Surplus 88,798 80 (453) 88,425
Retained earnings 570,442 1,099 571,541
Net unrealized loss on marketable
equity securities (9,803) (9,803)
Deferred compensation on restricted stock
incentive plan (3,391) (3,391)
--------------- -------- ----- --------------
Total shareholders' equity 725,737 1,179 -- 726,916
--------------- -------- ----- --------------
Total liabilities and shareholders' equity $ 10,228,733 $ 7,264 $ -- $ 10,235,997
=============== ======== ===== ==============
(1) Reflects the conversion of 950 shares of Emerald Mortgage Co's common
stock outstanding at April 30, 1994, into 181,158 shares of FTNC's $2.50
par value common stock (using an exchange ratio of 190.6926 which is based
on an FTNC stock price of approximately $43.00 and assumes that the Final
Exchange Price equals the Base Exchange Price).
PF - 2
58
FIRST TENNESSEE NATIONAL CORPORATION
PRO FORMA COMBINED
STATEMENT OF CONDITION
AS OF
Emerald
FTNC (1) Mortgage Co. Adjust- Year End
(Thousands) December 31, 1993 October 31, 1993 ment (2) Pro Forma
- ----------- ----------------- ---------------- --------- --------------
ASSETS
Cash and cash equivalents $ 755,877 $ 3,558 $ $ 759,435
Investments in bank time deposits 7,637 7,637
Trading account securities inventory 178,663 178,663
Assets held for sale 1,152,721 17,587 1,170,308
Investment securities 2,186,047 2,186,047
Net loans 5,305,346 5,305,346
Premises and equipment, net 134,792 379 135,171
Real estate acquired by foreclosure 31,650 31,650
Mortgage servicing rights 82,625 82,625
Other identifiable intangible assets 28,905 28,905
Goodwill 62,565 62,565
Customers' acceptances 4,871 4,871
Other assets 369,320 928 370,248
-------------- ------------ ----- --------------
Total assets $ 10,301,019 $ 22,452 $ -- $ 10,323,471
============== ============ ===== ==============
LIABILITIES
Deposits $ 7,347,057 $ $ 7,347,057
Federal funds purchased and securities
sold under agreements to repurchase 1,010,473 1,010,473
Other borrowings 746,561 18,033 764,594
Long term debt 92,043 225 92,268
Acceptances outstanding 4,871 4,871
Other liabilities 412,105 3,010 415,115
-------------- ------------ ----- --------------
Total liabilities 9,613,110 21,268 -- 9,634,378
SHAREHOLDERS' EQUITY
Common stock 79,364 453 79,817
Surplus 85,413 80 (453) 85,040
Retained earnings 525,507 1,104 526,611
Deferred compensation on restricted stock
incentive plan (2,375) (2,375)
-------------- ------------ ----- --------------
Total shareholders' equity 687,909 1,184 -- 689,093
-------------- ------------ ----- --------------
Total liabilities and shareholders' equity $ 10,301,019 $ 22,452 $ -- $ 10,323,471
============== ============ ===== ==============
_________________
(1) FTNC amounts as of December 31, 1993 include the acquisitions of SNMC
Management Corporation, Cleveland Bank and Trust Company, and Highland
Capital Management Corp. which have closed during 1994 and were accounted
for as poolings of interests.
(2) Reflects the conversion of 950 shares of Emerald Mortgage Co's common stock
outstanding at April 30, 1994, into 181,158 shares of FTNC's $2.50 par
value common stock (using an exchange ratio of 190.6926 which is based on
an FTNC stock price of approximately $43.00 and assumes that the Final
Exchange Price equals the Base Exchange Price).
PF - 3
59
FIRST TENNESSEE NATIONAL CORPORATION
PRO FORMA COMBINED CONDENSED
STATEMENTS OF INCOME
SIX MONTHS ENDED
Emerald
FTNC Mortgage Co.
(Thousands) June 30, 1994 April 30, 1994 Pro Forma
- ----------- ---------------- --------------- -------------
Interest income:
Interest and fees on loans $ 247,950 $ 312 $ 248,262
Interest on investment securities 61,061 61,061
Interest on trading securities inventory 5,646 5,646
Interest on other earning assets 3,210 3,210
---------------- ---------------- -------------
Total interest income 317,867 312 318,179
---------------- ---------------- -------------
Interest expense:
Interest on deposits 93,943 93,943
Interest on short-term borrowings 28,139 430 28,569
Interest on long-term debt 4,523 4,523
---------------- ---------------- -------------
Total interest expense 126,605 430 127,035
---------------- ---------------- -------------
Net interest income 191,262 (118) 191,144
Provision for loan losses 8,415 8,415
---------------- ---------------- -------------
Net interest income after provision
for loan losses 182,847 (118) 182,729
---------------- ---------------- -------------
Noninterest income:
Bond division 46,197 46,197
Service charges on deposit accounts 30,327 30,327
Mortgage Banking 59,725 3,199 62,924
Bank card 14,114 14,114
Trust service 13,861 13,861
Securities gains 22,342 22,342
Other 22,080 10 22,090
---------------- ---------------- -------------
Total noninterest income 208,646 3,209 211,855
---------------- ---------------- -------------
Noninterest expense:
Employee compensation, incentives, and benefits 157,465 2,245 159,710
Operations services 16,232 16,232
Occupancy 14,198 547 14,745
Communications and courier 13,301 78 13,379
Equipment rentals, depreciation, and
maintenance 11,523 126 11,649
Deposit insurance premium 8,005 8,005
Amortization of intangible assets 11,794 11,794
Other 55,874 103 55,977
---------------- ---------------- -------------
Total noninterest expense 288,392 3,099 291,491
---------------- ---------------- -------------
Income before income taxes 103,101 (8) 103,093
Applicable income taxes 30,883 (3) 30,880
---------------- ---------------- -------------
Net income $ 72,218 $ (5) $ 72,213
Net income per common share 2.27 (5.68) 2.26
---------------- ---------------- -------------
Weighted average shares outstanding (1) 31,821 0.950 32,002
---------------- ---------------- -------------
(1) Pro forma weighted average shares outstanding have been calculated by
increasing FTNC's current weighted average shares by the FTNC equivalent
weighted average shares for Emerald Mortgage Co. The exchange ratio
used in the Emerald Mortgage Co. calculation was 190.6926, an estimate
based on an FTNC stock price of approximately $43.00 and which assumes
that the Final Exchange Price equals the Base Exchange Price.
PF - 4
60
FIRST TENNESSEE NATIONAL CORPORATION
PRO FORMA COMBINED CONDENSED
STATEMENTS OF INCOME
FOR THE YEAR ENDED
Emerald
FTNC (1) Mortgage Co.
December 31, 1993 October 31, 1993 Pro Forma
(Thousands) ----------------- ---------------- -----------
Interest income:
Interest and fees on loans $ 433,092 $ 904 $ 433,996
Interest on investment securities 175,283 175,283
Interest on trading securities inventory 9,304 9,304
Interest on other earning assets 3,803 3,803
------------ ---------- ---------
Total interest income 621,482 904 622,386
------------ ---------- ---------
Interest expense:
Interest on deposits 195,823 195,823
Interest on short-term borrowings 55,069 883 55,952
Interest on long-term debt 9,315 9,315
------------ ---------- ---------
Total interest expense 260,207 883 261,090
------------ ---------- ---------
Net interest income 361,275 21 361,296
Provision for loan losses 35,240 35,240
------------ ---------- ---------
Net interest income after provision for loan losses 326,035 21 326,056
------------ ---------- ---------
Noninterest income:
Bond division 91,525 91,525
Service charges on deposit accounts 57,253 57,253
Mortgage banking 85,640 8,987 94,627
Bank card 26,417 26,417
Trust service 26,532 26,532
Securities gains 770 770
Other 46,296 194 46,490
------------ ---------- ---------
Total noninterest income 334,433 9,181 343,614
------------ ---------- ---------
Noninterest expense:
Employee compensation, incentives, and benefits 265,094 7,570 272,664
Operations services 28,400 28,400
Occupancy 24,833 877 25,710
Communications and courier 21,544 152 21,696
Equipment rentals, depreciation, and
maintenance 20,103 251 20,354
Deposit insurance premium 15,909 15,909
Amortization of intangible assets 30,811 30,811
Other 83,571 458 84,029
------------ ---------- ---------
Total noninterest expense 490,265 9,308 499,573
------------ ---------- ---------
Income before income taxes 170,203 (106) 170,097
Applicable income taxes 64,627 (35) 64,592
------------ ---------- ---------
Net income $ 105,576 $ (71) $ 105,505
============ ========== =========
Net income per common share 3.33 (73.33) 3.30
============ ========== =========
Weighted average shares outstanding (2) 31,745 0.963 31,929
(1) FTNC amounts as of December 31, 1993 include the acquisitions of SNMC
Management Corporation, Cleveland Bank and Trust Company, and Highland
Capital Management Corp. which have closed during 1994 and have been
accounted for as poolings of interests.
(2) Pro forma weighted average shares outstanding have been calculated by
increasing FTNC's weighted average shares by the FTNC equivalent weighted
average shares for Emerald Mortgage Co. The exchange ratio used in the
Emerald Mortgage Co. calculation was 190.6926, an estimate based on an
FTNC stock price of approximately $43.00 and which assumes that the Final
Exchange Price equals the Base Exchange Price.
PF-5
61
INDEPENDENT AUDITORS' REPORT
Stockholders
Emerald Mortgage Company
Lynnwood, Washington
We have audited the accompanying balance sheet of Emerald Mortgage Company as
of October 31, 1993 and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards, Government Auditing Standards, issued by the Comptroller General of
the United States, the provisions of the Consolidated Audit Guide for Audits of
HUD Programs dated July 1993, and the provisions of the Compliance Reporting
Guide for use by Independent Public Accountants in Audits of Freddie Mac
Approved Seller/Servicers dated March 1993. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Emerald Mortgage Company as of
October 31, 1993 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Benson & McLaughlin P.S.
December 14, 1993
F-1
62
EMERALD MORTGAGE COMPANY
BALANCE SHEET
OCTOBER 31, 1993
ASSETS
CURRENT ASSETS:
Cash:
Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,580,517
Restricted-for note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 977,130 $ 3,557,647
-----------
Trade receivables (Note 3):
Mortgage contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,220,761
Loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,581
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261,931 16,743,273
-----------
Mortgage contracts held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 844,078
Employee advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,659
Miscellaneous receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,781
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,817
Refundable income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,160
-----------
21,363,415
PROPERTY AND EQUIPMENT, AT COST:
Office furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,971
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282,310
Automobiles (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273,819
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,093
Assets under capital lease (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,810
-----------
808,003
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (428,528) 379,475
-----------
OTHER ASSETS:
Excess mortgage servicing rights (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 592,169
Investments:
Common stock, at cost (no regularly
quoted market) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,300
Artwork . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,373 39,673
-----------
Cash surrender value of life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,739
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,783
-----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,452,254
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,033,229
Accounts payable - trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,321
Accrued liabilities:
Salaries and commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,642,545
Taxes accrued and withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,336
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,230
Profit-sharing contribution (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 2,917,111
-----------
Current maturities of long-term debt
(Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,610
Current maturities of obligations under
capital leases (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,071
-----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,084,342
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities
(Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,139
Obligations under capital leases, net of
current maturities (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,114
Lease payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,857
Deferred federal income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500 183,610
-----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 8 and 9)
STOCKHOLDERS' EQUITY:
Common stock, $.40 par value, 50,000
shares authorized, 950 shares issued . . . . . . . . . . . . . . . . . . . . . . . . . 380
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,350
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,103,572
-----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,184,302
-----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,452,254
===========
See accompanying notes to financial statements.
F-2
63
EMERALD MORTGAGE COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1993
INCOME:
Loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,622,123
Marketing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,051,881
Loan servicing fees (net of subservicing costs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 926,752
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 904,284
Correspondent fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416,540
Processing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,784
Appraisal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,204
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,727
-----------
10,480,295
OPERATING EXPENSES:
Office salaries and commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,909,444
Officers' salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,281,471
Interest expense-loan funding and
servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 883,204
Mortgage loan expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378,525
Amortization of excess mortgage
servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394,779
Office rent (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305,388
Payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272,096
Office expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,096
Telephone and utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,688
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,942
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,481
Equipment and auto lease expense
(Notes 7 and 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,176
Legal and accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,368
Profit-sharing contribution (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Travel and entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,204
Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,739
Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,842
Other professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,677
Business taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,782
Dues and subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,609
Training and education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,312
Auto allowance and expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,863
Quality control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,157
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,763 10,571,606
---------- -----------
LOSS FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (91,311)
OTHER INCOME (EXPENSE):
Income from limited partnership
investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,455
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,488)
Net gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,814 (14,129)
---------- -----------
LOSS BEFORE FEDERAL INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (105,440)
FEDERAL INCOME TAX BENEFIT (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,820
-----------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (70,620)
===========
See accompanying notes to financial statements.
F-3
64
EMERALD MORTGAGE COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1993
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- ---------- -------------
BALANCE,
OCTOBER 31,
1992...... 975 $390 $80,350 $1,214,182 $1,294,922
PURCHASE AND
RETIREMENT
OF 25
SHARES OF
COMMON
STOCK..... (25) (10) (39,990) (40,000)
NET LOSS.... (70,620) (70,620)
---- ---- ------- ---------- ----------
BALANCE,
OCTOBER 31,
1993...... 950 $380 $80,350 $1,103,572 $1,184,302
==== ==== ======= ========== ==========
See accompanying notes to financial statements.
F-4
65
EMERALD MORTGAGE COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1993
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,324,756
Cash paid to suppliers and employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,467,312)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,025,744)
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (276,755)
Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
-----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . 555,035
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (59,408)
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000
Distributions received from partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,555
Increase in cash surrender value of life insurance.. . . . . . . . . . . . . . . . . . . . . . . (61,739)
-----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (85,592)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,174
Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,661)
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,000)
-----------
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (57,487)
-----------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411,956
CASH AT BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,168,561
-----------
CASH AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,580,517
===========
RECONCILIATION OF NET LOSS NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (70,620)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,481
Amortization of excess mortgage servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . 394,779
Net gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,814)
Income from investment in partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,455)
Lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,520)
Changes in assets and liabilities:
Increase in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (977,130)
Decrease in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829,316
Increase in mortgage contracts held for sale . . . . . . . . . . . . . . . . . . . . . . . . . (844,078)
Increase in prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,872)
Increase in refundable income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (65,160)
Increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,876)
Increase in note payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836,353
Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (121,113)
Decrease in interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (113,052)
Increase in accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 892,211
Decrease in federal income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (249,915)
Increase in deferred federal income tax payable . . . . . . . . . . . . . . . . . . . . . . . . 3,500
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 555,035
===========
See accompanying notes to financial statements.
F-5
66
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993
NOTE 1: Business Purpose and Summary of Significant Accounting Policies
Business purpose:
Loan closing:
Emerald Mortgage Company was incorporated September 2, 1982,
principally to qualify as a FHA approved non-supervised
mortgagee for HUD-insured mortgages. The company also provides
services for conventional, VA, FHLMC and FNMA mortgage
financing. The company provides these services primarily in
western Washington.
Loan servicing:
During the year ended October 31, 1988 Emerald Mortgage Company
entered the loan servicing market to service loans closed
through the Federal Home Loan Mortgage Corporation (FHLMC). The
company entered the Federal National Mortgage Association (FNMA)
loan servicing market during the year ended October 31, 1992.
At year end October 31, 1993 the company was servicing 2,917
loans on behalf of the FHLMC and 402 loans on behalf of FNMA,
with an approximate portfolio value of $335,450,426 and
$48,198,930, respectively.
Summary of significant accounting policies:
Cash:
At October 31, 1993, $3,557,647 was deposited with a single bank
in two separate accounts.
Accounts receivable:
The company is on the direct write-off method for recognizing
uncollectible accounts. No allowance was considered necessary
at October 31, 1993. Collectibility of mortgage contracts is
subject to purchase of the contract by an investor. Emerald
Mortgage Company generally obtains a commitment to sell each
loan prior to its closing. In the event a contract is not sold,
or the company is required to repurchase it, the company would
retain the mortgage secured by the property involved. Mortgages
receivable are recorded at cost which approximates market value
at October 31, 1993.
Property, equipment and depreciation:
Property and equipment is stated at cost. Material expenditures
which significantly increase value or extend useful lives are
capitalized. Expenditures for maintenance and repairs are
charged to expense as incurred.
F-6
67
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1993
NOTE 1: Business Purpose and Summary of Significant Accounting Policies
(continued)
Summary of significant accounting policies (continued):
Property, equipment and depreciation (continued):
Depreciation expense is computed over the estimated useful lives
of the assets using straight-line and accelerated methods.
Income recognition:
The company recognizes loan placement fee income when the loan
is closed.
Income tax:
Effective November 1, 1992, the company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income
Taxes. The cumulative effect of the change in accounting
principle was immaterial to the accompanying financial
statements and has been included in determining net income for
the fiscal year ended October 31, 1993. Financial statements
for the prior year have not been restated.
SFAS 109 requires a provision for income taxes for the tax
effects of transactions reported in the financial statements and
consists of taxes currently payable (refundable) plus deferred
taxes related primarily to differences between the depreciation
methods used for property and equipment for tax and financial
reporting purposes. The deferred tax liability represents the
future tax return consequences of this difference.
NOTE 2: Excess Mortgage Servicing Rights
During the year ended October 31, 1990, the company began recognizing
income from excess mortgage servicing rights connected with their
FHLMC loan servicing portfolio. Mortgage servicing rights represent
the company's opportunity to maintain mortgage records for a
servicing fee.
F-7
68
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1993
NOTE 2: Excess Mortgage Servicing Rights (continued)
The industry establishes a "normal" servicing fee (presently .25%),
any amount to be earned in addition to the normal fee is considered
"excess" and may be capitalized. Excess mortgage servicing rights
capitalized in any given year are computed over the estimated lives
of the loans by multiplying the anticipated principal balances with
the excess servicing rate and applying an appropriate present value
factor to the resulting income stream. As the servicing fees are
collected the amount which represents previously capitalized excess
mortgage servicing reduces the basis of the asset. There were no
additional excess mortgage servicing rights capitalized during the
year. The remaining balance at October 31, 1993 is $592,169 which is
net of $653,269 in accumulated amortization.
NOTE 3: Notes Payable to Banks
The company has a line of credit with First Interstate Bank of
Washington of $15,000,000 at October 31, 1993. Interest is computed
at the bank's prime rate (6% at October 31, 1993) plus 1/4% and is
payable monthly. The balance outstanding at October 31, 1993 is
$13,237,990. The company also has a line of credit with Seattle
First National Bank of $7,000,000 at October 31, 1993. Interest is
computed at the bank's prime rate (6% at October 31, 1993) plus 1/2%
and is payable monthly. The balance outstanding at October 31, 1993
is $4,795,239.
Both lines of credit are secured by trade receivables and are
personally guaranteed by the company's stockholders. The proceeds of
the loans are used to fund individual mortgage transactions closed
through the company. Typically an individual mortgage transaction is
sold to an outside investor and the line of credit loan repaid in
less than ten days.
F-8
69
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1993
NOTE 4: Long-term Debt
Long-term debt at October 31, 1993 consisted of the following:
Note payable to a bank, collateralized by an automobile, payable $482 per month
including interest at 10.25% due January 3, 1994 . . . . . . . . . . . . . . . . . . $ 668
Note payable to a bank, collateralized by an automobile, payable $1,034 per month
including interest at 10.75% due April 30, 1998 . . . . . . . . . . . . . . . . . . 43,777
Note payable to a bank, collateralized by an automobile, payable $1,104 per month
including interest at 10.75% due April 30, 1998 . . . . . . . . . . . . . . . . . . 47,121
Note payable to a bank, collateralized by an automobile, payable $853 per month
plus interest at 9.5% due May 1999 . . . . . . . . . . . . . . . . . . . . . . . . . 57,183
--------
148,749
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,610
--------
$121,139
========
Principal maturities of long-term debt for the fiscal years
subsequent to October 31, 1993 are as follows:
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,610
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,828
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,928
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,264
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,146
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,973
--------
$148,749
========
F-9
70
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1993
NOTE 5: Obligations under Capital Leases
Equipment is being held under a number of noncancelable capital
leases with terms of thirty-six to sixty months. These assets are
stated on the balance sheet at their capitalized cost of $130,810.
Accumulated depreciation of $74,828 has been recognized to date.
Annual maturities of capital lease obligations for the fiscal years
subsequent to October 31, 1993 are as follows:
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,573
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,818
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,364
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,367
-------
Total lease payments . . . . . . . . . . . . . . . . . . . 87,122
Less amount representing interest . . . . . . . . . . . 10,937
-------
Present value of future lease payments . . . . . . . . . . 76,185
Current obligations under capital leases . . . . . . . . . 31,071
-------
Long-term obligations under capital leases . . . . . . . . $45,114
=======
NOTE 6: Profit-sharing Plan
The company has a non-contributory, trusteed, qualified
profit-sharing plan for all qualified employees. The plan provides
for discretionary contributions by the company up to the maximum
amount permitted by the Internal Revenue Code, such amount to be
determined annually by the Board of Directors. The company has
determined a $100,000 contribution to the plan for the year ended
October 31, 1993.
F-10
71
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1993
NOTE 7: Related Party Transactions
Leases:
The company leases office equipment from an entity related through
common ownership. A description and a schedule of future
obligations for these leases is provided in Note 8.
Asset sales:
The company sold various office equipment with a book value of
$3,086 to an entity related though common ownership for $11,000
resulting in a gain of $7,914.
NOTE 8: Operating Lease Commitments
Facilities:
Operations for main and branch offices are conducted in leased
facilities under terms of agreements expiring March 1994 and June
1995, respectively. The branch lease agreement provides for
increased payments over the life of the lease. For financial
statement purposes, these payments have been amortized on a
straight-line basis as required by generally accepted accounting
principles. Total lease expense is $305,388 for the year ended
October 31, 1993. The branch office lease agreement contains an
option to extend the lease for a five year period.
Automobile:
The company leases an automobile under terms of an agreement
expiring February 1997. Total automobile lease expense is $12,982
for the year ended October 31, 1993.
Future obligations under the lease agreements for the fiscal years
subsequent to October 31, 1993 are as follows:
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . $237,846
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 94,704
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 12,984
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 4,328
--------
$349,862
========
F-11
72
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1993
NOTE 8: Operating Lease Commitments (continued)
Office equipment:
The company leases office equipment from a related entity under
noncancelable operating leases expiring April 1995 and December
1995. Total lease expense of $99,710 for the year ended October
31, 1993 was paid to the related entity.
Future obligations under the lease agreements for the fiscal years
subsequent to October 31, 1993 are as follows:
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,780
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 76,715
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 6,270
--------
$161,765
========
NOTE 9: Stock Options
The majority stockholders have granted options to two minority
stockholders to purchase a majority of equity interest in the company
at a price set from a value formula in the stock option agreement.
During the year ended October 31, 1993 the minority stockholders
indicated their intent to exercise options purchasing 42.7% of the
corporate stock from the majority stockholders. The stockholders are
currently negotiating the final terms of this agreement.
NOTE 10: Provision for Income Tax
The provision for income tax is comprised of the following:
Current tax benefit resulting from carryback of net
operating loss . . . . . . . . . . . . . . . . . . . . . $33,320
Deferred income tax benefit . . . . . . . . . . . . . . . 1,500
-------
$34,820
=======
Deferred taxes of $3,500 results from timing differences related to
accelerated depreciation for tax purposes.
F-12
73
INDEPENDENT AUDITORS' REPORT
Stockholders
Emerald Mortgage Company
Lynnwood, Washington
We have audited the accompanying balance sheet of Emerald Mortgage Company as
of October 31, 1992 and the related statements of income, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards, Government Auditing Standards, issued by the Comptroller General of
the United States, the provisions of the Consolidated Audit Guide for Audits of
HUD Programs dated October 1991, and the provisions of the Audit Guide for Use
by Independent Public Accountants in Audits of Freddie Mac Approved
Seller/Servicers dated June 1991. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Emerald Mortgage Company as of
October 31, 1992 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Benson & McLaughlin, P.S.
December 16, 1992
F-13
74
EMERALD MORTGAGE COMPANY
BALANCE SHEET
OCTOBER 31, 1992
ASSETS
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,168,561
Trade receivables (Note 3):
Mortgage contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,196,876
Loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332,528
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,648 17,630,052
-----------
Employee advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,268
Miscellaneous receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,709
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,945
-----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,889,535
PROPERTY AND EQUIPMENT, AT COST:
Office furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,543
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268,614
Automobiles (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,266
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,093
Assets under capital lease (Note 5) . . . . . . . . . . . . . . . . . . . . . . . 98,035
-----------
756,551
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (362,817) 393,734
-----------
OTHER ASSETS:
Excess mortgage servicing rights (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 986,948
Investments:
Common stock, at cost (no regularly
quoted market) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,300
Limited partnership interest, at
underlying equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,100
Artwork . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,373 56,773
-----------
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,907
-----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,340,897
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,196,876
Accounts payable - trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,434
Accrued liabilities:
Salaries and commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,715,490
Taxes accrued and withheld . . . . . . . . . . . . . . . . . . . . . . . . . . 46,180
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,282
Profit-sharing contribution (Note 6) . . . . . . . . . . . . . . . . . . . . . 100,000
Federal income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,915 2,387,867
---------
Current maturities of long-term debt (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . 30,630
Current maturities of obligations under capital leases
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,150
-----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,830,957
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities
(Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,104
Obligations under capital leases, net of
current maturities (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . 43,537
Lease payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,377 215,018
---------
COMMITMENTS AND CONTINGENCIES (Notes 5, 8 and 9)
STOCKHOLDERS' EQUITY:
Common stock, $.40 par value, 50,000 shares
authorized, 975 shares issued . . . . . . . . . . . . . . . . . . . . . . . . . 390
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,350
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,214,182
----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,294,922
-----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,340,897
===========
See accompanying notes to financial statements.
F-14
75
EMERALD MORTGAGE COMPANY
STATEMENT OF INCOME
FOR THE YEAR ENDED OCTOBER 31, 1992
INCOME:
Loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,766,394
Marketing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,742,770
Loan servicing fees (net of subservicing costs) . . . . . . . . . . . . . . . . . . . . . . . . 960,604
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 877,674
Sale of loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,335
Correspondent fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,105
Processing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227,019
Appraisal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,705
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,739
-----------
10,336,345
OPERATING EXPENSES:
Office salaries and commissions . . . . . . . . . . . . . . . . . . . . . . . . . $3,465,175
Officers' salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,924,699
Interest expense-loan funding and servicing . . . . . . . . . . . . . . . . . . . 909,465
Office rent (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299,273
Payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316,260
Office expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228,402
Telephone and utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,124
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,670
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,783
Equipment and auto lease expense (Notes 7 and 8) . . . . . . . . . . . . . . . . 119,504
Mortgage loan expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228,619
Legal and accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,828
Profit-sharing contribution (Note 6) . . . . . . . . . . . . . . . . . . . . . . 100,000
Travel and entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,326
Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,831
Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,377
Other professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,405
Business taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,297
Dues and subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,970
Training and education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,642
Auto allowance and expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,007
Quality control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,034
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,837 9,282,528
---------- -----------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,053,817
OTHER INCOME (EXPENSE):
Income from limited partnership investment . . . . . . . . . . . . . . . . . . . 3,178
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,717
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,581)
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,967) (24,653)
---------- -----------
INCOME BEFORE FEDERAL INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,029,164
FEDERAL INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355,000
-----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 674,164
===========
See accompanying notes to financial statements.
F-15
76
EMERALD MORTGAGE COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1992
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- ------------
BALANCE,
OCTOBER 31,
1991...... 1,000 $400 $65,350 $ 575,774 $ 641,524
PURCHASE AND
RETIREMENT
OF 25
SHARES OF
COMMON
STOCK (25) (10) (35,756) (35,766)
CONTRIBUTION
BY
STOCKHOLDER 15,000 15,000
NET INCOME.. 674,164 674,164
---- ---- ------- ---------- ----------
BALANCE,
OCTOBER 31,
1992..... 975 $390 $80,350 $1,214,182 $1,294,922
==== ==== ======= ========== ==========
See accompanying notes to financial statements.
F-16
77
EMERALD MORTGAGE COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1992
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,497,281
Cash paid to suppliers and employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,040,085)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (761,758)
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (207,912)
Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,717
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3,000)
-----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,489,243
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (144,693)
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,781
Distributions received from partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,140
Purchase of artwork . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,500)
-----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (131,272)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,692
Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39,987)
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35,766)
-----------
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,061)
-----------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,353,910
CASH AT BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 814,651
-----------
CASH AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,168,561
===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 674,164
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,783
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,967
Income from investment in partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,178)
Excess mortgage servicing rights (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (462,005)
Lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,695)
Changes in assets and liabilities:
Increase in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,835,650)
Increase in prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,264)
Increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (216)
Increase in note payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,458,591
Increase in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,688
Increase in accrued profit-sharing contributions . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Increase in interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,288
Increase in accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,151,682
Increase in federal income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,588
Decrease in deferred federal income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . (1,500)
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,489,243
===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
On April 12, 1992, a stockholder made a capital contribution of an automobile with a value of $15,000.
See accompanying notes to financial statements.
F-17
78
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1992
NOTE 1: Business Purpose and Summary of Significant Accounting Policies
Business Purpose:
Loan closing:
Emerald Mortgage Company was incorporated September 2, 1982,
principally to qualify as a FHA approved nonsupervised mortgagee
for HUD-insured mortgages. The company also provides services
for conventional, VA, FHLMC and FNMA mortgage financing. The
company provides these services primarily in western Washington.
Loan servicing:
During the year ended October 31, 1988 Emerald Mortgage Company
entered the loan servicing market to service loans closed
through the Federal Home Loan Mortgage Corporation (FHLMC). The
company entered the Federal National Mortgage Association (FNMA)
loan servicing market during the year ended October 31, 1992.
At year end October 31, 1992 the company was servicing 2,350
loans on behalf of the FHLMC and 12 loans on behalf of FNMA,
with an approximate portfolio value of $277,275,000 and
$1,368,000, respectively.
Summary of significant accounting policies:
Cash:
At October 31, 1992, $2,168,561 was deposited with a single bank
in three separate accounts.
Accounts receivable:
The company is on the direct write-off method for recognizing
uncollectible accounts. No allowance was considered necessary
at October 31, 1992. Collectibility of mortgage contracts is
subject to purchase of the contract by an investor. Emerald
Mortgage Company obtains a commitment to sell each loan prior to
its closing. In the event a contract is not sold, or the
company is required to repurchase it, the company would retain
the mortgage secured by the property involved. Mortgages
receivable are recorded at cost which approximates market value
at October 31, 1992.
Property, equipment and depreciation:
Property and equipment is stated at cost. Material expenditures
which significantly increase value or extend useful lives are
capitalized. Expenditures for maintenance and repairs are
charged to expense as incurred.
F-18
79
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1992
NOTE 1: Business Purpose and Summary of Significant Accounting Policies
(continued)
Property, equipment and depreciation (continued):
Depreciation expense is computed over the estimated useful lives of
the assets using straight-line and accelerated methods.
Income recognition:
The company recognizes loan placement fee income when the loan
is closed.
Income tax:
The company uses the deferred credit method of accounting for
income tax. Tax on amounts which affect financial and taxable
income in different periods are reported as deferred income tax.
There were no items which significantly affect financial and
taxable income at October 31, 1992. Accordingly there is no
provision for deferred income tax.
NOTE 2: Excess Mortgage Servicing Rights
During the year ended October 31, 1990, the company began recognizing
income from excess mortgage servicing rights connected with their
FHLMC loan servicing portfolio. For the year ended October 31, 1992
excess servicing rights related to FNMA loans have also been
recognized (see Note 1). Mortgage servicing rights represent the
company's opportunity to maintain mortgage records for a servicing
fee. The industry establishes a "normal" servicing fee (presently
.25%), any amount to be earned in addition to the normal fee is
considered "excess" and may be capitalized.
Excess servicing is computed over the estimated lives of the loans by
multiplying the anticipated principal balances with the excess
servicing rate and applying an appropriate present value factor to
the resulting income stream. As the servicing fees are collected the
amount which represents previously capitalized excess mortgage
servicing reduces the basis of the asset. The amount capitalized at
October 31, 1992 is $986,948 which is net of $258,490 in
amortization.
F-19
80
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1992
NOTE 3: Note Payable to Bank
The company has a line of credit with a bank of $17,500,000 at
October 31, 1992 which will reduce to $15,000,000 on November 6,
1992. The line of credit is secured by trade receivables and is
personally guaranteed by the company's majority stockholders. The
proceeds of the loan are used to fund individual mortgage
transactions closed through the company. Typically an individual
mortgage transaction is sold to an outside investor and the line of
credit loan repaid in less than ten days. Interest is computed at
the bank's prime rate (6% at October 31, 1992) plus 1/4% and is
payable monthly. The balance outstanding at October 31, 1992 is
$17,196,876.
NOTE 4: Long-term Debt
Long-term debt at October 31, 1992 consisted of the following:
Note payable to a bank, collateralized by an
automobile, payable $482 per month
including interest at 10.25% due January 3,
1994 . . . . . . . . . . . . . . . . . . . . . $ 6,406
Note payable to a bank, collateralized by an
automobile, payable $1,034 per month
including interest at 10.75% due April 30,
1998 . . . . . . . . . . . . . . . . . . . . . 51,051
Note payable to a bank, collateralized by an
automobile, payable $1,104 per month
including interest at 10.75% due April 30,
1998 . . . . . . . . . . . . . . . . . . . . . 54,852
Note payable to a bank, collateralized by an
automobile, payable $853 per month plus
interest at 9.5% due May 1999 . . . . . . . . 67,425
--------
179,734
Less current maturities . . . . . . . . . . . . 30,630
--------
$149,104
========
F-20
81
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1992
NOTE 4: Long-term Debt (continued):
Principal maturities of long-term debt for the fiscal years
subsequent to October 31, 1992 are as follows:
1993 . . . . . . . . . . . . . . . . . . . . $ 30,630
1994 . . . . . . . . . . . . . . . . . . . . 27,965
1995 . . . . . . . . . . . . . . . . . . . . 28,828
1996 . . . . . . . . . . . . . . . . . . . . 30,928
1997 . . . . . . . . . . . . . . . . . . . . 33,264
Thereafter . . . . . . . . . . . . . . . . . 28,119
--------
$179,734
========
NOTE 5: Obligations under Capital Leases
Equipment is being held under a number of noncancelable capital
leases with terms of thirty-six to sixty months. These assets are
stated on the balance sheet at their capitalized cost of $98,035.
