MISSISSIPPI VIEW HOLDING COMPANY
Offer to Purchase For Cash Up to 222,000 Shares of its
Common Stock
at a Purchase Price not in excess of
$21.50 nor less than $19.50 Per Share
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M.,
EASTERN TIME, ON MONDAY, MAY 11, 1998, UNLESS THE OFFER IS EXTENDED.
Mississippi View Holding Company, a Minnesota corporation (the 'Company'),
invites its shareholders to tender shares of its common stock, $0.10 par value
per share (the 'Shares') at prices not in excess of $21.50 nor less than $19.50
per Share in cash, as specified by shareholders tendering their Shares, upon the
terms and subject to the conditions set forth herein and in the related Letter
of Transmittal (which together constitute the 'Offer'). The Company will
determine the single per Share price, not in excess of $21.50 nor less than
$19.50 per Share, net to the seller in cash (the 'Purchase Price'), that it will
pay for Shares validly tendered pursuant to the Offer, taking into account the
number of Shares so tendered and the prices specified by tendering shareholders.
The Company will select the lowest Purchase Price that will allow it to buy
222,000 Shares (or such lesser number of Shares as are validly tendered at
prices not in excess of $21.50 nor less than $19.50 per Share). All Shares
validly tendered at prices at or below the Purchase Price and not withdrawn will
be purchased at the Purchase Price, upon the terms and subject to the conditions
of the Offer, including the proration provisions. All Shares acquired in the
Offer will be acquired at the Purchase Price.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THE COMPANY OBTAINING THE
FUNDS NECESSARY TO CONSUMMATE THE OFFER AND TO PAY ALL RELATED FEES AND
EXPENSES. THE OFFER IS NOT CONDITIONED ON ANY MINIMUM NUMBER OF SHARES BEING
TENDERED. SEE 'THE OFFER--CERTAIN CONDITIONS OF THE OFFER.'
The Shares are traded in the over-the-counter market ('OTC'). On March 31,
1998, the last full trading day in the OTC on which a sale was reported prior to
the commencement of the Offer, the closing per Share sales price was $18.50.
Shareholders are urged to obtain current market quotations for the shares. FOR
INFORMATION REGARDING RECENT TRADING IN THE SHARES, SHAREHOLDERS MAY CALL
MACKENZIE PARTNERS, INC. AT 1-800-322-2885. See 'The Offer--Price Range of
Shares; Dividends.'
Any shareholder wishing to tender all or any part of his or her Shares
should either (a) complete and sign a Letter of Transmittal (or a facsimile
thereof) in accordance with the instructions in the Letter of Transmittal and
either mail or deliver it with any required signature guarantee and any other
required documents to Registrar and Transfer Company (the 'Depositary'), and
either mail or deliver the stock certificates for such Shares to the Depositary
(with all such other documents) or tender such Shares pursuant to the procedure
for book-entry delivery set forth in 'The Offer--Procedures for Tendering
Shares,' or (b) request a broker, dealer, commercial bank, trust company or
other nominee to effect the transaction for such shareholder. Holders of Shares
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee must contact that broker, dealer, commercial bank, trust company
or other nominee if such shareholder desires to tender such Shares. Any
shareholder who desires to tender Shares and whose certificates for such Shares
cannot be delivered to the Depositary or who cannot comply with the procedure
for book-entry delivery or whose other required documents cannot be delivered to
the Depositary, in any case, by the expiration of the Offer must tender such
Shares pursuant to the guaranteed delivery procedure set forth in 'The
Offer--Procedures for Tendering Shares.' SHAREHOLDERS MUST PROPERLY COMPLETE THE
LETTER OF TRANSMITTAL INCLUDING THE SECTION OF THE LETTER OF TRANSMITTAL
RELATING TO THE PRICE AT WHICH THEY ARE TENDERING SHARES IN ORDER TO EFFECT A
VALID TENDER OF THEIR SHARES.
THE BOARD OF DIRECTORS OF THE COMPANY, BASED ON, AMONG OTHER THINGS, THE
UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF NON-EMPLOYEE DIRECTORS OF THE
BOARD, HAS UNANIMOUSLY APPROVED THE OFFER, HOWEVER, NEITHER THE COMPANY NOR ITS
BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER TO
TENDER OR REFRAIN FROM TENDERING SHARES. EACH SHAREHOLDER MUST MAKE THE DECISION
WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER AND AT WHICH
PRICE OR PRICES.
Questions and requests for assistance or for additional copies of this Offer
to Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery may
be directed to MacKenzie Partners, Inc. (the 'Information Agent'), at its
address and telephone number set forth on the back cover of this Offer to
Purchase.
------------------------
The Date of this Offer to Purchase is April 13, 1998
SUMMARY
This general summary is solely for the convenience of the Company's
shareholders and is qualified in its entirety by reference to the full text and
more specific details in this Offer to Purchase.
Purchase Price.......................................... The Company will select a single Purchase Price
which will be not more than $21.50 nor less than
$19.50 per Share. All Shares purchased by the
Company will be purchased at the Purchase Price
even if tendered at or below the Purchase Price.
Each shareholder desiring to tender Shares must
specify in the Letter of Transmittal the minimum
price (not more than $21.50 nor less than $19.50 per
Share) at which such shareholder is willing to have
his or her Shares purchased by the Company.
Number of Shares to be Purchased........................ 222,000 Shares (or such lesser number of Shares as
are validly tendered).
How to Tender Shares.................................... See "The Offer--Procedures for Tendering Shares."
Call the Information Agent or consult your broker for
additional assistance.
Brokerage Commissions................................... None.
Stock Transfer Tax...................................... None, if payment is made to the registered holder.
Expiration and Proration Dates.......................... Monday, May 11, 1998, at 5:00 p.m., Eastern time,
unless extended by the Company.
Payment Date............................................ As soon as practicable after the termination of the
Offer.
Position of the Company and its
Directors............................................. Neither the Company nor its Board of Directors
makes any recommendation to any shareholder as to
whether to tender or refrain from tendering Shares.
The Company has been advised that none of its
directors or executive officers intends to tender any
Shares pursuant to the Offer.
Withdrawal Rights....................................... Tendered Shares may be withdrawn at any time until
5:00 p.m., Eastern time, on Monday, May 11, 1998,
unless the Offer is extended by the Company, and,
unless previously purchased, after 12:00 Midnight,
Eastern time, on Monday, June 8, 1998. See "The
Offer--Withdrawal Rights."
Odd Lots................................................ There will be no proration of Shares tendered by any
shareholder owning beneficially less than 100 Shares
as of April 8, 1998, who tenders all such Shares at or
below the Purchase Price prior to the Expiration Date
and who checks the "Odd Lots" box in the Letter of
Transmittal. See "The Offer--Number of Shares;
Proration."
2
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
COMPANY AS TO WHETHER SHAREHOLDERS SHOULD TENDER OR REFRAIN FROM TENDERING
SHARES PURSUANT TO THE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER OTHER
THAN THOSE CONTAINED HEREIN OR IN THE RELATED LETTER OF TRANSMITTAL. IF GIVEN OR
MADE, ANY SUCH RECOMMENDATION OR ANY SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
--------------------------
TABLE OF CONTENTS
PAGE
----
INTRODUCTION..........................................................................................................4
SPECIAL FACTORS.......................................................................................................5
1. Background of the Offer..............................................................................5
2. Purposes of and Reasons for the Offer ...............................................................8
3. Fairness of the Offer ...............................................................................9
4. Opinion of Financial Advisor .......................................................................10
5. Plans for the Company After the Offer ..............................................................16
6. Certain Effects of the Offer........................................................................16
7. Interest of Directors and Executive Officers; Transactions and Arrangements
Concerning Shares................................................................................17
8. Certain Federal Income Tax Consequences.............................................................18
9. Dissenters' Rights..................................................................................20
THE OFFER............................................................................................................20
1. Number of Shares; Proration.........................................................................20
2. Procedures for Tendering Shares.....................................................................22
3. Withdrawal Rights...................................................................................26
4. Price Range of Shares; Dividends....................................................................27
5. Purchase of Shares and Payment of Purchase Price....................................................28
6. Certain Conditions of the Offer.....................................................................28
7. Extension of the Offer; Termination; Amendment......................................................30
8. Source and Amount of Funds..........................................................................30
9. Certain Information Concerning the Company..........................................................31
10. Effects of the Offer on the Market for Shares;
Registration under the Exchange Act...........................................................39
11. Fees and Expenses...................................................................................39
ADDITIONAL INFORMATION...............................................................................................40
MISCELLANEOUS........................................................................................................40
Schedule A................. Certain Information Concerning the Directors and Executive Officers of the Company
Annex I.................... Opinion of FinPro, Inc.
Annex II................... Financial Statements of Mississippi View Holding Company and Subsidiary
3
To the Holders of Common Stock of Mississippi View Holding Company:
INTRODUCTION
Mississippi View Holding Company, a Minnesota corporation (the
"Company"), invites its shareholders to tender shares of its common stock, $0.10
par value per share (the "Shares") at prices, net to the seller in cash, not in
excess of $21.50 nor less than $19.50 per Share, as specified by shareholders
tendering their Shares, upon the terms and subject to the conditions set forth
herein and in the related Letter of Transmittal (which together constitute the
"Offer"). The Company will determine the single per Share price, not in excess
of $21.50 nor less than $19.50 per Share (the "Purchase Price"), that it will
pay for Shares validly tendered pursuant to the Offer, taking into account the
number of Shares so tendered and the prices specified by tendering shareholders.
The Company will select the lowest Purchase Price that will allow it to buy
222,000 Shares (or such lesser number of Shares as are validly tendered). All
Shares acquired in the Offer will be acquired at the Purchase Price. All Shares
validly tendered at prices at or below the Purchase Price and not withdrawn will
be purchased at the Purchase Price, net to the seller in cash, upon the terms
and subject to the conditions of the Offer, including the proration provisions.
The Offer is conditioned upon, among other things, the Company
obtaining the funds necessary to consummate the Offer and to pay all related
fees and expenses (the "Financing Condition"). The Offer is not conditioned on
any minimum number of shares being tendered. See "The Offer--Certain Conditions
of the Offer."
Upon the terms and subject to the conditions of the Offer, if at the
expiration of the Offer more than 222,000 Shares are validly tendered at or
below the Purchase Price and not withdrawn, the Company will buy Shares first
from all Odd Lot Holders (as defined in "The Offer--Number of Shares;
Proration") who validly tender all their Shares at or below the Purchase Price
and then on a pro rata basis from all other shareholders who validly tender at
prices at or below the Purchase Price (and did not withdraw them prior to the
expiration of the Offer). See "The Offer--Number of Shares; Proration." All
Shares not purchased pursuant to the Offer, including Shares tendered at prices
greater than the Purchase Price and not withdrawn and Shares not purchased
because of proration, will be returned at the Company's expense to the
shareholders who tendered such Shares.
The Purchase Price will be paid net to the tendering shareholder in
cash for all Shares purchased. Tendering shareholders will not be obligated to
pay brokerage commissions, solicitation fees or, subject to Instruction 7 of the
Letter of Transmittal, stock transfer taxes on the purchase of Shares by the
Company. HOWEVER, ANY TENDERING SHAREHOLDER OR OTHER PAYEE WHO FAILS TO
COMPLETE, SIGN AND RETURN TO THE DEPOSITARY THE SUBSTITUTE FORM W-9 THAT IS
INCLUDED IN THE LETTER OF TRANSMITTAL MAY BE SUBJECT TO REQUIRED BACKUP FEDERAL
INCOME TAX WITHHOLDING. SEE "THE OFFER--PROCEDURES FOR TENDERING SHARES" OF THIS
OFFER TO PURCHASE AND INSTRUCTION 12 OF THE LETTER OF TRANSMITTAL. The Company
will pay all fees and expenses of Registrar and Transfer Company (the
"Depositary") and MacKenzie Partners, Inc. (the "Information Agent") incurred in
connection with the Offer. See "The Offer--Fees and Expenses."
The Company is the sponsor of three employee benefit plans (the "Stock
Plans") which hold Shares: the Community Federal Savings and Loan Association of
Little Falls Employee Stock Ownership Plan ("ESOP"); the Community Federal
Savings and Loan Association of Little Falls Management Stock Bonus Plan
("MSBP"); and the Community Federal Savings and Loan Association of Little Falls
Profit Sharing Plan ("Profit Sharing Plan"). Participants in each plan have the
right to direct the Trustee to tender Shares in their accounts, to specify the
price at which such Shares (if any) are to be tendered and to receive tender
offer materials in connection therewith.
THE BOARD OF DIRECTORS OF THE COMPANY, BASED ON, AMONG OTHER THINGS,
THE UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF NON-EMPLOYEE DIRECTORS OF
THE BOARD (THE "SPECIAL COMMITTEE"), HAS UNANIMOUSLY APPROVED THE
4
OFFER. HOWEVER, NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY
RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING THEIR SHARES. EACH SHAREHOLDER MUST MAKE THE DECISION WHETHER TO
TENDER SHARES AND, IF SO, HOW MANY SHARES AND AT WHICH PRICE OR PRICES.