Accumulated depreciation of $57,982 has been recognized to date.
Annual maturities of capital lease obligations for the fiscal years
subsequent to October 31, 1992 are as follows:
1993 . . . . . . . . . . . . . . . . . . . . $27,491
1994 . . . . . . . . . . . . . . . . . . . . 25,987
1995 . . . . . . . . . . . . . . . . . . . . 23,751
1996 . . . . . . . . . . . . . . . . . . . . 896
-------
Total lease payments . . . . . . . . . . . . 78,125
Less amount representing interest . . . . 15,438
-------
Present value of future lease payments . . . 62,687
Current obligations under capital leases . . 19,150
-------
Long-term obligations under capital leases . $43,537
=======
NOTE 6: Profit-sharing Plan
The company has a non-contributory, trusteed, qualified
profit-sharing plan for all qualified employees. The plan provides
for discretionary contributions by the company up to the maximum
amount permitted by the Internal Revenue Code, such amount to be
determined annually by the Board of Directors. The company has
determined a $100,000 contribution to the plan for the year ended
October 31, 1992.
F-21
82
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1992
NOTE 7: Related Party Transactions
Leases:
The company leases office equipment from an entity related through
common ownership. A description and a schedule of future
obligations for these leases is provided in Note 8.
NOTE 8: Operating Lease Commitments
Facilities:
Operations for main and branch offices are conducted in leased
facilities under terms of agreements expiring February, 1993 and
June, 1995, respectively. The branch lease agreement provides for
increased payments over the life of the lease. For financial
statement purposes, these payments have been amortized on a
straight-line basis as required by generally accepted accounting
principles. Total lease expense is $299,273 for the year ended
October 31, 1992. The branch office lease agreement contains an
option to extend the lease for a five year period.
Automobile:
The company leases an automobile under terms of an agreement
expiring February, 1997. Total automobile lease expense is $2,164
for the year ended October 31, 1992.
Future obligations under the lease agreements for the fiscal years
subsequent to October 31, 1992 are as follows:
1993 . . . . . . . . . . . . . . . . . . . $192,632
1994 . . . . . . . . . . . . . . . . . . . 143,736
1995 . . . . . . . . . . . . . . . . . . . 94,704
1996 . . . . . . . . . . . . . . . . . . . 12,984
1997 . . . . . . . . . . . . . . . . . . . 4,328
--------
$448,384
========
F-22
83
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1992
NOTE 8: Operating Lease Commitments (continued)
Office equipment:
The company leases office equipment from a related entity under
noncancelable operating leases expiring April, 1994 and December,
1995. Total lease expense of $94,786 for the year ended October
31, 1992 was paid to the related entity.
Future obligations under the lease agreements for the fiscal years
subsequent to October 31, 1992 are as follows:
1993 . . . . . . . . . . . . . . . . . . . $ 78,780
1994 . . . . . . . . . . . . . . . . . . . 78,780
1995 . . . . . . . . . . . . . . . . . . . 76,715
1996 . . . . . . . . . . . . . . . . . . . 6,270
--------
$240,545
========
NOTE 9: Stock Options
The majority stockholders have granted options to two minority
stockholders to purchase a substantial portion of their equity
interest in the company at a price set from a value formula in the
stock option agreement. During the year ended October 31, 1992 the
minority stockholders exercised options purchasing 4.9% of the
corporate stock from the majority stockholders. The final options
may be exercised in October, 1993.
F-23
84
INDEPENDENT AUDITOR'S REPORT
Stockholders
Emerald Mortgage Company
Lynnwood, Washington
We have audited the accompanying balance sheet of Emerald Mortgage Company as
of October 31, 1991 and the related statements of income and retained earnings,
cash flows, and the computation of adjusted net worth for the year then ended.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards, Government Auditing Standards, issued by the Comptroller General of
the United States, the provisions of the Audit Guide for Use by Independent
Public Accountants in Audits of HUD-Approved Nonsupervised Mortgagees, Loan
Correspondents and Co-insuring Mortgagees and the Audit Guide for Use by
Independent Public Accountants in Audits of Freddie Mac Approved
Sellers/Servicers. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Emerald Mortgage Company as of
October 31, 1991 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Benson & McLaughlin, P.S.
December 5, 1991
F-24
85
EMERALD MORTGAGE COMPANY
BALANCE SHEET
OCTOBER 31, 1991
ASSETS
CURRENT ASSETS (Note 3):
Cash:
Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 814,651
Restricted - for note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336,504 $1,151,155
----------
Receivables:
Trade:
Mortgage contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,742,847
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,954
Employee advances (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,050
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,528 5,808,379
----------
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,681
----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,032,215
PROPERTY AND EQUIPMENT, AT COST (Note 3):
Office furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,759
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,168
Automobiles (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,961
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,093
Assets under capital lease (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,035
----------
623,016
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (299,444) 323,572
----------
OTHER ASSETS (Note 3):
Excess mortgage servicing rights (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 524,943
Investments:
Common stock, at cost (no regularly
quoted market) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,300
Limited partnership interest, at
underlying equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,062
Artwork . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,873 55,235
----------
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,691
----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,949,656
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,074,789
Accounts payable - trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,746
Accrued liabilities:
Salaries and commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $576,365
Taxes accrued and withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,188
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,994
Profit-sharing contribution (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Federal income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,327
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,435 855,309
--------
Current maturities of long-term debt (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,343
Current maturities of obligations under capital leases
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,188
----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,107,375
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities
(Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,332
Obligations under capital leases, net of
current maturities (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,853
Lease payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,072
Deferred federal income tax (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 200,757
--------
COMMITMENTS AND CONTINGENCIES (Notes 5, 9 and 10)
STOCKHOLDERS' EQUITY:
Common stock, $.40 par value, 50,000 shares
authorized, 1,000 shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,350
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575,774
--------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 641,524
----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,949,656
==========
See accompanying notes to financial statements.
F-25
86
EMERALD MORTGAGE COMPANY
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED OCTOBER 31, 1991
INCOME:
Loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,751,056
Marketing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,182,694
Loan servicing fees (net of subservicing costs) . . . . . . . . . . . . . . . . . . . . . . . . . . 566,697
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461,537
Processing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,110
Correspondent fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,797
Appraisal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,415
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,320
----------
5,349,626
OPERATING EXPENSES:
Office salaries and commissions . . . . . . . . . . . . . . . . . . . . . . . $1,887,148
Officers' salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,319,584
Interest expense-loan funding . . . . . . . . . . . . . . . . . . . . . . . . 412,372
Office rent (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268,132
Payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233,539
Office expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,462
Telephone and utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,443
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,664
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,546
Equipment expense (Notes 8 and 9) . . . . . . . . . . . . . . . . . . . . . . 65,888
Mortgage loan expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,811
Legal and accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,981
Profit-sharing contribution (Note 6) . . . . . . . . . . . . . . . . . . . . . 40,000
Travel and entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,382
Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . 31,712
Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,633
Other professional services . . . . . . . . . . . . . . . . . . . . . . . . . 26,243
Business taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . 19,838
Dues and subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,225
Training and education . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,709
Auto allowance and expense . . . . . . . . . . . . . . . . . . . . . . . . . . 7,155
Quality control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,159
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,059 4,923,685
---------- ----------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425,941
OTHER INCOME (EXPENSE):
Litigation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (93,338)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,856)
Income from limited partnership
investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,116
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 (111,972)
---------- ----------
INCOME BEFORE FEDERAL INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313,969
FEDERAL INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,000
----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,969
RETAINED EARNINGS, OCTOBER 31, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368,805
----------
RETAINED EARNINGS, OCTOBER 31, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 575,774
==========
See accompanying notes to financial statements.
F-26
87
EMERALD MORTGAGE COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1991
INCREASE IN UNRESTRICTED CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,891,803
Cash paid to suppliers and employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,862,787)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (366,497)
Income taxes refunded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,727
Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
-----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . 669,352
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (224,144)
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,000
Distributions received from partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,195
-----------
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . (173,949)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,974
Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,595)
-----------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . 114,379
-----------
NET INCREASE IN UNRESTRICTED CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609,782
UNRESTRICTED CASH AT BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,869
-----------
UNRESTRICTED CASH AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 814,651
===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 206,969
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,546
Income from investment in partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,116)
Excess mortgage servicing rights (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . (426,346)
Lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,382
Changes in assets and liabilities:
Increase in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,483,524)
Decrease in refundable federal income tax . . . . . . . . . . . . . . . . . . . . . . . . . 9,400
Increase in prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,842)
Increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (912)
Increase in note payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,452,047
Increase in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,063
Increase in accrued profit-sharing contributions . . . . . . . . . . . . . . . . . . . . . . 31,000
Increase in interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,731
Increase in accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572,627
Increase in federal income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,327
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 669,352
===========
See accompanying notes to financial statements.
F-27
88
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1991
NOTE 1: Business Purpose and Summary of Significant Accounting
Policies
Business Purpose:
Loan closing:
Emerald Mortgage Company was incorporated September
2, 1982, principally to qualify as a FHA approved
nonsupervised mortgagee for HUD-insured mortgages.
The company also provides services for conventional,
VA and FHLMC mortgage financing. The company
provides these services primarily in western
Washington.
Loan servicing:
During the year ended October 31, 1988 Emerald
Mortgage Company entered the loan servicing market to
service loans closed through the Federal Home Loan
Mortgage Corporation (FHLMC). At year end October
31, 1991 the company was servicing 943 loans on
behalf of the FHLMC with an approximate portfolio
value of $111,725,000.
Summary of significant accounting policies:
Unrestricted cash:
At October 31, 1991 $814,651 was deposited with a single
bank.
Accounts receivable:
The company is on the direct write-off method for
recognizing uncollectible accounts. No allowance was
considered necessary at October 31, 1991.
Collectibility of mortgage contracts is subject to
purchase of the contract by an investor. In the
event a contract is not sold, the company would
retain the mortgage secured by the property involved.
Mortgages receivable are recorded at cost which
approximates market value at October 31, 1991.
Property, equipment and depreciation:
Property and equipment is stated at cost. Material
expenditures which significantly increase value or
extend useful lives are capitalized. Expenditures
for maintenance and repairs are charged to expense as
incurred.
Depreciation expense is computed over the estimated
useful lives of the assets using straight-line and
accelerated methods.
F-28
89
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1991
NOTE 1: Business Purpose and Summary of Significant Accounting
Policies (continued)
Income recognition:
The company recognizes loan placement fee income when the
loan is closed.
Income tax:
The company uses the deferred credit method of
accounting for income tax. Tax on amounts which
affect financial and taxable income in different
periods are reported as deferred income tax. The
principal item that results in deferred income tax is
depreciation.
NOTE 2: Excess Mortgage Servicing Rights
During the year ended October 31, 1990, the company began
recognizing income from excess mortgage servicing rights
connected with their FHLMC loan servicing portfolio (see note
1). Mortgage servicing rights represent the company's
opportunity to maintain mortgage records for a servicing fee.
The industry establishes a "normal" servicing fee, any amount to
be earned in addition to the normal fee is considered "excess"
and may be capitalized. As the servicing fees are collected the
amount which represents previously capitalized excess mortgage
servicing reduces the basis of the asset. The amount
capitalized at October 31, 1991 is $524,943 which is net of
$63,918 in amortization.
NOTE 3: Note Payable to Bank
The company has a line of credit with a bank which totals
$10,000,000, is secured by all the assets of the company and is
personally guaranteed by the company's stockholders. The
proceeds of the loan are used to fund individual mortgage
transactions closed through the company. Typically an
individual mortgage transaction is sold to an outside investor
and the line of credit loan repaid in less than ten days.
Interest is computed at the bank's prime rate (8% at October 31,
1991) plus 1/4% and is payable monthly. The balance outstanding
at October 31, 1991 is $6,074,789.
F-29
90
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1991
NOTE 4: Long-term Debt
Long-term debt at October 31, 1991 consisted of the following:
Note payable to a bank, collateralized by an
automobile, payable $482 per month
including interest at 10.25% due January 3,
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,290
Note payable to a bank, collateralized by an
automobile, payable $1,034 per month
including interest at 10.75% due April 30,
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,588
Note payable to a bank, collateralized by an
automobile, payable $1,104 per month
including interest at 10.75% due April 30,
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,797
--------
130,675
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . 18,343
--------
$112,332
========
Principal maturities of long-term debt for the years subsequent to October 31, 1991 are as follows:
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,343
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,388
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,746
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,586
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,686
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,926
--------
$130,675
========
NOTE 5: Obligations under Capital Leases
Equipment is being held under a number of noncancelable capital leases
with terms of thirty-six to sixty months. These assets are stated on
the balance sheet at their capitalized cost of $98,035. Accumulated
depreciation of $38,506 has been recognized to date.
F-30
91
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1991
NOTE 5: Obligations under Capital Leases (continued)
Annual maturities of capital lease obligations for the years
subsequent to October 31, 1991 are as follows:
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,607
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,729
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,987
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,751
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 895
--------
Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . 106,969
Less amount representing interest . . . . . . . . . . . . . . . . . . . 26,928
--------
Present value of future lease payments . . . . . . . . . . . . . . . . . 80,041
Current obligations under capital leases . . . . . . . . . . . . . . . . 17,188
--------
Long-term obligations under capital leases . . . . . . . . . . . . . . . $ 62,853
========
NOTE 6: Profit-sharing Plan
The company has a non-contributory, trusteed, qualified
profit-sharing plan for all qualified employees. The plan
provides for discretionary contributions by the company up to
the maximum amount permitted by the Internal Revenue Code,
such amount to be determined annually by the Board of
Directors. The company made a $40,000 contribution to the plan
for the year ended October 31, 1991.
NOTE 7: Federal Income Tax
Deferred taxes of $1,500 results from timing differences
related to accelerated depreciation for tax purposes.
The company has a capital loss carryover of $846 to be applied
against future capital gain income. The carryover expires
October 31, 1992.
NOTE 8: Related Party Transactions
Stockholder advance receivable:
During the year ended October 31, 1991 the company
advanced $5,000 to a stockholder. The advance is non
interest bearing and there are no formal repayment
terms.
F-31
92
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1991
NOTE 8: Related Party Transactions (continued)
Leases:
The company leases office equipment from an entity
related through common ownership. A description and
a schedule of future obligations for these leases is
provided in Note 9.
NOTE 9: Operating Lease Commitments
Facilities:
Operations for main and branch offices are conducted
in leased facilities under terms of agreements
expiring February, 1993 and June, 1995, respectively.
The lease agreements provide for increased payments
over the life of the lease. For financial statement
purposes, these payments have been amortized on a
straight-line basis as required by generally accepted
accounting principles. Total lease expense is $268,132
for the year ended October 31, 1991. The branch
office lease agreement contains an option to extend
the lease for a five year period.
Future obligations under the lease agreements for the years
subsequent to October 31, 1991 are as follows:
1992 . . . . . . . . . . . . . . . . . . $251,647
1993 . . . . . . . . . . . . . . . . . . 173,680
1994 . . . . . . . . . . . . . . . . . . 130,752
1995 . . . . . . . . . . . . . . . . . . 81,720
--------
$637,799
========
Office equipment:
The company leases office equipment from a related entity under
noncancelable operating leases expiring August 1994 and April 1995.
Total lease expense of $46,315 for the year ended October 31, 1991 was
paid to the related entity.
Future obligations under the lease agreements for the years subsequent
to October 31, 1991 are as follows:
1992 . . . . . . . . . . . . . . . . . . . . . . . $ 56,340
1993 . . . . . . . . . . . . . . . . . . . . . . . 56,340
1994 . . . . . . . . . . . . . . . . . . . . . . . 47,540
1995 . . . . . . . . . . . . . . . . . . . . . . . 1,475
--------
$161,695
========
F-32
93
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
OCTOBER 31, 1991
NOTE 10: Stock Options
The majority stockholders have granted options to two minority
stockholders to purchase a substantial portion of their equity
interest in the company. The minority stockholders notified
the majority stockholders on October 2, 1991 of their intent
to purchase an additional 4.9% of the outstanding corporate
stock on or before January 31, 1992 at a price set from a
value formula in the stock option agreement. Additional
options may be exercised in 1993.
F-33
94
BENSON & McLAUGHLIN
Certified Public Accountants, P.S.
July 28, 1994
Stockholders
Emerald Mortgage Company
Lynnwood, Washington
We have compiled the accompanying balance sheet of Emerald Mortgage Company as
of April 30, 1994 and 1993 and the related statements of operations,
stockholders' equity and cash flows for the six months then ended in accordance
with Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
Benson & McLaughlin, P.S.
F-34
95
EMERALD MORTGAGE COMPANY
BALANCE SHEET
APRIL 30, 1994 AND 1993
ASSETS
1994 1993
---------- -----------
CURRENT ASSETS:
Cash........................................ $ 313,189 $ 970,039
Trade receivables (Note 3).................. 5,848,187 13,466,719
Prepaid expenses and miscellaneous
receivables............................. 145,615 121,777
---------- -----------
Total current assets.............. 6,306,991 14,558,535
---------- -----------
PROPERTY AND EQUIPMENT, at cost:
Office furniture............................ 110,971 109,543
Office equipment............................ 286,165 267,406
Automobiles (Note 4)........................ 273,819 270,266
Leasehold improvements...................... 10,093 10,093
Assets under capital lease (Note 5)......... 130,810 131,120
---------- -----------
811,858 788,428
Less accumulated depreciation........... (457,554) (397,711)
---------- -----------
354,304 390,717
---------- -----------
OTHER ASSETS:
Excess mortgage servicing rights
(Note 2)................................ 485,717 789,558
Investments................................. 39,673 39,673
Cash surrender value of life
insurance............................... 61,739
Deposits.................................... 15,083 14,866
---------- -----------
602,212 844,097
---------- -----------
TOTAL................... $7,263,507 $15,793,349
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks (Note 3)............. $5,710,884 $13,095,492
Accounts payable and accrued liabilities.... 165,848 658,675
Current maturities of long-term debt
(Note 4)................................ 28,108 29,555
Current maturities of obligations under
capital leases (Note 5)................. 30,359 23,163
---------- -----------
Total current liabilities......... 5,935,199 13,806,885
---------- -----------
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities
(Note 4)................................ 106,725 135,121
Obligations under capital leases, net of
current maturities (Note 5)............. 29,578 59,162
Lease payable............................... 9,597 18,117
Deferred federal income tax................. 3,500
---------- ----------
149,400 212,400
---------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)
STOCKHOLDERS' EQUITY:
Common stock $.40 par value, 50,000 shares
authorized, 950 shares issued........... 380 380
Additional paid-in capital.................. 80,350 80,350
Retained earnings........................... 1,098,178 1,693,334
---------- -----------
Total stockholders' equity........ 1,178,908 1,774,064
---------- -----------
TOTAL...................... $7,263,507 $15,793,349
========== ===========
See accountants' compilation report and notes to financial statements.
F-35
96
EMERALD MORTGAGE COMPANY
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1994 AND 1993
1994 1993
---------- ----------
INCOME:
Loan origination and broker fees......... $2,113,254 $2,449,189
Loan servicing fees, net of subservicing
costs................................ 422,314 423,280
Interest income.......................... 311,764 418,435
Net gain on sale of loans................ 768,666 1,233,065
Other.................................... 10,338 18,636
---------- ----------
3,626,336 4,542,605
---------- ----------
OPERATING EXPENSES:
Personnel................................ 2,244,814 2,363,010
Interest expense - loan funding and
servicing............................ 429,721 420,933
Mortgage loan expense.................... 66,866 63,813
Amortization of excess mortgage servicing
rights............................... 106,452 197,390
Occupancy (Note 8)....................... 157,724 148,965
Office operations........................ 389,213 330,121
Telephone and utilities.................. 77,513 71,468
Depreciation............................. 29,027 38,897
Equipment and maintenance expense........ 97,208 82,541
Other.................................... 35,892 38,325
---------- ----------
3,634,430 3,755,463
---------- ----------
INCOME (LOSS) BEFORE FEDERAL INCOME TAX..... (8,094) 787,142
FEDERAL INCOME TAX BENEFIT (EXPENSE)........ 2,700 (268,000)
---------- ----------
NET INCOME (LOSS)........................... $ (5,394) $ 519,142
========== ==========
See accountants' compilation report and
notes to financial statements.
F-36
97
EMERALD MORTGAGE COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED APRIL 30, 1994 AND 1993
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- ---------- -------------
BALANCE,
OCTOBER 31,
1992....... 975 $390 $80,350 $1,214,182 $1,294,922
PURCHASE AND
RETIREMENT
OF 25
SHARES OF
COMMON
STOCK...... (25) (10) (39,990) (40,000)
NET INCOME... 519,142 519,142
--- ---- ------- ---------- ----------
BALANCE,
APRIL 30,
1993....... 950 $380 $80,350 $1,693,334 $1,774,064
=== ==== ======= ========== ==========
BALANCE,
OCTOBER 31,
1993....... 950 $380 $80,350 $1,103,572 $1,184,302
NET LOSS..... (5,394) (5,394)
--- ---- ------- ---------- ----------
BALANCE,
APRIL 30,
1994....... 950 $380 $80,350 $1,098,178 $1,178,908
=== ==== ======= ========== ==========
See accountants' compilation report and
accompanying notes to financial statements.
F-37
98
EMERALD MORTGAGE COMPANY
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1994 AND 1993
INCREASE (DECREASE) IN CASH
1994 1993
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers........... $ 4,091,725 $ 4,618,531
Cash paid to suppliers and employees... (5,811,023) (4,965,817)
Interest paid.......................... (544,763) (557,410)
Income taxes refunded (paid)........... 30,753 (255,000)
----------- -----------
Net cash used in operating
activities.................. (2,233,308) (1,159,696)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..... (3,856) (38,966)
Proceeds from sale of assets........... 11,000
Distributions received from partnership 24,555
----------- -----------
Net cash used in investing
activities.................... (3,856) (3,411)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt............................... 30,505
Principal payments on long-term debt... (30,164) (25,920)
Repurchase of common stock............. (40,000)
----------- -----------
Net cash used in financing
activities.................. (30,164) (35,415)
----------- -----------
NET DECREASE IN CASH...................... (2,267,328) (1,198,522)
CASH AT BEGINNING OF PERIOD............... 2,580,517 2,168,561
----------- -----------
CASH AT END OF PERIOD..................... $ 313,189 $ 970,039
=========== ===========
(continued)
See accountants' compilation report and
notes to financial statements.
F-38
99
EMERALD MORTGAGE COMPANY
STATEMENT OF CASH FLOWS (continued)
FOR THE SIX MONTHS ENDED APRIL 30, 1994 AND 1993
1994 1993
------------ -----------
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH USED IN OPERATING
ACTIVITIES:
Net income (loss)....................... $ (5,394) $ 519,142
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation..................... 29,027 38,897
Amortization of excess mortgage
servicing...................... 106,452 197,390
Net gain on sale of assets....... (7,914)
Income from investment in
partnership.................. (7,455)
Lease expense.................... (4,260) (4,260)
Changes in assets and liabilities:
Decrease in restricted cash......... 977,130
Decrease in receivables............. 11,810,604 4,177,310
Increase in prepaid expenses........ (26,691) (44,832)
Decrease in refundable income tax... 28,053
(Increase) decrease in deposits..... 700 (959)
Decrease in note payable to bank.... (12,322,345) (4,101,384)
Decrease in accounts payable and
accrued liabilities.............. (2,826,584) (1,938,631)
Increase in federal income tax
payable.......................... 13,000
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES...... $ (2,233,308) $(1,159,696)
============ ===========
(concluded)
See accountants' compilation report and
notes to financial statements.
F-39
100
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1994 AND 1993
NOTE 1: Business Purpose and Summary of Significant Accounting Policies
Business purpose:
Loan closing:
Emerald Mortgage Company was incorporated September 2,
1982, principally to qualify as a FHA approved
non-supervised mortgagee for HUD-insured mortgages. The
company also provides services for conventional, VA, FHLMC
and FNMA mortgage financing. The company provides these
services primarily in western Washington.
Loan servicing:
During the year ended October 31, 1988 Emerald Mortgage
Company entered the loan servicing market to service loans
closed through the Federal Home Loan Mortgage Corporation
(FHLMC). The company entered the Federal National
Mortgage Association (FNMA) loan servicing market during
the year ended October 31, 1992. At April 30, 1994 the
company was servicing 3,175 loans on behalf of the FHLMC
and FNMA, with an approximate portfolio value of
$361,766,435.
Summary of significant accounting policies:
The accompanying unaudited financial statements present
the balance sheet of Emerald Mortgage Company as of April 30,
1994 and 1993 and the related statements of operations,
stockholders' equity and cash flows for the six months then
ended in accordance with generally accepted accounting
principles. The results for the interim periods are not
necessarily indicative of the results to be expected for the
full fiscal year due to the seasonal nature of the company's
business and the effects of interest rate fluctuations. In the
opinion of management, all adjustments, which are of a normal
and recurring nature, necessary for a fair statement of the
results of operations of these interim periods have been
included. It is management's belief that year-end accruals for
discretionary officers' bonuses and contributions to the
profit-sharing plan are not attributable to the six month
periods ended April 30, 1994 and 1993. Accordingly, no
adjustments to accrue officers' bonuses or profit-sharing
contributions have been made at April 30, 1994 and 1993. These
unaudited interim financial statements should be read in
conjunction with the audited financial statements and related
notes as of October 31, 1993 and for the year then ended.
F-40
101
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
APRIL 30, 1994 AND 1993
NOTE 1: Business Purpose and Summary of Significant Accounting Policies
(continued)
Summary of significant accounting policies (continued):
Cash:
At April 30, 1994, $313,189 was deposited with a single
bank in one account.
Accounts receivable:
The company is on the direct write-off method for
recognizing uncollectible accounts. No allowance was
considered necessary at April 30, 1994 and 1993.
Collectibility of mortgage contracts is subject to
purchase of the contract by an investor. Emerald Mortgage
Company generally obtains a commitment to sell each loan
prior to its closing. In the event a contract is not
sold, or the company is required to repurchase it, the
company would retain the mortgage secured by the property
involved. Mortgages receivable are recorded at cost which
approximates market value at April 30, 1994 and 1993.
Property, equipment and depreciation:
Property and equipment is stated at cost. Material
expenditures which significantly increase value or extend
useful lives are capitalized. Expenditures for
maintenance and repairs are charged to expense as
incurred.
Depreciation expense is computed over the estimated
useful lives of the assets using straight-line and
accelerated methods.
Investments:
Investments include common stock (no regularly quoted
market price) and artwork recorded at cost.
Income recognition:
The company recognizes loan placement fee income when the
loan is closed.
F-41
102
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
APRIL 30, 1994 AND 1993
NOTE 1: Business Purpose and Summary of Significant Accounting Policies
(continued)
Summary of significant accounting policies (continued):
Income tax:
Effective November 1, 1992, the company adopted
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. The cumulative effect of the
change in accounting principle was immaterial to the
accompanying financial statements and has been included in
determining net income for the six months ended April 30,
1993. Financial statements for the prior year have not
been restated.
SFAS 109 requires a provision for income taxes for the
tax effects of transactions reported in the financial
statements and consists of taxes currently payable
(refundable) plus deferred taxes related primarily to
differences between the depreciation methods used for
property and equipment for tax and financial reporting
purposes. The deferred tax liability represents the
future tax return consequences of this difference.
NOTE 2: Excess Mortgage Servicing Rights
During the year ended October 31, 1990, the company began
recognizing income from excess mortgage servicing rights
connected with their FHLMC loan servicing portfolio. Mortgage
servicing rights represent the company's opportunity to maintain
mortgage records for a servicing fee.
The industry establishes a "normal" servicing fee (presently
.25%), any amount to be earned in addition to the normal fee is
considered "excess" and may be capitalized. Excess mortgage
servicing rights capitalized in any given year are computed over
the estimated lives of the loans by multiplying the anticipated
principal balances with the excess servicing rate and applying
an appropriate present value factor to the resulting income
stream. As the servicing fees are collected the amount which
represents previously capitalized excess mortgage servicing
reduces the basis of the asset. There were no additional excess
mortgage servicing rights capitalized during the six months
ended April 30, 1994 and 1993. The remaining balance at April
30, 1994 and 1993 was $485,717 and $789,558, respectively which
is net of accumulated amortization of $759,721 and $455,880,
respectively.
F-42
103
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
APRIL 30, 1994 AND 1993
NOTE 3: Notes Payable to Banks
The company has a line of credit with First Interstate Bank of
Washington of $15,000,000 at April 30, 1994, expiring February
25, 1995. Interest is computed at the bank's prime rate (6.75%
at April 30, 1994) plus 1/4% and is payable monthly. The
balance outstanding at April 30, 1994 was $4,973,507. The
company also has a line of credit with Seattle First National
Bank of $7,000,000 at April 30, 1994, expiring May 1, 1995.
Interest is computed at the bank's prime rate (6.75% at April
30, 1994) plus 1/2% and is payable monthly. The balance
outstanding at April 30, 1994 was $737,377.
Both lines of credit are secured by trade receivables and are
personally guaranteed by the company's stockholders. The
proceeds of the loans are used to fund individual mortgage
transactions closed through the company. Typically an
individual mortgage transaction is sold to an outside investor
and the line of credit loan repaid in less than ten days.
NOTE 4: Long-term Debt
Long-term debt at April 30, 1994 and 1993 consisted of the
following:
1994 1993
-------- --------
Note payable to a bank, collateralized by an automobile, payable
$482 per month including interest at 10.25% due
January 3, 1994 . . . . . . . . . . . . . . . . . . . . . . . $ 3,695
Note payable to a bank, collateralized by an automobile, payable
$1,034 per month including interest at 10.75% due
April 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . $ 39,837 47,511
Note payable to a bank, collateralized by an automobile, payable
$1,104 per month including interest at 10.75% due
April 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . 42,935 51,090
Note payable to a bank, collateralized by an automobile, payable
$853 per month plus interest at 9.5% due May 1999 . . . . . 52,061 62,380
-------- --------
134,833 164,676
Less current maturities . . . . . . . . . . . . . . . . . . . . 28,108 29,555
-------- --------
$106,725 $135,121
======== ========
F-43
104
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
APRIL 30, 1994 AND 1993
NOTE 4: Long-term Debt (continued)
Principal maturities of long-term debt for the twelve month
periods subsequent to April 30, 1994 are as follows:
1995.......................................... $ 28,108
1996.......................................... 29,878
1997.......................................... 32,096
1998.......................................... 27,705
1999.......................................... 17,046
--------
$134,833
========
NOTE 5: Obligations under Capital Leases
Equipment is being held under a number of noncancelable capital
leases with terms of thirty-six to sixty months. These assets
are stated on the balance sheet at their capitalized cost of
$130,810. Accumulated depreciation of $85,779 has been
recognized to April 30, 1994.
Minimum future lease payments under capital leases for the
twelve month periods subsequent to April 30, 1994 are as
follows:
1995........................................... $37,196
1996........................................... 23,091
1997........................................... 7,549
-------
Total lease payments........................... 67,836
Less amount representing interest.......... 7,899
-------
Present value of future lease payments......... 59,937
Current obligations under capital leases....... 30,359
-------
Long-term obligations under capital leases..... $29,578
=======
NOTE 6: Profit-sharing Plan
The company has a non-contributory, trusteed, qualified
profit-sharing plan for all qualified employees. The plan
provides for discretionary contributions by the company up to
the maximum amount permitted by the Internal Revenue Code, such
amount to be determined annually by the board of directors. The
company has not accrued a profit sharing contribution for the
six months ended April 30, 1994 and 1993.
F-44
105
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
APRIL 30, 1994 AND 1993
NOTE 7: Related Party Transactions
Leases:
The company leases office equipment from an entity
related through common ownership. A description and a schedule
of future obligations for these leases is provided in Note 8.
Asset sales:
On April 1, 1993, the company sold various office
equipment with a book value of $3,086 to an entity related
through common ownership for $11,000 resulting in a gain of
$7,914.
NOTE 8: Operating Lease Commitments
Facilities:
Operations for main and branch offices are conducted in
leased facilities under terms of agreements expiring February
1997 and June 1995, respectively. The main office lease
agreement stipulates monthly payments of $14,065 ($9,737 base
rent and $4,328 common area maintenance) and may be cancelled
by the company with 120 days written notice. The branch lease
agreement provides for increased payments over the life of the
lease. For financial statement purposes, these payments have
been amortized on a straight-line basis as required by
generally accepted accounting principles. Total lease expense
is $157,352 and $148,612 for the six months ended April 30,
1994 and 1993, respectively. The branch office lease agreement
contains an option to extend the lease for a five year period.
Automobile:
The company leases an automobile under terms of an
agreement expiring February 1997. Total automobile lease
expense is $6,492 for the six months ended April 30, 1994
and 1993, respectively.
Future obligations under the noncancelable lease
agreements for the twelve month periods subsequent to April 30,
1994 are as follows:
1995........................................ $143,736
1996........................................ 29,328
1997........................................ 10,820
--------
$183,884
========
F-45
106
EMERALD MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS (continued)
APRIL 30, 1994 AND 1993
NOTE 8: Operating Lease Commitments (continued)
Office equipment:
The company leases office equipment from a related
entity under noncancelable operating leases expiring April 1995
and December 1995. Total lease expense of $39,390 for the six
months ended April 30, 1994 and 1993, respectively was paid to
the related entity.
Future obligations under the lease agreements for the
twelve month periods subsequent to April 30, 1994 are as
follows:
1995........................................ $ 77,748
1996........................................ 44,627
--------
$122,375
========
NOTE 9: Subsequent Event
Subsequent to April 30, 1994, the stockholders signed a letter
of intent to enter into a stock exchange agreement with First
Tennessee National Corporation of Memphis, Tennessee.