On April 2, 1998, the Board of Directors of the Company approved the
creation of a stock employee compensation trust (the "Trust") for the purpose of
enabling the Company to pre-fund a portion of its obligations under certain of
its employee benefit plans and to make an ongoing commitment to such employee
benefit plans and the employees participating in them. Pursuant to its terms,
the Trust is restricted from funding any liabilities of the Company related to
future benefit plans which benefit directors of the Company. Pursuant to an
agreement between the Company and the Trust dated April 10, 1998, the Company
will sell to the Trust, in exchange for a note in an aggregate principal amount
of $1,214,750 issued by the Trust to the Company, the number of Shares having a
value of $1,214,750 based on the Purchase Price subject, however, to the Trust
not purchasing more than 9.9% of the outstanding Shares. It is currently
anticipated that the consummation of the sale of Shares to the Trust will occur
on the day immediately following the Expiration Date.
Assuming the maximum 222,000 Shares are purchased pursuant to the
Offer and the sale of Shares to the Trust immediately after the Expiration Date,
officers, directors, the ESOP, the MSBP and the Trust, in the aggregate, will
own approximately 49.5% of the outstanding Shares. Consequently, the officers
and directors will be able to exert greater control over the business affairs
and management of the Company than that which they were able to exert prior to
the Offer. In addition, it will be more difficult to remove directors and change
the management. See "Special Factors--Certain Effects of the Offer."
The Special Committee was formed on April 2, 1998, for the purpose of
reviewing and considering the creation of a stock employee compensation trust
and stock repurchases by the Company. FinPro, Inc. ("FinPro"), financial advisor
to the Special Committee and the Board, has delivered its opinion to the Special
Committee and the Board of Directors to the effect that the Offer is fair, from
a financial point of view, to the shareholders of the Company. A copy of this
opinion is attached hereto as Annex I. Shareholders should read the full text of
FinPro's opinion for a description of the assumptions made, matters considered
and procedures followed in rendering such opinion. See "Special Factors--Opinion
of Financial Advisor." See "Special Factors--Fairness of the Offer" for the
various factors considered by the Special Committee in approving the Offer and
in unanimously recommending that the Board approve the Offer.
As of April 9, 1998, there were 736,864 Shares outstanding held by
approximately 199 holders of record, and 92,860 Shares issuable upon exercise of
stock options under the Company's stock option plans. The 222,000 Shares that
the Company is offering to purchase pursuant to the Offer represent
approximately 30% of the outstanding Shares. The Shares are traded in the
over-the-counter market ("OTC") with quotations available through the OTC
Electronic Bulletin Board. Shareholders are urged to obtain current market
quotations for the Shares. For trading information regarding the Shares,
shareholders may call MacKenzie Partners, Inc. at 1-800-322- 2885. See "The
Offer--Price Range of Shares; Dividends."
SPECIAL FACTORS
1. Background of the Offer
The Company was organized in November 1994 at the direction of
Community Federal Savings and Loan Association of Little Falls (the
"Association") in connection with the Association's conversion from the mutual
to stock form (the "Conversion"). On March 23, 1995, the Association completed
the Conversion and became a wholly owned subsidiary of the Company. The
Conversion generated, through the issuance of common stock of the Company, $7.6
million of new capital to the Company, of which approximately $3.8 million was
contributed to the Association, whose capital ratios prior to the Conversion had
significantly exceeded all minimum federal
5
regulatory capital requirements. Prior to the Conversion, the Association's
total risk-based capital ratio was 20.08% which exceeded the minimum regulatory
capital requirement of 8% by 12.08%. After the Conversion as of March 31, 1995,
the Association's total risk-based capital ratio was 32.07%, exceeding the
minimum regulatory capital requirement by 24.07%. The additional capital was
raised through the Conversion due to regulations (the "Conversion Regulations")
promulgated by the Office of Thrift Supervision (the "OTS") governing
conversions from the mutual to stock form by savings associations. After the
Conversion, the cash proceeds were invested in U.S.
Government and federal agency securities.
Due to the Offering of stock of the Company in connection with the
Conversion and pursuant to the Conversion Regulations, the Company's common
stock was registered under Section 12(g) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). In addition, the Conversion Regulations have
required the Company to maintain such registration for a period of no less than
three years from the consummation of the Conversion on March 23, 1995.
Since the Conversion, management has attempted to deploy the
additional capital in such a manner so as to maximize earnings. However, due to
limited loan demand within the Association's market area, management has been
unable to substantially increase the Association's loan portfolio. As of
September 30, 1994, the Association's loans receivable, net was $44.2 million
compared with $44.5 million as of December 31, 1997. Consequently, the cash
proceeds from the Conversion have either been invested in mortgage-backed
securities or have remained in U.S. Government and federal agency securities.
Both mortgage-backed securities and U.S. Government securities typically have
lower yields than substantially all loans contained in the Association's loan
portfolio. The inability to invest the Conversion proceeds in higher yielding
assets such as loans has adversely affected the Company's return on average
equity. For the three months ended December 31, 1997, the Company's annualized
return on average equity was 6.37% compared to 7.35% for the Comparable Group.
For more information regarding the Comparable Group, see " --Opinion of
Financial Advisor."
The Company has considered the use of the excess capital to fund
growth of the Association through branch acquisitions and/or acquisitions of
other financial institutions. However, the Company has been unable to identify
potential institutions and transactions which would meet the strategic goals of
the Company or with terms which were acceptable. The Company may still consider
such acquisitions after the Offer.
In light of the above, the Company has taken efforts to reduce capital
through the payment of dividends and the implementation of open market
repurchase programs during the past three years. In fiscal years 1996 and 1997,
the Company paid annual cash dividends of $0.16 per share. In addition, as of
December 31, 1997, the Company had repurchased approximately 27% of the common
stock sold in the Conversion. While such efforts have reduced capital, the
Company still has excess capital which is adversely affecting the return on
average equity. As of December 31, 1997, the Association's total risk-based
capital ratio was 33.09%.
In February 1998, management discussed with the Board of Directors a
proposal to repurchase stock by means of an issuer tender offer. The Board
discussed the matter at such meeting and instructed management to obtain further
information from counsel regarding the structure, timing and costs of such an
offer. At the Board of Director's meeting in March 1998, the Board was advised
of management's review of issuer tender offers and provided a memorandum from
counsel. The Board considered that the Conversion Regulations have restricted
the amount and timing of stock repurchases conducted by the Company during the
past three years and that such restrictions would be lifted on March 23, 1998,
the third anniversary of the consummation of the Conversion. Absent such
restrictions, the Board discussed the possibility of a one-time repurchase of a
large block of stock in order to reduce excess capital and possibly save costs.
Management also discussed with the Board of Directors a proposal to create a
stock employee compensation trust ("SECT") to fund existing stock compensation
plans and future stock compensation plans. The Board instructed management to
consult with counsel regarding the advantages, disadvantages and mechanics of
such a trust. After the meeting, management had further discussions with counsel
regarding issuer tender offers and SECTs.
6
On April 2, 1998, the Board of Directors of the Company established
the Special Committee. The members appointed to the Special Committee were Peter
Vogel and Wallace R. Mattock. In addition, the Board authorized management to
create a SECT on behalf of the Company. In so authorizing management, the Board
considered the anticipated effects on future compensation expenses and on the
voting power to be held by affiliates resulting from the creation of a SECT.
Based on a review of liquidity, the average rate on earning assets and return on
equity as well as other factors, the Board authorized management to prepare
terms of an issuer tender offer and propose such terms to the Special Committee
for its review and consideration.
The Special Committee met on April 8, 1998 to act on organizational
matters and review and consider the proposed transaction. At that meeting the
Special Committee ratified the selection of FinPro, as financial advisor, and
directed counsel to, and counsel did by letter dated April 10, 1998, instruct
the Board that any proposals from third parties relating to an acquisition of
the Company should be referred to the Special Committee for its consideration
and recommendation. The Special Committee then invited a representative from
FinPro into the meeting, by teleconference, and received an analysis from FinPro
of the estimated trading value of the Shares based on a comparable trading
analysis, acquisition analysis and a discounted cash flow analysis. FinPro then
presented an analysis of multiples to trading value for comparable issuer tender
offers by similar financial institution holding companies. Members of the
Special Committee asked questions of counsel and FinPro regarding the
methodologies used by FinPro, the ramifications of third party offers and the
effect on the value of Shares held by remaining shareholders. The Special
Committee then invited a representative of management into the meeting and
discussed the potential need for financing and the likelihood of obtaining
financing, the possibility of increasing the dividend to the Company from the
Association and the need for regulatory approval and the size of the repurchase
in light of aggregate costs.
On April 9, 1998, the Special Committee met with FinPro, counsel and a
management representative. At such meeting FinPro presented a booklet containing
its analysis of the Company, the Offer and the methodologies it employed. The
Special Committee asked questions regarding FinPro's presentation regarding the
extent to which growth potential was considered, the adjustments made to
FinPro's acquisition analyses and the effect of the Offer on future earnings per
Share. FinPro provided the Special Committee with its recommendation regarding
the pricing of the Offer and the Special Committee questioned FinPro's analyses
regarding the selection of members of the comparable groups, the effect of the
current illiquidity in the Shares and the short-term and long-term Share price
potential after successful completion of such an offer. FinPro stated that it
was prepared to render its opinion that the Offer (based on the range it
recommended) was fair from a financial point of view to the shareholders of the
Company. The Special Committee, by unanimous vote, determined to accept FinPro's
recommended pricing and to recommend that the Board of Directors approve the
Offer as fair and in the best interests of the Company and its shareholders.
The Board of Directors met after the Special Committee meeting on
April 9, 1998, with all directors in attendance. The proposed offer with a price
range of $19.50 to $21.50 was presented. The Board reviewed the opinion of
FinPro, the recommendation of the Special Committee and the terms of the Offer,
including the sale of Shares to the Trust, and determined to approve the Offer
as fair and in the best interests of the Company and its shareholders.
7
2. Purposes of and Reasons for the Offer
The Company is making the Offer to promote its long-term objectives of
(1) remaining a locally owned financial institution committed to the convenience
and needs of the communities served by the Association, and (2) providing a fair
financial return to its shareholders as well as providing those shareholders who
desire to sell their Shares an opportunity to do so at a fair price. The Company
has recognized that since the Shares were delisted from the Nasdaq SmallCap
Market on March 17, 1998, there is no established market for the Shares and
limiting opportunities for shareholders to sell their Shares. The Company also
believes that its purchase of Shares represents an attractive long-term
investment that will benefit the Company and its remaining shareholders.
The Offer is designed to reposition the Company's balance sheet to
increase return on equity and earnings per share by redeploying a portion of the
Company's equity capital. In addition, the Offer will offset the earnings per
share dilution which would otherwise result from the issuance of Shares to the
Trust, as referred to above. Following completion of the Offer, the Company and
the Association, will continue to have strong capital positions and will
continue to qualify as "well capitalized" institutions under the prompt
corrective action scheme enacted by the Federal Deposit Insurance Corporation
Improvements Act of 1991. On a pro forma basis as of December 31, 1997, giving
effect to the Offer at the maximum Purchase Price of $21.50 per Share and
assuming acceptance of the maximum number of Shares in the Offer, the Company
would have had an equity to assets ratio of 12.07%, and the Association would
have had a total risk-based capital ratio of approximately 20.10% and a leverage
ratio of approximately 10.38%.
The Offer will enable shareholders to sell a portion of their Shares
while retaining a continuing equity interest in the Company if they so desire.
The Offer may provide shareholders who are considering a sale of all or a
portion of their Shares the opportunity to determine the price or prices (not
greater than $21.50 nor less than $19.50 per Share) at which they are willing to
sell their Shares and, if any such Shares are purchased pursuant to the Offer,
to sell those Shares for cash without the usual transaction costs associated
with open-market sales. In addition, Odd Lot Holders whose Shares are purchased
pursuant to the Offer not only will avoid the payment of brokerage commissions
but also would avoid any applicable odd lot discounts in a sale of such holder's
Shares. To the extent the purchase of Shares in the Offer results in a reduction
in the number of shareholders of record, the costs of the Company for services
to shareholders may be reduced. For shareholders who do not tender, there is no
assurance that the price of the stock will not trade below the price currently
being offered by the Company pursuant to the Offer. For shareholders who do
tender, the trading price of stock may increase as a result of the Offer or an
unexpected acquisition at a premium could occur in the future. Finally, the
Offer may affect the Company's ability to qualify for pooling-of-interests
accounting treatment for any acquisition transaction for approximately the next
two years.
THE BOARD OF DIRECTORS, BASED ON, AMONG OTHER THINGS, THE UNANIMOUS
RECOMMENDATION OF THE SPECIAL COMMITTEE, HAS UNANIMOUSLY APPROVED THE OFFER.
HOWEVER, NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION
TO ANY SHAREHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY OR ALL
OF SUCH SHAREHOLDER'S SHARES AND HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY SUCH
RECOMMENDATION. SHAREHOLDERS ARE URGED TO EVALUATE CAREFULLY ALL INFORMATION IN
THE OFFER, CONSULT THEIR OWN INVESTMENT AND TAX ADVISORS AND MAKE THEIR OWN
DECISIONS WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER AND THE
PRICE OR PRICES AT WHICH SHARES SHOULD BE TENDERED.