F-46
107
Appendix "A"
================================================================================
STOCK EXCHANGE AGREEMENT
DATED AS OF JUNE 15, 1994
BY AND AMONG
DONALD P. BALKE, STEPHEN M. FRISON,
CRAIG VAN SKAIK, MICHAEL VAN SKAIK
AND PAMELA DELONG,
("SELLERS")
EMERALD MORTGAGE COMPANY,
("MORTGAGE BANK")
FIRST TENNESSEE BANK NATIONAL ASSOCIATION,
("FTB")
AND
FIRST TENNESSEE NATIONAL CORPORATION,
("FTNC")
================================================================================
108
TABLE OF CONTENTS Page
----
ARTICLE I
CERTAIN DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
THE ACQUISITION
2.1 The Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Exchange of Emerald Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.3 No Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.4 Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.5 Base Exchange Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.6 Closing; Payment of Closing Exchange Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.7 Closing Adjustment Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.8 Calculation of Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.9 Supplemental Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.10 Additional Adjustments to Final Exchange Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF SELLERS AND MORTGAGE BANK
3.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.3 Subsidiaries of the Mortgage Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.4 Authority; No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.6 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.7 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.8 Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.9 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.10 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.11 Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.13 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.14 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.15 Ownership of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.16 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.18 Mortgage Banking Licenses and Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.19 Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.20 Title to Certain Mortgage Loans; Mortgage Servicing Agreements . . . . . . . . . . . . . . . . . . . . . . . . 22
3.21 No Recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.22 Mortgage Servicing Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.23 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.24 Investor Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.25 Custodial Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.26 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.27 Inquiries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.28 Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.29 Physical Damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.30 Application of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.31 Pool Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
i
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3.32 Loan Disbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.33 Payment of Taxes, Insurance Premiums, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.34 Tax Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.35 Payoff Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.36 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.37 Cooperation Re Blue Sky Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE IV
REPRESENTATION AND WARRANTIES OF FTNC AND FTB
4.1 Organization; FTNC Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.2 Authority; No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.4 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.5 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.6 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.7 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.8 Statements Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.10 Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.11 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.12 Inquiries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.13 Blue Sky Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.14 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE V
PRE-CLOSING COVENANTS
5.1 Reasonable Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.2 Conduct Prior to Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.3 Access to Properties and Records; Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.4 Filings and Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.5 Press Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.6 Transfer and Recording Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.7 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.8 Consistency in Methodologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.9 Filing of Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.10 No Action to Prohibit Pooling-of-Interests Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . 32
5.11 Disposition of Certain Assets and Termination of Certain Agreements . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE VI
POST-CLOSING COVENANTS
6.1 Standard of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.2 Mitigation of Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.3 Expenses and Reimbursement of Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.4 Tax Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.5 Sellers' Representative Continuing Access to Books/Records . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.6 Payment of Warehouse Lines of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ii
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ARTICLE VII
CERTAIN TAX MATTERS
7.1 Returns; Indemnification; Liability for Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.2 Cooperation; Refunds and Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.3 Conduct of Audits and Other Procedural Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.4 Resolution of Disagreements Among Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE VIII
CONDITIONS
8.1 Conditions to Each Party's Obligations under this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.2 Additional Conditions to Sellers' and Mortgage Bank's Obligations under this Agreement . . . . . . . . . . . . 36
8.3 Additional Conditions to FTNC's and FTB's Obligations under this Agreement . . . . . . . . . . . . . . . . . . 37
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE X
TERMINATION, WAIVER AND AMENDMENT
10.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
10.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
10.3 Amendment, Extension and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE XI
MISCELLANEOUS
11.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
11.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
11.3 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
11.4 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.5 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.7 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.9 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
List of Exhibits:
Exhibit "A" -- Base Exchange Price (Not included herein)
Exhibit "B" -- Disclosure Schedule (Not included herein)
Exhibit "C" -- Escrow Agreement
Exhibit "D" -- Intentionally Omitted
Exhibit "E" -- Paying Agent Agreement
Exhibit "F" -- Buyer's Indemnification Exhibit (Not included herein)
Exhibit "G" -- Sellers' Agreement
Exhibit "H" -- FTNC Capitalization (Not included herein)
iii
111
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT (the "Agreement"), dated the 15th day of
June, 1994, is made by and among DONALD P. BALKE, STEPHEN M. FRISON, CRAIG VAN
SKAIK, MICHAEL VAN SKAIK and PAMELA DELONG ("Sellers"), EMERALD MORTGAGE
COMPANY ("Mortgage Bank"), FIRST TENNESSEE NATIONAL CORPORATION ("FTNC") and
FIRST TENNESSEE BANK NATIONAL ASSOCIATION ("FTB").
W I T N E S S E T H:
WHEREAS, Sellers collectively own all of the issued and outstanding
capital stock of Mortgage Bank which is a Washington corporation engaged in the
business of originating, purchasing, selling and servicing residential mortgage
loans; and
WHEREAS, FTNC is a Tennessee corporation, and the parent of FTB, a
national banking association; and
WHEREAS, the parties desire that FTB acquire all of the capital stock
of Mortgage Bank in exchange for the issuance to Sellers of FTNC Common Stock
(defined in Article I below) in the manner and subject to the terms and
conditions hereinafter set forth (the "Acquisition");
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, agreements, representations and warranties herein contained, the
parties hereto do hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
For purposes of this Agreement, except as otherwise expressly
provided, the terms defined in this Article I have the meanings assigned to
them in this Article I and include the plural as well as the singular.
ACQUISITION-- The acquisition of Mortgage Bank by FTB.
ADVANCES -- Amounts that, as of the Closing Date, have been advanced
by Mortgage Bank in connection with servicing the Mortgage Loans (including,
without limitation, principal, interest, taxes and insurance premiums) and
which are required or permitted to be paid by Mortgage Bank (or Western on
Mortgage Bank's behalf) as the servicer of the Mortgage Loans pursuant to
applicable Investor requirements and the terms of the applicable Mortgage
Servicing Agreements.
AFFILIATE-- With respect to any Person, any Person directly or
indirectly controlling, controlled by, or under common control with such other
Person. For purposes of this definition, "control" (including with correlative
meaning, the terms "controlled by" and "under common control with") as used
with respect to any Person, means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
such Person, whether through ownership of voting securities, by contract or
otherwise.
AFFILIATED GROUP -- Any affiliated group within the meaning of Code
Section 1504 or any similar group defined under a similar provision of state,
local or foreign law, including any consolidated, unitary or combined group of
companies.
AGENCY -- FHA, VA, FNMA, FHLMC or a State Agency, as applicable.
112
AGREEMENT-- This Stock Exchange Agreement and all exhibits and
schedules hereto as the same may from time to time be amended or supplemented
by one or more instruments executed by the parties hereto.
AUDITED FINANCIAL STATEMENTS-- As defined in Section 3.7.
BALANCE SHEET -- The unaudited balance sheet of Mortgage Bank as of
March 31, 1994.
BASE EXCHANGE PRICE-- The amount defined in Section 2.5.
BUYDOWN-- With respect to a VA Loan, the waiver by FTB or Mortgage
Bank of a portion of the indebtedness of a Mortgage Loan, including, without
limitation, a reduction of the principal, a credit to escrow or unapplied funds
accounts or the forgiveness of accrued interest, which causes the VA to pay off
the remaining amount of indebtedness owed and acquire the Collateral.
CLOSING-- The closing with respect to the Acquisition.
CLOSING ADJUSTMENT DOCUMENTS-- As defined in Section 2.7(a).
CLOSING DATE BALANCE SHEET -- The unaudited balance sheet of Mortgage
Bank as of the Closing Date Balance Sheet Date.
CLOSING DATE BALANCE SHEET DATE-- The date as of which the Closing
Date Balance Sheet is prepared which shall be the last day of the month
immediately preceding the Closing Date.
CLOSING DATE-- The date and time of Closing as defined in Section
2.6(b).
CLOSING MEASUREMENT PRICE - The average of the closing prices of the
shares of FTNC Common Stock as quoted on the National Association of Securities
Dealers Automatic Quotation System ("NASDAQ") National Market System during the
twenty (20) trading days ending on the fifth (5th) trading day prior to the
Closing Date.
CLOSING PORTFOLIO -- The unpaid principal balance of the Mortgage
Servicing Portfolio, provided, that the Closing Portfolio shall not include
Excluded Loans; provided further, that for purposes of Section 2.8(a)(i) and
2.8(b)(i), as to Mortgage Loans originated or acquired by Mortgage Bank after
March 31, 1994 and before the Closing Date, the Mortgage Loans included in the
Closing Portfolio shall consist of Mortgage Loans and/or Servicing Rights with
characteristics materially the same as Mortgage Loans or Servicing Rights
originated or acquired prior to March 31, 1994 and shall not include bulk
purchases after March 31, 1994.
CLOSING EXCHANGE PRICE -- As defined in Section 2.6(a).
CODE-- The Internal Revenue Code of 1986, as amended.
COLLATERAL -- The property securing a Mortgage Loan.
CONFORMING LOAN -- A Mortgage Loan which is or is eligible to be an
FHA Loan or a VA Loan or which is a loan eligible to be sold to FNMA or FHLMC.
CONTRACTS-- As defined in Section 3.11.
CUSTODIAL ACCOUNTS -- As defined in Section 3.25.
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DEBT-- Shall mean, for purposes of Section 5.2(k), with respect to
Mortgage Bank, (a) all indebtedness for borrowed money or for the deferred
purchase price of property, (b) the face amount of all letters of credit and,
without duplication, all outstanding drafts drawn thereunder and any unpaid
reimbursement obligation or indemnity with respect thereto, (c) all liabilities
secured by any Encumbrance on any property owned by Mortgage Bank, to the
extent attributable to Mortgage Bank's interest in such property, even though
Mortgage Bank has not assumed or become liable for the payment thereof, (d) all
indebtedness arising under acceptance facilities and (e) any other monetary
obligation (including without limitation guarantees, accommodations and
endorsements or obligations of like nature); but excluding trade and other
accounts and accrued expenses payable in the ordinary course of business and
accrued reserves with respect to expenses arising in the ordinary course of
business.
DISAGREEMENT-- As defined in Section 2.7(b).
DISCLOSURE SCHEDULE -- The disclosure schedule marked as Exhibit "B"
hereto which is divided into sections to correspond to the subsections of
Articles III and IV.
EMERALD COMMON STOCK -- Shares of issued and outstanding common stock
of Mortgage Bank as set forth in Section 3.2.
EMERALD TAX RETURNS-- As defined in Section 7.1(a).
EMPLOYMENT CONTRACTS -- Those certain employment and noncompetition
agreements entered into by Mortgage Bank and the Sellers.
ENCUMBRANCE-- Any lien, pledge, security interest, claim, charge,
easement, restriction or encumbrance of any kind or nature whatsoever.
ENVIRONMENTAL LAWS -- As defined in Section 3.26.
ERISA -- The Employee Retirement Income Security Act of 1974, as
amended.
ESCROW AGREEMENT -- That certain escrow agreement which shall be
substantially in the form of Exhibit "C" attached hereto and incorporated
herein by this reference.
ESCROW SHARES -- Shares of FTNC Common Stock subject to the Escrow
Agreement.
ESCROW BANK -- The corporate trust division of FTB.
ESTIMATION DATE -- The last day of the second (2nd) month preceding
the Closing Date.
EXCLUDED LOANS -- Mortgage Loans which are (i) ninety (90) days or
more delinquent, (ii) in bankruptcy, in Foreclosure, in forbearance or in
litigation relating to delinquency, (iii) real estate owned loans ("REO"), (iv)
Pipeline Loans, or (v) subject to subservicing agreements with a third party
owner of the Servicing Rights with respect to such Loans.
FED FUNDS RATE-- The federal funds rate, as reported in The Wall
Street Journal, Midwest Edition at the relevant time or, if not reported
therein, then as reported in another definitive source.
FEDERAL TAXES -- As defined in Section 9.1(d).
FHA -- Federal Housing Administration or any successor thereto.
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FHA LOANS -- Mortgage Loans which are insured by FHA.
FHLMC -- Federal Home Loan Mortgage Corporation or any successor
thereto.
FINAL EXCHANGE PRICE -- As defined in Section 2.8(b).
FINANCIAL STATEMENTS -- As defined in Section 3.7.
FNMA-- Federal National Mortgage Association or any successor thereto.
FORECLOSURE-- The process by which title to Collateral is acquired in
a foreclosure sale or pursuant to any other comparable procedure allowed under
applicable law.
FTB -- First Tennessee Bank National Association, a national banking
association and, where the context requires, its successors and assigns
(including its Subsidiaries and second tier Subsidiaries) as owner of the
Emerald Common Stock or the assets and liabilities of Mortgage Bank.
FTNC- First Tennessee National Corporation, a Tennessee corporation.
FTNC COMMON STOCK - Shares of voting common stock of FTNC, par value
$2.50 per share.
GAAP-- Generally accepted accounting principles as used in the United
States of America as in effect at the time any applicable financial statements
were prepared.
HUD -- United States Department of Housing and Urban Development or
any successor thereto.
INDEPENDENT ACCOUNTING FIRM -- Any "Big Six" accounting firm or its
successor which does not serve as the independent auditor of a Seller, FTB,
FTNC or Mortgage Bank or any Affiliate of any of these entities.
INJUNCTION -- As defined in Section 8.1(b).
INSURANCE PROCEEDS -- Insurance or guarantee proceeds paid or payable
with respect to a Mortgage Loan from an Insurer to Mortgage Bank (or Western on
Mortgage Bank's behalf) or to any Investor.
INSURER-- A Person who insures or guarantees all or any portion of the
risk of loss upon borrower default on any of the Mortgage Loans, including,
without limitation, the FHA, the VA and any private mortgage insurer, and
providers of life, hazard, flood, disability, title or other insurance with
respect to any of the Mortgage Loans or the Collateral.
INTERIM FINANCIAL STATEMENTS-- As defined in Section 3.7.
INVESTOR -- Any Person (including any Agency) who (i) owns Mortgage
Loans or Previously Disposed Loans or Servicing Rights to Mortgage Loans or
Previously Disposed Loans, serviced or master serviced by Mortgage Bank (and
subserviced by Western on Mortgage Bank's behalf), pursuant to a Mortgage
Servicing Agreement or (ii) is a party (other than Mortgage Bank) to an
Investor Commitment.
INVESTOR COMMITMENT -- The commitment of a Person to purchase a
Mortgage Loan owned by Mortgage Bank.
IRS -- Internal Revenue Service.
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LICENSES -- As defined in Section 3.18.
LOAN DOCUMENTS -- All files, records and documents necessary to
originate and/or service the Mortgage Loans in accordance with Investor
requirements or Regulations.
LOSS-- Any liability, loss, cost, damage, penalty, fine, interest,
obligation or expense of any kind whatsoever (including, without limitation,
reasonable attorneys', accountants', consultants' or experts' fees and
disbursements) actually incurred.
MORTGAGE BANK -- Emerald Mortgage Company, a Washington corporation
and, where the context requires, after the Acquisition, its successors and
assigns, including any Subsidiary or second tier Subsidiary of FTNC or FTB into
which Mortgage Bank may be merged or liquidated.
MORTGAGE LOAN -- Any closed mortgage loan, whether or not such
mortgage is included in a securitized portfolio (and whether or not such loan
is an Excluded Loan), in the Mortgage Servicing Portfolio, as evidenced by
notes or other evidences of indebtedness secured by mortgages or deeds of
trust.
MORTGAGE SERVICING AGREEMENTS-- All contracts or arrangements between
Mortgage Bank and an Investor pursuant to which Mortgage Bank services or
master services (and Western subservices on Mortgage Bank's behalf) Mortgage
Loans for such Investor.
MORTGAGE SERVICING PORTFOLIO-- The portfolio of Mortgage Loans
serviced or master serviced by Mortgage Bank (and subserviced by Western on
Mortgage Bank's behalf) pursuant to Mortgage Servicing Agreements, together
with all Warehouse Loans.
NOTICE OF DISAGREEMENT -- As defined in Section 2.7(b).
PAYING AGENT AGREEMENT -- means the Sellers' Representative and Paying
Agent Agreement attached hereto as Exhibit "E."
PERMITTED ENCUMBRANCES -- For purposes of Section 5.2(m), shall mean:
(i) Encumbrances for taxes, assessments, charges or other
governmental levies not yet due or as to which the period of grace not
to exceed sixty (60) days, if any, related thereto has not expired or
which are being diligently contested in good faith and by appropriate
proceedings, if adequate reserves with respect thereto are maintained
on the books of the Mortgage Bank, in accordance with GAAP;
(ii) carriers', warehousemen's, landlords', materialmen's,
repairmen's or other like encumbrances arising in the ordinary course
of business (i) which are not overdue for a period of more than sixty
(60) days or (ii) which are being diligently contested in good faith
and by appropriate proceedings;
(iii) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security
legislation, or to secure the performance of statutory obligations,
appeal or similar bonds, leases and trade contracts (exclusive of
obligations for the payment of borrowed money);
(iv) Encumbrances in favor of existing warehouse lenders
pursuant to the terms of such warehouse loans;
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(v) any Encumbrance constituting a renewal or continuation of
any Encumbrance permitted by this definition of Permitted
Encumbrances, but only, in the case of each such renewal or
continuation, to the extent that the principal amount of indebtedness
secured by such Encumbrance does not exceed the principal amount of
such indebtedness so secured at the time of the renewal or
continuation, and that such Encumbrance is limited to all or part of
the property that secured the Encumbrance renewed or continued; and
(vi) other Encumbrances incidental to the conduct of Mortgage
Bank's business or the ownership of its property which are not
incurred in connection with borrowed money and which do not in the
aggregate materially detract from the value of its property or
materially impair the use thereof in the operation of their businesses
and which, in any event, do not secure obligations in excess of
$50,000 in the aggregate.
PERSON -- Any individual, corporation, company, partnership (limited
or general), joint venture, association, trust or other entity.
PIPELINE LOANS -- Those pending loans to be secured by a first
priority mortgage lien on a one-to-four family residence with respect to which
Mortgage Bank has taken an application or has agreed in writing with an
originator to purchase, including those loans which are pending with a
correspondent or wholesale originator as of the related date of determination
and which meet Mortgage Bank's acquisition criteria for such loans, but which
have not yet closed or been purchased from the correspondent or wholesale
originator on such date of determination.
POOL-- An aggregate of one or more Mortgage Loans that have been
pledged or granted to secure mortgage-backed securities or participation
certificates.
PIPELINE LOANS TARGET-- Pipeline Loans equal to $60,000,000.
PORTFOLIO TARGET - An unpaid principal balance of the Mortgage
Servicing Portfolio equal to $363,628,460.00.
PREFORECLOSURE-- The waiver by Mortgage Bank of a portion of the
indebtedness of a Mortgage Loan (other than a VA Loan), including, without
limitation, a reduction in the principal amount outstanding under such Mortgage
Loan, a credit to escrow or unapplied funds accounts or a forgiveness of any
accrued interest, which enables the borrower to sell the applicable Collateral
and pay off the remaining amount of indebtedness owed.
PREVIOUSLY DISPOSED LOAN-- Any mortgage loan and/or the Servicing
Rights related thereto which is not a Warehouse Loan, a Pipeline Loan or in the
Mortgage Servicing Portfolio.
PROCEEDINGS-- As defined in Section 7.3.
RECOURSE LOAN -- As defined in Section 3.21 hereof.
RECOVERY -- Any recovery or reimbursement received or receivable by
FTNC, FTB or Mortgage Bank on and after the Closing Date from any source,
including, without limitation, Insurance Proceeds.
REGISTRATION STATEMENT -- As defined in Section 3.36.
REGULATIONS-- (i) Federal, state and local laws, rules and regulations
with respect to the origination, insuring, purchase, sale, servicing or filing
of claims in connection with a Mortgage Loan, Pipeline Loan or
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Previously Disposed Loan, (ii) the responsibilities and obligations set forth
in any agreement between Mortgage Bank, and an Investor or private mortgage
insurer (including, without limitation, Mortgage Servicing Agreements, Investor
Commitments and selling and servicing guides), and (iii) the laws, rules,
regulations, guidelines, handbooks and other published requirements of an
Investor, Agency, private mortgage insurer, public housing program or Investor
program, with respect to the origination, insuring, purchase, sale, servicing
or filing of claims in connection with a Mortgage Loan, Pipeline Loan or
Previously Disposed Loan.
REPURCHASE -- The purchase of a Mortgage Loan out of a Pool or an
Investor's portfolio by Mortgage Bank at the direction of the Investor based
upon a breach by Mortgage Bank (or Western as subservicer of mortgage loans for
Mortgage Bank) prior to the Closing Date of a representation, warranty or
undertaking contained in the related agreement with such Investor.
SELLER OR SELLERS -- The Persons listed as selling shareholders in the
introductory paragraph of this Agreement who are all of the shareholders of
Mortgage Bank.
SELLERS AGREEMENT -- The Sellers Agreement among the Sellers, FTNC and
FTB, a copy of which is attached as Exhibit "G."
SELLERS' REPRESENTATIVE - Stephen M. Frison (or Craig Van Skaik as an
alternative representative if so designated by Stephen M. Frison) as
representative of the shareholders of Mortgage Bank pursuant to the Paying
Agent Agreement.
SERVICING RELEASED LOANS-- As defined in Section 3.21.
SERVICING RIGHTS -- The right to receive the servicing fees and any
other income the servicer is entitled to receive arising from or connected to
any Mortgage Loans and the related obligations to (i) administer and collect
payments for the reduction of principal and interest, (ii) pay taxes and
insurance premiums, (iii) remit all amounts in accordance with any Mortgage
Servicing Agreements, (iv) provide foreclosure services and full escrow
administration and (v) perform such other obligations as may, from time to
time, be imposed under any Mortgage Servicing Agreement.
STATE AGENCY-- Any state agency with authority to regulate the
business of Mortgage Bank, determine the investment or servicing requirements
with regard to loans originated, purchased or serviced by Mortgage Bank, or
otherwise participate in or promote mortgage lending.
SUBSIDIARY -- A company is a Subsidiary of another company if 50% or
more of its outstanding voting securities is owned by such other company.
SUPPLEMENTAL CLOSING -- As defined in Section 2.9.
SUPPLEMENTAL CLOSING DATE -- As defined in Section 2.9.
TANGIBLE NET ASSETS- The difference between (i) the total assets of
Mortgage Bank (less capitalized Servicing Rights, capitalized costs and other
intangible assets included in such total assets) and (ii) total liabilities of
Mortgage Bank, which may be a negative number. For purposes of calculating
Tangible Net Assets, any adjustment to the reserve for foreclosure losses or to
the valuation of capitalized Servicing Rights made pursuant to Section 5.8 will
not be included in Mortgage Bank's total assets or total liabilities, will not
affect the determination of Base Exchange Price, Closing Exchange Price or
Final Exchange Price, or otherwise modify Mortgage Bank's obligations under
this Agreement.
TANGIBLE NET ASSET TARGET - $856,000 in Tangible Net Assets.
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TAX AFFILIATE -- A Person is a Tax Affiliate of another Person if they
are both members of the same Affiliated Group.
TAXES -- As defined in Section 3.12(c).
TAX RETURN -- Any return, report or information return required to be
filed with any taxing authority with respect to Taxes.
TRANSFERRED LOANS -- As defined in Section 6.1.
TREASURY REGULATIONS -- The regulations promulgated under the Code.
UNCOMMITTED LOANS -- The loans shown on Mortgage Bank's mark-to-market
work sheet as being held for resale that are not marketable or deliverable
under the normal and customary secondary marketing programs of Mortgage Bank.
VA-- Department of Veteran's Affairs or any successors thereto.
VA LOANS -- Mortgage Loans guaranteed by VA.
VA NO-BID -- A delinquent VA Loan originated or otherwise acquired by
Mortgage Bank, with respect to which the VA has notified Mortgage Bank (or
Western as subservicer for Mortgage Bank) that it intends to exercise its
option to pay the amount guaranteed by the VA and relinquish all rights in the
collateral securing such VA Loan to Mortgage Bank (or Western as subservicer
for Mortgage Bank).
WAREHOUSE LOANS -- Mortgage Loans owned by Mortgage Bank and held for
sale.
WESTERN-- Western Mortgage Loan Corporation, the subservicer of the
Mortgage Servicing Portfolio for the benefit of Mortgage Bank.
ARTICLE II
THE ACQUISITION
2.1 THE ACQUISITION. On the Closing Date, upon satisfaction in full
with each condition set forth in Article VIII of this Agreement or waiver by
the appropriate party of any such condition, FTB agrees to acquire from
Sellers, and Sellers consent and agree to transfer to FTB, all of the issued
and outstanding shares of Emerald Common Stock, being all of the outstanding
capital stock of Mortgage Bank, free and clear of any and all Encumbrances.
2.2 EXCHANGE OF EMERALD COMMON STOCK. (a) On the Closing Date, all
of the shares of Emerald Common Stock issued and outstanding on the Closing
Date shall be exchanged for the right to receive the total number of shares of
FTNC Common Stock which is equal to the Base Exchange Price subject to
adjustment on the Closing Date as provided in Sections 2.8(a) and subject to
post- closing adjustments as provided in Sections 2.8(b) and 2.10 in each case
divided by the Closing Measurement Price.
(b) Each share of Emerald Common Stock issued and outstanding on the
Closing Date (in the aggregate, the "Total Emerald Shares") shall be exchanged
for the number of shares of FTNC Common Stock equal to the total number of
shares of FTNC Common Stock determined under Section 2.2(a) above divided by
the Total Emerald Shares and subject to post-closing adjustments as provided in
Sections 2.8(b) and 2.10.
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(c) If the Closing Measurement Price is less than or equal to $35 per
share, either FTNC or Sellers shall have the right to terminate this Agreement;
provided, however, that (1) FTNC shall have the right to require Sellers to
consummate the Acquisition using the actual Closing Measurement Price (equal to
or less than $35 per share) to calculate the aggregate number of shares of FTNC
Common Stock to be issued pursuant to Section 2.2(a) above and (2) Sellers
shall have the right to require the FTNC to consummate the Acquisition using
$35 per share as the Closing Measurement Price. To exercise its right to
require consummation of the Acquisition under this Section 2.2(c), the party
exercising its option must give written notice of its election to exercise to
the other party not later than the close of business on the third (3rd)
business day following the last day of the twenty (20) day determination period
for calculating the Closing Measurement Price.
(d) As to payment of the Closing Exchange Price, subsequent to the
date of this Agreement but prior to the Closing Date or subsequent to the
Closing Date and prior to the payment of any post-Closing Date payments due
under Section 2.9 hereof or subsequent to the Closing Date and prior to payment
of any refunds to FTNC of the Closing Exchange Price due under Section 2.11, if
the outstanding shares of FTNC Common Stock shall be increased, decreased,
changed into or exchanged for a different number or class of shares by reason
of any reclassification, recapitalization, split-up, combination or exchange of
shares, or if a stock dividend thereon shall be declared with a record date
within such period, or other like changes in FTNC's capitalization shall have
occurred, the terms and provisions subsections (a), (b) and (c) of this Section
2.2 shall be adjusted accordingly so that the number of shares of FTNC Common
Stock for which a share of Emerald Common Stock will be exchanged or a refund
payment made, will equal the number of shares of FTNC Common Stock which the
holders of shares of Emerald Common Stock would have received pursuant to such
reclassification, recapitalization, split-up, combination, exchange of shares
or readjustment, or stock dividend or otherwise had the record date been
immediately following the Closing Date or the date a payment is made under
Section 2.9 or Section 2.11, as applicable.
2.3 NO FRACTIONAL SHARES. Notwithstanding any other provision
hereof, no fractional shares of FTNC Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in exchange
for any Emerald Common Stock; instead, FTNC shall pay to each holder of Emerald
Common Stock exchanged pursuant to this Agreement who would otherwise be
entitled to a fractional share an amount in cash determined by multiplying such
holder's fractional interest by the Closing Measurement Price.
2.4 PROCEDURES. Subject to the Escrow Agreement, certificates which
represent shares of Emerald Common Stock that are outstanding on the Closing
Date (each, a "Certificate") and are delivered by Sellers on the Closing Date
in exchange for the right to receive shares of FTNC Common Stock shall be
exchangeable by the holders thereof in the manner provided in the transmittal
materials described below for new certificates representing the shares of FTNC
Common Stock for which such shares are exchanged.
Not later than ten (10) days prior to the Closing Date, FTNC shall
send to each holder of record of shares of Emerald Common Stock outstanding at
the Closing Date transmittal materials for use in exchanging the Certificates
for such shares for certificates for shares of the FTNC Common Stock for which
such shares of Emerald Common Stock shall be exchanged. Except for the Escrow
Shares upon surrender of a Certificate at Closing, together with a duly
executed and completed letter of transmittal and any other required documents,
the holder of such Certificate shall be entitled to receive in exchange
therefor as soon as is reasonably practicable following the Closing Date a
certificate for the number of shares of FTNC Common Stock to which such holder
is entitled, and such Certificate shall forthwith be cancelled. If any such
delivery is to be made in whole or in part to a person other than the person in
whose name a surrendered Certificate is registered, it shall be a condition to
such delivery or exchange that the Certificate surrendered shall be properly
endorsed or shall be otherwise in proper form for transfer and that the person
requesting such delivery or exchange shall have paid any transfer and other
taxes required by reason of such delivery or exchange in a name other than that
of the registered holder of the Certificate surrendered or shall have
established to the reasonable satisfaction of FTNC or its agent that such tax
either has been paid or is not payable.
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No holder of Emerald Common Stock shall be entitled to exercise any
rights as a shareholder of FTNC until such holder shall have properly
surrendered its Certificate(s) (together with all required documents) as set
forth above. No dividend or other distribution payable after the Closing Date
with respect to the FTNC Common Stock shall be paid to the holder of any
unsurrendered Certificate until the holder thereof properly surrenders such
Certificate (together with all required documents), at which time such holder
shall receive all dividends and distributions, without interest thereon,
previously withheld from such holder pursuant hereto. After the Closing Date,
there shall be no transfers on the stock transfer books of Mortgage Bank of any
shares of Emerald Common Stock which were issued and outstanding on the Closing
Date and which are required to be exchanged for FTNC Common Stock. If, after
the Closing Date, Certificates are presented for transfer to Mortgage Bank,
they shall be cancelled and exchanged for the shares of FTNC Common Stock
deliverable in respect thereof as determined in accordance with the provisions
of Section 2.2 and in accordance with the procedures set forth in this Section
2.4.
After delivery of the Emerald Common Stock on the Closing Date, the
Sellers shall cease to be, and shall have no rights as stockholders of,
Mortgage Bank other than to receive shares of FTNC Common Stock for which such
shares have been exchanged or fractional share payments pursuant to this
Agreement.
Notwithstanding the foregoing, neither FTNC nor Mortgage Bank nor any
other person shall be liable to any former holder of Emerald Common Stock for
any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
In the event any Certificate shall have been lost, stolen or
destroyed, upon receipt of appropriate evidence as to such loss, theft or
destruction and to the ownership of such Certificate by the person claiming
such Certificate to be lost, stolen or destroyed and the receipt by FTNC of
appropriate and customary indemnification including, where appropriate, the
posting of a bond, FTNC will issue in exchange for such lost, stolen or
destroyed certificate shares of FTNC Stock or the fractional share payment, if
any, deliverable in respect thereof as determined in accordance with this
Article II.
2.5 BASE EXCHANGE PRICE. The base exchange price for the Emerald
Common Stock shall be $7,800,000.00 as set forth on Exhibit "A" ("Base Exchange
Price"); provided, however, that such Base Exchange Price shall be adjusted in
accordance with Sections 2.8 and 2.10 hereof.
2.6 CLOSING; PAYMENT OF CLOSING EXCHANGE PRICE. (a) At least
fifteen (15) days prior to the Closing Date, Sellers' Representative shall
deliver to FTNC an estimate of all adjustments to the Base Exchange Price,
which estimate shall (i), subject to the provisions of the last sentence of
this Section 2.6(a), be computed in accordance with the provisions of Section
2.8(a) hereof and (ii) be accompanied by a schedule setting forth in reasonable
detail the calculations contemplated by Section 2.8(a). The Base Exchange
Price, as adjusted by the estimated adjustments determined pursuant to this
Section 2.6, is referred to herein as the "Closing Exchange Price." In
computing the Closing Exchange Price pursuant to Exhibit "A" and this Section
2.6(a), the Closing Portfolio, Tangible Net Assets and Pipeline Loans shall be
determined as of the Estimation Date.
(b) The Closing shall occur at the offices of Heiskell, Donelson,
Bearman, Adams, Williams & Caldwell, 20th Floor, First Tennessee Building,
Memphis, Tennessee, or at such other place as shall be mutually agreeable to
the parties, on the "Closing Date" which shall be August 15, 1994 or such other
date as shall be mutually agreeable to the parties.
(c) On the Closing Date (except as otherwise provided in this Section
2.6(c)), the following actions shall be taken:
(i) The Escrow Agreement, duly executed by the Sellers'
Representative, shall be delivered to FTNC; and
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(ii) Sellers shall deliver certificates for the Emerald Stock
to FTB, duly endorsed in blank, together with such other documents as
FTB may reasonably request to evidence the transfer to FTB of good and
marketable title in and to the Emerald Common Stock, free and clear of
any and all Encumbrances; and
(iii) As soon as is reasonably practicable following the
Closing Date but in no event later than five (5) business days after
the Closing Date, FTNC shall deliver certificates for the FTNC Common
Stock to Sellers' Representative representing the Closing Exchange
Price; and
(iv) As soon as is reasonably practicable following the
Closing Date, FTNC shall deliver the Escrow Shares to the Escrow Bank;
and
(v) Each party shall take such other actions, and shall
execute and deliver such other instruments or documents, as shall be
required under the terms of this Agreement.
2.7 CLOSING ADJUSTMENT DOCUMENTS. In order to prepare for the
adjustments of the Closing Exchange Price as contemplated in Section 2.8
hereof, the parties shall proceed as follows:
(a) As soon as reasonably practicable following the Closing Date, and
in no event more than sixty (60) days thereafter, FTNC shall prepare and
deliver to Sellers' Representative (i) the Closing Date Balance Sheet, which
Closing Date Balance Sheet shall be prepared in accordance with GAAP, (ii)
schedules calculating the amount of the Tangible Net Assets, (iii) a schedule
of the Closing Portfolio, (iv) a schedule of the Pipeline Loans, and (v) a
schedule setting forth in reasonable detail the calculations contemplated by
Section 2.8(b) below (collectively, the "Closing Adjustment Documents"). The
parties shall cooperate in the preparation of the Closing Adjustment Documents
in accordance with this Section 2.7 and Section 2.8(b) hereof.