Shares the Company acquires pursuant to the Offer will be held in the
Company's treasury and will be available for the Company to issue without
further shareholder action (except as required by applicable law). Such Shares
could be issued without shareholder approval for such purposes as, among others,
the acquisition of other businesses or the raising of additional capital for use
in the Company's business.
8
3. Fairness of the Offer
The Company. The Special Committee of the Board, designated by the
Board on April 2, 1998, and the Board upon the recommendation of the Special
Committee, each unanimously approved the Offer as fair and in the best interests
of the Company and its shareholders.
The Special Committee took into account a number of factors, including
the following, in concluding to approve the Offer:
(i) The opinion delivered to the Special Committee by FinPro,
financial advisor to the Special Committee, that the consideration to
be received in the Offer is fair, from a financial point of view, to
the Company's shareholders, and the oral and written presentations of
FinPro supporting this opinion. A copy of FinPro's opinion is attached
to this Offer to Purchase as Annex I and should be read in its
entirety by each shareholder. For a description of the information
presented by FinPro to the Special Committee, see "--Opinion of
Financial Advisor"
(ii) The financial condition and results of operations of the
Company, including the earnings per Share and capital levels of the
Company for fiscal year 1997 and the first three months of fiscal year
1998.
(iii) The capital of the Company and the Association after
the payment of a dividend to the Company by the Association and the
Company's purchase of 222,000 Shares in the Offer would remain
significantly in excess of minimum capital requirements. The following
table sets forth (a) the Association's capital ratios as of December
31, 1997 and as adjusted to give effect to the purchase of 222,000
Shares, and (b) the minimum capital ratios for savings associations
required by the OTS;
As of December 31, 1997
-----------------------
Ratio Historical As Adjusted Minimum
----- ---------- ----------- -------
Tangible capital ratio 16.36% 10.38% 1.50%
Leverage capital ratio 16.36 10.38 3.00
Total risk-based capital ratio 33.09 20.10 8.00
(iv) The percentage by which the per Share price to be paid
in the Offer exceeds recent trading prices and estimated trading
values. See "--Opinion of Financial Advisor."
(v) Various financial ratios of the Company compared to those
of comparable companies, including particularly comparisons of return
on equity and equity-to-assets ratio. See "--Opinion of Financial
Advisor."
(vi) The likelihood that the transaction would be
consummated.
(vii) The fact that the public shareholders would be able to
participate in the Offer by selling a portion of their Shares and have
the opportunity to participate in any future growth of the Company
following consummation of the Offer. The Special Committee also is
aware that certain members of management of the Company will benefit
from any increase in the value of the Company following the Offer by
virtue of the equity interest they will have in the Company following
the Offer. The Special Committee recognizes that because of the equity
interests in the Company which certain members of management of the
Company have or are expected to acquire following the Offer, such
persons have
9
conflicts of interest in connection with the Offer. See "Interests of
Certain Persons in the Offer." Accordingly, the Special Committee
considered the Company's results of operations and future growth
opportunities in light of these factors.
(viii) The Company's payment of a dividend to the Company to
purchase Shares in the Offer would not require prior approval by the
OTS.
Among the reasons for the Special Committee reaching its decision to
approve the Offer were the following: that recent return on average equity of
the Company had not shown substantial improvement; that the future prospects of
the Company, particularly low growth potential; that the per Share consideration
in the Offer was at a premium over the recent trading price and such premium, on
a percentage basis, appeared generally comparable to, or in excess of, premiums,
in other recent issuer tender offers; that based in part upon the written and
oral presentations of FinPro, including the opinion of FinPro referred to above,
the Special Committee concluded that the consideration in the Offer was fair to
the shareholders of the Company; that based upon the various financial ratios of
the Company compared to those of comparable companies in the FinPro
presentation, the consideration in the Offer was fair to the shareholders of the
Company; that based upon the Offer is a voluntary transaction in which
shareholders of the Company may or may not participate; that the use of all-cash
consideration means that the value of the consideration received by the
shareholders would not be dependent on the future performance of the Company;
and that, given the financial condition and capital levels of the Association,
there is a significant likelihood that the Offer would be consummated. The
Special Committee did not take into consideration the book value of the Company
because it believed that book value did not reflect the fair value of the
Company and because book value was substantially lower than the values resulting
from any of the analyses of FinPro.
In making its determination that the Offer is fair and in the best
interests of the shareholders of the Company, the Board considered, among other
things, the opinion of FinPro, the recommendation of the Special Committee, and
the factors considered by the Special Committee.
In view of the wide variety of factors considered in connection with
its evaluation of the Offer, each of the Special Committee and the Board has
found it impractical to, and therefore has not, quantified or otherwise
attempted to assign relative weights to the specific factors considered in
reaching a decision to approve the Offer.
The Offer does not require the approval of a majority of unaffiliated
security holders. All directors, including the directors who are not employees
of the Company, have approved the Offer. The non-employee directors, who
comprise a majority of the Board of Directors, have not retained an unaffiliated
representative to act solely on behalf of the unaffiliated shareholders for
purposes of negotiating terms of the Offer.
It is expected that if Shares are not accepted for payment by the
Company in the Offer, the Company's current management, under the general
direction of the Company's Board of Directors, will continue to manage the
Company as an ongoing business.
The Trust. The Trust believes that the Offer is fair to shareholders.
This determination is based upon the conclusions as to fairness reached by the
Special Committee, the Board of Directors, and FinPro's fairness analysis and
opinion.
4. Opinion of Financial Advisor
As of April 2, 1998 the Company retained FinPro, a financial
consulting firm, on the basis of its experience, to render a written fairness
opinion to the Board of Directors and shareholders of the Company. FinPro, Inc.
has been in the business of consulting for the banking industry for ten years,
including the appraisal and valuation of banking institutions and their
securities in connection with mergers, acquisitions and other securities
transactions. FinPro has knowledge of and experience with the banking and thrift
market on a national and regional
10
level. FinPro reviewed the terms of the Offer including governance matters.
Except as described herein, FinPro is not affiliated in any way with the Company
or its respective affiliates.
On April 9, 1998, in connection with its consideration of the Offer,
FinPro issued an Opinion to the Board of Directors of the Company that, in its
opinion as financial consultants, the terms of the share repurchase as provided
in the Offer are fair and equitable, from a financial perspective, to the
Company and its shareholders. This opinion is based upon conditions as they
existed on April 2, 1998. A copy of the opinion is attached as Annex I to this
Offer to Purchase and should be read in its entirety by the Company
shareholders. FinPro's written opinion does not constitute an endorsement of the
Offer or a recommendation to any shareholder to tender their shares.
In rendering its opinion, FinPro reviewed certain publicly available
information concerning the Company, including its audited financial statements
and annual reports. FinPro considered many factors in making its evaluation. In
arriving at its Opinion regarding the fairness of the transaction, FinPro
reviewed: (i) the Offer; (ii) the most recent external auditor's reports to the
Boards of Directors; (iii) the December 31, 1997 Report of Condition and Income;
(iv) the most recent regulatory report, compliance report and Community
Reinvestment Act Report; (v) the most recent annual report (10k); (vi) the
internal loan classification list, OREO list and Delinquency list; (vii) details
on stock price performance; (viii) the budget and long range operating plan; and
(ix) details on the ESOP and MSBP. FinPro conducted an off-site review of the
Company's historical performance and current financial condition.
In addition, FinPro discussed with the management of the Company the
relative operating performance and future prospects for the Company, primarily
with respect to the current level of their earnings and future expected
operating results, giving weight to FinPro's assessment of the future of the
banking industry and the Company's performance within the industry. FinPro
compared the results of operation of the Company with the results of operation
of all Minnesota thrifts and to those of a Comparable Group selected by FinPro
on the basis of similarity with the Company.
11
At or For the Three Months Ended December 31, 1997
--------------------------------------------------------------
The Company Comparable Group Median National Median
----------- ----------------------- ---------------
Balance Sheet Data
Gross Loans to Deposits......................... 82.66% 107.56% 96.56%
Total Net Loans to Assets....................... 66.10 73.28 69.92
Deposits to Assets.............................. 79.96 69.59 71.94
Borrowed Funds to Assets........................ 0.00 9.58 12.83
Capital
Equity to Assets................................ 18.18 18.26 10.51
Tangible Equity to Assets....................... 18.18 18.26 10.45
Intangible Assets to Equity..................... 0.00 0.00 0.00
Regulatory Core Capital to Assets............... 16.36 15.12 9.16
Equity + Reserves to Assets..................... 19.44 18.47 11.19
Total Capital to Risk Adjusted Assets........... 33.09 26.83 17.62
Growth
Asset Growth.................................... (7.20) 4.77 8.35
Loan Growth..................................... 1.39 11.99 10.87
Deposit Growth.................................. (2.62) 2.60 5.38
Asset Quality
Non-Performing Loans to Loans................... 0.65% 0.27% 0.62%
Reserves to Non-Performing Loans................ 290.24 64.36 122.13
Non-Performing Assets to Assets................. 0.43 0.23 0.49
Non-Performing Assets to Equity................. 2.38 1.17 4.41
Reserves to Loans............................... 1.90 0.44 0.81
Profitability
Return on Assets................................ 1.08 1.25 0.92
Return on Equity................................ 6.37 7.35 8.22
Income Statement
Net Interest Margin............................. 3.91% 3.59% 3.48%
Interest Income to Average Assets............... 7.48 7.35 7.39
Interest Expense to Average Assets.............. 3.62 3.83 4.14
Net Interest Income to Average Assets........... 3.85 3.49 3.31
Noninterest Income to Average Assets............ 0.25 0.19 0.33
Noninterest Expense to Average Assets........... 2.35 2.36 2.18
Efficiency Ratio................................ 57.68 55.45 58.36
- ---------------
Source: SNL Securities as of April 2, 1998 with financial data from the most
recent quarter available
12
Many variables affect the value of banks, not the least of which is
the uncertainty of future events, so that the relative importance of the
valuation variable differs in different situations, with the result that
appraisal theorists argue about which variables are the most appropriate ones on
which to focus. However, most appraisers agree that the primary financial
variables to be considered are earnings, equity, dividends or dividend-paying
capacity, asset quality and cash flow. In addition, in most instances, if not
all, value is further tempered by non-financial factors such as marketability,
voting rights or block size, history of past sales of the banking company's
stock, nature and relationship of the other shareholdings in the bank, and
special ownership or management considerations.
FinPro analyzed the total purchase price on a cash equivalent fair
market value basis using the standard evaluation techniques (as discussed below)
including comparable trading multiples, comparable sales multiples, net present
value, return on investment and the price equity index based on certain
assumptions of projected growth, earnings and dividends and a range of discount
rates from 10% to 12%.
Net Asset Value. Net asset value is the value of the net equity of a
bank, including every kind of property and value. This approach normally assumes
liquidation on the date of appraisal with the recognition of securities gains or
losses, real estate appreciation or depreciation, adjustments to the loan loss
reserve, discount to the loan portfolio and changes in the net value of other
assets. As such, it is not the best approach to use when valuing a going
concern, because it is based on historical costs and varying accounting methods.
Even if the assets and liabilities are adjusted to reflect prevailing prices and
yields (which is often of limited accuracy because readily available data is
often lacking), it still results in a liquidation value for the concern.
Furthermore, since this method does not take into account the values
attributable to the going concern such as the interrelationship among the
company's assets and liabilities, customer relations, market presence, image and
reputation, and staff expertise and depth, little weight is given by FinPro to
the net asset value method of valuation.
Market Value. Market value is generally defined as the price,
established on an "arms-length" basis, at which knowledgeable, unrelated buyers
and sellers would agree. The market value is frequently used to determine the
price of a minority block of stock when both the quantity and the quality of the
"comparable" data are deemed sufficient. However, the relative thinness of the
specific market for the stock of the banking company being appraised may result
in the need to review alternative markets for comparative pricing purposes. The
"hypothetical" market value for a small bank with a thin market for its stock is
normally determined by comparison to the average price to earnings, price to
equity and dividend yield of local or regional publicly-traded bank issues,
adjusting for significant differences in financial performance criteria and for
any lack of marketability or liquidity. The market value in connection with the
evaluation of control of a bank is determined by the previous sales of banks in
the state or region. In valuing a business enterprise, when sufficient
comparable trading data is available, the market value deserves greater weight
than the net asset value and similar emphasis as the investment value as
discussed below.