(b) Within twenty (20) days after delivery of each of the Closing
Adjustment Documents to Sellers' Representative, Sellers' Representative may
dispute all or any portion of the Closing Adjustment Documents by giving
written notice (a "Notice of Disagreement") to FTNC setting forth in reasonable
detail the basis for any such dispute (any such dispute being hereinafter
called a "Disagreement"). Seller's Representative may, at any time during such
twenty (20) day period, deliver notice to FTNC of Sellers' Representative's
acceptance of the Closing Adjustment Documents delivered by FTNC. FTNC shall
provide Sellers' Representative and its designees with full access to the
books, records, personnel and representatives of Mortgage Bank and such other
information as Sellers' Representative may reasonably request in connection
with its review of the Closing Adjustment Documents and with respect to the
resolution of any Disagreement. The parties shall promptly commence good faith
negotiations with a view to resolving all such Disagreements. If Sellers'
Representative does not give a Notice of a Disagreement in accordance with the
provisions of the first sentence of this paragraph (b) within the twenty (20)
day period set forth therein, Sellers' Representative shall be deemed to have
irrevocably accepted such Closing Adjustment Documents in the form delivered to
Sellers' Representative by FTNC.
(c) If Sellers' Representative shall deliver a Notice of Disagreement
and FTNC shall not dispute all or any portion of such Notice of Disagreement by
giving written notice to Sellers' Representative setting forth in reasonable
detail the basis for such dispute within twenty (20) days following the
delivery of such Notice of Disagreement, FTNC shall be deemed to have
irrevocably accepted the Closing Adjustment Documents as modified in the manner
described in the Notice of Disagreement. If FTNC disputes all or any portion
of the Notice of Disagreement within the twenty (20) day period described in
the previous sentence, and within ten (10) days following the delivery to
Sellers' Representative of the notice of such dispute (the "Conference Period")
Sellers' Representative and FTNC do not resolve the Disagreement (as evidenced
by a written agreement among the parties hereto) not later than the end of the
Conference Period, such Disagreement shall be referred to an Independent
Accounting Firm mutually selected by Sellers' Representative and FTNC for a
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resolution of such Disagreement in accordance with the terms of this Agreement.
If FTNC and Sellers' Representative do not agree on the selection of an
Independent Accounting Firm, their respective independent public accountants
shall select such firm not later than five (5) business days following the end
of the Conference Period. The determinations of such firm with respect to any
Disagreement shall be final and binding upon the parties and the amount so
determined shall be used to complete the final Closing Adjustment Documents.
FTNC and Sellers' Representative shall use their best efforts to cause the
Independent Accounting Firm to render its determination not later than twenty
(20) business days after referral of the Disagreement to such firm, and each
shall cooperate with such firm and provide such firm with access to the books,
records, personnel and representatives of it and such other information as such
firm may require in order to render its determination. FTNC and Sellers'
Representative shall each pay all fees and expenses of any Independent
Accounting Firm retained by it pursuant to this paragraph (c).
2.8 CALCULATION OF ADJUSTMENTS. (a) CLOSING EXCHANGE PRICE. In
connection with the calculation of the Closing Exchange Price, the following
adjustments shall be made to the Base Exchange Price:
(i) Portfolio Target. The Base Exchange Price shall be (i) increased
by an amount equal to the product of (y) the excess of the Closing Portfolio as
of the Estimation Date over the Portfolio Target and (z) 1.15% or (ii)
decreased by an amount equal to the product of (y) the excess of the Portfolio
Target over the Closing Portfolio as of the Estimation Date and (z) 1.15%.
(ii) Tangible Net Asset Target. The Base Exchange Price shall be (i)
increased by the amount by which Tangible Net Assets as of the Estimation Date
exceed the Tangible Net Asset Target or (ii) decreased by the amount by which
the Tangible Net Asset Target exceeds Tangible Net Assets as of the Estimation
Date.
(iii) Pipeline Loans. The Base Exchange Price shall be (i) increased
by amount equal to the product of (y) the excess of the Pipeline Loans
determined as of the Estimation Date over the Pipeline Loans Target and (z)
.37% or (ii) decreased by an amount equal to the product of (y) the excess of
the Pipeline Loans Target over the Pipeline Loans determined as of the
Estimation Date and (z) .37%.
(b) FINAL EXCHANGE PRICE. In connection with the calculation of the
Final Exchange Price (as defined herein) and the preparation of the Closing
Adjustment Documents, the following adjustments shall be made to the Closing
Purchase Price:
(i) Final Portfolio Adjustment. The Closing Exchange Price shall be
(i) increased by an amount equal to the product of (y) the excess of the
Closing Portfolio as of the Closing Date Balance Sheet Date over the Closing
Portfolio as of the Estimation Date and (z) 1.15% or (ii) decreased by an
amount equal to the product of (y) the excess of the Closing Portfolio as of
the Estimation Date over the Closing Portfolio as of the Closing Date Balance
Sheet Date and (z) 1.15%.
(ii) Final Tangible Net Asset Adjustment. The Closing Exchange Price
shall be (i) increased by the amount by which Tangible Net Assets as of the
Closing Date Balance Sheet Date exceed the Tangible Net Assets as of the
Estimation Date or (ii) decreased by the amount by which the Tangible Net
Assets as of the Estimation Date exceed Tangible Net Assets as of the Closing
Date Balance Sheet Date.
(iii) Final Pipeline Loans Adjustment. The Closing Exchange Price
shall be (i) increased by an amount equal to the product of (y) the excess of
the Pipeline Loans as of the Closing Date Balance Sheet Date over the Pipeline
Loans as of the Estimation Date and (z) .37% or (ii) decreased by an amount
equal to the product of (y) the excess of the Pipeline Loans as the Estimation
Date over the Pipeline Loans as of the Closing Date Balance Sheet Date and (z)
.37%.
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(iv) The adjustments to the Closing Exchange Price described in this
Section 2.8(b) shall be netted, such that there shall be determined an
aggregate increase or decrease in the Closing Exchange Price. The Closing
Exchange Price, as adjusted in the manner provided in Section 2.7, this Section
2.8(b) and Exhibit "A" is referred to herein as the "Final Exchange Price."
(c) TOTAL ADJUSTMENTS AND INDEMNIFICATION PAYMENTS LIMITATIONS.
Notwithstanding anything else to the contrary contained in this Section 2.8,
Sections 2.9, 2.10, 2.11 or Section 9.1 of this Agreement, the aggregate number
of Escrow Shares plus the number of shares of FTNC Common Stock issued pursuant
to Section 2.9, if any, shall not exceed the number of shares delivered to
Sellers at Closing pursuant to Section 2.6(c)(iii).
2.9 SUPPLEMENTAL CLOSING. Promptly after the Closing Adjustment
Documents have been finally determined in accordance with Section 2.7
(including by means of a deemed acceptance of such documents by FTNC or
Sellers' Representative as provided in Sections 2.7(b) and 2.7(c) hereof,
respectively), but in no event later than five (5) business days following such
final determination (the "Supplemental Closing Date"), the parties hereto shall
hold a supplemental closing (the "Supplemental Closing"), either by telephone
or in person at a mutually convenient location. If the Final Exchange Price is
greater than the Closing Exchange Price, FTNC shall deliver that number of
shares of FTNC Common Stock valued at the Closing Measurement Price having a
value equal to the difference (rounded up to the nearest cent) between the
Closing Exchange Price and the Final Exchange Price.
2.10 ADDITIONAL ADJUSTMENTS TO FINAL EXCHANGE PRICE. (a) Loss of
Certain Servicing. The Final Exchange Price shall be decreased by an amount
equal to the amount, if any, by which (i) 1.15% of the aggregate unpaid
principal balance of any Mortgage Loans included in the Closing Portfolio, the
servicing or master servicing of which by Mortgage Bank (or subservicing of
which by Western on Mortgage Bank's behalf) shall have been terminated and not
reinstated by an Investor within the one hundred eighty (180) day period
immediately following the Closing (unless such termination shall have been due
to the repayment in full of the principal amount of the underlying Mortgage
Loan or the breach by Mortgage Bank of the terms of the servicing agreement
relating to such Mortgage Loan following the Closing Date) exceeds (ii) the
aggregate amount of all termination or similar fees or charges paid or payable
to Mortgage Bank in connection with the termination of the servicing or master
servicing of such Mortgage Loans by Mortgage Bank (or subservicing of which by
Western or Mortgage Bank's behalf). In connection with the foregoing, FTNC or
Mortgage Bank shall provide Sellers with written notice of the termination of
the servicing of any Mortgage Loan included in the Closing Portfolio within
five (5) business days after any such termination, and such notice shall give
Sellers the right to contact the relevant Investor concerning such termination
and to attempt to have such Mortgage Loan reinstated.
(b) Payment at Supplemental Closing. Any amounts payable under this
Section 2.10 which are capable of being determined on or before the
Supplemental Closing Date shall be made in connection with the Supplemental
Closing. Any payments subsequent to the Supplemental Closing Date shall be
made on the last day of each subsequent month following the month in which the
Supplemental Closing occurs but in no event later than one hundred and
ninety-five (195) days after the Closing Date. All payments under this Section
2.10 shall be accompanied by interest thereon calculated at the Fed Funds Rate.
2.11 SELLERS' REFUND AT SUPPLEMENTAL CLOSING. If the Final Exchange
Price is less than the Closing Exchange Price or if Sellers are required to
make payments to FTNC under Section 2.10, each Seller shall be severally liable
to refund or pay to FTNC at Sellers' option either (i) cash or (ii) FTNC Common
Stock valued at the Closing Measurement Price, as to each Seller, proportionate
to the amount of FTNC Common Stock received by such Seller at Closing and
having an aggregate value equal to the difference between the Final Exchange
Price and the Closing Exchange Price and/or the amounts due under Section 2.10,
as applicable.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF SELLERS AND MORTGAGE BANK
Sellers and Mortgage Bank, jointly and severally, hereby represent and
warrant to FTNC and FTB as of the date of this Agreement as follows:
3.1 ORGANIZATION. Mortgage Bank is a corporation duly organized,
validly existing and in good standing under the laws of the state of its
incorporation with full corporate power and authority to carry on its business
as now conducted and to own or lease all of its properties and assets and is
duly licensed or qualified to do business and is in good standing in each state
or jurisdiction where the ownership or leasing of its properties or assets or
the conduct of its business requires such licensing or qualification, except
where the failure to be so licensed or qualified would not have a material
adverse effect on the business, financial condition or results of operations of
Mortgage Bank taken as a whole. Mortgage Bank has hereto delivered to FTNC
accurate and complete copies of the respective articles of incorporation,
by-laws, minutes, written consents, stock transfer ledgers and other corporate
documents of Mortgage Bank, as in effect on the date of this Agreement.
3.2 CAPITALIZATION. The authorized capital stock of Mortgage Bank
consists only of fifty thousand (50,000) shares of Emerald Common Stock, nine
hundred fifty (950) of which are validly issued and outstanding, fully paid and
nonassessable and owned by Sellers. No shares of Emerald Common Stock are
reserved for issuance. Neither Mortgage Bank nor any of its Affiliates has or
is bound by any outstanding subscriptions, options, warrants, calls,
commitments, agreements or other rights of any character calling for the
purchase or issuance of any shares of Emerald Common Stock or any other capital
stock of Mortgage Bank or any securities representing the right to purchase or
otherwise receive any shares of Emerald Common Stock or any other capital stock
of Mortgage Bank. There are no voting trusts, proxies, or other agreements or
understandings with respect to the voting of the Emerald Common Stock.
3.3 SUBSIDIARIES OF THE MORTGAGE BANK. Mortgage Bank does not own
any equity interest, directly or indirectly, in any Subsidiary.
3.4 AUTHORITY; NO VIOLATION. (a) Mortgage Bank has full corporate
power and authority, and Sellers each have the legal capacity and power, 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 authorized
by all requisite corporate action on the part of Mortgage Bank and no other
corporate proceedings on the part of Sellers or Mortgage Bank are necessary to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Sellers and Mortgage Bank and, assuming
this Agreement constitutes a valid and binding obligation of FTB and FTNC,
constitutes a valid and binding obligation of Sellers and Mortgage Bank
enforceable against Sellers and Mortgage Bank in accordance with its terms
(subject to applicable bankruptcy, insolvency, and similar laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity (whether applied in a proceeding in equity or at law).
(b) Except as set forth in Section 3.4 of the Disclosure Schedule,
neither the execution and delivery of this Agreement by Sellers or Mortgage
Bank nor the consummation by Sellers or Mortgage Bank of the transactions
contemplated hereby, nor compliance by Sellers or Mortgage Bank with any of the
terms or provisions hereof, will (i) conflict with or result in a breach of any
provision of the articles of incorporation or bylaws of Mortgage Bank, or (ii)
assuming the consents, permits, authorizations, approvals, filings and
registrations referred to in Section 3.6 hereof and Section 3.6 of the
Disclosure Schedule are obtained or made, (x) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction, or
any interpretation of any of the foregoing applicable to Sellers or Mortgage
Bank or any of their Affiliates or any of
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their respective properties or assets or (y) violate, conflict with, result in
a breach of any provisions of, 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, accelerate the performance required by, or result in a
right of termination or acceleration or the creation of any Encumbrance upon
any of the respective properties or assets of any Seller or Mortgage Bank
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 any Seller or Mortgage Bank is a party, or by which any
Seller or Mortgage Bank or any of their respective properties or assets may be
bound, except, in the case of this clause (ii), for such violations, conflicts,
breaches or defaults which, either individually or in the aggregate, would not
have a material adverse effect on the business, financial condition or results
of operations of Sellers or Mortgage Bank taken as a whole.
3.5 STATEMENTS MADE. No representation, warranty, statement made or
information or data provided by Sellers or Mortgage Bank in this Agreement or
in any exhibit, written material, document, magnetic media, books and records
or certificate furnished by or on behalf of Sellers or Mortgage Bank to FTNC or
FTB in connection with the transactions contemplated hereby contains or will
contain any untrue statement of material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
3.6 CONSENTS AND APPROVALS. Except as set forth in this Section 3.6
of the Disclosure Schedule, no consents, permits, authorizations or approvals
of, or filings or registrations with, any governmental or regulatory
authorities, government sponsored agencies or corporations, Investors or other
third parties are necessary to be obtained or made by Sellers or Mortgage Bank
in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby.
3.7 FINANCIAL STATEMENTS. Sellers have previously delivered to FTB
copies of (i)(a) audited balance sheets of Mortgage Bank as of October 31,
1991, October 31, 1992 and October 31, 1993, and (b) audited statements of
income, changes in stockholders' equity and statements of cash flow of Mortgage
Bank for the periods ended October 31, 1991, October 31, 1992 and October 31,
1993 (collectively, the "Audited Financial Statements"), together with reports
on the Audited Financial Statements by Mortgage Bank's independent accountants
and (ii) unaudited statements of income, changes in stockholders' equity and
statements of cash flow of Mortgage Bank for the periods ending January 31,
1994, March 31, 1994 and May 31, 1994 and unaudited balance sheets as of
January 31, 1994, March 31, 1994 and May 31, 1994 of Mortgage Bank
(collectively, the "Interim Financial Statements", and together with the
Audited Financial Statements and the Closing Date Balance Sheet, the "Financial
Statements"). The Financial Statements (except for the failure to include all
of the notes thereto required by GAAP in the Interim Financial Statements and
the Closing Date Balance Sheet) have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods covered by such statements
(except as may be indicated in the notes thereto) and are accurate and fairly
present in all material respects the financial position of Mortgage Bank as of
the respective dates thereof and the results of its operations and the changes
in its financial position for the respective periods covered thereby.
3.8 UNDISCLOSED LIABILITIES. Mortgage Bank has no liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise,
asserted or unasserted, known or unknown, and whether or not required to be
shown on a balance sheet prepared in accordance with GAAP, except for
liabilities and obligations stated on the Balance Sheet, the Closing Date
Balance Sheet or otherwise disclosed in the Disclosure Schedule.
3.9 NO MATERIAL ADVERSE CHANGE. Except as set forth in Section 3.9
of the Disclosure Schedule, since October 31, 1993, there has not been any
material adverse change in the business, condition, financial or otherwise, or
results of operations of Mortgage Bank taken as a whole.
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3.10 LEGAL PROCEEDINGS. Except as set forth in Section 3.10 of the
Disclosure Schedule, there are no legal, administrative, arbitral, governmental
or other proceedings, actions or governmental investigations of any nature
("Legal Proceedings") pending or, to the best knowledge of Sellers and Mortgage
Bank, threatened, against Mortgage Bank which could result in a Loss to
Mortgage Bank. Except as set forth in Section 3.10 of the Disclosure Schedule,
Mortgage Bank is not subject to any order, judgment, injunction, rule or decree
which has or could result in a Loss to Mortgage Bank. There are no facts or
circumstances that could form the basis for any Legal Proceedings against
Mortgage Bank.
3.11 MATERIAL CONTRACTS. Section 3.11 of the Disclosure Schedule is a
complete and accurate list of the following contracts, agreements and other
written or oral arrangements (hereinafter collectively referred to as
"Contracts"), to which Mortgage Bank is a party on the date hereof:
(a) any Contract (including the lease of real or personal property
from or to third parties) providing for payments in excess of $25,000 per annum
or in excess of $50,000 for the remaining term of the contract;
(b) any Contract in which Mortgage Bank is participating as a general
partner or joint venturer;
(c) any Contract which shall survive the Closing (other than recourse
servicing) under which Mortgage Bank has created, incurred, assumed, or
guaranteed (or may create, incur, assume, or guarantee) indebtedness for
borrowed money (including capitalized lease obligations) involving more than
$20,000;
(d) any Contract concerning noncompetition;
(e) any Contract between any Seller or any of its Affiliates (other
than Mortgage Bank), on the one hand, and Mortgage Bank, on the other hand;
(f) any Mortgage Servicing Agreements or subservicing agreements;
(g) any Contract between Mortgage Bank and any Investor other than
Mortgage Servicing Agreements;
(h) any Contract, other than Mortgage Servicing Agreements, that is
terminable upon a change in control of Mortgage Bank; and
(i) any Contract pursuant to which Seller or any of its Affiliates
has promised to pay, or loan any amount to, or sold, transferred or leased any
property or assets to or from, any Person who is an officer, director or other
employee of Mortgage Bank.
Sellers have made available to FTNC a correct and complete copy of
each written Contract listed in Section 3.11 of the Disclosure Schedule. With
respect to each Contract so listed and except as noted therein: (A) the
Contract is in full force and effect; (B) no Seller or Mortgage Bank, as
applicable, is in breach or default thereof, and no event has occurred which
with notice or lapse of time or both would constitute a breach or default by
any Seller or Mortgage Bank, or permit termination, modification, or
acceleration against Seller or Mortgage Bank under the Contract applicable to
it; (C) no Seller or Mortgage Bank, as applicable, has repudiated or waived any
material provision of any such Contract; and (D) no other party to any such
Contract is, to the knowledge of any Seller and Mortgage Bank, in default in
any respect or has repudiated or waived any material provision thereunder.
With respect to any lease disclosed pursuant to this Section 3.11, all rents
and other amounts currently due thereunder have been paid; no waiver or
indulgence or postponement of any obligation thereunder has been granted by any
lessor or sublessor or been requested by any lessee or sublessee; and neither
any Seller nor Mortgage Bank has received any notice that any Seller or
Mortgage Bank has breached any term, condition or covenant under any such
lease.
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3.12 TAXES. (a) Except as disclosed on Section 3.12 of the
Disclosure Schedule, Mortgage Bank has (i) duly filed (or there has been duly
filed on its behalf) with the appropriate federal, state, local and foreign
taxing authorities all Tax Returns required to be filed by or with respect to
Mortgage Bank on or before the date hereof, and (ii) paid in full on a timely
basis (or there has been paid on its behalf) all Taxes shown to be due on such
Tax Returns. Except as disclosed on Section 3.12 of the Disclosure Schedule,
(x) the provision for current and deferred Taxes on each of the Financial
Statements and the Closing Date Balance Sheet for the payment of all accrued
but unpaid Taxes through the date thereof has been determined in accordance
with GAAP and reflects all Taxes that could be assessed against Mortgage Bank,
and (y) each deferred or current tax receivable reflected on each of the
Financial Statements and the Closing Date Balance Sheet is properly recorded in
accordance with GAAP at a value not exceeding the net realizable value of such
receivable, and there are no facts or circumstances that could result in any
such receivable being recorded on any Financial Statement or the Closing Date
Balance Sheet at a value that is less than the net realizable value of such
receivable.
(b) Except as set forth in Section 3.12(b) of the Disclosure
Schedule, Mortgage Bank has not received any notice of a deficiency or
assessment with respect to Taxes of from any federal, state, local or foreign
taxing authority which has not been fully paid or finally settled, and any such
deficiency or assessment shown on such Section of the Disclosure Schedule is
being contested in good faith through appropriate proceedings described in
Section 3.12(b) of the Disclosure Schedule; there are no ongoing audits or
examination of any Tax Return of Mortgage Bank, and no notice of audit or
examination of any such Tax Return has been received by Mortgage Bank; Mortgage
Bank has not given and there has not been given on behalf of Mortgage Bank a
waiver or extension of any statute of limitations relating to the payment of
Taxes of Mortgage Bank, the federal income Tax Returns of Mortgage Bank have
been audited by the IRS or are closed by the applicable statute of limitations
for all periods through October 31, 1991; and no issue has been raised in
writing on audit or in any other proceeding with respect to taxes of Mortgage
Bank by any federal, state, local or foreign taxing authority.
(c) For 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, but not
limited to, income, excise, property, sales, transfer, franchise, payroll,
gains, withholding, ad valorem, social security or other taxes, including any
interest, penalties or additions attributable to Taxes.
(d) Mortgage Bank has not filed a consent under Section 341(f) of the
Code concerning collapsible corporations. Mortgage Bank has not made any
payments, is not obligated to make any payments, and is not a party to any
contract, agreement or other arrangement that could obligate it to make any
payments that would not be deductible under Section 280G of the Code.
3.13 EMPLOYEES. (a) Section 3.13(a) of the Disclosure Schedule sets
forth with respect to each employee (an "Employee") of Mortgage Bank as of May
31, 1994, the Employee's name, job title, annual salary, hourly rate, hire
date, years of service and other related data.
(b) Section 3.13(b) of the Disclosure Schedule sets forth (i) all
employment, consulting, severance, retention, termination and similar
agreements and arrangements under which Mortgage Bank has any obligation to any
Employee or to any former employee or independent contractor of Mortgage Bank
and (ii) all incentive, bonus, performance and similar compensatory plans and
arrangements in which Employees of Mortgage Bank are eligible to participate.
Sellers have provided FTB with copies of all plans, agreements and arrangements
listed on Section 3.13(b) of the Disclosure Schedule.
(c) Except as set forth on Disclosure Schedule 3.13(c), there are no
investigations, claims or proceedings pending or, to the best knowledge of
Sellers or Mortgage Bank, threatened relating to or arising out of the
employment of any Employee or former employee. None of the Employees is
represented by a union or other collective bargaining unit.
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3.14 ERISA. (a) GENERAL. Except as listed on Section 3.14 or Section
3.13(b) of the Disclosure Schedule, Mortgage Bank is not a party to, does not
participate in and has not participated in (i) any profit sharing, deferred
compensation, bonus, stock retirement, welfare or incentive plan or agreement,
whether legally binding or not, (ii) any plan providing for "fringe benefits"
to its employees, including but not limited to vacation, sick leave, medical,
hospitalization, life insurance and other insurance plans, and related
benefits, (iii) any other "employee benefit plan" (within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), or (iv) any "multi-employer plan" (within the meaning of Section
3(37) of ERISA) not designated as such on Section 3.14 of the Disclosure
Schedule. True, correct and complete copies of the plan documents and
agreements referred to in Section 3.14 of the Disclosure Schedule and all
related summary plan descriptions have been delivered to FTNC. Mortgage Bank
is in substantial compliance with the applicable provisions of ERISA and the
regulations and rulings issued thereunder with respect to each employee benefit
plan subject thereto, except as noted on Section 3.14 of the Disclosure
Schedule and, except as noted on Section 3.14 of the Disclosure Schedule, has
performed in all material respects all of its obligations under such plans.
There are no actions, suits or claims (other than routine claims for benefits)
pending or threatened against such plans or the assets of such plans, and no
facts exist which could give rise to any actions, suits or claims (other than
routine claims for benefits) against such plans or the assets of such plans
which could result in a material adverse effect to Mortgage Bank.
(b) PENSION AND PROFIT SHARING PLAN. The "employee pension benefit
plans" (within the meaning of Section 3(2) of ERISA) described on Section 3.14
of the Disclosure Schedule have been duly authorized by the Board of Directors
of Mortgage Bank. Each such plan in all material respects is qualified in form
and operation under Sections 401(a) and 501(a) of the Code to the extent the
Code requires such qualification, except as noted on Section 3.14 of the
Disclosure Schedule. No event has occurred which will or could subject
Mortgage Bank or any such plans to tax under Sections 511, 4972 or 4975 of the
Code. No prohibited transaction (within the meaning of Section 4975 of the
Code or Section 406 of ERISA), or breach of fiduciary responsibility under
Title I of ERISA, which transaction is not exempt or for which exemption is not
available under Section 4975 of the Code or Section 408 of ERISA, has occurred
with respect to any of such plans. No accumulated funding deficiency, whether
or not waived, exists with respect to any such plan, no condition has occurred
or exists which with the passage of time would be expected to result in an
accumulated funding deficiency as of the last day of the current plan year of
any such plan, and no employer maintaining the plan has failed to make full
payment when due of all amounts which under the provisions of any such plan are
required to be made as contributions thereto and no excise taxes are payable
under the Code.
Sellers have delivered to FTNC for each of the employee pension
benefit plans (i) a copy of the Form 5500 which was filed in each of the most
recent three plan years, including, without limitation, all schedules thereto
and all financial statements with attached opinions of independent accountants,
(ii) a copy of the Form PBGC-1 which was filed in each of the most recent three
(3) plan years, and (iii) the most recent determination letter from the
Internal Revenue Service. Copies have been furnished to FTNC of (i) the
consolidated statement of assets and liabilities of each of the employee
pension benefit plans as of its most recent valuation date; (ii) the statement
of changes in fund balance and in financial position or the statement of
changes in net assets available for benefits under each of said plans for the
most recently ended plan year, and (iii) with respect to any such plan which is
subject to Title IV of ERISA, the actuarial report as of the last valuation
date. Such documents fairly present the financial condition of each said plan
as at such dates and the results of operations of each of said plans, all on a
consistent basis, unless otherwise noted on or apparent from the documents of
Section 3.14 of the Disclosure Schedule.
(c) TITLE IV PLANS. With respect to each employee pension benefit
plan (excluding plans not subject to the provisions of Title IV of ERISA)
listed on Section 3.14 of the Disclosure Schedule, (i) no employer maintaining
the plan has withdrawn from such a pension plan during the most recent plan
year in which it was a "substantial employer" (as defined in Section 4001(a)(2)
of ERISA), (ii) there has been no notice of intent to terminate any such plan
filed and no such plan has been terminated, (iii) the Pension Benefit Guaranty
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Corporation ("PBGC") has not instituted proceedings to terminate any such plan,
(iv) no other event or condition has occurred which constitutes grounds under
Section 4042 of ERISA for the termination of, or the appointment of a trustee
to administer, any such plan, and (v) all required premium payments to the PBGC
have been paid when due, and (vi) except as set forth in Section 3.14(c) of the
Disclosure Schedule, no other reportable event, as described in Section 4043 of
ERISA and the regulations thereunder, has occurred with respect to said plans.
(d) CONTINUATION COVERAGE REQUIREMENTS OF HEALTH PLAN. All group
health plans of Mortgage Bank (including any Affiliates which must be taken
into account under Section 4980B of the Code) have been operated in good faith,
substantially in compliance with the group health plan continuation coverage
requirements of Section 4980B of the Code to the extent such requirements are
applicable.
(e) FINES AND PENALTIES. There are no fines, penalties, taxes, or
related charges under Sections 502(c) or (k) or (l) or 4071 of ERISA or Chapter
43 or Section 511 of the Code which are assessable against Mortgage Bank.
3.15 OWNERSHIP OF PROPERTY. Mortgage Bank has good and marketable
title to all assets and properties, whether real or personal, tangible or
intangible, reflected in the Balance Sheet, or acquired subsequent thereto and
reflected in the Closing Date Balance Sheet (except to the extent that such
assets and properties have been disposed of for fair value in the ordinary
course of business since the date of the Balance Sheet), each of which is
reflected on the Balance Sheet or the Closing Date Balance Sheet at a value
that does not exceed the net realizable value, as determined in accordance with
GAAP, of such asset subject to no Encumbrances, except (i) those assets and
properties that secure liabilities that are reflected in the Balance Sheet or
the notes thereto or were incurred in the ordinary course of business after the
date of the Balance Sheet that secure additional liabilities to fund or
purchase Mortgage Loans, (ii) statutory liens for amounts not yet delinquent or
which are being contested in good faith, (iii) ordinary liens and encumbrances
on, and rights of redemptions with respect to, foreclosed real estate, (iv)
with respect to assets and properties acquired subsequent to the date of the
Balance Sheet, Encumbrances created in connection with the acquisition thereof
and (v) such Encumbrances that do not in the aggregate detract from the value
or interfere with the use or operations of the asset and property subject
thereto. Mortgage Bank as lessee has the right under valid and subsisting
leases to occupy, use, possess and control all property leased by Mortgage
Bank, as presently occupied, used, possessed and controlled by Mortgage Bank.
The properties and assets owned or leased by Mortgage Bank are adequate for the
conduct of the current business of Mortgage Bank in the manner in which it is
currently being conducted. All such assets and properties are in good
operating condition, ordinary wear and tear excepted. All such assets and
properties are being operated and maintained in material compliance with all
leases, contracts and commitments to which Mortgage Bank is a party or by which
Mortgage Bank or such assets and properties are bound.
3.16 BROKERS AND FINDERS. Other than Financial Capital Resources,
Inc., none of Sellers, Mortgage Bank or any of their respective officers,
directors, employees, agents or Affiliates has employed any broker, finder or
financial advisor or incurred any liability for any broker's or finder's fees
or commissions in connection with the transactions contemplated hereby.
3.17 INSURANCE. Section 3.17 of the Disclosure Schedule lists all of
the insurance policies, binders and bonds maintained by Mortgage Bank, all of
which are in full force and effect; Mortgage Bank is not in default thereunder;
and all claims thereunder have been filed in due and timely fashion. Mortgage
Bank is insured with reputable insurers against such risks and in such amounts
as are normally insured against by companies of the same type and in the same
line of business and as are adequate for the conduct of Mortgage Bank's
business.
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3.18 MORTGAGE BANKING LICENSES AND QUALIFICATIONS. Mortgage Bank (i)
is qualified (A) by FHA as a mortgagee and servicer for FHA Loans, (B) by the
VA as a lender and servicer for VA Loans, and (C) by FNMA and FHLMC as a
seller/servicer of first mortgages to FNMA and FHLMC and (ii) has all other
material certifications, authorizations, licenses, permits and other approvals
necessary to conduct its current mortgage banking business ("Licenses"), and is
in good standing under all applicable federal, state and local laws and
regulations thereunder as a mortgage lender and servicer. Section 3.18 of the
Disclosure Schedule lists each state in which Mortgage Bank has (i) obtained or
applied for a License, or (ii) is exempt from licensing.
3.19 LOAN PORTFOLIO. (a) Sellers have previously delivered to FTNC a
tape (magnetic media) on which certain information regarding the Mortgage
Servicing Portfolio as of March 31, 1994 is recorded. The information
contained in such tape is true and correct in all material respects. Each
Mortgage Loan (i) is, except as set forth in Section 3.19 of the Disclosure
Schedule, evidenced by a note or other evidence of indebtedness with such terms
as are customary in the business and (ii) is duly secured by a mortgage or deed
of trust with such terms as are customary in the business and which grants the
holder thereof, as set forth on the tape (magnetic media) previously provided
to FTNC, either a first lien on the subject property (including any
improvements thereon) with respect to loans originated as first mortgages, and
with respect to loans originated as second mortgages, a second lien on the
subject property (including any improvements thereon) with the exception of (a)
liens for real estate taxes and special assessments not yet due and payable,
(b) covenants, conditions and restrictions, rights of way, easements and other
matters of public record as of the date of the recording of such security
interest which are acceptable to mortgage lending institutions generally or
specifically reflected in the appraisal made in connection with the origination
of the related Mortgage Loan, and (c) other matters to which like properties
are commonly subject which do not, individually or in the aggregate, materially
interfere with the benefits of the security intended to be provided by such
mortgage. Except as set forth in Section 3.19 of the Disclosure Schedule, each
Warehouse Loan is a Conforming Loan or is subject to an Investor Commitment.
(b) Except as set forth on Schedule 3.19 of the Disclosure Schedule,
with respect to each Mortgage Loan:
(i) Such Mortgage Loan was originated and currently exists in
material compliance with all requirements of federal, state and other
applicable laws and Regulations;
(ii) Each note, agreement or other instrument evidencing a
Mortgage Loan and any related security instrument (including, without
limitation, any guaranty or similar instrument) is complete in all
material respects and constitutes a valid, legal and binding
obligation of the obligor thereunder enforceable in accordance with
its terms, subject as to enforcement to bankruptcy, insolvency and
other laws of general applicability relating to or affecting
creditors' rights and to general principles of equity; and all actions
necessary to perfect any related security interest have been duly
taken, including, without limitation, filings (and payment of all
required filing taxes and fees) or taking of possession of Collateral;
(iii) There has been no material modification to or waiver of
such terms except as evidenced in documents executed by the parties
and included in the Mortgage Loan documents;
(iv) No claims or defenses to the enforcement of such
Mortgage Loan have been asserted and Mortgage Bank is not aware of any
acts or omissions that would give rise to any claim or right of
rescission, set off, counterclaim or defense by the borrower, obligor
or any other person obligated to perform under any related Mortgage
Loan documents;
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(v) There is no default, by any borrower, obligor or any
other person obligated to perform under any related Mortgage Loan
document with respect to such Mortgage Loan, nor are there any
conditions that with notice or lapse of time or both, would constitute
a default, breach, violation or event permitting acceleration under
the terms of such Mortgage Loan;
(vi) All due diligence requirements have been met on such
Mortgage Loan (whether owned by Mortgage Bank or serviced by Mortgage
Bank for others) guaranteed or insured by the FHA or the VA, and any
other such guarantor or insurer of such Mortgage Loan, in a manner
that all such guarantees and insurance arrangements are in full force
and effect;
(vii) At the time the Mortgage was originally made, the
Collateral had sufficient value to cover the principal amount of the
Mortgage Loan;
(viii) Such Mortgage Loan was made substantially in
accordance with Mortgage Bank's standard indemnity and documentation
guidelines as in effect at the time of its origination and has been
administered substantially in accordance with Mortgage Bank's standard
loan servicing and operation procedures as in effect from time to
time;
(ix) With respect to the Mortgage Loans:
(1) A title insurance policy in an amount at least
equal to the original principal amount of the Mortgage Loan is
in effect and Mortgage Bank is the sole owner of each such
Mortgage Loan, except for participations as are documented in
the related Mortgage Loan documents or other records;
(2) There are casualty insurance policies in force
to insure the Collateral, with Mortgage Bank as loss payee;
and a real estate appraisal was made by a duly licensed
appraiser to determine the Collateral value;
(3) Flood insurance has been obtained and is in
force as to such real estate located in a flood zone,
notwithstanding any designation of such flood zone or zones
after the date of origination of the Mortgage Loan; and
(4) All buildings on mortgaged property are insured
for not less than the total debt secured by such buildings and
improvements thereto against any loss by fire, hazards of
extended coverage, flood (at least to the extent required by
the Flood Disaster Protection Act of 1973) and such other
hazards (the "hazard insurance policy"), as are customary in
the area where the premises are situated; and the mortgagor is
required by the terms of the Mortgage Loan documentation to
maintain all such insurance with a standard mortgagee's
endorsement or similar protection for the mortgagee at
mortgagor's cost and expense and, on the mortgagor's failure
to do so, authorizing the holder to maintain such insurance at
the mortgagor's cost and expense and to seek reimbursement
there for from the mortgagor; such mortgaged property
constitutes a single tax lot; any improvements located on the
mortgaged property are within its lot lines and do not violate
any set back or zoning ordinances or if such improvements are
not within its lot lines or violate any set back ordinance,
such violation will not result in any Loss; and there is
nothing affecting the condition of the mortgaged property
which would impair the value of the mortgaged property or its
use for the purposes presently used.
3.20 TITLE TO CERTAIN MORTGAGE LOANS; MORTGAGE SERVICING AGREEMENTS.
(a) All Mortgage Loans held for Mortgage Bank's account (whether or not for
future sale or delivery to an Investor) are owned by
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Mortgage Bank free and clear of any Encumbrance other than Encumbrances in
favor of Mortgage Bank's lender banks pursuant to warehouse lines. Such
Mortgage Loans have been duly recorded or submitted for recordation in the
appropriate filing office in the name of Mortgage Bank as mortgagee. Mortgage
Bank has not, with respect to any such Mortgage Loan, released any security
there for, except upon receipt of reasonable consideration for such release or
of Investor approval, or accepted prepayment of any such Mortgage Loan which
has not been promptly applied to such Mortgage Loan.
(b) Except as set forth in Section 3.20 of the Disclosure Schedule,
all of the Mortgage Servicing Agreements and the rights created thereunder are
owned by Mortgage Bank free and clear of any Encumbrances and upon the
transfer, assignment and delivery of the Emerald Common Stock, will continue to
be so owned by Mortgage Bank except upon termination by an Investor pursuant to
contract right.
3.21 NO RECOURSE. Except as set forth in Section 3.21 of the
Disclosure Schedule and except on customary terms with respect to VA No-Bids,
Mortgage Bank is not a party to (i) any agreement or arrangement with (or
otherwise obligated to) any Person, including an Investor or Insurer, to
repurchase from any such Person any Mortgage Loan, mortgaged property serviced
for others or mortgage loan sold by Mortgage Bank with servicing released
("Servicing Released Loans') or Previously Disposed Loans or (ii) any
agreement, arrangement or understanding to reimburse, indemnify or hold
harmless any Person or otherwise assume any liability with respect to any Loss
suffered or incurred as a result of any default under or the foreclosure or
sale of any such Mortgage Loan, mortgaged property, Servicing Released Loans,
or Previously Disposed Loans except insofar as (A) such recourse is based upon
a breach by Mortgage Bank of a customary representation, warranty or
undertaking, or (B) Mortgage Bank incurs expenses such as legal fees in excess
of the customary reimbursement limits, if any, set forth in the applicable
Mortgage Servicing Agreement. For purposes of this Agreement, the term
"Recourse Loan" means any Mortgage Loan, mortgaged property, Servicing Released
Loan or Previously Disposed Loan with respect to which Mortgage Bank bears the
risk of loss as described in the preceding sentence.
3.22 MORTGAGE SERVICING AGREEMENTS. Sellers have previously made
available to FTNC true and complete copies of all Mortgage Servicing Agreements
to which Mortgage Bank is a party as of the date hereof. Except as set forth
in Section 3.22 of the Disclosure Schedule, the Mortgage Servicing Agreements
and the Regulations set forth all the terms and conditions of Mortgage Bank's
rights against and obligations to the Agencies and Investors and they have not
been modified in any material respect. All of the Mortgage Servicing
Agreements are valid and binding obligations of Mortgage Bank and, to the best
knowledge of Sellers and Mortgage Bank, all of the other parties thereto and,
are in full force and effect and are enforceable in accordance with their
terms, except as enforcement thereof may be limited by bankruptcy, insolvency
or other similar laws affecting the enforcement of creditors' rights generally
and by general principles of equity (whether applied in a proceeding in equity
or at law). Except as set forth in Section 3.22 of the Disclosure Schedule,
there is no default or claim of default by any party under any such Mortgage
Servicing Agreement, and except for the consummation of the transactions
contemplated by this Agreement, no event has occurred which with the passage of
time or the giving of notice or both would constitute a default by any party
under any such Mortgage Servicing Agreement or would result in any such
Mortgage Servicing Agreement being terminable by any party thereto. As of the
date of this Agreement, there is no pending or threatened cancellation of any
Mortgage Servicing Agreement. Except as set forth in Section 3.22 of the
Disclosure Schedule, no material sanctions or penalties have been imposed upon
Mortgage Bank under any Mortgage Servicing Agreement or under any applicable
Regulation.
3.23 COMPLIANCE. (a) Mortgage Bank and Western and, as to purchases
of Servicing Rights, all prior servicers and originators have been and are in
compliance in all material respects with all federal, state and other
applicable laws, rules and regulations including Regulations, orders, writs,
decrees, injunctions and other requirements of any court or governmental
authorities applicable to it, its properties and assets and its conduct of
business, the breach of which would require the Repurchase of a Mortgage Loan
or result in the
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Mortgage Bank incurring a Loss. Mortgage Bank (or Western on Mortgage Bank's
behalf) has timely filed, or will have timely filed by the Closing Date, all
material reports required by any Investor or Insurer or by any federal, state
or municipal law, regulation or ordinance, to be filed except where the failure
to do so would not have a material adverse effect on the business, financial
condition or results of operations of Mortgage Bank taken as a whole. Mortgage
Bank has not done or failed to do, and has not caused to be done or omitted to
be done, any act, the effect of which would operate to invalidate or materially
impair (i) any approvals of the FHA, VA, FNMA, FHLMC or HUD, (ii) any FHA
insurance or commitment of the FHA to insure, (iii) any VA guarantee or
commitment of the VA to guarantee, (iv) any private mortgage insurance or
commitment of any private mortgage insurer to insure, (v) any title insurance
policy, (vi) any hazard insurance policy, (vii) any flood insurance policy,
(viii) any fidelity bond, direct surety bond, or errors and omissions insurance
policy required by HUD, FNMA, FHA, FHLMC, VA or private mortgage insurers, (ix)
any surety or guaranty agreement or (x) any guaranty issued by FNMA or FHLMC to
Mortgage Bank respecting mortgage backed securities issued by Mortgage Bank and
other like guaranties. Except as set forth in Section 3.23 of the Disclosure
Schedule, no Agency, Investor or private mortgage insurer has (i) claimed that
Mortgage Bank has violated or has not complied with the applicable underwriting
standards with respect to Mortgage Loans sold by Mortgage Bank to an Investor
or (ii) imposed restrictions on the activities (including commitment authority)
of Mortgage Bank.
(b) Except as set forth in Section 3.23 of the Disclosure Schedule,
no Mortgage Loan, Pipeline Loan, Warehouse Loan or Previously Disposed Loan has
been originated and/or serviced by Mortgage Bank in violation of the
Regulations, the violation of which would require the Repurchase of a Mortgage
Loan or Previously Disposed Loan or result in Mortgage Bank incurring a Loss.
3.24 INVESTOR COMMITMENTS. Set forth in Section 3.24 of the
Disclosure Schedule is a complete and correct list of each Investor Commitment
to which Mortgage Bank was a party on May 31, 1994. Sellers and Mortgage Bank
have made available to FTNC complete and correct copies of all Investor
Commitments in effect on such date. Each Investor Commitment constitutes a
valid and binding obligation of Mortgage Bank, and, to the best knowledge of
Sellers and Mortgage Bank, all of the other parties thereto, enforceable in
accordance with its terms, subject to bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and by general
principles of equity (whether applied in a proceeding in equity or at law).
Each Mortgage Loan, or Warehouse Loan which is subject to an Investor
Commitment, is a Conforming Loan or is otherwise readily saleable in the
secondary market.
3.25 CUSTODIAL ACCOUNTS. Mortgage Bank (or Western on Mortgage Bank's
behalf as subservicer of the Mortgage Servicing Portfolio) has full power and
authority to maintain escrow accounts ("Custodial Accounts") for certain
serviced loans. Such Custodial Accounts comply in all material respects with
(i) all applicable Regulations and the payment of interest on escrows and (ii)
any terms of the Mortgage Loans (and Mortgage Servicing Agreements) relating
thereto. The Custodial Accounts contain the amounts shown in the records of
Mortgage Bank (or Western on Mortgage Bank's behalf as subservicer of the
Mortgage Servicing Portfolio), which amounts represent all monies received or
advanced by Mortgage Bank (or Western on Mortgage Bank's behalf as subservicer
of the Mortgage Servicing Portfolio) as required by the applicable Mortgage
Servicing Agreements, less amounts remitted by or on behalf of Mortgage Bank
pursuant to applicable Mortgage Servicing Agreements, except for checks in
process.
3.26 ENVIRONMENTAL MATTERS. (a) Mortgage Bank has complied in all
material respects with all Environmental Laws (as defined below) with respect
to any real property currently or previously owned or leased by it and no
charge, complaint, action, suit, proceeding, hearing, investigation, claim,
demand, notice or inquiry has been received by Sellers or Mortgage Bank nor to
its best knowledge threatened alleging any failure to comply with any such
Environmental Laws;
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(b) "Environmental Law" means (i) any federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, order, directive, executive or
administrative order, judgment, decree, injunction, requirement or agreement
with any governmental entity, (A) relating to the protection, preservation or
restoration of the environment (which includes, without limitation, air, water
vapor, surface water, ground water, drinking water supply, structures, soil,
surface land, subsurface land, plant and animal life or any other natural
resource), or to human health or safety, or (B) the exposure to, or the use,
storage, recycling, treatment, generation, transportation, processing,
handling, labeling, production, release or disposal of, Hazardous Materials, in
each case as amended and as now or hereafter in effect, including all current
Environmental Laws, all future interpretations of current Environmental Laws
and all future Environmental Laws and subsequent interpretations thereof. The
term Environmental Law includes, without limitation, the Federal Comprehensive
Environmental Response Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act, the Federal Water Pollution Control Act of
1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal
Resource Conservation and Recovery Act of 1976 (including the Hazardous and
Solid Waste Amendments thereto), the federal Solid Waste Disposal and the
federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and
Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, the
Federal Hazardous Materials Transportation Act, or any so-called "Super fund"
or "Super lien" law, each as amended and as now or hereafter in effect, and
(ii) any common law or equitable doctrine (including, without limitation,
injunctive relief and tort doctrines such as negligence, nuisance, trespass and
strict liability) that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of our exposure to
any Hazardous Material;
(c) "Hazardous Material" means any substance which is or could be
detrimental to human health or safety or to the environment, currently or
hereafter listed, defined, designated or classified as hazardous, toxic,
radioactive or dangerous, or otherwise regulated, under any Environmental Law,
whether by type or by quantity, including any substance containing any such
substance as a component. Hazardous Material includes, without limitation, any
toxic waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance, oil or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos,
asbestos-containing material, urea formaldehyde foam insulation, lead and
polychlorinated biphenyl.
3.27 INQUIRIES. Section 3.27 of the Disclosure Schedule contains a
true and correct list of all of the audits, investigations, complaints and
inquiries of Mortgage Bank by an Agency, an Investor, or a private mortgage
insurer commenced since March 31, 1991, or ongoing as of the date of this
Agreement. Except for customary ongoing quality control reviews and except as
disclosed in Section 3.27 of the Disclosure Schedule, no audit or investigation
is pending or, to the best knowledge of Sellers and Mortgage Bank, threatened
that could result in:
(a) a claim of a material failure to comply with applicable
Regulations,
(b) a repurchase of Mortgage Loans by Mortgage Bank,
(c) indemnification by Mortgage Bank in connection with Mortgage
Loans,
(d) rescission of any insurance or guaranty contract or agreement or
(e) payment of a material penalty by Mortgage Bank to any Agency,
HUD, an Investor or a private mortgage insurer.
Sellers have made available to FTNC copies of all written reports and materials
received in connection with such audits, investigations, complaints and
inquiries.
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3.28 ADVANCES. Except as set forth in Section 3.28 of the Disclosure
Schedule, there are no pooling, participation, servicing or other agreements to
which Mortgage Bank is a party which obligate it to make servicing advances
with respect to defaulted or delinquent Mortgage Loans other than as provided
in FNMA or FHLMC pooling and servicing agreements. The Advances are valid and
subsisting amounts owing to Mortgage Bank, subject to the terms of the
applicable Mortgage Servicing Agreement.
3.29 PHYSICAL DAMAGE. There exists no physical damage to any
Collateral, which physical damage is not insured against in compliance with the
Regulations and would cause any Mortgage Loan to become delinquent or adversely
affect the value or marketability of any Mortgage Loan, Servicing Rights or
Collateral.
3.30 APPLICATION OF FUNDS. All monies received with respect to each
Mortgage Loan have been properly accounted for and applied.
3.31 POOL CERTIFICATION. Except as set forth in Section 3.31 of the
Disclosure Schedule, all Pools relating to the Mortgage Loans have been
certified, finally certified and recertified (if required) in accordance with
applicable regulations, and the securities backed by such Pools have been
issued on uniform documents, in accordance with the applicable Investor guide
without any deviations therefrom. The principal balance outstanding and owing
on the Mortgage Loans in each Pool equals or exceeds the amount owing to the
corresponding security holders of such Pool. No event has occurred or failed
to occur which would require Mortgage Bank to repurchase any Mortgage Loan from
any Pool.
3.32 LOAN DISBURSEMENT. Upon origination, all of the Mortgage Loans
were fully disbursed in accordance with applicable law and regulations.
3.33 PAYMENT OF TAXES, INSURANCE PREMIUMS, ETC. The responsibilities
of Mortgage Bank with respect to all applicable taxes (including tax reporting
for the period prior to the Closing), assessments, ground rents, flood
insurance premiums, hazard insurance premiums and mortgage insurance premiums
that are related to the Mortgage Loans have been duly met in all material
respects.
3.34 TAX IDENTIFICATION. All tax identifications are correct and
complete and comply with all applicable federal, state and other applicable
laws, rules and regulations in all material respects, and property descriptions
contained in any Loan Document are legally sufficient.
3.35 PAYOFF STATEMENTS. All payoff and assumption statements with
respect to each Mortgage Loan provided by Mortgage Bank (or Western on Mortgage
Bank's behalf as subservicer of the Mortgage Servicing Portfolio) to borrowers
or their agents were, at the time they provided, complete and accurate in all
material respects.
3.36 REGISTRATION STATEMENT. The information to be supplied by
Sellers and Mortgage Bank for inclusion in the registration statement on Form
S-4 and/or such other form(s) as may be appropriate to be filed under the
Securities Act of 1933, as amended (the "Securities Act"), with the SEC by FTNC
for the purpose of, among other things, registering the FTNC Common Stock to be
issued to the Sellers under Article II (the "Registration Statement"), and
together with the prospectuses included in the Registration Statement, as
amended or supplemented from time to time (the "Prospectus"), will not at the
time such Registration Statement becomes effective and in the case of each
Prospectus, at the time it is mailed and at the time of the meeting of the
stockholders, contemplated under this Agreement, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
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3.37 COOPERATION RE BLUE SKY FILINGS. Sellers and Mortgage Bank will
cooperate with FTNC to enable it to obtain all necessary state securities laws
or "Blue Sky" permits and approvals as provided in Sections 3.36 and 4.15.
ARTICLE IV
REPRESENTATION AND WARRANTIES OF FTNC AND FTB
FTNC and FTB each hereby severally represent and warrant, to the
extent applicable to each, to Sellers as of the date of this Agreement as
follows:
4.1 ORGANIZATION; FTNC COMMON STOCK. (a) FTB is a duly organized
national banking association. FTB has full corporate power and authority to
carry on its business as now conducted and to own and lease its properties and
assets and is duly licensed or qualified to do business and is in good standing
in each state or jurisdiction where its ownership or leasing of property or
assets or the conduct of its business requires such licensing or qualification,
except where the failure to be so licensed or qualified would not have a
material adverse effect on the business, financial condition or results of
operations of FTB taken as a whole.
(b) FTNC is a duly organized Tennessee corporation. FTNC has full
corporate power and authority to carry on its business as now conducted and to
own and lease its properties and assets and is duly licensed or qualified to do
business and is in good standing in each state or jurisdiction where its
ownership or leasing of property or assets or the conduct of its business
requires such licensing or qualification, except where the failure to be so
licensed or qualified would not have a material adverse effect on the business,
financial condition or results of operations of FTNC taken as whole. FTNC owns
all of the issued and outstanding capital stock of FTB. The shares of FTNC
Common Stock to be issued pursuant to the terms of this Agreement, when issued
will be duly authorized, validly issued, fully paid and non-assessable, and
subject to no preemptive rights and, upon the effective date of the
Registration Statement, shall be registered securities, subject to no
restrictions regarding sale, resale or other transfer other than (i) those
arising pursuant to Rule 145 under the Securities Act of 1933 and (ii) to the
provisions described in Section 8.3(c) hereof to ensure pooling-of-interests
accounting treatment for the Acquisition.
4.2 AUTHORITY; NO VIOLATION. (a) Each of FTB and FTNC 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 authorized by all requisite corporate action in respect thereof
on the part of FTB and FTNC and no other corporate proceedings on the part of
FTB or FTNC are necessary to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by FTB and FTNC
and, assuming this Agreement constitutes a valid and binding agreement of
Sellers and Mortgage Bank, constitutes a valid and binding obligation of FTB
and FTNC, respectively, enforceable against FTB and FTNC in accordance with its
terms (subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity (whether applied in a proceeding in equity or at law)).
(b) Neither the execution and delivery of this Agreement nor the
consummation by FTB or FTNC of the transactions contemplated hereby, nor
compliance by FTB or FTNC with any of the terms or provisions hereof, will (i)
conflict with or result in a breach of any provision of the articles of
incorporation (or similar governing document) or by-laws of FTB or FTNC or (ii)
assuming the consents, permits, authorizations, approvals, filings and
registrations set forth in Section 4.5 of the Disclosure Schedule, which has
previously been delivered by FTNC to Sellers, are obtained or made, (A) violate
any statute, code, ordinance, rule, regulation, judgment, order, writ, decree
or injunction applicable to FTB or FTNC or any of their respective properties
or assets or (B) violate, conflict with, result in a breach of any provisions
of, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination
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of, accelerate the performance required by, or result in a right of termination
or acceleration or the creation of any Encumbrance upon any of the properties
or assets of FTB or FTNC 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 FTB or FTNC is a party, or by which
its properties or assets may be bound or affected, except, in the case of this
clause (ii), for such violations, conflicts, breaches or defaults which, either
individually or in the aggregate, would not have a material adverse effect on
the business, financial condition or results of operation of FTB or FTNC or the
ability of FTB or FTNC to consummate the transactions contemplated hereby.
4.3 CAPITALIZATION. The authorized capital stock of FTNC consists
only of those shares of Common Stock and preferred stock as set forth on
Exhibit "H." To FTNC's best knowledge, there are no voting trusts, proxies, or
other agreements or understandings with respect to the voting of FTNC Common
Stock.
4.4 FINANCIAL STATEMENTS. FTNC has previously delivered to Sellers'
Representative copies of (i) (a) audited consolidated balance sheets of FTNC as
of December 31, 1993 and December 31, 1992 and (b) audited consolidated
statements of income, changes in stockholder's equity and statements of cash
flow of FTNC for the years ending December 31, 1991, December 31, 1992 and
December 31, 1993 (collectively, the "FTNC Audited Financial Statements"),
together with reports on the FTNC Audited Financial Statements by FTNC's
independent accountants and (ii) unaudited consolidated statement of income,
changes in stockholder's equity and statement of cash flow of FTNC for the
period ending March 31, 1994 and unaudited consolidated balance sheet as of
March 31, 1994, of FTNC (collectively, the "FTNC Interim Financial Statements,"
and together with the FTNC Audited Financial Statements, the "FTNC Financial
Statements"). The FTNC Financial Statements (except for the failure to include
all of the notes thereto required by GAAP in the FTNC Interim Financial
Statements) have been prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered by such statements (except as may be
indicated in the notes thereto) and fairly present in all material respects the
consolidated financial position of FTNC as of the respective dates thereof and
the results of their operations and the changes in their financial position for
the respective periods covered thereby.
4.5 CONSENTS AND APPROVALS. Except as set forth in Section 4.5 of
the Disclosure Schedule, no consents, permits, authorizations or approvals of,
or filings or registrations with, any governmental or regulatory authorities,
government-sponsored agencies or corporations or other third parties are
necessary to be obtained or made by FTB or FTNC in connection with the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
4.6 BROKERS AND FINDERS. Neither FTB nor FTNC nor any of their
officers, directors, employees or agents has employed any broker, finder or
financial advisor or incurred any liability for any broker's or finder's fees
or commissions in connection with the transactions contemplated hereby.
4.7 FINANCING. FTB has, or has the capacity to borrow, sufficient
funds to satisfy any warehouse and operating lines of credit of Mortgage Bank
outstanding at the Closing Date.
4.8 STATEMENTS MADE. No representation, warranty or statement made
by FTNC or FTB in this Agreement or in any exhibit, written statement, or
certificate furnished by or on behalf of FTB or FTNC or to Sellers in
connection with the transactions contemplated hereby contains or will contain
any untrue statement of material fact or omits or will omit to state a material
fact necessary to make the statements contained herein or therein not
misleading.
4.9 LEGAL PROCEEDINGS. There are no Legal Proceedings pending or, to
the best knowledge of FTB or FTNC, any Legal Proceedings threatened, nor is
there any order, injunction or decree outstanding against or relating to FTB or
FTNC or their respective properties, assets, or business, any of which would
reasonably be expected to have a material adverse effect on FTB's or FTNC's
ability to meet its obligations hereunder, nor
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does FTB or FTNC know of any material basis for any such Legal Proceedings. To
the best knowledge of FTB and FTNC, no action or proceeding has been instituted
or threatened before any court or other governmental body by any person or
public authority seeking to restrain or prohibit or to obtain damages with
respect to the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby.
4.10 UNDISCLOSED LIABILITIES. Neither FTNC nor FTB has any material
liabilities or material obligations of any nature, whether accrued, absolute,
contingent or otherwise, asserted or unasserted, known or unknown, which would
be shown on a balance sheet prepared in accordance with GAAP, except for
liabilities and obligations stated on the FTNC Financial Statements, or
otherwise disclosed in the Disclosure Schedule.
4.11 NO MATERIAL ADVERSE CHANGE. Except as set forth in Section 4.11
of the Disclosure Schedule, since December 31, 1993, there has not been any
material adverse change in the business, condition, financial or otherwise, or
results of operations of FTNC and its subsidiaries taken as a whole, or FTB and
its subsidiaries, respectively, taken as a whole.
4.12 INQUIRIES. Section 4.12 of the Disclosure Schedule contains a
true and correct list of all non-routine or special examinations and written
inquiries of FTNC and FTB by any bank or bank holding company regulator or the
SEC since December 31, 1993, and all non-routine examinations now being
conducted, pending, or to the best knowledge of FTNC and FTB, threatened.
4.13 BLUE SKY COMPLIANCE. FTNC shall obtain, prior to the effective
date of the Registration Statement, all necessary state securities law or "Blue
Sky" permits and approvals required to carry out the transactions contemplated
by this Agreement.
4.14 REGISTRATION STATEMENT. The information to be supplied by FTB
and FTNC for inclusion in (1) the Registration Statement or (2) the Prospectus
will not at the time such Registration Statement becomes effective and, in the
case of the Prospectus, at the time it is delivered, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading.
ARTICLE V
PRE-CLOSING COVENANTS
5.1 REASONABLE BEST EFFORTS. Subject to the terms and conditions
thereof, each of the parties shall use its respective reasonable best efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective the
Acquisition.
5.2 CONDUCT PRIOR TO CLOSING. During the period from the date of
this Agreement to the Closing Date, and except as otherwise contemplated by
this Agreement or the Disclosure Schedule or consented to by FTNC, Sellers
shall cause Mortgage Bank to use its best efforts to preserve intact its
organization, properties, business and relationships with customers, employees
and others with whom business relationships exist. Without limiting the
generality of the foregoing, except as otherwise contemplated in this Agreement
or the Disclosure Schedule or consented to in writing by FTNC, Sellers shall
cause Mortgage Bank to conduct its business only in the ordinary course
consistent with past practices and shall not permit Mortgage Bank to:
(a) issue, sell, redeem, repurchase or deliver any shares of its
capital stock or declare or pay a dividend or issue or sell any securities
convertible into, or options with respect to, or warrants to purchase or rights
to subscribe to, any shares of its capital stock;
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(b) effect any recapitalization, reclassification, stock dividend,
stock split or like change in capitalization;
(c) amend its articles of incorporation, by-laws or similar governing
documents;
(d) merge or consolidate with, or, except as a result of foreclosure
or repossession in the ordinary course of its mortgage banking business,
acquire substantially all of the assets of or make any investment in the equity
securities of, any other entity;
(e) sell, transfer, lease or encumber any Servicing Rights or other
assets except for Mortgage Loans and related Servicing Rights in the ordinary
course of business or as otherwise specifically provided herein or purchase any
assets except for Mortgage Loans and Servicing Rights related thereto from
third party mortgage loan originators with respect to which Mortgage Bank is a
party to a Contract;
(f) materially alter or vary Mortgage Bank's methods or policies of
(i) underwriting, pricing, originating, warehousing, selling and servicing, or
buying or selling rights to service, mortgage loans, (ii) hedging (which term
includes both buying futures and forward commitments from financial
institutions) its mortgage loan positions or commitments, and (iii) obtaining
financing and credit;
(g) grant to any director, officer, employee or consultant any
material increase in compensation or benefits (other than as set forth in
Section 5.11 or as may be required under the terms of written agreements in
effect on the date hereof, true and correct copies of which have been delivered
to FTNC, and other than normal increases in compensation or benefits made in
the ordinary course of business to officers or employees in accordance with
existing personnel policies);
(h) grant any severance or termination pay (other than as may be
required under the terms of agreements in effect on the date hereof, true and
correct copies of which have been delivered to FTNC) to, or enter into or amend
any employment or severance agreement with, any Person, other than termination
pay paid in accordance with existing personnel policies to officers or
employees;
(i) adopt any new or amend any existing director, officer or employee
benefit plans (including, without limitation, profit sharing, bonus, director
and officer incentive compensation, retirement, medical, hospitalization, life
or other insurance plans, arrangements and commitments);
(j) enter into any employment or collective bargaining agreement or
modify any existing employment agreement;
(k) incur any Debt, other than (i) Debt incurred to fund or purchase
mortgage loans or (ii) otherwise in the ordinary course of business or (iii) to
pay obligations on existing debt agreements;
(l) make any change in accounting principles or methods from those
employed as of the date of preparation of the Balance Sheet and the Audited
Financial Statements, except as required by GAAP or by applicable regulatory
requirements;
(m) grant any mortgage or security interest in, or make any pledge
of, or permit any lien or encumbrance to be placed on, any of its assets or
properties other than a Permitted Encumbrance;
(n) make any capital expenditures other than in the ordinary course
of business or as necessary to maintain existing assets in good repair which
expenditures will in no event exceed $10,000 on a per occurrence basis and
$25,000 in the aggregate;
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(o) take any action, or fail to take any action, that is intended or
may reasonably be expected to result in a breach or violation of any of the
respective representations and warranties of Sellers or Mortgage Bank contained
in this Agreement or would cause any condition to the transactions contemplated
hereby not to be satisfied, except, in every case, as may be required by law;
(p) accelerate, terminate, or cancel any material contract, lease or
license to which it is a party other than in the ordinary course of business or
enter into any material contract, lease or license that is not terminable
without penalty by Mortgage Bank upon sixty (60) days or less notice;
(q) enter into mortgage loan subservicing agreements; or
(r) agree to do any of the foregoing.
5.3 ACCESS TO PROPERTIES AND RECORDS; CONFIDENTIALITY. (a) During
the period from the date of this Agreement to the Closing Date, upon reasonable
notice and subject to applicable laws relating to the exchange of information,
Sellers shall permit (and shall cause Mortgage Bank to permit) FTNC and its
authorized representatives reasonable access to the properties of Mortgage
Bank, and shall disclose and make available to FTNC all books, papers and
records relating to the assets, stock, ownership, properties, operations,
obligations and liabilities of Mortgage Bank, including, but not limited to,
all books of account (including the general ledger), tax records (including Tax
Returns of Mortgage Bank and schedules thereto), minute books of directors' and
stockholders' meetings, organizational documents, bylaws, contracts and
agreements, filings and correspondence with, and notices or other documents
from, any federal or state regulatory authority, government sponsored
enterprise, Investor or private mortgage insurer, plans affecting employees and
any other business activities or prospects. Mortgage Bank shall not be
required to provide access to or to disclose information where such access or
disclosure would jeopardize the attorney-client privilege of Mortgage Bank or
would 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
satisfactory to FTNC under circumstances in which the restrictions of the
preceding sentence apply. FTNC will, and will cause its agents to, conduct
such investigations in such a manner as not to unreasonably interfere with the
normal operations of Mortgage Bank.
(b) All information furnished by Sellers, Mortgage Bank or any of
their representatives to FTNC or its representatives pursuant hereto shall be
treated as the sole property of Sellers and, if the Acquisition shall not
occur, FTNC and its representatives shall return to Sellers all of such written
information and all documents, magnetic media, notes, summaries or other
materials containing, reflecting or referring to, or derived from, such
information. FTNC shall and shall cause its representatives to keep
confidential all such information, and shall use such information solely for
purposes of this Agreement and shall not directly or indirectly use such
information for any competitive or other commercial purposes. The obligation
to keep such information confidential shall continue indefinitely and shall not
apply to (i) any information which (x) was already in FTNC's possession prior
to the disclosure thereof by any Seller or Mortgage Bank or any of their
representatives; (y) was then generally known to the public; or (z) was
disclosed to FTNC by a third party not bound by any obligation of
confidentiality or (ii) disclosures made as required by law. It is further
agreed that, if in the absence of a protective order or the receipt of a waiver
hereunder, FTNC is nonetheless, in the opinion of its counsel, compelled to
disclose information concerning any Seller or Mortgage Bank to any tribunal or
governmental body or agency or else stand liable for contempt or suffer other
censure or penalty, FTNC may disclose such information to such tribunal or
governmental body or agency without liability hereunder. FTNC shall provide
written notice of a pending disclosure to Sellers' Representative as soon as
practicable and shall use its best efforts to give such written notice prior to
its compulsory disclosure.
(c) During the period from the date of this Agreement to the Closing
Date, upon reasonable notice and subject to applicable laws relating to the
exchange of information, FTNC shall permit Sellers' Representative
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reasonable access to the respective properties of FTB and FTNC, and shall
disclose and make available to Sellers' Representative all books, papers and
records relating to the assets, stock, ownership, properties, operations,
obligations and liabilities of FTB and FTNC, including, but not limited to, all
books of account (including the general ledger), tax records (including Tax
Returns of FTB and FTNC and schedules thereto), minute books of directors' and
stockholders' meetings, organizational documents, bylaws, contracts and
agreements, filings and correspondence with, and notices or other documents
from, any federal or state regulatory authority, government sponsored
enterprise, and plans affecting employees and any other business activities or
prospects. Neither FTB nor FTNC shall be required to provide access to or to
disclose information where such access or disclosure would jeopardize the
attorney-client privilege of FTB or FTNC or would 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 satisfactory to Sellers'
Representative under circumstances in which the restrictions of the preceding
sentence apply. Sellers' Representative will, and will cause its agents to,
conduct such investigations in such a manner as not to unreasonably interfere
with the normal operations of FTB or FTNC.
(d) All information furnished by FTB or FTNC, or any of their
representatives to Sellers' Representative or Mortgage Bank or any of its
representatives pursuant hereto shall be treated as the sole property of FTNC
and, if the Acquisition shall not occur, Sellers' Representative and Mortgage
Bank shall return to FTNC and shall cause any Seller and any representative of
Mortgage Bank receiving such materials to return to FTNC all of such written
information and all documents, notes, summaries or other materials containing,
reflecting or referring to, or derived from, such information. Sellers,
Sellers' Representative and Mortgage Bank shall, and Sellers' Representative
and Mortgage Bank shall cause their respective representatives to, keep
confidential all such information, and shall not directly or indirectly use
such information for any competitive or other commercial purposes. The
obligation to keep such information confidential shall continue indefinitely
and shall not apply to (i) any information which (x) was already in any
Seller's or Sellers' Representative's, Mortgage Bank's or any representative of
Mortgage Bank's possession prior to the disclosure thereof by FTNC or any of
its representatives; (y) was then generally known to the public; or (z) was
disclosed to a Seller, Sellers' Representative, Mortgage Bank or any
representative of Mortgage Bank by a third party not bound by any obligation of
confidentiality or (ii) disclosures made as required by law. It is further
agreed that, if in the absence of a protective order or the receipt of a waiver
hereunder, Sellers, Sellers' Representative, Mortgage Bank or any
representative of Mortgage Bank are nonetheless, in the opinion of their
respective counsel, compelled to disclose information concerning FTB or FTNC to
any tribunal or governmental body or agency or else stand liable for contempt
or suffer other censure or penalty, Sellers, Sellers' Representative, Mortgage
Bank or any representative of Mortgage Bank may disclose such information to
such tribunal or governmental body or agency without liability hereunder.