FinPro maintains substantial files concerning the trading prices and
acquisition prices paid for thrifts and banking institutions nationwide. The
database includes transactions involving national thrift organizations,
Minnesota thrift organizations and thrift organizations in the Midwest region of
the United States over the last five years. Organized by different peer groups,
the data presents averages of financial performance, trading levels and purchase
price levels, thereby facilitating a valid comparative pricing analysis. In
analyzing the transaction value of the Company, FinPro has considered the market
approach and has evaluated price to equity and price to earnings multiples of
all national, Minnesota, the Comparable Group and Regional banking organizations
with assets less than $100 million.
a. Comparable Trading Multiples. FinPro calculated an "Adjusted Book
Value" of $23.06 per share, based on the Company's fully diluted December 31,
1997 equity and the median price to book multiple of 136.85% for Comparable
savings organizations using trading data as of April 2, 1998. FinPro calculated
an "Adjusted Book Value" of $27.16 per share, based on the Company's fully
diluted December 31, 1997 equity and the median price to book multiple of
161.16% for national savings organizations using trading data as of April 2,
1998. FinPro calculated an "Adjusted Book Value" of $22.55 per share, based on
the Company's fully diluted December 31, 1997
13
equity and the median price to book multiple of 133.81% for Minnesota savings
organizations using trading data as of April 2, 1998. FinPro calculated an
"Adjusted Book Value" of $21.25 per share, based on the Company's fully diluted
December 31, 1997 equity and the median price to book multiple of 126.12% for
institutions less than $100 million in asset size using trading data as of April
2, 1998.
FinPro calculated an "Adjusted Earnings Value" of $18.01 per share,
based on the Company's fully diluted unadjusted last twelve months earnings
ending December 31, 1997 and the median price to earnings multiple of 18.96 for
Comparable savings organizations using trading data as of April 2, 1998. FinPro
calculated an "Adjusted Earnings Value" of $19.77 per share, based on the
Company's fully diluted unadjusted last twelve months earnings ending December
31, 1997 and the median price to earnings multiple of 20.81 for national savings
organizations using trading data as of April 2, 1998. FinPro calculated an
"Adjusted Earnings Value" of $18.65 per share, based on the Company's fully
diluted unadjusted last twelve months earnings ending December 31, 1997 and the
median price to earnings multiple of 19.63 for Minnesota savings organizations
using trading data as of April 2, 1998. FinPro calculated an "Adjusted Earnings
Value" of $21.86 per share, based on the Company's fully diluted unadjusted last
twelve months earnings ending December 31, 1997 and the median price to earnings
multiple of 23.01 for institutions less than $100 million in asset size using
trading data as of April 2, 1998.
The financial performance characteristics of the regional banking
organizations vary, sometimes substantially, from those of the Company. When the
variance is significant for relevant performance factors, adjustments to the
price multiples are appropriate when comparing them to the transaction value.
b. Comparable Sales Multiples. FinPro calculated an "Adjusted Book
Value" of $26.68 per share, based on the Company's fully diluted December 31,
1997 equity and the median price to book multiple of 158.33% for Comparable
savings organizations sold between April 2, 1997 and April 2, 1998. FinPro
calculated an "Adjusted Book Value" of $31.27 per share, based on the Company's
fully diluted December 31, 1997 equity and the median price to book multiple of
185.60% for national savings organizations sold between April 2, 1997 and April
2, 1998. FinPro calculated an "Adjusted Book Value" of $25.55 per share, based
on the Company's fully diluted December 31, 1997 equity and the median price to
book multiple of 151.65% for savings organizations less than $100 million in
asset size sold between April 2, 1997 and April 2, 1998.
FinPro calculated an "Adjusted Earnings Value" of $24.02 per share,
based on the Company's fully adjusted last twelve month ended December 31, 1997
earnings and the median price to last twelve months earnings multiple of 25.28
for Comparable savings organizations sold between April 2, 1997 and April 2,
1998. FinPro calculated an "Adjusted Earnings Value" of $21.26 per share, based
on the Company's fully adjusted last twelve month ended December 31, 1997
earnings and the median price to last twelve months earnings multiple of 22.38
for national savings organizations sold between April 2, 1997 and April 2, 1998.
FinPro calculated an "Adjusted Earnings Value" of $21.25 per share, based on the
Company's fully adjusted last twelve month ended December 31, 1997 earnings and
the median price to last twelve months earnings multiple of 22.37 for savings
organizations less than $100 million in asset size sold between April 2, 1997
and April 2, 1998.
The financial performance characteristics of the regional banking
organizations vary, sometimes substantially, from those of the Company. When the
variance is significant for relevant performance factors, adjustments to the
price multiples are appropriate when comparing them to the transaction value.
Investment Value. The investment value is sometimes referred to as the
income value or earnings value. One investment value method frequently used
estimates the present value of an enterprise's future earnings or cash flow.
Another popular investment value method is to determine the level of current
annual benefits (earnings, cash flow, dividends, etc.), and then capitalize one
or more of the benefit types using an appropriate capitalization rate such as an
earnings or dividend yield. Yet another method of calculating investment value
is a cash flow analysis of the ability of a banking company to service
acquisition debt obligations (at a certain price level) while providing
sufficient earnings for reasonable dividends and capital adequacy requirements.
In connection with the cash flow
14
analysis, the return on investment that would accrue to a prospective buyer at
the transaction value is calculated. The investment value methods which were
analyzed in connection with this transaction were the net present value
analysis, and the return on investment analysis, which are discussed below.
a. Net Present Value Analysis. The investment of earnings value of any
banking organization's stock is an estimate of present value of the future
benefits, usually earnings, cash flow or dividends, which will accrue to the
stock. An earnings value is calculated using an annual future earnings stream
over a period of time of no less than ten years and the residual value which
assumes the sale of the organization in the tenth year, and an appropriate
capitalization rate (the net present value discount rate). FinPro's computations
were based on an analysis of the banking industry, the economic and competitive
situations in the Company's market area, its current financial condition and
historical levels of growth and earnings. Using a net present value discount
rate of 12%, an acceptable discount rate considering the risk-return
relationship most investors would demand for an investment of this type as of
the valuation date, the "Net Present Value of Future Earnings," equaled $20.00
per share.
b. Return on Investment Analysis. Return on investment (ROI) analysis
assumes the formation of a bank holding company and analyzes the ten year ROI of
an equity investment equal to the Company's book value at December 31, 1997,
assuming a constant return on equity of 5.96%, with a liquidation at book value
in the year 2007, as opposed to a sale at 25.7 times projected earnings for the
year 2007. This ROI analysis provides a benchmark for assessing the validity of
the fair market value of a majority block of stock. The ROI analysis is one
approach to valuing a going concern, and is directly impacted by the earnings
stream, dividend payout levels and levels of debt, if any. Other financial and
non-financial factors indirectly affect the ROI; however, these factors more
directly influence the level of ROI an investor would demand from an investment
in a majority block of stock of a specific bank at a certain point in time. The
ROI, assuming a constant return on equity of 5.96% with liquidation at book
value in 2007, is 5.96%, and sale at 25.7 projected earnings in 2007, is 9.86%.