Sellers' Representative or Mortgage Bank shall provide written notice of a
pending disclosure to FTB as soon as practicable and shall use its best efforts
to give such written notice prior to its compulsory disclosure.
5.4 FILINGS AND CONSENT. (a) Promptly following the execution and
delivery hereof Sellers, Mortgage Bank, FTNC and FTB, as applicable, shall file
and use their best efforts to obtain all consents (including as to Mortgage
Bank, Agency and Investor consents), approvals, permits, authorizations,
notices, and registrations (collectively, "filings and consent solicitations")
necessary to consummate the Acquisition. Each party shall cooperate with the
other in obtaining or making the necessary filings and consent solicitations.
Each party will use its respective best efforts to cause the filings and
consent solicitations to be made as soon as practicable. The parties hereto
agree that they will consult with each other with respect to the obtaining of
all the filings and consent solicitations, and each party will keep the others
apprised of the status of matters relating thereto.
(b) Sellers and Mortgage Bank, as applicable, and FTNC shall
promptly furnish each other with copies of written communications received by
Sellers, Mortgage Bank, FTNC or FTB from or delivered by any
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of them to any governmental body, Agency, Investor or private mortgage insurer
in respect of the transactions contemplated hereby.
5.5 PRESS RELEASES. Sellers' Representative, Mortgage Bank, FTNC and
FTB shall provide each other with copies of all news releases and other public
information disclosures with respect to this Agreement or the transactions
contemplated hereby prior to their distribution; provided, however, no party
hereto shall make any public announcement or disclosure without the prior
approval of the other party, except where disclosure is required by law, in
which case the party making such public announcement or disclosure shall give
prior written notice to the other party.
5.6 TRANSFER AND RECORDING FEES. Prior to the Closing, Sellers or
Mortgage Bank shall pay all transfer and recording taxes and other fees
(including any mortgage servicing portfolio transfer fees, fees, if any, due as
a result of the change in the tax service for the Mortgage Servicing Portfolio,
any notification letters sent to mortgagors or Investors (including any Agency)
by Mortgage Bank, FTB or any Subsidiary, and fees to record assignments of the
Mortgage Loans) in connection with the Acquisition.
5.7 NO SOLICITATION. From and after the date hereof, until the
earlier of the Closing Date or termination of this Agreement, neither Sellers,
Mortgage Bank nor any of their respective Affiliates will nor will they
authorize or permit any of the respective officers, directors, employees,
representatives, agents or other persons controlled by any of them to, (a)
encourage or solicit (including by way of furnishing nonpublic information), or
take any action to facilitate, any inquiry or proposal from any Person (other
than FTNC and its Affiliates) concerning any merger, consolidation, sale of
substantially all assets, sale of shares of capital stock or similar
transaction involving Sellers or Mortgage Bank or (b) entertain, agree to,
endorse, or participate in any discussions or negotiations or provide third
parties with nonpublic information relating to any such inquiry or proposal.
Sellers and Mortgage Bank shall notify FTNC promptly of any such inquiry or
proposal received by any of them.
5.8 CONSISTENCY IN METHODOLOGIES. Prior to the Closing Date,
Mortgage Bank shall increase its reserve for foreclosure losses and/or decrease
its valuation of capitalized Servicing Rights by additional provisions, if
necessary, in order to be consistent with the specific methodologies for these
items used by FTB. An adjustment under this Section 5.8 for foreclosure losses
will be (i) in addition to and not inclusive of the reserve for foreclosure
losses at the Closing Date determined to be adequate pursuant to Section 2.7,
and (ii) subject to the definition of "Tangible Net Assets." If an adjustment
to the reserve for foreclosure losses or to the valuation of capitalized
Servicing Rights is made pursuant to this Section 5.8, Mortgage Bank shall not
record on the Closing Date Balance Sheet the applicable income tax benefit.
5.9 FILING OF REGISTRATION STATEMENT. Sellers' Representative,
Mortgage Bank, FTNC and FTB shall cooperate in the preparation and filing of
the Proxy Statement/Prospectus and the Registration Statement in order to file
the Registration Statement.
5.10 NO ACTION TO PROHIBIT POOLING-OF-INTERESTS ACCOUNTING TREATMENT.
None of FTNC, FTB, Sellers or Mortgage Bank shall take any action or fail to
take any action before or after the Closing which would cause the Acquisition
to fail to qualify as a pooling-of-interests for accounting purposes.
5.11 DISPOSITION OF CERTAIN ASSETS AND TERMINATION OF CERTAIN
AGREEMENTS. Unless otherwise agreed in writing by FTNC and Mortgage Bank,
Mortgage Bank shall, effective prior to the Closing Date, terminate or
otherwise dispose of all automobile leases, all life insurance policies
covering any Seller, all club memberships, all cellular telephone agreements
and the J.D.S. lease agreements.
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ARTICLE VI
POST-CLOSING COVENANTS
6.1 STANDARD OF CARE. In addition to any other requirements imposed
by this Agreement, from and after the Closing Date and for so long as Mortgage
Bank owns the Transferred Loans (defined below), Mortgage Bank shall service
the Mortgage Loans in the Closing Portfolio, the Pipeline Loans, and the
Excluded Loans (collectively, the "Transferred Loans"), make advances with
respect thereto, conduct foreclosures, manage Collateral and pay, perform and
discharge all obligations as the servicer of the Transferred Loans in
accordance with applicable law and Regulations and applicable Investor and
Insurer requirements. Mortgage Bank shall exercise with respect to the
servicing of the Transferred Loans (including the conduct of foreclosures and
the management of Collateral) and the collection of Advances, not less than the
degree of care which is standard in the industry with respect to the servicing
of loans (including the conduct of foreclosures and the management of property)
and the collection of Advances for one's own account. In the event there is a
conflict between any provision of this Agreement and any applicable Investor or
Insurer requirements, the latter shall govern Mortgage Bank's conduct with
respect to the Transferred Loans.
6.2 MITIGATION OF LOSSES. FTB shall cause Mortgage Bank to at all
times use its reasonable efforts to minimize the Losses for which Sellers may
be liable pursuant to this Agreement (including, without limitation, Article
IX). Without limiting the foregoing, in carrying out its duty to mitigate
Losses for which Sellers may or would be so liable, Mortgage Bank shall take
the actions described in this Section 6.2.
(a) BUYDOWNS AND PREFORECLOSURES. If there is a reasonable good
faith basis for doing so, Mortgage Bank shall appeal, through such processes as
are reasonably available, any VA No-Bid if Sellers' liability for the related
Buydown is reasonably likely to be reduced. Mortgage Bank shall attempt to
initiate a Preforeclosure with respect to any Transferred Loan (other than a VA
Loan) if Sellers' liability with respect thereto is reasonably likely to be
reduced and to do so would be in compliance with the terms of Section 6.1.
(b) RELATED CLAIMS, PURSUIT OF CONTRACTUAL RIGHTS. With respect to
any matter for which Sellers may be liable pursuant to the provisions of this
Agreement (including, without limitation, Articles VII and IX hereof), Mortgage
Bank shall diligently pursue (including, without limitation, the commencement
and pursuit of litigation) any and all rights and remedies under agreements and
contracts with third parties reasonably likely to be successful, including,
without limitation, insurance policies, pursuant to which Mortgage Bank has
rights of recourse or is indemnified or the beneficiary of a guaranty.
(c) DEFENSES AND CURES. Before Mortgage Bank shall initiate, agree
or consent to any Repurchase, Mortgage Bank shall use reasonable efforts to
attempt to cure the defect that is the basis for such potential Repurchase and,
if there is a reasonable basis for doing so, Mortgage Bank shall, through such
processes as are reasonably available, defend and appeal the request or demand
by an Investor that a Transferred Loan be repurchased.
6.3 EXPENSES AND REIMBURSEMENT OF RECOVERIES.
(a) Within ten (10) business days of written notice by Mortgage
Bank to Sellers' Representative, all expenses, but not including expenses
attributable to or arising from overhead allocations or general and
administrative costs, incurred by FTNC or FTB in minimizing Losses for which
Sellers may be liable under this Agreement ("Mitigation Expenses") shall be
deemed to have been incurred on Sellers' behalf and shall be reimbursed by
Sellers, subject to proper documentation and detail. All payments of
Mitigation Expenses by Sellers made after ten (10) days of written demand by
FTB shall be accompanied by payment of interest on the amount of such payment
through the date of payment calculated at the Fed Funds Rate.
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6.4 TAX REPORTING. Mortgage Bank, at its cost and expense, shall
prepare, report to the IRS and provide to borrowers under a Transferred Loan,
all in accordance with applicable law, rules and regulations, any and all tax
information required to be provided after the Closing Date with respect to the
Transferred Loans for the entire calendar year in which the Closing Date
occurs.
6.5 SELLERS' REPRESENTATIVE CONTINUING ACCESS TO BOOKS/RECORDS. For
a period of six (6) months after the Closing Date, Sellers' Representative
shall have the right, at its cost and expense and upon reasonable notice to
FTNC and under those conditions and circumstances that FTNC may reasonably
impose, to examine the books and records of Mortgage Bank with regard to the
Servicing Rights and related assets transferred to Mortgage Bank under this
Agreement.
6.6 PAYMENT OF WAREHOUSE LINES OF CREDIT. On the Closing Date, FTB
shall pay in full all warehouse and operating lines of credit of Mortgage Bank
outstanding at the Closing Date.
ARTICLE VII
CERTAIN TAX MATTERS
Sellers, Mortgage Bank, FTNC and FTB hereby covenant and agree with
respect to certain tax matters as follows:
7.1 RETURNS; INDEMNIFICATION; LIABILITY FOR TAXES. (a) Sellers
shall indemnify and hold FTNC and FTB and each Affiliate of FTNC and FTB
harmless against and from, on an after-tax basis, (i) all Taxes of Mortgage
Bank for all taxable years or periods which end on or before the Closing Date
which are not paid prior to the Closing Date and for which adequate reserve was
not made on the Closing Date Balance Sheet; (ii) all Taxes of Mortgage Bank due
or accrued or subsequently determined to be due through the Closing Date in
respect of any taxable year or period commencing before the Closing Date and
ending after the Closing Date (a "Straddle Period") to the extent that the
Closing Date Balance Sheet did not contain adequate reserves for such Taxes;
and (iii) all Losses attributable to such Taxes.
(b) FTNC shall prepare and file or cause to be prepared and filed on
a timely basis all Tax Returns of Mortgage Bank due after the Closing Date.
7.2 COOPERATION; REFUNDS AND CREDITS. Sellers and FTNC shall
reasonably cooperate, and shall cause their respective Affiliates, officers,
employees, agents, auditors and representatives reasonably to cooperate, in
preparing and filing all Tax Returns (including amended returns and claims for
refund), including maintaining and making available to each other all records
necessary in connection with Taxes and in resolving all disputes and audits
with respect to all taxable periods relating to Taxes. FTNC recognizes that
Sellers' Representative may need access, from time to time, after the Closing
Date, to certain accounting and tax records and information held by Mortgage
Bank to the extent such records and information pertain to events occurring
prior to the Closing Date; therefore, FTNC agrees that (i) from and after the
Closing Date, FTNC shall, and shall cause Mortgage Bank to (A) retain and
maintain such records until such time as Sellers' Representative reasonably
agree(s) that such retention and maintenance is no longer necessary, and (B)
allow Sellers' Representative and its agents and representatives, at Sellers'
Representative's expense, to inspect, review and make copies of such records as
Sellers' Representative may reasonably deem necessary or appropriate from time
to time, such activities to be conducted during normal business hours and (ii)
FTNC shall not, and shall cause Mortgage Bank not to, dispose of any of such
records without first providing Sellers' Representative with an opportunity to
take possession of such records or to make copies thereof prior to any such
disposal.
7.3 CONDUCT OF AUDITS AND OTHER PROCEDURAL MATTERS. Each party shall
have the right, at its own expense, to control any audit or examination by any
taxing authority, initiate any claim for refund or amended
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return, and contest, resolve and defend against any assessment, notice of
deficiency or other adjustment or proposed adjustment of Taxes ("Proceedings")
for any taxable period for which that party or any of its Affiliates is charged
with payment or indemnification responsibility under this Agreement. Each
party shall promptly forward to the other all written notifications and other
written communications from any taxing authority received by such party or its
Affiliates relating to any liability for Taxes for any taxable period for which
such other party or any of its Affiliates is charged with payment or
indemnification responsibility under this Agreement and each indemnifying party
shall promptly notify, and consult with, each indemnified party as to any
action it proposes to take with respect to any liability for Taxes for which it
is required to indemnify another party and shall not enter into any closing
agreement or final settlement with any taxing authority with respect to any
such liability without the written consent of the indemnified parties, which
consent shall not be unreasonably withheld. Where a party has withheld its
consent to any closing agreement or final settlement, such party shall continue
or initiate further proceedings, at its own expense, and the liability of the
party giving up control of such Proceeding, after giving effect to this Section
7.3, shall not exceed the liability that would have resulted from the proposed
closing agreement or final settlement (including interest, additions to tax and
penalties which have accrued at that time). In the case of any Proceedings
relating to any Straddle Period, the parties shall jointly control such
Proceedings and the principles of this Section 7.3, and the right and
obligation of the parties pursuant hereto, shall apply to such
jointly-controlled Proceedings. Each party shall, at the expense of the
requesting party, execute or cause to be executed any powers of attorney or
other documents reasonably requested by such requesting party to enable it or
its Affiliates to take any and all actions such party reasonably requests with
respect to any Proceedings which such party controls singly or jointly. The
failure by a party to provide timely notice under this Section 7.3 shall
relieve the other party from its obligations under this Article VII with
respect to the subject matter of any notification not timely forwarded, to the
extent the other party has suffered a loss or other economic detriment because
of such failure to provide notification in a timely fashion.
7.4 RESOLUTION OF DISAGREEMENTS AMONG PARTIES. If Sellers'
Representative and FTNC disagree as to the matters governed by this Article
VII, Sellers' Representative and FTNC shall promptly consult with each other in
an effort to resolve such dispute. If any such disagreement cannot be resolved
within fifteen (15) days of the date of initial consultation, Sellers'
Representative and FTNC shall jointly select an Independent Accounting Firm to
act as an arbitrator to resolve such disagreement, whose decision shall be
final and binding upon the parties. If FTNC and Sellers' Representative cannot
agree on the selection of an Independent Accounting Firm to act as an
arbitrator, then FTNC and Sellers' Representative each shall submit the name of
one such accounting firm to FTNC's counsel who shall conduct a lottery to
choose one of the submitted names. Any expenses relating to the engagement of
such Independent Accounting Firm shall be shared equally by Sellers and FTNC.
ARTICLE VIII
CONDITIONS
8.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS UNDER THIS AGREEMENT. The
respective obligations of each party to consummate the Acquisition shall be
subject to the satisfaction at or prior to the Closing Date of the following
conditions:
(a) All regulatory approvals required to be obtained in connection
with the transactions contemplated by this Agreement or the operation of
Mortgage Bank's business by FTB or its Subsidiaries or second tier Subsidiaries
shall have been obtained, all notices required to be filed with any
governmental agency in connection with the transactions contemplated by this
Agreement or the operation of Mortgage Bank's business by FTB or its
Subsidiaries or second tier Subsidiaries shall have been filed, all such
regulatory approvals shall be in full force and effect, and all notice periods
and waiting periods required by law or regulation applicable to the
transactions contemplated by this Agreement shall have expired or been
terminated and no adverse action shall have been taken or threatened.
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(b) None of any Seller, Mortgage Bank, FTNC or FTB shall be subject
to any order, decree or injunction ("Injunction") of a court or agency of
competent jurisdiction which enjoins or prohibits the consummation of the
transactions contemplated hereby, and no proceeding initiated by a governmental
agency or similar authority seeking an Injunction shall be threatened;
provided, that if such an Injunction is in effect or any proceeding is
commenced or threatened pursuant to which an Injunction is sought, the parties
shall cooperate and use reasonable best efforts expeditiously to remove the
impediment prohibiting the Closing of the Acquisition.
(c) The Closing Measurement Price for the FTNC Common Stock shall not
be less than $35 per share; provided, that if the Closing Measurement Price for
the FTNC Common Stock is less than $35 per share, the parties shall have the
rights set forth in Section 2.2(c) of this Agreement.
(d) No statute, rule, regulation, order, injunction or decree shall
have been enacted, entered, promulgated or enforced by any governmental
authority which prohibits, makes illegal or materially restricts consummation
of the Acquisition.
(e) FTNC shall have received all state securities laws and "Blue Sky"
permits and other authorizations necessary to consummate the transactions
contemplated hereby.
(f) The S-4 Registration Statement shall have become effective and no
stop order suspending the effectiveness of the S-4 Registration Statement shall
have been issued and no proceedings for that purpose shall have been initiated
or threatened by the SEC.
8.2 ADDITIONAL CONDITIONS TO SELLERS' AND MORTGAGE BANK'S OBLIGATIONS
UNDER THIS AGREEMENT. The obligations of Sellers and Mortgage Bank hereunder
shall be subject to the satisfaction at or prior to the Closing Date of each of
the following additional conditions unless waived by Sellers' Representative
pursuant to Section 10.3 hereof:
(a) The obligations of FTNC or FTB required to be performed by any of
them at or prior to the Closing Date pursuant to the terms of this Agreement
shall have been duly performed and complied with in all material respects and
the representations and warranties of FTNC and FTB set forth in this Agreement
shall be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date (except as to any representation or warranty which speaks to an earlier
date), and Sellers' Representative shall receive certificates duly executed by
authorized officers of FTNC and FTB certifying the foregoing, provided,
however, that nothing contained in this Section 8.2(a) shall be deemed to
preclude, or otherwise limit, the right of Sellers to be indemnified for any
breach of a representation or warranty by FTNC or FTB in accordance with the
provisions of Article IX hereof.
(b) Sellers shall have received a legal opinion of Heiskell,
Donelson, Bearman, Adams, Williams & Caldwell dated as of the Closing Date,
addressing matters customary in transactions similar to the Acquisition and in
form and substance mutually satisfactory to Sellers' Representative and FTNC.
(c) Since the date of this Agreement, there shall not have been any
material adverse change in the business, condition, financial or otherwise, or
results of operations of FTNC and FTB, taken as a whole.
(d) The FTNC Common Stock shall be approved for quotation on the
NASDAQ National Market System and be registered securities, subject to no
restrictions regarding sale, resale or other transfer other than those arising
pursuant to Rule 145 under the Securities Act of 1933 ("Securities Act"), and
the S-4 Registration Statement relating to the shares of FTNC Common Stock to
be delivered to Sellers shall have been filed with the SEC and become
effective. At the time the S-4 Registration Statement becomes effective, it
shall comply in all material respects with the provisions of the Securities Act
and the published rules and regulations thereunder.
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8.3 ADDITIONAL CONDITIONS TO FTNC'S AND FTB'S OBLIGATIONS UNDER THIS
AGREEMENT. The obligations of FTNC and FTB hereunder shall be subject to the
satisfaction at or prior to the Closing Date of each of the following
conditions unless waived by FTNC pursuant to Section 10.3 hereof:
(a) The respective obligations of Sellers and Mortgage Bank required
to be performed at or prior to the Closing Date pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects and the respective representations and warranties of Sellers and
Mortgage Bank set forth in this Agreement as of the date of this Agreement
shall be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date (except as to any representation or warranty which speaks to an earlier
date), and FTNC shall have received a certificate duly executed by the Sellers'
Representative and a duly authorized officer of Mortgage Bank certifying the
foregoing, provided, however, that nothing contained in this Section 8.3(a)
shall be deemed to preclude, or otherwise limit, the right of FTNC and FTB to
be indemnified for any breach of a representation or warranty by any Seller or
Mortgage Bank in accordance with the provisions of Articles VII and IX hereof.
For purposes of this Agreement, Sellers and Mortgage Bank shall be deemed not
to have materially performed their respective obligations hereunder and their
respective representations and warranties made on and as of the date of this
Agreement shall be deemed not to be true and correct in all material respects
if (i) the losses (singly or aggregate) which have resulted or are reasonable
likely to result from the sum of one or more breaches of Sellers' or Mortgage
Bank's or both's respective obligations, covenants, representations or
warranties as set forth in this Agreement as of the date of this Agreement
exceed $300,000.
(b) Sellers and Mortgage Bank shall have received from all parties to
any material Contract to which Mortgage Bank is a party including without
limitation all Investors and Agencies all consents required as a result of the
Acquisition, and shall have properly filed all notices with such Investors and
Agencies which are required as a result of such Acquisition.
(c) Each director, executive officer and other person who is an
"affiliate" (for purposes of Rule 145 under the Securities Act) of Mortgage
Bank shall have delivered to FTNC a written agreement satisfactory to FTNC
providing, among other matters, that such person will not sell, pledge,
transfer or otherwise dispose of or take any action which would reduce such
person's risk with respect to, any shares of Emerald Common Stock held by such
"affiliate" or the shares of FTNC Common Stock to be received by such
"affiliate" in the Acquisition (i) in the case of shares of FTNC Common Stock
only, except in compliance with the applicable provisions of the Securities Act
and the rules and regulations thereunder, and (ii) during the periods during
which any such sale, pledge, transfer, disposition or other action would, under
GAAP or the rules, regulations or interpretations of the SEC, disqualify the
Acquisition for pooling-of-interests accounting treatment. The parties
understand that such periods in general encompass the period commencing thirty
(30) days prior to the Acquisition and ending at the time of the publication of
financial results covering at least thirty (30) days of combined operations of
FTNC and Mortgage Bank within the meaning of Section 201-01 of the SEC's
Codification of Financial Reporting Policies.
(d) The duly executed Escrow Agreement shall have been delivered to
FTB.
(e) FTNC shall have received a legal opinion of Mortgage Bank's
Counsel dated as of the Closing Date, addressing matters customary in
transactions similar to the Acquisition and in form and substance mutually
satisfactory to FTNC and Sellers' Representative.
(f) On the Closing Date, commissioned loan officers who originated
not less than seventy-five percent (75%) of retail loan production for the
period from January 1, 1994 to the Closing Date shall be full-time employees of
Mortgage Bank.
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(g) Since the date of this Agreement, there shall not have been any
material adverse change in the business, condition, financial or otherwise, or
results of operations of Mortgage Bank taken as a whole.
(h) FTNC and its directors and officers who sign the S-4 Registration
Statement shall have received from Mortgage Bank's independent certified public
accountants "cold comfort" letters, dated (i) the date of the mailing of the
Proxy Statement/Prospectus to the Sellers and (ii) shortly prior to the Closing
Date, with respect to certain financial information regarding Mortgage Bank in
the form customarily issued by such accountants at such time in transactions of
this type.
(i) FTNC shall have received a duly executed copy of the Sellers
Agreement executed by all of the Sellers.
(j) FTNC shall have received evidence satisfactory to FTNC (i) of the
termination of the subservicing agreement between Mortgage Bank and Western,
and either no fee shall be owed to Western in respect of such termination, or
any such fee shall have been paid by Mortgage Bank or accrued on Mortgage
Bank's books prior to Closing, and (ii) that Mortgage Bank has either paid or
accrued on its books prior to Closing any termination benefits or expenses,
with respect to any employee of Mortgage Bank on or before the Closing Date to
whom employment for more than six (6) months following Closing is not offered
("Termination Costs").
(k) FTNC and FTB shall receive an opinion from Arthur Andersen in
form and substance satisfactory to FTNC and FTB allowing the
pooling-of-interests accounting treatment of the Acquisition.
(l) FTNC shall have received evidenced satisfactory to FTNC of the
termination of that certain Employment, Stock Purchase and Stock Option
Agreement dated March 20, 1990, as amended, and that certain Stock Transfer and
Purchase Agreement dated August 5, 1990, and no party to the foregoing
agreements shall have exercised any stock options or warrants granted
thereunder on and after February 1, 1992.
(m) Approval of and consent to the Acquisition by Sellers.
(n) Delivery on the Closing Date of all of the issued and outstanding
Emerald Common Stock duly endorsed for transfer accompanied by all other
documents as FTB may reasonably require to evidence the transfer to FTB of good
and marketable title to the Emerald Common Stock, free and clear of any and all
Encumbrances.
(o) FTNC shall have received written confirmation that the Employment
Agreements between the Mortgage Company and Craig Van Skaik and Michael Van
Skaik of even date herewith, the Covenants Not to Compete among the Mortgage
Company, FTNC, FTB, Sunbelt and Donald P. Balke and Stephen M. Frison of even
date and the Non-Solicitation Agreement among the Mortgage Bank, FTNC, FTB,
Sunbelt and Pamela DeLong of even date remain in full force and effect as to
the parties to be bound and have not been modified or changed.
ARTICLE IX
INDEMNIFICATION
9.1 INDEMNIFICATION. (a) From and after the Closing Date, subject
to the terms and conditions of this Agreement, Sellers and Mortgage Bank (but
only through credit for payments made from the Escrow Agreement), except as to
Section 7.1 for which Sellers shall be personally liable, shall indemnify and
hold harmless FTNC and FTB and each of their Affiliates from and against any
and all Losses and Taxes which any of them actually suffer, incur or sustain
arising out of or attributable to (whether or not arising out of third party
claims) (i) any breach of any representation or warranty made by any Seller or
Mortgage Bank in this Agreement, (ii) any breach of any covenant to be
performed by any Seller or Mortgage Bank pursuant to this
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Agreement, (iii) Buydowns effected as a result of VA No-Bids, to the extent
that any Losses relating thereto are not indemnifiable by Sellers pursuant to
Section 9.1(a)(i) of this Agreement, (iv) the matters described in Section
7.1(a) of this Agreement, (v) any Loss incurred by FTNC, FTB or any of its
Affiliates in respect of any legal proceedings pending or threatened on the
Closing Date, (vi) the inability as a consequence of a breach of Environmental
Laws with respect to such property as a practical matter to foreclose on,
accept a deed in lieu of foreclosure or otherwise realize the value of any
residential multi-family property which is collateral for any Recourse Loan,
and (vii) in addition to and not in limitation of the preceding provisions of
this Section 9.1(a), any of the matters or items listed on Exhibit "F" attached
hereto, irrespective of the inclusion or listing of any such matter or item on
the Disclosure Schedule.
(b) From and after the Closing Date, subject to the terms and
conditions of this Agreement, FTNC and FTB shall indemnify and hold harmless
Sellers from and against any and all Losses which any of them actually suffer,
incur or sustain arising out of or attributable to (whether or not arising out
of third party claims) (i) any breach of any representation or warranty made by
FTB or FTNC in this Agreement, (ii) any breach of any covenant to be performed
by FTB or FTNC pursuant to this Agreement other than any covenant contained in
Section 6.1 and (iii) any act or omission of FTB and FTNC following the Closing
Date with respect to the processing, handling or servicing of any Mortgage
Loan, Loan Documents, Advances or any other asset of Mortgage Bank (including,
without limitation, any payment or remittance and any correspondence or
interaction with any borrower or Investor) unless such act or omission is in
accordance with practices, procedures and policies of Mortgage Bank in effect
on or before the Closing Date.
(c) The indemnified party shall promptly notify the indemnifying
party of the discovery by it of, or the assertion against it of, any claim or
potential liability for which indemnification is provided herein or the
commencement of any action or proceeding in respect of which indemnity may be
sought hereunder; provided, however, that the failure promptly to give such
notice shall affect any indemnified party's rights hereunder only to the extent
that such failure shall (i) actually materially and adversely affect any
indemnifying party or its rights hereunder or (ii) result in the indemnified
party failing to give notice of a claim for indemnification prior to the
expiration of the survival period set forth in Section 11.1 hereof to which the
claim relates.
(d) The right of an indemnified party under this Section 9.1 shall be
subject to the following conditions and limitations: (i) except as provided in
clause (iv) of Section 9.1(a), notice of any claim for indemnification under
Section 9.1(a) or 9.1(b) shall have been given prior to the one hundred
eightieth (180th) day following the Closing Date; provided, that if such day is
not a business day, then notice shall be given no later than the next business
day following such one hundred-eightieth (180th) day following the Closing
Date; and (ii) notice of any claim for taxes, charges, fees, levies, interest,
additions, penalties or other assessments arising under the Code, including any
interest attributable thereto ("Federal Taxes") as set forth in Section 3.12
and Article VII, shall have been given prior to the three (3) year statute of
limitations, giving effect to any extensions thereof.
With respect to a claim for indemnification arising out of or involving an
assertion by a third party of liability on the part of an indemnified party,
the indemnified party shall advise the indemnifying party of all facts relating
to such assertion within the knowledge of the indemnified party, and shall
afford the indemnifying party the opportunity, at the indemnifying party's cost
and expense, to defend against such claims for liability; in any such action or
proceeding, the indemnified party shall have the right to retain its own
counsel and to participate in the defense, but the fees and expenses of such
counsel shall be at the expense of the indemnified party unless (i) the
indemnifying party and indemnified party mutually agree in writing to the
retention of such counsel or (ii) the named parties to any such suit, action or
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and, in the reasonable judgment of the
indemnified party, representation of the indemnifying party and the indemnified
party by the same counsel would be inadvisable due to actual or potential
differing or conflicts of interest between them.
(e) At Closing, Sellers shall deliver to FTNC at Sellers' expense the
Escrow Agreement, the purpose of which shall be to fulfill Sellers' indemnity
obligations under paragraph (a) of this Section 9.1 except as to Federal Taxes.
Neither FTNC nor FTB shall be required to take any action to collect from
Sellers for any
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indemnity obligations and, except as to claims made for Federal Taxes as to
which the Sellers shall remain personally liable, as to claims made under this
Section 9.1, shall proceed exclusively under the Escrow Agreement in accordance
with the terms of the Escrow Agreement. The terms and provisions set forth in
the Escrow Agreement shall be substantially in the form set forth as Exhibit
"C" attached hereto, with such changes as shall be reasonably mutually
satisfactory.
(f) Notwithstanding anything else to the contrary contained in this
Section 9.1 and in addition to any of the other conditions, limitations and
exclusions set forth herein, Sellers shall not be required to indemnify FTNC or
FTB or any of FTNC's other Affiliates, and neither FTNC nor FTB nor any of its
Affiliates shall seek indemnity from Sellers for any of the following:
(i) Losses attributable to or arising from overhead
allocations or general and administrative costs or the costs of
administering or complying with the requirements imposed by or under
this Agreement other than those requirements which require FTNC or FTB
to mitigate Sellers' indemnity obligations.
(ii) After the Closing Date, losses with respect to which
FTNC or FTB fails in any material respect to comply with its
obligations under this Agreement (including, without limitation,
Article VI),provided, however, that, neither FTNC's nor FTB's
noncompliance with such obligations after the Closing Date shall limit
FTNC or FTB or FTNC's other Affiliates' ability to recover Losses
otherwise indemnifiable by Sellers, under the terms of this Agreement
(including recoveries made by draws on the Escrow Agreement) unless
such noncompliance (A) materially and adversely affects Sellers'
ability to administer a claim made by FTNC or FTB or any of FTNC's
other Affiliates against Sellers, in which case Sellers'
Representative may refuse to consent to a draw on the Escrow Agreement
on claims for which FTNC or FTB or any of FTNC's other Affiliates
seeks reimbursement until FTNC or FTB comply with their obligations
hereunder, or (B) materially and adversely affects the ability to cure
a breach, mitigate Losses or defend a claim or otherwise results in or
increases the amount of a Loss in which case, Sellers' Representative
may withhold consent to a draw on the Escrow Agreement for claims for
which FTNC or FTB or any of FTNC's other Affiliates seeks
reimbursement only in that amount by which FTNC's or FTB's
noncompliance increases the amount of such Loss unless the act or
omission constituting such noncompliance is in accordance with the
practices, procedures and policies of Mortgage Bank in effect on or
before the Closing Date, in which case Sellers' indemnification
obligations shall not be affected by such noncompliance.
(iii) with respect to any Transferred Loan, Losses recovered
by or paid to FTNC or FTB by any Person other than Sellers.
(g) The indemnifying party shall have the right to settle or
compromise any claim or liability subject to indemnification under this Section
9.1 which is susceptible to being settled or compromised, provided, however,
that any such settlement shall require the consent of the indemnified party,
which consent shall not be unreasonably withheld, provided further however,
that the consent of the indemnified party shall not be required if (i) the
terms of the settlement require only the payment of damages and payment of the
full amount of the relevant indemnification obligation to the indemnified party
is assured and (ii) the indemnified party is not otherwise materially and
adversely affected by the terms of the settlement.
(h) For purposes of determining Sellers' indemnification obligations
under this Article IX arising from breaches of Sellers' and Mortgage Bank's
representations, warranties and covenants (and without otherwise limiting
Sellers' indemnity obligations, including but not limited to those provided in
Section 9.1(a)(vii) hereof), the representations, warranties and covenants and
the Disclosure Schedule delivered on the date of this
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Agreement shall be the operative terms and shall not be modified by any
revision of any existing item or inclusion of a new item in the Disclosure
Schedule after such date.
(i) For the limited purposes of determining Sellers' indemnification
obligations under this Article IX and FTNC's or FTB's right to collect under
the Escrow Agreement, the "materiality" test set up by the use of the terms
material, materially, material adverse effect or similar words to that effect
in this Agreement shall be deemed to have been met where a party has incurred,
suffered or sustained an actual Loss including, but not limited to, a Loss
arising or resulting from any item that is incorrectly stated on or omitted
from the Financial Statements, even if such incorrectly stated or omitted item
would not result in the Financial Statements failing to be prepared in
accordance with GAAP because such incorrectly stated or omitted item is not,
under GAAP, material.
ARTICLE X
TERMINATION, WAIVER AND AMENDMENT
10.1 TERMINATION. This Agreement may be terminated on or at any time
prior to the Closing Date:
(i) by the mutual written consent of FTB, FTNC, Sellers'
Representative and Mortgage Bank;
(ii) by Sellers and Mortgage Bank, if there shall have been
any material breach of any obligation of FTNC or FTB contained herein
and such breach shall not have been remedied within twenty (20) days
after receipt by FTNC or FTB of notice in writing specifying the
nature of such breach and requesting that it be remedied;
(iii) by FTNC and FTB, if there shall have been any material
breach as defined in Section 8.3(a) of any obligation of Sellers or
Mortgage Bank contained herein and such breach shall not have been
remedied within twenty (20) days after receipt by Sellers'
Representative or Mortgage Bank of notice in writing specifying the
nature of such breach and requesting that it be remedied;
(iv) by FTNC and FTB or Sellers and Mortgage Bank, if the
Closing Date shall not have occurred on or prior to February 15, 1995,
unless the failure of such occurrence shall be due to the failure of
the party seeking to terminate this Agreement to perform or observe
its agreements as set forth in this Agreement required to be performed
or observed by such party on or before the Closing Date;
(v) by FTNC and FTB or Sellers and Mortgage Bank if the
conditions set forth in Section 8.1(a) are unable to be fulfilled as a
result of FTNC's or FTB's inability to obtain necessary approvals and
consents; and
(vi) by FTNC and FTB or Sellers and Mortgage Bank in
accordance with the provisions of Section 2.2(c) hereto.
10.2 EFFECT OF TERMINATION. In the event of a termination of this
Agreement pursuant to Section 10.1 hereof, this Agreement shall become void and
have no effect, except that the provisions relating to confidentiality and
expenses set forth in Sections 5.3(b) and 11.2 hereof, respectively, and this
Section 10.2, shall survive any such termination; provided, however, that no
such termination shall relieve any party from liability for any willful breach
of this Agreement.
10.3 AMENDMENT, EXTENSION AND WAIVER. Subject to applicable law,
Mortgage Bank, Sellers' Representative and FTNC and FTB may (i) amend this
Agreement, (ii) extend the time for the performance of any of the obligating or
other acts of any other party hereto, (iii) waive any inaccuracies in the
representations
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and warranties contained herein or in any document delivered pursuant hereto,
or (iv) waive compliance with any of the agreements or conditions contained in
Articles V, VI, VII, and VIII hereof. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.
Any agreement on the part of a party hereto to any extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party, but such waiver or failure to insist on strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
ARTICLE XI
MISCELLANEOUS
11.1 SURVIVAL. The representations and warranties set forth in
Articles III and IV hereof shall be deemed to have been relied upon by the
party to whom they are made and survive the Closing until the one hundred
eightieth (180th) day following the Closing Date, except that the
representations and warranties contained in Section 3.12 as to Federal Taxes
shall survive until expiration of the three (3) year statute of limitations
period(s) (taking into account any extensions thereof). No investigation made
by or on behalf of either party shall affect the representations and warranties
made pursuant to this Agreement.
11.2 EXPENSES. Except as otherwise specified in this Agreement, each
party hereto shall bear and pay all costs and expenses incurred by it in
connection with the transactions contemplated hereby, including fees and
expenses of its own brokers, finders, financial consultants, accountants and
counsel ("Transaction Expenses"), provided, however, that nothing contained in
this Section 11.2 shall limit a party's rights to recover damages for willful
breach of this Agreement as specified in Section 10.2 hereof. All Transaction
Expenses incurred by Sellers or Mortgage Bank and all Termination Costs shall
be either paid on the Closing Date or accrued on the Closing Date Balance Sheet
and no Transaction Expenses or Termination Costs which are not so paid or
accrued shall be a liability of or paid by FTNC or any of its Affiliates.
11.3 ENTIRE AGREEMENT. This Agreement, including the Exhibits and the
Disclosure Schedule, contains the entire agreement and understanding of the
parties with respect to its subject matter. This Agreement supersedes all
prior arrangements and understandings between the parties, both written or
oral, with respect to its subject matter.
11.4 PARTIES IN INTEREST. The Agreement shall be binding upon and
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns; provided, however, that nothing in this
Agreement, expressed or implied, is intended to confer upon any other Person
any rights, remedies, obligations or liabilities of any nature whatsoever under
or by reason of this Agreement.
11.5 ASSIGNMENT. No party hereto may assign any of its rights or
obligations hereunder to any other Person, without prior written consent of the
other parties, provided, however, FTNC or FTB may assign its rights and
obligations hereunder to any one or more of its Affiliates (whether existing on
the date hereof or hereafter created) designated to carry out all or part of
the transaction contemplated hereby.
11.6 NOTICES. All notices or other communications hereunder shall be
in writing and shall be deemed given if delivered personally or mailed by
prepaid registered or certified mail (return receipt requested), or by
overnight courier, or telecopy addressed as follows:
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(a) If to Sellers' Representative, to:
---------------------------------
Stephen M. Frison
c/o Leo Palmer Escrow, Inc.
3500 188 Street, S.W., Ste. 501
Lynnwood, Washington 98037
Facsimile: (206) 771-7083
Copies to:
---------
George Holzapfel, Esq.
2600 Two Union Square
601 Union Street
Seattle, Washington 98101-4000
Facsimile: (206) 340-2563
Fredric R. Reed
Maltman, Reed, North, et al.
1415 Norton Building
801 Second Avenue
Seattle, Washington 98104-1522
Facsimile: (206) 624-6672
(b) If to FTB, to:
-------------
First Tennessee Bank National Association
165 Madison Avenue
Memphis, Tennessee 38103
Attention: Elbert L. Thomas, Jr.
Facsimile: (901) 523-4614
Copies to:
---------
Heiskell, Donelson, Bearman, Adams, Williams & Caldwell
2000 First Tennessee Building
Memphis, Tennessee 38103
Attention: Charles T. Tuggle, Esq.
Facsimile: (901) 577-2303
First Tennessee Bank National Association
165 Madison Avenue
Memphis, Tennessee 38103
Attention: Harry A. Johnson, III, Esq. (FTB General Counsel)
Facsimile: (901) 523-4248
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(c) If to FTNC, to:
--------------
First Tennessee National Corporation
165 Madison Avenue
Memphis, Tennessee 38103
Attention: Elbert L. Thomas, Jr.
Facsimile: (901) 523-4212
Copies to:
---------
Heiskell, Donelson, Bearman, Adams, Williams & Caldwell
2000 First Tennessee Building
Memphis, Tennessee 38103
Attention: Charles T. Tuggle, Esq.
Facsimile: (901) 577-2303
First Tennessee National Corporation
165 Madison Avenue
Memphis, Tennessee 38103
Attention: Harry A. Johnson, III, Esq. (FTNC General Counsel)
Facsimile: (901) 523-4248
11.7 CAPTIONS. The table of contents and captions contained in this
Agreement are for reference purposes only and are not part of this Agreement.
11.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
Agreement.
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11.9 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Tennessee, without giving effect to
the principles of conflict of laws thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers as of the date first written
above.
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
By: /s/ Elbert L. Thomas, Jr.
------------------------------------
Title: Senior Vice President
---------------------------------
FIRST TENNESSEE NATIONAL CORPORATION
By: /s/ Elbert L. Thomas, Jr.
-----------------------------------
Title: Senior Vice President
--------------------------------
EMERALD MORTGAGE COMPANY
By: /s/ Pamela DeLong
-----------------------------------
Title: President
--------------------------------
SELLERS:
/s/ Donald P. Balke
---------------------------------------
DONALD P. BALKE
/s/ Stephen M. Frison
---------------------------------------
STEPHEN M. FRISON
/s/ Craig Van Skaik
---------------------------------------
CRAIG VAN SKAIK
/s/ Michael Van Skaik
---------------------------------------
MICHAEL VAN SKAIK
/s/ Pamela Delong
---------------------------------------
PAMELA DELONG
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EXHIBIT "C"
FORM OF ESCROW AGREEMENT
THIS ESCROW AGREEMENT is entered into as of ______________, 1994, by
and among FIRST TENNESSEE NATIONAL CORPORATION ("FTNC"), STEPHEN M. FRISON
("Sellers' Representative"), and FIRST TENNESSEE BANK NATIONAL ASSOCIATION,
acting in its fiduciary capacity through its corporate trust department
("Escrow Agent"). All terms not otherwise defined in this Escrow Agreement
shall have the meanings set forth in the Agreement (as defined in Recital B
below).
R E C I T A L S
A. Sellers own one hundred percent (100%) of the issued and
outstanding capital stock of Emerald Mortgage Company, a Washington corporation
("Mortgage Bank").
B. FTB and FTNC have entered into an Agreement with Sellers and
Mortgage Bank dated as of June 15, 1994 (the "Agreement"), which provides that
FTB will acquire all of the issued and outstanding capital stock of Mortgage
Bank in exchange for the issuance to Sellers of FTNC Common Stock equal to the
Closing Exchange Price (as adjusted pursuant to the terms of the Agreement)
(the "Acquisition").
C. The Agreement contains certain representations, warranties and
covenants made by Mortgage Bank and Sellers with respect to which FTNC and FTB
desire security for the faithful performance thereof.
THEREFORE, the parties hereto agree as follows:
1. Deposit of Shares of FTNC Common Stock.
1.01. As provided in Section 2.6(c)(iv) of the Agreement, shares of
FTNC Common Stock in the amount set forth in Section 1.06 hereof (the "Escrow
Shares") shall be deposited and left on deposit with the Escrow Agent for the
Escrow Period (as defined in Section 1.08 hereof). The Escrow Shares shall be
represented by a stock certificate or certificates registered in the name of
Escrow Agent or its nominee with such restrictive legend as may be required by
the Agreement, and such certificate or certificates shall be delivered to the
Escrow Agent. The Escrow Shares and any Reserves (as defined in and established
pursuant to Section 1.05 hereof) shall serve as an escrow fund (the "Escrow
Fund") for any claims made by FTNC or FTB after the Closing Date for Losses
indemnifiable pursuant to Articles VII and IX of the Agreement ("Escrow
Claims").
1.02. Upon receipt of the Escrow Shares, the Escrow Agent shall hold
and dispose of them in accordance with the terms of this Escrow Agreement. Upon
the expiration of the Escrow Period, the Escrow Agent shall distribute to the
Sellers their relative proportion, as set forth on Schedule A, of the remaining
Escrow Shares and Reserves. The number of shares to be distributed pursuant to
the preceding sentence to any Seller who has established a Reserve pursuant to
Section 1.05 shall be reduced by the number of shares which (according to
Section 1.05) are equivalent to the amount of such Seller's remaining Reserve.
All such distributions to Sellers are subject to diminution by claims of
Sellers' Representative presented and paid in accordance with Section 9 hereof.
1.03. Cash dividends or other distributions paid with respect to the
Escrow Shares shall be distributed to the Sellers in proportion to their
respective interests set forth on Schedule A hereto as soon as practicable
after the receipt thereof by the Escrow Agent; provided, however, that such
proportions shall be adjusted as necessary for purposes of such distribution to
reflect any reduction in the number of Escrow Shares held by a particular
Seller as a result of such Seller's creation of a Reserve. The Escrow Agent
shall vote or cause to be voted Escrow Shares in accordance with instructions
given it by Sellers entitled to vote such shares and shall promptly transmit to
Sellers all proxy materials and other information relating to the Escrow Shares
received by it.
1.04. If FTNC shall effect any reorganization, reclassification,
consolidation, merger or other event which results in the exchange of
securities or other assets for the Escrow Shares ("Replacement Securities") or
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if FTNC shall issue any additional shares upon any stock split or stock
dividend affecting the Escrow Shares ("Additional Securities"), the Replacement
Securities or Additional Securities shall be delivered to Escrow Agent and when
received by the Escrow Agent such Replacement Securities or Additional
Securities shall become or be included in the Escrow Shares for the purposes of
this Agreement.
1.05. At any time during the Escrow Period following the time of the
publication of financial results covering at least 30 days of combined
operations of FTNC and Mortgage Bank within the meaning of Section 201-01 of
the SEC's Codification of Financial Reporting Policies, the Escrow Agent, at
the written instruction of any Seller, which instruction indicates that Seller
is acting in compliance with applicable securities laws, and subject to
compliance with applicable securities laws, shall cause to be sold all or a
portion of the pro rata portion of the Escrow Shares allocable to such Seller
which have not previously been sold, distributed or withdrawn hereunder, and
shall establish a reserve of the cash proceeds of such sale (such reserve is
herein referred to as a "Reserve"); provided that proceeds from a sale of the
Escrow Shares shall at all times be under the dominion and control of the
Escrow Agent and subject to the escrow interest and security interest of FTNC
as provided in Section 1.09 hereof. The Escrow Agent shall maintain each such
Reserve in a separate account so as to identify it as the Reserve attributable
to such Seller and subject to the escrow interests and security interest of
FTNC in such proceeds. For purposes of payments, distributions or withdrawals
under this Agreement, a Reserve established and attributable to a Seller
pursuant to the foregoing sentence shall be deemed to be equivalent to the
number of Escrow Shares that were sold at the time to create such Reserve. When
amounts are to be withdrawn out of the Escrow Fund to be paid or distributed to
any party other than the Sellers, the Escrow Agent shall withdraw and pay to
such party cash from the Reserve attributed to such Seller to the extent that
such Seller's pro rata portion of the Escrow Shares, minus the number of Escrow
Shares sold to create a Reserve, is less than that Seller's pro rata portion of
the aggregate amount required to be paid or distributed.
1.06. On the Closing Date, shares of FTNC Common Stock equal to
$250,000 calculated at the Closing Measurement Price shall be deposited by FTNC
with the Escrow Agent. The amount of the Escrow Fund shall be reduced on the
one hundred eightieth (180th) day following the Closing Date, or provided, that
if such day is not a Business Day, on the next Business Day following such one
hundred eightieth (180th) day following the Closing Date (the "Adjustment
Date") to (i) the amount of any Unresolved Claims (as defined in the Agreement)
outstanding on the Adjustment Date, if any (the "Adjusted Escrow Fund"), and
(ii) if there are no Unresolved Claims outstanding on the Adjustment Date, to
zero. If the Escrow Fund is reduced to zero as provided in clause (ii) of the
Section 1.06, the Escrow Shares and any Reserves shall be distributed to the
Sellers in accordance with the terms of this Escrow Agreement.
1.07. For purposes of calculating the number of Escrow Shares to be
included in any distribution, payment or withdrawal from the Escrow Fund,
Escrow Shares shall be valued at the closing sales price of FTNC Common Stock
on the NASDAQ on the Business Day before the date on which the distribution,
payment or withdrawal is made.
1.08. For purposes of this Escrow Agreement, the term "Escrow Period"
shall mean that period of time that Sellers are obligated to maintain Escrow
Shares or Reserves, as applicable, in the Escrow Fund, which shall in no event
be for a period in excess of the longer of (i) one hundred eighty (180) days
after the Closing Date and (ii) the date of final resolution of any Unresolved
Claims outstanding on the Adjustment Date (including, if applicable, payment in
full of such Unresolved Claims to FTNC).
1.09. (a) Each Seller hereby pledges, hypothecates, assigns,
transfers, sets over and delivers unto FTNC, and hereby grants to FTNC, a
security interest in its proportionate share of the Escrow Shares. The Escrow
Shares shall be held by the Escrow Agent as agent for and for the benefit of
FTNC for purposes of perfecting a security interest in the Escrow Shares and
Escrow Agent's possession of the Escrow Shares is hereby acknowledged to be
constructive possession by FTNC. Subject and subordinate in every respect to
the security interest and escrow interests of FTNC, the Escrow Agent holds the
Escrow Shares as to the Sellers in the respective proportions indicated on
Schedule A attached hereto.
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(b) Upon a sale of any Escrow Shares and investment of the proceeds
as provided in Section 3.06 hereof, if and to the extent the Substitute Escrow
Assets (as defined in Section 3.06) constitute "book entry securities," the
Substitute Escrow Assets shall be issued in the name of the Escrow Agent for
the benefit of FTNC as the secured party or, if required to perfect FTNC's
security interest in the Substitute Escrow Assets, the Escrow Agent shall cause
the Substitute Escrow Assets to be issued in the name of FTNC. The Sellers
agree that FTNC shall have the right to cause the Escrow Agent to take such
actions with respect to the Substitute Escrow Shares as are reasonable and
customary to ensure the perfection of FTNC's security interest, but such action
shall in no way give the right to FTNC to have possession or to remove control
of the Escrow Shares or Reserves from the custody of the Escrow Agent except
upon a distribution to FTNC as provided in Section 3 hereof.
2. Sellers' Representative.
Pursuant to the terms of that Sellers' Representative and Paying Agent
Agreement dated as of ________________, 1994, Sellers' Representative shall act
as representative for the Sellers with respect to this Escrow Agreement.
Sellers' Representative shall receive no compensation for its services.
Sellers' Representative shall, however, be reimbursed out of the Escrow Fund,
as provided in this Escrow Agreement, for all reasonable expenses which it may
incur in the performance of its duties and powers hereunder, including, if
necessary, the employment of agents, attorneys, accountants or other services.
There shall be no liability on the part of the Sellers' Representative for any
actions or omissions to act under this Escrow Agreement, or error or mistake of
judgment, unless Sellers' Representative shall have acted in bad faith,
negligently or fraudulently.
3. Indemnification: Claims Against Escrow.
3.01. Except as otherwise provided in the Agreement with respect to
certain representations and warranties, the Agreement provides that
representations and warranties, covenants and agreements contained in or made
pursuant to the Agreement, shall survive the Closing for a period ending on the
Adjustment Date.
3.02. Subject to Article IX of the Agreement, to the extent of the
Escrow Fund created hereunder, the Sellers shall indemnify and hold FTNC and
FTB and each of their Affiliates harmless against any and all Losses arising
out of, resulting from or based on any inaccuracy in or breach or
non-performance of any of the representations, warranties, covenants or
agreements made by Sellers or Mortgage Bank in or pursuant to the Agreement.
Regardless of the value of the Escrow Shares in the Escrow Fund, the Sellers'
liability with respect to their obligations under the Agreement shall be
limited to that amount set forth in Section 1.06 hereof.
3.03. The Escrow Shares and any Reserves established therefrom to the
extent required to satisfy any Escrow Claims made in accordance herewith shall
be held by the Escrow Agent until payment to FTNC of the amount of all Escrow
Claims to which it may be entitled in accordance with this Section 3 hereof but
in no event shall such Escrow Shares and Reserves be held beyond the Escrow
Period.
3.04. Upon presentation of an Escrow Claim by FTNC or FTB, the Escrow
Agent shall be immediately notified by FTNC and the Escrow Agent shall send a
copy of FTNC's notice to the Sellers' Representative. No Escrow Claim by FTNC
pursuant to this Escrow Agreement shall be effective unless written notice is
received by the Escrow Agent prior to the end of the Escrow Period. If the
Sellers' Representative shall object to such Escrow Claim, it shall give
written notice of such objection to the Escrow Agent and FTNC within five (5)
Business Days after the receipt of the notice sent to the Sellers'
Representative. If the Sellers' Representative shall have agreed to pay such
Escrow Claim in whole or in part within such period, the Escrow Agent shall
thereupon make a distribution from the Escrow Fund to the party making the
claim in the amount so agreed by the Sellers' Representative.
3.05. In the event that the Sellers' Representative shall not have
responded to any Escrow Claim within five (5) Business Days, or the Sellers'
Representative shall have made timely objection in whole or in part to any such
Escrow Claim of FTNC or FTB, by delivering written notice of such objection to
Escrow Agent and FTNC, and the Sellers' Representative and FTNC shall have
failed to resolve or compromise the
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Escrow Claim within five (5) Business Days from the date of FTNC's receipt of
such objection (or such longer period as may be mutually agreed in writing by
FTNC and the Sellers' Representative), then such Escrow Claim shall be settled
by arbitration in Seattle, Washington, in accordance with the rules of the
American Arbitration Association ("AAA") and the procedures set forth below:
(a) Within twenty (20) days after receiving written demand for
arbitration, the parties involved in the dispute shall attempt to
reach agreement upon the selection of a qualified impartial
arbitrator. If the parties cannot agree upon an arbitrator within
such twenty (20) day period, then each of FTNC and the Sellers'
Representative shall appoint one arbitrator, and the two arbitrators
so appointed, each of whose fees and expenses shall be treated as
attorneys' fees for purposes of this Section 3.05, shall then together
appoint a third arbitrator ("neutral arbitrator") from a list of
persons supplied by the AAA in Seattle, Washington. If one party shall
fail to appoint the arbitrator to be appointed by it within seven (7)
Business Days of the end of the applicable five (5) Business Day
period provided for above, the arbitrator appointed by the other party
shall select from a list of persons supplied by the AAA a person who
shall serve as the single neutral arbitrator for purposes of the
arbitration. If each party shall have appointed one arbitrator but
such designees cannot agree on the person to act as the neutral
arbitrator within a period of two (2) Business Days after the
appointment of the second arbitrator, then either side may apply to
the AAA in Seattle, Washington. who shall appoint a neutral
arbitrator. The arbitrator shall promptly obtain such information
regarding the matter as he deems desirable and shall decide the matter
and render a written award which shall be delivered to FTNC, the
Sellers' Representative and the Escrow Agent. As used hereafter the
term "arbitrator" shall include the singular and the plural as
applicable.
(b) As part of each such award, the arbitrator shall establish the
reasonable fee of the neutral arbitrator in accordance with the rules
of the AAA and expenses in connection therewith. In the event that the
arbitrator shall totally uphold any claim by FTNC, then FTNC shall be
entitled to reimbursement of the attorneys' fees and other costs out
of the Escrow Fund. In the event that the arbitrator shall totally
deny any claim by FTNC, then the Sellers shall be entitled to
reimbursement of attorneys' fees and other costs by FTNC. If any claim
is partially upheld, there shall be distributed or paid out of the
Escrow Fund the proportion of the total costs which bears the same
ratio as the portion of the claim which is upheld bears to the entire
claim and the balance shall be paid by FTNC. Any part of the fees and
expenses of the neutral arbitrator or the attorneys' fees of FTNC to
be distributed or paid out of the Escrow Fund shall be specifically so
directed in the arbitrator's award.
(c) Any award shall be a conclusive determination of the matter and
shall be binding upon FTNC and any of its Affiliates, including FTB,
the Sellers, the Sellers' Representative and the Escrow Agent, and
shall not be contested by any of them. In the event that the
arbitrator shall determine that FTNC shall be entitled to any
indemnification by reason of its claim, an executed copy of the award
setting forth the amount of the indemnification shall be delivered to
the Escrow Agent, and the Escrow Agent shall thereupon make a
distribution or payment from the Escrow Fund to FTNC in accordance
with Section 1.05 of the amount to which such party is entitled for
indemnification, together with the portion, if any, of the
arbitrator's fee to be paid from the Escrow Fund.
(d) If a matter claimed to be subject to indemnification involves a
third party claim which has not yet been determined, the arbitrator
may in his discretion make a separate determination solely as to
whether the third-party claim is one for which indemnification may be
had or may defer a determination as to whether indemnification may be
had pending further development of information as to the nature of the
third-party claim. If the arbitrator determines that the matter is
subject to indemnification or defers such a determination, the
arbitrator may then adjourn the arbitration proceeding pending the
outcome of the third-party claim, and determine the amount of the
indemnification at such time. If the arbitrator determines that the
third-party claim is not subject to indemnification, he shall set
forth the basis of his decision in detail.
3.06. Investments of Reserves. Any Reserves may be invested, and,
upon the written request of the Sellers' Representative, shall be invested, as
directed by the Sellers' Representative, by the Escrow Agent, if
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and to the extent then permitted by law, in direct obligations of the United
States of America or obligations which as to principal and interest constitute
full faith and credit obligations of the United States of America which have a
maturity of not more than 365 days or in any mutual fund selected by the Escrow
Agent in its discretion which is rated by a nationally recognized rating agency
and which invests solely in the foregoing described securities ("Substitute
Escrow Assets"). Any interest, profit or loss on such investments shall be
credited or charged to the Reserve and shall remain part of the Escrow Fund and
subject to FTNC's escrow interest and security interest. The Escrow Agent may
sell or present for redemption any obligations so purchased whenever it shall
be necessary in order to provide moneys to meet any payment, and neither the
Escrow Agent nor the Sellers' Representative shall be liable or responsible for
any loss resulting from such investment. The Escrow Agent may act as principal
or agent in the making or disposing of any investment.
4. Transfer of Interest in Escrow Shares. No Seller may assign or
transfer his interest in the Escrow Shares or any Reserve in whole or in part,
except as required by operation of law. Any assignment or transfer made in
violation of this Section 4 shall be void ab initio. In the event of any
transfer by operation of law, and notwithstanding any attempted assignment or
transfer in violation of this Section 4, all Escrow Shares and Reserves shall
remain subject to this Agreement and no assignment or transfer by operation of
law or attempted assignment or transfer in violation of this Section 4 by any
Seller shall in any way affect any rights or security interest FTNC may have in
such Escrow Shares or Reserve. Upon any such permitted assignment or transfer,
the Escrow Agent shall notify the other parties hereto of the name(s),
address(es) and interest(s) of the assignee(s) or transferee(s) who shall
thereupon become "Sellers" for purposes of this Agreement. No right or interest
of any Seller in the Escrow Shares or in his or its account shall be liable
for, or subject to, any other obligation or liability of such Seller other than
such obligations and liabilities that exist under the Agreement.
5. Sharing of Claims and Expenses. Except as otherwise agreed by the
Sellers, all amounts paid from the Escrow Fund shall be charged proportionately
to each of the Sellers according to their respective interest as set forth on
Schedule A hereto.
6. Termination of Escrow. When all Escrow Shares and Reserves
therefrom held by Escrow Agent have been finally distributed in accordance
herewith, this Escrow Agreement shall terminate.
7. Distributions to Sellers. Unless otherwise specifically provided
herein, whenever it is provided in this Escrow Agreement that distributions of
Escrow Shares or cash shall be made pro rata to Sellers, such distributions
shall be made in the relative proportions indicated on Schedule A hereto.
8. Fractional Share Interests. FTNC shall not be required to issue
certificates for any fractional share interest to which any Sellers may be
entitled upon distribution of the Escrow Shares pursuant to Section 1.02. In
lieu of issuance, fractional share interests shall be aggregated and rounded
down to the nearest whole share, and the Escrow Agent shall cause such shares
to be sold and the proceeds therefrom to be distributed to such Sellers in
accordance with their relative interests in such fractional share interests.
9. Expenses. The expenses of the Escrow Agent and the Sellers'
Representative shall be paid subsequent to the payment of all Escrow Claims at
the end of the Escrow Period. Such payments shall be made in cash by the
Escrow Agent by withdrawing an amount out of the Escrow Fund in accordance with
Section 1.05 and causing the Escrow Shares so withdrawn to be sold. The Escrow
Agent shall be reimbursed for its normal out-of-pocket expenses including, but
not by way of limitation, the fees and costs of attorneys or agents which it
may find necessary to engage in performance of its duties hereunder, including
costs arising from the defense of any suits in which the Escrow Agent is named
as a defendant. The expenses of the Escrow Agent shall be paid in cash in full
prior to the payment of any expenses of incurred by the Sellers'
Representative. If the Sellers' Representative incurs or pays any costs or
expenses as authorized under Section 2 of this Escrow Agreement, then the
Sellers' Representative shall give notice of such costs and expenses to FTNC
and the Escrow Agent. Any such claims by the Sellers' Representative shall be
paid in cash as described above.
10. Notices. Any notice required or permitted to be given hereunder
shall be deemed to be sufficiently given if delivered personally or sent by
registered or certified mail, postage prepaid, or by overnight courier or
telecopy, addressed to the addressee at his or its address last furnished to
the sender in writing by the addressee
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for the purpose of receiving notices under this Escrow Agreement, or, unless
and until such address shall have been so furnished, addressed to the addressee
as follows:
TO FTNC: First Tennessee National Corporation
P.O. Box 84
Memphis, Tennessee 38101
Attention: Elbert L. Thomas, Jr.,
Harry A. Johnson, III, Esq.
Telecopier: (901) 523-4614
with a copy to: Heiskell, Donelson, Bearman,
Adams, Williams & Caldwell
2000 First Tennessee Building
Memphis, Tennessee 38103
Attention: Charles T. Tuggle, Jr., Esq.
Telecopier: (901) 577-2303
TO SELLERS'
REPRESENTATIVE: Stephen M. Frison
18716 Soundview Place
Edmonds, Washington 98020
Telecopier: ( )
--- --------
with a copy to:
---------------------------
---------------------------
---------------------------
Attention:
---------------------
Telecopier: ( )
--- ------------
TO ESCROW AGENT: First Tennessee Bank National Association,
Corporate Trust Division
4385 Poplar Avenue
Memphis, Tennessee 38117
Attention: Dennis D. Gillespie
Telecopier: (901) 681-2450
11. Liability of Escrow Agent. The Escrow Agent's sole liability
hereunder shall be to hold the Escrow Shares and any moneys received with
respect thereto, and to make payments, distributions and withdrawals therefrom
in accordance with the terms of this Escrow Agreement and to distribute
information as provided in Section 1.03 hereof. The Escrow Agent shall at no
time during the performance of its duties hereunder be required to advance any
of its own funds in order to satisfy its obligations hereunder. The Escrow
Agent shall not be liable for any act performed in good faith or in reliance on
any document, instrument or statement believed by it to be genuine. The Escrow
Agent may rely upon any instruction by the Sellers' Representative. The Escrow
Agent shall not be liable for any of its own acts or omissions unless it is
determined by a court of competent jurisdiction by clear and convincing
evidence that the Escrow Agent is guilty of gross negligence or willful
misconduct. If any dispute should arise with respect to the payment or
ownership or right of possession of the Escrow Fund, or any part thereof, at
any time, which cannot be settled under other provisions hereof, the Escrow
Agent is authorized to retain in its possession, without liability to anyone,
all or any part of the Escrow Fund or the proceeds from any sale thereof until
such dispute shall have been settled either by mutual agreement between the
parties concerned or until otherwise ordered by a court having jurisdiction
over it or by arbitration as provided in Section 3.05.
12. Resignation or Removal of Escrow Agent. The Escrow Agent may
resign following the giving of thirty (30) days' prior written notice to the
other parties hereto. Similarly, the Escrow Agent may be removed
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and replaced following the giving of thirty (30) days' prior written notice to
the Escrow Agent by each of the other parties hereto. In either event, the
duties of the Escrow Agent shall, if a successor has been appointed, terminate
thirty (30) days after the date of such notice (or as of such earlier date as
may be mutually agreeable); and the Escrow Agent shall then deliver the balance
of the Escrow Fund then in its possession to a successor Escrow Agent as shall
be appointed by the other parties hereto as evidenced by a written notice filed
with the Escrow Agent.
If the other parties hereto are unable to agree upon a successor or
shall have failed to appoint a successor prior to the expiration of thirty (30)
days following the date of notice of resignation or removal, the then acting
Escrow Agent may petition any court of competent jurisdiction for the
appointment of a successor Escrow Agent or otherwise appropriate relief; and
any such resulting appointment shall be binding upon all of the parties hereto.
Upon acknowledgment by any successor Escrow Agent of the receipt of
the then remaining balance of the Escrow Fund, the then acting Escrow Agent
shall be fully released and relieved of all duties, responsibilities, and
obligations under this Escrow Agreement.
13. Continuance of Escrow Agreement. This Escrow Agreement shall be
binding upon the parties hereto and their respective transferees, successors,
assigns, legal representatives, heirs and legatees.
14. Amendment. This Escrow Agreement may be amended only in writing
and only if executed by FTNC, Escrow Agent and the Sellers' Representative.
15. Assignment. FTNC may, upon written notice to Sellers'
Representative and the Escrow Agent, assign all of its rights, duties and
interests hereunder to FTB or any of its other Affiliates, which, upon such
assignment, shall succeed to all such rights, duties and interests.
16. Governing Law. This Escrow Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Tennessee.
17. Escrow Agent's Compensation. By the execution of this Escrow
Agreement, the Escrow Agent acknowledges the receipt of ______________________
AND NO/100 DOLLARS ($___________________) from _______________________________
(the "Payment"). The Payment is in full satisfaction of all fees owing to
Escrow Agent (except as provided in this paragraph) for the term of this Escrow
Agreement. The expenses of Escrow Agent incurred in connection with this Escrow
Agreement shall be paid in accordance with the terms of Section 9 above. The
Escrow Agent may elect to charge any individual Seller the Escrow Agent's then
current transaction fee for any investment instruction given pursuant to
Sections 1.05, 3.06 or 4 of this Escrow Agreement.
18. Business Day. For purposes of this Escrow Agreement, the term
"Business Day" shall mean any day on which (i) banks in Tennessee and
Washington are not required or authorized to remain closed, and (ii) The New
York Stock Exchange is not closed.
IN WITNESS WHEREOF, the parties hereto have executed this Escrow
Agreement as of the date and year first above written.
ESCROW AGENT
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
By:_____________________________________
Title:__________________________________
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FTNC
FIRST TENNESSEE NATIONAL
CORPORATION
By:_____________________________________
Title:__________________________________
SELLERS' REPRESENTATIVE
________________________________________
STEPHEN M. FRISON
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ESCROW AGREEMENT
DATED AS OF ______________, 1994
SCHEDULE A
Seller Percentage of Escrow Shares
- ------ ---------------------------
Pamela DeLong 15.7894
Stephen M. Frison 26.3684
Donald P. Balke 26.3684
Michael Van Skaik 15.7369
Craig Van Skaik 15.7369
Formula for determining the number of shares of FTNC Common Stock to be
deposited in escrow by each of the above holders:
Escrow Shares multiplied by the percentage set forth opposite the holders' name
above.
165
EXHIBIT "E"
FORM OF
SELLERS' REPRESENTATIVE AND
PAYING AGENT AGREEMENT
THIS SELLERS' REPRESENTATIVE AND PAYING AGENT AGREEMENT (this "Paying
Agent Agreement"), dated as of ______________, 1994, is made by and among those
persons listed on the signature pages hereto (collectively, the "Sellers" and
singly, a "Seller"), STEPHEN M. FRISON ("Frison") and CRAIG VAN SKAIK, in his
capacity as the designee, from time to time, of Frison as determined by Frison
in his sole discretion (all references herein to Frison shall include, as
applicable, Craig Van Skaik). All terms not otherwise defined in this Paying
Agent Agreement shall have the meanings set forth in the Agreement (as defined
in Recital B below).
RECITALS
A. Sellers own all of the issued and outstanding capital stock of
Emerald Mortgage Company, Inc., a Washington corporation ("Mortgage Bank").
B. FTB and FTNC have entered into a Stock Exchange Agreement with
Mortgage Bank and Sellers dated as of June 15, 1994 (the "Agreement"), pursuant
to which FTB will acquire all of the issued and outstanding capital stock of
Mortgage Bank in exchange for the issuance of FTNC Common Stock to the Sellers
equal to the Closing Exchange Price (as adjusted pursuant to the terms of the
Agreement) (the "Acquisition").
C. In connection with the Agreement and the Acquisition, Sellers
desire to appoint Frison to represent Sellers and enforce Sellers' rights under
the Agreement.
D. Sellers also desire to appoint Frison to act as the paying agent
for purposes of collecting, holding and disbursing the consideration to be
exchanged under the Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Designation. Subject to the terms and conditions of this Paying
Agent Agreement and the Agreement, Frison is designated by each of the Sellers
to serve as the sole representative of the Sellers with respect to the matters
set forth herein, in the Agreement and the Escrow Agreement.
2. Authority. Each of the Sellers, by execution of this Agreement,
irrevocably appoint Frison as the agent, proxy, and attorney-in-fact for such
Seller for all purposes of the Agreement and the Escrow Agreement, including
full power and authority on such Seller's behalf to:
(a) take all actions which Frison considers necessary or desirable in
connection with the defense, pursuit or settlement of any adjustments
to the Closing Exchange Price and any claims for indemnification,
including to sue, defend, negotiate, settle, compromise and otherwise
handle any such adjustments to the Closing Exchange Price and any such
claims for indemnification made by or against, and any other disputes
with, FTB or FTNC pursuant to the Agreement, Escrow Agreement or any
of the agreements or transactions contemplated thereby;
(b) engage and employ agents and representatives (including
accountants, legal counsel and other professionals) and to incur such
other expenses as it shall deem necessary or prudent in connection
with the administration of the foregoing;
(c) provide for all expenses incurred in connection with the
administration of the foregoing to be paid by directing the Sellers to
pay (or to reimburse Frison for) such expenses in the amounts
determined by applying the procedures specified in Section 9 below;
166
(d) disburse all indemnification payments received from FTB and FTNC
under the Agreement in the amounts determined by applying the
procedures specified in Section 9 below;
(e) accept and receive notices pursuant to the Agreement and Escrow
Agreement;
(f) take all other actions and exercise all other rights which Frison
(in his sole discretion) considers necessary or appropriate in
connection with the Agreement and the Escrow Agreement; and
(g) direct the Escrow Agent (as defined in the Escrow Agreement) to
disburse remaining Escrow Shares (as defined in the Escrow Agreement)
and any Reserves in the Escrow Fund upon termination of the Escrow
Agreement in accordance with its terms.
Each Seller agrees that such agency and proxy are coupled with an interest, and
are therefore irrevocable without the consent of Frison and shall survive the
death, incapacity, bankruptcy, dissolution or liquidation of any Seller. All
decisions and acts by Frison shall be binding upon all the Sellers, and no
Seller shall have the right to object, dissent, protest or otherwise contest
the same.
3. Funding of Paying Agent.
(a) As promptly as practicable after the Closing of the transactions
contemplated by the Agreement, FTNC (or its duly appointed transfer agent)
shall deliver to Frison the FTNC Common Stock (except for those shares of FTNC
Common Stock being deposited into escrow pursuant to the terms of the Escrow
Agreement) pursuant to Section 2.4 of the Agreement (the "Stock").
(b) At or prior to the Closing, Sellers shall deliver all stock
certificates representing the Emerald Common Stock and transmittal materials to
Frison.
4. Disposition of the Funds and Securities. Frison shall hold the FTNC
Common Stock, funds and the interest earned thereon in trust for the Sellers
and deliver such FTNC Common Stock and funds as follows:
(a) As promptly as practicable after the Closing, Frison shall
deliver the FTNC Common Stock to the Sellers, in accordance with
Exhibit A hereto.
(b) In addition, Frison shall take all necessary action to assure
that FTNC's transfer agent shall deliver all funds to the Sellers as
promptly as practicable after Closing in pro rata portions to each
Seller. Any interest earned upon any funds deposited with Frison shall
inure to the benefit of the Sellers.
5. Duties as Paying Agent. The duties of Frison as the paying agent
are only as herein specifically provided and are purely ministerial in nature.
In performing his duties hereunder, Frison shall act as an agent in a fiduciary
capacity on behalf of all parties.
6. Resignation. In the event that Frison shall resign for any reason,
Frison shall select another representative and paying agent to fill such
vacancies and such substituted representative/agent shall be deemed to be the
Sellers' representative and paying agent for all purposes of the Agreement and
the Escrow Agreement.
7. Termination. Frison's obligation as paying agent shall terminate
when the FTNC Common Stock, and any funds and interest thereon, have been fully
distributed in accordance with the provisions of Section 4 above.
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167
8. Exculpation. Neither Frison nor any agent employed by him shall be
liable to any Seller relating to the performance of his duties under this
Paying Agent Agreement as Sellers' Representative or Paying Agent for any
errors in judgment, oversight, breach of duty or otherwise except to the
extent it is finally determined in a court of competent jurisdiction that the
actions taken or not taken by Frison constituted negligence, fraud or were
taken or not taken in bad faith. Frison shall be indemnified and held harmless
by each Seller, in amounts determined by applying the procedures specified in
Section 9, against all expenses (including attorneys' fees), judgements, fines
and other amounts paid or incurred in connection with any action, suit,
proceeding or claim to which Frison is made a party by reason of the fact that
he was acting as Sellers' Representative or Paying Agent pursuant to this
Paying Agent Agreement, the Agreement or the Escrow Agreement; provided,
however, that Frison shall not be entitled to indemnification hereunder to the
extent it is finally determined in a court of jurisdiction that the actions
taken or not taken by Frison constituted fraud or were taken or not taken in
bad faith. Frison shall be protected in acting upon any notice, statement or
certificate believed by him to be genuine and to have been furnished by the
appropriate person and in acting or refusing to act in good faith or any
matter. With respect to his duties as paying agent, Frison may, in the event of
any conflict between the parties to this Paying Agent Agreement, institute an
interpleader action, suit or proceeding he deems appropriate to resolve the
conflict.
9. Allocation of Payments. Whenever Sellers are entitled to receive
any payments under the Agreement or are obligated to make any payments under
the Agreement, each Seller shall be entitled to receive or shall be obligated
to make such portion of any such payment that is equal to his pro rata interest
with respect thereto.
10. Sellers' Representation. None of the undersigned Sellers has a
present plan or intention to sell, exchange or otherwise dispose of more than
fifty percent (50%) of the FTNC Common Stock that he or she will receive in the
Acquisition within two (2) years of the Closing Date.
11. Counterparts. This Paying Agent Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one Agreement.
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168
12. Governing Law. This Paying Agent Agreement shall be governed by
and construed in accordance with the laws of the State of Washington, without
giving effect to the principles of conflict of laws thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Paying Agent
Agreement to be executed by their duly authorized officers as of the date first
written above.
SELLERS:
________________________________________
DONALD P. BALKE
________________________________________
STEPHEN M. FRISON
________________________________________
CRAIG VAN SKAIK
________________________________________
MICHAEL VAN SKAIK
________________________________________
PAMELA DELONG
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169
EXHIBIT "G"
FORM OF SELLERS AGREEMENT
THIS SELLERS AGREEMENT (the "Sellers Agreement"), dated as of
_______________, 1994, is made by and among the Persons listed on the signature
pages attached hereto (collectively, the "Sellers" and singly, a "Seller"),
First Tennessee Bank National Association ("FTB"), and First Tennessee National
Corporation ("FTNC"). All terms not otherwise defined in this Sellers Agreement
shall have the meanings set forth in the Agreement (as defined in Recital B
below).
RECITALS
A. Sellers own one hundred percent (100%) of the issued and
outstanding capital stock of Emerald Mortgage Company, Inc., a Washington
corporation ("Mortgage Bank").
B. FTB and FTNC have entered into a Stock Exchange Agreement with
Sellers and Mortgage Bank dated as of June 15, 1993 (the "Agreement"), which
provides that FTB will acquire all of the issued and outstanding capital stock
of Mortgage Bank in exchange for the issuance of FTNC Common Stock to the
Sellers equal to the Closing Exchange Price (as adjusted pursuant to the terms
of the Agreement) (the "Acquisition").
C. In connection with the Agreement, and in furtherance of its
purposes, Sellers, FTB and FTNC desire to make the agreements contained in this
Sellers Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Ownership of Shares. Each Seller severally represents that such
Seller has good and marketable title to the issued and outstanding capital
stock of Mortgage Bank to be exchanged by such Seller pursuant to the Agreement
free and clear of all Encumbrances, contracts, rights, options and assignments
whatsoever. Following the delivery of the shares of Emerald Common Stock by
Sellers to FTB on the Closing Date in accordance with the terms and subject to
the conditions of the Agreement and this Sellers Agreement, FTB shall have good
and marketable title to all of the issued and outstanding shares of Emerald
Common Stock delivered by such Seller, free and clear of any and all claims,
charges, defenses, offsets, Encumbrances of any kind or nature, contracts,
rights, options and assignments.
2. Seller Refund. If the Final Exchange Price is less than the Closing
Exchange Price or if Sellers are required to make payments to FTNC under
Section 2.10 of the Agreement, each Seller shall refund or pay to FTNC, at such
Seller's option, either (i) cash or (ii) FTNC Common Stock valued at the
Closing Measurement Price, as to each Seller, proportionate to the amount of
FTNC Common Stock received by such Seller at Closing and having an aggregate
value equal to the difference between the Final Exchange Price and the Closing
Exchange Price and/or the amounts due under Section 2.11 of the Agreement, as
applicable.
3. Indemnification.
At Closing, Sellers shall deliver to FTB at Sellers' expense the
Escrow Agreement, the purpose of which shall be to fulfill Sellers' indemnity
obligations under the Agreement except as to Federal Taxes. Neither FTNC nor
FTB shall be required to take any action to collect from Sellers for any
indemnity obligations except for indemnification for Federal Taxes pursuant to
Section 9.1(a)(iv) as to which Sellers shall remain personally liable, and, as
to any such indemnity claim made pursuant to the Agreement (except for
indemnification for Federal Taxes pursuant to Section 9.1(a)(iv) as to which
Sellers shall remain personally liable), shall proceed exclusively under the
Escrow Agreement against the Escrow Fund (as defined in the Escrow Agreement)
in accordance with the terms of the Escrow Agreement. Sellers shall have no
direct or personal liability for Sellers' indemnity obligations under the
Agreement other than delivery of the Escrow Agreement except for
indemnification for Federal Taxes pursuant to Section 9.1(a)(iv), as to which
Sellers shall remain personally liable. The terms and provisions set forth in
the Escrow Agreement shall be substantially in the form set forth in Exhibit
"C" to the Agreement with such changes as shall be reasonably mutually
satisfactory.
170
4. Resale Limitations/Representations. (a) Each Seller who is a
director, executive officer or an "affiliate" (for purposes of Rule 145 under
the Securities Act) of Mortgage Bank shall deliver simultaneously with this
Sellers Agreement to FTNC a written agreement satisfactory to FTNC providing,
among other matters, that such person will not sell, pledge, transfer or
otherwise dispose of, or take any action which would reduce his or her risk
with respect to, any shares of Emerald Common Stock held by such person or the
shares of FTNC Common Stock to be received by such person on the Closing Date
(i) in the case of shares of FTNC Common Stock only, except in compliance with
the applicable provisions of the Securities Act and the rules and regulations
thereunder, and (ii) during the periods during which any such sale, pledge,
transfer or other disposition or other action would, under GAAP or the rules,
regulations or interpretations of the SEC, disqualify the Acquisition for
pooling of interests accounting treatment. The Sellers understand that such
period in general encompasses the period commencing thirty (30) days prior to
the Acquisition and ending at the time of the publication of financial results
covering at least thirty (30) days of combined operations of FTNC and Mortgage
Bank within the meaning of Section 201-01 of the SEC's Codification of
Financial Reporting Policies.
(b) Sellers have no present plan or intention to act in concert for
purposes of disposing of the FTNC Common Stock received by the Sellers pursuant
to the Agreement, and Sellers have no intention to file Securities and Exchange
Commission Form 13-D.
5. None of the Sellers shall take any action or fail to take any
action which would cause the Acquisition to fail to qualify as a
pooling-of-interests for accounting purposes.
6. Counterpart. This Sellers Agreement may be executed in any number
of counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
Agreement.
7. Governing Law. This Sellers Agreement shall be governed by and
construed in accordance with the laws of the State of Tennessee, without giving
effect to the principles of conflict of laws thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Sellers
Agreement to be executed by their duly authorized officers as of the date first
written above.
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
By:_____________________________________
Title:__________________________________
FIRST TENNESSEE NATIONAL CORPORATION
By:_____________________________________
Title:__________________________________
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171
SELLERS:
________________________________________
DONALD P. BALKE
________________________________________
STEPHEN M. FRISON
________________________________________
CRAIG VAN SKAIK
________________________________________
MICHAEL VAN SKAIK
________________________________________
PAMELA DELONG
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172
FIRST AMENDMENT TO STOCK EXCHANGE AGREEMENT
BY AND AMONG
DONALD P. BALKE, STEPHEN M. FRISON,
CRAIG VAN SKAIK, MICHAEL VAN SKAIK
AND PAMELA DELONG,
("SELLERS")
EMERALD MORTGAGE COMPANY,
("MORTGAGE BANK")
FIRST TENNESSEE BANK NATIONAL ASSOCIATION,
("FTB")
AND
FIRST TENNESSEE NATIONAL CORPORATION
("FTNC")
173
FIRST AMENDMENT TO STOCK EXCHANGE AGREEMENT
This First Amendment to Stock Exchange Agreement ("First Amendment")
is made and entered into as of the 6th day of July, 1994, by and among
DONALD P. BALKE, STEPHEN M. FRISON, CRAIG VAN SKAIK, MICHAEL VAN SKAIK and
PAMELA DELONG ("Sellers"), EMERALD MORTGAGE COMPANY ("Mortgage Bank"), FIRST
TENNESSEE NATIONAL CORPORATION ("FTNC") and FIRST TENNESSEE BANK NATIONAL
ASSOCIATION ("FTB").
WHEREAS, FTNC, FTB, Mortgage Bank and Sellers are parties to that
certain Stock Exchange Agreement dated as of June 15, 1994 (the "Agreement");
and
WHEREAS, the parties thereto have mutually agreed to certain
amendments to the Agreement as set forth in this First Amendment;
NOW, THEREFORE, the parties agree as follows:
1. Addition of the Defined Terms "Current Production Loans" and
"Unresolved Claims". Article I of the Agreement is amended by adding the terms
"Current Production Loans" and "Unresolved Claims" as herein defined.
Current Production Loans-- Any mortgage loan which is closed by on and
after June 15, 1994 and prior to the Closing Date which (i) complies in full
with the Regulations or (ii) is a fixed rate mortgage loan acceptable to FTB
and is sold servicing released prior to the Closing Date to Sunbelt National
Mortgage Corporation, or any other affiliate or subsidiary of FTB.
Unresolved Claims - Any claim arising from a breach of any one or more
of Sellers' or Mortgage Bank's representations, warranties or covenants under
this Agreement which has not been finally resolved.
2. Amendment of Section 2.8. (a) Section 2.8(a)(i) is amended by
deleting such section in its entirety and inserting the following in lieu
thereof:
Portfolio Target. The Base Exchange Price shall be (i)
increased by an amount equal to the product of (y) the excess of the
sum of the Closing Portfolio and Current Production Loans as of the
Estimation Date over the Portfolio Target and (z) 1.15% or (ii)
decreased by an amount equal to the product of (y) the excess of the
Portfolio Target over the sum of the Closing Portfolio and Current
Production Loans as of the Estimation Date and (z) 1.15%.
(b) Section 2.8(b)(i) is amended by deleting such section in its
entirety and inserting the following in lieu thereof:
Final Portfolio Adjustment. The Closing Exchange Price shall
be (i) increased by an amount equal to the product of (y) the excess
of the sum of the Closing Portfolio and Current Production Loans as of
the Closing Date Balance Sheet Date over the sum of the Closing
Portfolio and Current Production Loans as of the Estimation Date and
(z) 1.15% or (ii) decreased by an amount equal to the product of (y)
the excess of the sum of the Closing Portfolio and Current Production
Loans as of the Estimation Date over the sum of the Closing Portfolio
and Current Production Loans as of the Closing Date Balance Sheet Date
and (z) 1.15%.
3. Addition of Section 2.12. Article II of the Agreement is amended
by adding Section 2.12 as hereinafter set forth:
2.12 Payment for Current Production Loans If Closing Does Not
Occur. If this Agreement is terminated on or at any time prior to the
Closing Date as set forth in Section 10.1 hereof or if Closing of the
Acquisition does not occur for any other reason on or before August
15, 1994 (or such other date as shall be mutually agreeable to the
parties), FTB shall pay to Mortgage Bank the purchase price for the
Servicing Rights relating to the Current Production Loans, which shall
be equal to the product of the Current Production Loans as of the date
which would have been the Closing Date (the "Current Production
Determination Date") and 1.15%. FTB shall pay such amount within ten
(10) business days following the Current Production Determination Date
by wire transfer in immediately available funds to the account
designated by
174
Mortgage Bank. The provisions of this Section shall be in lieu of the
provisions set forth in Section 2.8, as amended, and not in addition
thereto.
4. Amendment of Section 11.1. Section 11.1 of the Agreement is
amended by inserting the following after the word "Date" on the fourth line
thereof:
; or provided, that if such day is not a business day, until the next
business day following such one hundred eightieth (180th) day
following the Closing Date (the "Adjustment Date"); provided, further,
that as to each Unresolved Claim, if any, which is outstanding on the
Adjustment Date, the specific representations and warranties which are
the basis of each such Unresolved Claim shall survive the Closing
until the date of the final resolution of each such Unresolved Claim
outstanding on the Adjustment Date (including, if appropriate, payment
in full of such Unresolved Claims to FTNC),
(a) Section 11.6(a) of the Agreement is amended by deleting the
facsimile number of Sellers' Representatives and by inserting the following in
lieu thereof:
Facsimile: (206) 771-6590
5. Amendment of Exhibit "F." Exhibit "F" to the Agreement is amended
by (i) amending item 1 on such Exhibit by deleting the word "matter" on the
first line thereof and (ii) by adding as item 3 of such Exhibit the following:
3. Losses incurred by Mortgage Bank with respect to that
certain mortgage loan secured by a deed of trust in favor of Mortgage
Bank recorded under King County Auditor's File No. 9402081808 and
described on Disclosure Schedule 3.20(a).
6. Amendment of Section 2.3 Section 2.3 is amended by adding the
following at the conclusion thereof:
No seller shall receive cash for an amount in excess of the value of
one (1) share of FTNC Common Stock. No cash payment for any
fractional share shall be made to any Seller until the Supplemental
Closing Date under Section 2.9 or the termination of the Escrow Fund,
whichever event shall last occur, but each Seller shall at such time
receive credit for any fractional share not previously issued.
7. Miscellaneous.
Governing Law. This First Amendment shall be governed by and
construed in accordance with the laws of the State of Tennessee applicable to a
contract executed and performed in such State without giving effect to the
conflicts of laws and principles thereof.
Successors and Assigns. This First Amendment is binding upon,
inures to the benefit of, and is enforceable by the parties hereto and their
respective successors and assigns.
Defined Terms. All defined terms used in this First Amendment
shall have the same meaning as provided in the Agreement except where
specifically herein modified.
Ratification. As modified and amended hereby, the parties
hereby ratify, approve and confirm the Agreement in all respects.
Amendments. This First Amendment may not be changed orally,
but only by an agreement in writing signed by the parties hereto.
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175
IN WITNESS WHEREOF, this First Amendment has been duly
executed and delivered by the duly authorized officer of each party as of the
date first above written.
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
By: /s/ Elbert L. Thomas, Jr.
-----------------------------------
Title: Senior Vice President
-----------------------------------
FIRST TENNESSEE NATIONAL CORPORATION
By: /s/ Elbert L. Thomas, Jr.
-----------------------------------
Title: Senior Vice President
-----------------------------------
EMERALD MORTGAGE COMPANY
By: /s/ Pamela DeLong
-----------------------------------
Title: President
-----------------------------------
SELLERS:
/s/ Donald P. Balke
---------------------------------------
DONALD P. BALKE
/s/ Stephen M. Frison
---------------------------------------
STEPHEN M. FRISON
/s/ Craig Van Skaik
---------------------------------------
CRAIG VAN SKAIK
/s/ Michael Van Skaik
---------------------------------------
MICHAEL VAN SKAIK
/s/ Pamela DeLong
---------------------------------------
PAMELA DELONG
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176
SECOND AMENDMENT TO STOCK EXCHANGE AGREEMENT
BY AND AMONG
DONALD P. BALKE, STEPHEN M. FRISON,
CRAIG VAN SKAIK, MICHAEL VAN SKAIK
AND PAMELA DELONG,
("SELLERS")
EMERALD MORTGAGE COMPANY,
("MORTGAGE BANK")
FIRST TENNESSEE BANK NATIONAL ASSOCIATION,
("FTB")
AND
FIRST TENNESSEE NATIONAL CORPORATION
("FTNC")
177
SECOND AMENDMENT TO STOCK EXCHANGE AGREEMENT
This Second Amendment to Stock Exchange Agreement ("Second Amendment")
is made and entered into as of the 26th day of July, 1994, by and among DONALD
P. BALKE, STEPHEN M. FRISON, CRAIG VAN SKAIK, MICHAEL VAN SKAIK AND PAMELA
DELONG ("Sellers"), EMERALD MORTGAGE COMPANY ("Mortgage Bank"), FIRST TENNESSEE
NATIONAL CORPORATION ("FTNC") and FIRST TENNESSEE BANK NATIONAL ASSOCIATION
("FTB").
WHEREAS, FTNC, FTB, Mortgage Bank and Sellers are parties to that
certain Stock Exchange Agreement dated as of June 15, 1994 as amended by that
certain First Amendment to Stock Exchange Agreement dated July 6, 1994
(collectively, the "Agreement"); and
WHEREAS, the parties thereto have mutually agreed to certain
amendments to the Agreement as set forth in this Second Amendment;
NOW, THEREFORE, the parties agree as follows:
1. Amendment of the Defined Term "Current Production Loans" and
Addition of the Defined Terms "Agreed Final Exchange Price Adjustment", "FTNC
Shareholder Dividend", "Preclosing Compensation Payments" and "Supplemental
Accounting Fees". Article I of the Agreement is amended by amending the term
"Current Production Loans" and adding the terms "Agreed Final Exchange Price
Adjustment", "FTNC Shareholder Dividend", "Preclosing Compensation Payments"
and "Supplemental Accounting Fees" as herein defined.
Current Production Loans-- Any mortgage loan which (i) is closed by
Mortgage Bank on and after June 15, 1994 and prior to the Closing Date, (ii) is
sold servicing released or brokered by Mortgage Bank prior to the Closing Date
to Sunbelt National Mortgage Corporation ("Sunbelt") or any other affiliate or
subsidiary of FTB and (iii) either (a) complies in full with the Regulations or
(b) is a mortgage loan acceptable to FTB. A mortgage loan so purchased by
Sunbelt shall be deemed acceptable to FTB if it complies in full with the terms
of the applicable rate sheet issued by Sunbelt to Mortgage Bank in effect at
the time that such mortgage loan is registered by Mortgage Bank with Sunbelt,
is registered and pre-approved by Sunbelt and otherwise complies in full with
the mortgage loan origination policies and procedures of Sunbelt.
Agreed Final Exchange Price Adjustment- As defined in Section
2.8(a)(iv).
FTNC Shareholder Dividend - The sum of the respective dividends
scheduled to be paid by FTNC on October 1, 1994 that would be payable to each
Seller if the Sellers were holders of FTNC Common Stock on the record date for
such dividend, which shall be the product of (i) the total number of shares of
FTNC Common Stock issued to Sellers in exchange for Sellers' Emerald Common
Stock in payment of the Closing Exchange Price and (ii) $.42.
178
Preclosing Compensation Payments - Any bonus paid by Mortgage Bank or
accrued on Mortgage Bank's books on the Closing Date Balance Sheet Date to any
employee of Mortgage Bank and any compensation paid by Mortgage Bank or accrued
on Mortgage Bank's books on the Closing Date Balance Sheet Date to any
temporary personnel that Mortgage Bank is required to pay in connection with
the operation of Mortgage Bank's business during the period from August 15,
1994 to the Closing Date; provided, that Mortgage Bank shall obtain FTB's
prior written consent with respect to any such payments.
Supplemental Accounting Fees - Any reasonable fees and expenses paid by
Mortgage Bank to Mortgage Bank's independent certified public accountants or
accrued on Mortgage Bank's books on the Closing Date Balance Sheet Date which
relate to work performed by such accountants on Mortgage Bank's behalf on and
after July 18, 1994 in connection with the preparation of the Registration
Statement.
2. Amendment of Section 2.8. Section 2.8(b) is amended by
redesignating subsection (iv) as subsection (v) and adding as new subsection
(iv) the following:
Agreed Final Exchange Price Adjustmen. The Closing Exchange Price
shall be increased by the amount of the FTNC Shareholder Dividend and
any Preclosing Compensation Payments and Supplemental Accounting Fees.
3. Amendment of Exhibit "A." Exhibit "A" to the Agreement is amended
by deleting such Exhibit in its entirety and substituting in lieu thereof the
form of Exhibit "A" attached as Schedule 1 hereof.
4. Miscellaneous.
Governing Law. This Second Amendment shall be governed by and
construed in accordance with the laws of the State of Tennessee applicable to a
contract executed and performed in such State without giving effect to the
conflicts of laws and principles thereof.
Successors and Assigns. This Second Amendment is binding
upon, inures to the benefit of, and is enforceable by the parties hereto and
their respective successors and assigns.
Defined Terms. All defined terms used in this Second
Amendment shall have the same meaning as provided in the Agreement except where
specifically herein modified.
Ratification. As modified and amended hereby, the parties
hereby ratify, approve and confirm the Agreement in all respects.
Amendments. This Second Amendment may not be changed orally,
but only by an agreement in writing signed by the parties hereto.
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179
IN WITNESS WHEREOF, this Second Amendment has been duly
executed and delivered by the duly authorized officer of each party as of the
date first above written.
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
By: /s/ Elbert L. Thomas, Jr.
---------------------------------
Title: Senior Vice President
---------------------------------
FIRST TENNESSEE NATIONAL CORPORATION
By: /s/ Elbert L. Thomas, Jr.
---------------------------------
Title: Senior Vice President
---------------------------------
EMERALD MORTGAGE COMPANY
By: /s/ Pamela DeLong
---------------------------------
Title: President
---------------------------------
SELLERS:
/s/ Donald P. Balke
----------------------------------------
DONALD P. BALKE
/s/ Stephen M. Frison
----------------------------------------
STEPHEN M. FRISON
/s/ Craig Van Skaik
----------------------------------------
CRAIG VAN SKAIK
/s/ Michael Van Skaik
----------------------------------------
MICHAEL VAN SKAIK
/s/ Pamela DeLong
----------------------------------------
PAMELA DELONG
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180
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Tennessee Code Annotated Sections 48-18-501 through 48-18-509
authorize a corporation to provide for the indemnification of officers,
directors, employees and agents in terms sufficiently broad to permit
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended. FTNC has adopted the provisions of the Tennessee statute pursuant
to Article XXVIII of its Bylaws. Also, FTNC has a "Directors' and Officers'
Liability Insurance Policy" which provides coverage sufficiently broad to
permit indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended.
Tennessee Code Annotated, Section 48-12-102, permits the inclusion in
the charter of a Tennessee corporation of a provision, with certain exceptions,
eliminating the personal monetary liability of directors to the corporation or
its shareholders for breach of the duty of care. FTNC has adopted the
provisions of the statute in Article 13 of its charter.
The shareholders of FTNC have approved an amendment to Article XXVIII
of the Bylaws pursuant to which FTNC is required to indemnify each director and
any officers designated by the FTNC Board, and advance expenses, to the maximum
extent not prohibited by law. In accordance with the foregoing, the FTNC Board
is authorized to enter into individual indemnity agreements with the directors
and such officers. Such indemnity agreements have been approved for all of the
directors and certain officers.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Number Description
------ -----------
2 Stock Exchange Agreement, as amended (included as Appendix "A" to the Proxy Statement-Prospectus)
3(i) Restated Charter of FTNC, as amended, attached as Exhibit 3(i) to FTNC's registration statement on Form S-4 (No.
33-53331) filed April 28, 1994, and incorporated herein by reference.
3(ii) Bylaws of FTNC, as amended, attached as Exhibit 3 (ii) to FTNC's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994, and incorporated herein by reference.
4(a) Form of Common Stock Certificate, incorporated herein by reference to exhibit 4(a) to FTNC's registration statement
on Form S-4 (No. 33-51223) filed November 30, 1993.
4(b) Shareholder Protection Rights Agreement, dated as of September 7, 1989, between FTNC and FTB as Rights Agent,
incorporated by reference to FTNC's Registration Statement on Form 8-A, filed September 8, 1989
4(c) Indenture, dated as of June 1, 1987, between FTNC and Security Pacific National Trust Company (New York), Trustee
incorporated by reference to FTNC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991
4(d) FTNC and certain of its consolidated subsidiaries have outstanding certain long-term debt. See Note 13 in FTNC's
1993 Annual Report to Shareholders. None of such debt exceeds 10% of the total assets of FTNC and its consolidated
subsidiaries. Thus, copies of constituent instruments defining the rights of holders of such debt are not required
to be included as exhibits. FTNC agrees to furnish copies of such instruments to the SEC upon request.
5 Opinion Regarding Legality
8 Opinion Regarding Tax Matters
II-1
181
Exhibit
Number Description
------- -----------
23(a) Consent of Arthur Andersen & Co.
23(b) Consent of Benson & McLaughlin, P.S.
23(c) Consent of Baylor and Backus
23(d) Consent of Ernst & Young
23(e) Consents of Heiskell, Donelson, Bearman, Adams, Williams & Caldwell included in Exhibit 8
23(f) Consent of Clyde A. Billings, Jr. included in Exhibit 5.
24 Powers of Attorney
99(a) Form of Proxy for Special Meeting of Shareholders of Emerald
Mortgage Company
(b) Financial Statement Schedules--Not applicable
(c) Not Applicable
Item 22. Undertakings
(a) 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 foregoing provisions 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 than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such 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.
(b) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales of the
securities are being made, a post-effective amendment to this Registration
Statement:
(i) to include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(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.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
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(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(c) 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.
(d) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this Registration Statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(e) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (d) immediately preceding, 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 offering thereof.
(f) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the Proxy
Statement-Prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the request.
(g) 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.
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SIGNATURES
Pursuant to the requirement of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Memphis, State of
Tennessee, on August 22, 1994.
FIRST TENNESSEE NATIONAL CORPORATION
By: Susan Schmidt Bies
--------------------------------------------------
Susan Schmidt Bies, Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Ralph Horn* Chief Executive Officer (principal August 22, 1994
- ---------------------------------- executive officer) and a Director
Ralph Horn
Susan Schmidt Bies* Executive Vice President and August 22, 1994
- ---------------------------------- Chief Financial Officer (principal
Susan Schmidt Bies financial officer)
James F. Keen* Senior Vice President and August 22, 1994
- ---------------------------------- Controller (principal
James F. Keen accounting officer)
Jack A. Belz* Director August 22, 1994
- ----------------------------------
Jack A. Belz
Robert C. Blattberg* Director August 22, 1994
- ----------------------------------
Robert C. Blattberg
J. R. Hyde, III* Director August 22, 1994
- ----------------------------------
J. R. Hyde, III
Joseph Orgill* Director August 22, 1994
- ----------------------------------
Joseph Orgill, III
Richard E. Ray* Director August 22, 1994
- ---------------------------------
Richard E. Ray
Vicki G. Roman* Director August 22, 1994
- ----------------------------------
Vicki G. Roman
Michael D. Rose* Director August 22, 1994
- ----------------------------------
Michael D. Rose
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William B. Sansom* Director August 22, 1994
- ----------------------------------
William B. Sansom
Gordon P. Street, Jr.* Director August 22, 1994
- ----------------------------------
Gordon P. Street
Ronald Terry* Director August 22, 1994
- ----------------------------------
Ronald Terry
*By: Clyde A. Billings, Jr. August 22, 1994
-----------------------------
Clyde A. Billings, Jr.
As Attorney-in-Fact
[The Power of Attorney is included herein as Exhibit 24.]
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Exhibit Index
-------------
Exhibit
Number Description
------ -----------
2 Stock Exchange Agreement, as amended (included as Appendix "A" to the Proxy Statement-Prospectus)
3(i) Restated Charter of FTNC, as amended, attached as Exhibit 3(i) to FTNC's registration statement on Form S-4 (No.
33-53331) filed April 28, 1994, and incorporated herein by reference.
3(ii) Bylaws of FTNC, as amended, attached as Exhibit 3 (ii) to FTNC's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994, and incorporated herein by reference.
4(a) Form of Common Stock Certificate, incorporated herein by reference to exhibit 4(a) to FTNC's registration statement
on Form S-4 (No. 33-51223) filed November 30, 1993.
4(b) Shareholder Protection Rights Agreement, dated as of September 7, 1989, between FTNC and FTB as Rights Agent,
incorporated by reference to FTNC's Registration Statement on Form 8-A, filed September 8, 1989
4(c) Indenture, dated as of June 1, 1987, between FTNC and Security Pacific National Trust Company (New York), Trustee
incorporated by reference to FTNC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991
4(d) FTNC and certain of its consolidated subsidiaries have outstanding certain long-term debt. See Note 13 in FTNC's
1993 Annual Report to Shareholders. None of such debt exceeds 10% of the total assets of FTNC and its consolidated
subsidiaries. Thus, copies of constituent instruments defining the rights of holders of such debt are not required
to be included as exhibits. FTNC agrees to furnish copies of such instruments to the SEC upon request.
5 Opinion Regarding Legality
8 Opinion Regarding Tax Matters
23(a) Consent of Arthur Andersen & Co.
23(b) Consent of Benson & McLaughlin, P.S.
23(c) Consent of Baylor and Backus
23(d) Consent of Ernst & Young
23(e) Consents of Heiskell, Donelson, Bearman, Adams, Williams & Caldwell included in Exhibit 8
23(f) Consent of Clyde A. Billings, Jr. included in Exhibit 5.
24 Powers of Attorney
99(a) Form of Proxy for Special Meeting of Shareholders of Emerald Mortgage Company