Price Equity Index Analysis. Furthermore, a price level indicator, the
equity index, may be used to confirm the validity of the transaction value. The
equity index adjusts the price to equity multiple in order to facilitate a truer
price level comparison with comparable banking organizations, regardless of
differing levels of equity capital. The equity index is derived by multiplying
the price to equity multiple by the equity-to-assets ratio. The following table
sets forth the average price equity indexes for all Minnesota public thrifts,
for all Comparable public thrifts, and for the Company for the years 1997, 1996
and 1995.
1997 1996 1995
equity index equity index equity index
------------ ------------ ------------
Mississippi View 0.2008 0.1510 0.1506
Comparables 0.1963 0.1790 0.2080
Minnesota 0.2026 0.1716 0.1506
Purchase Price at $19.50 0.2038
Purchase Price at $21.50 0.2247
Finally, another test of appropriateness for the transaction value of
a majority block of stock is the net present value-to-transaction value ratio.
Theoretically, an earnings stream may be valued through the use of a net present
value analysis. In FinPro's experience with majority block community bank stock
valuations, it has determined that a relationship does exist between the net
present value of an "average" community banking organization and the transaction
value of a majority block of the banking organization's stock. The net present
value-to-transaction value ratio ranges between and 102.56% (at $19.50 per
share) to 93.02% (at $21.50 per share) for the Company, which falls within
FinPro's expected range. There are many other factors to consider, when valuing
a going concern, which do not directly impact the earnings stream and the net
present value but which do exert a degree of influence over the fair market
value of a going concern. These factors include, but are not limited to, the
general condition of the industry, the economic and competitive situations in
the market area and the expertise of the management of the organization being
valued.
15
When the net asset value, market value and investment value methods
are subjectively weighed, using the appraiser's experience and judgment, it is
FinPro's opinion that the proposed transaction is fair.
FinPro considered this transaction as a trading valuation rather than
a merger or a purchase. Consideration was given to the levels of earnings per
share, equity per share and dividends per share appreciation or dilution
percentages. To justify the fairness of the transaction for the Company
shareholders, it is important to project, based upon realistic projections of
future performance, a positive impact for the Company shareholders. FinPro
projected that the Company shareholders will have a higher level of earnings per
share, equity per share and dividends per share after the transaction. The
primary focus has been on short-term and long-term earnings per share, equity
per share and dividends per share appreciation potential for the Company
shareholders.
The Company did not impose any limitations upon the scope of the
investigation to be performed by FinPro in formulating its Opinion. In rendering
its Opinion, FinPro did not independently verify the asset quality and financial
condition of the Company, but instead relied upon the data provided by or on
behalf of the Company to be true and accurate in all material respects.
For its services as independent financial analyst of the transaction,
including the rendering of its Opinion referred to above, the Company has paid
FinPro aggregate fees of approximately $20,000 including out-of-pocket expenses.
5. Plans for the Company After the Offer
It is expected that following the Offer, the business and operations
of the Company will be continued by the Company substantially as they are
currently being conducted by management. Except for the Offer and as otherwise
described in this Offer to Purchase, the Company does not have any present plans
or proposals which relate to or would result in an extraordinary corporate
transaction, such as a merger, reorganization, liquidation, relocation of any
operations of the Company or sale or transfer of a material amount of assets
involving the Company or any of its subsidiaries, or any changes in the
Company's capitalization or any other change in the Company's corporate
structure or business or the composition of its management. However, the Company
will continue to review its business plan and strategic direction and in such
process may develop strategies for internal growth through expansion of products
and services or growth through acquisitions and/or branching.
Following completion of the Offer, the Company may repurchase
additional Shares in the open market, in privately negotiated transactions or
otherwise. Any such purchases may be on the same terms or on terms which are
more or less favorable to shareholders than the terms of the Offer. Rule 13e-4
under the Exchange Act prohibits the Company and its affiliates from purchasing
any Shares, other than pursuant to the Offer, until at least ten business days
after the Expiration Date. The Company expects to obtain an exemption from the
Commission from compliance with the requirements of Rule 13e-4 to the extent
necessary to permit the sale of Shares to the Trust at or shortly after the
Expiration Date. Any possible future purchases by the Company will depend on
many factors, including the market price of the Shares, the results of the
Offer, the Company's business and financial position and general economic and
market conditions.
6. Certain Effects of the Offer
Impact on Tendering Shareholders. Shareholders who sell Shares to the
Company in response to the Offer will receive the Purchase Price in cash. The
sale of Shares in response to the Offer will have federal income tax
consequences to the selling shareholders and may have tax consequences under
applicable federal, state, local and other tax laws. See "--Certain Federal
Income Tax Consequences."
Impact on Non-Tendering Shareholders. The purchase of Shares as a
result of the Offer will decrease the Company's shareholders' equity per Share
because the Purchase Price will be greater than the Company's
16
shareholders' equity per Share of $16.85 at December 31, 1997. The Shares
purchased by the Company pursuant to the Offer will be held in the Company's
treasury and will constitute authorized but unissued Shares.
If the Company purchases Shares pursuant to the Offer with funds
received as dividends from the Association, the capital ratios of the
Association will be reduced but will continue to exceed the minimum capital
ratios required by the OTS. See "--Fairness of the Offer." To the extent the
Company utilizes borrowings to purchase Shares pursuant to the Offer, the
consolidated indebtedness of the Company following the Offer will be greater
than that of the Company prior to the Offer. The Company does not anticipate any
change to the current dividend policy, however, there can be no assurance that
dividends will be paid in the future. Any payment of cash dividends in the
future will depend upon the financial condition, capital requirements and
earnings of the Company, regulatory restrictions applicable to financial
institutions, as well as other factors the Board of Directors may deem relevant.
The purchase of Shares by the Company will increase the percentage
ownership of Shares held by non-tendering shareholders. The Offer may reduce the
number of Shares that might otherwise be traded publicly and, depending upon the
number of Shares purchased pursuant to the Offer, could adversely affect the
liquidity and market value of the remaining Shares held by the public. The
Shares were delisted from the Nasdaq SmallCap Market on March 17, 1998. The
Shares are currently traded in the over-the-counter market with quotations
available on the OTC Electronic Bulletin Board. Consummation of the Offer will
further reduce the liquidity of the Shares. There can be no assurance that
shareholders will be able to find willing buyers for their shares after the
Offer.
The Company is required to file periodic reports with the Commission
pursuant to Section 13 of the Exchange Act. Regardless of the results of the
Offer, the Company plans to apply to the Commission to suspend this duty since
the number of its shareholders is currently less than 300 holders of record.
Termination of the Company's reporting duty would substantially reduce the
public information available concerning the Company. The reduction of such
public information may adversely effect option holders' ability to exercise
their options or resell such underlying securities as well as the ability of
affiliates of the Company to resell Shares held by them. Such termination will,
however, decrease the Company's non-interest expenses.
To the extent that officers and directors of the Company do not tender
their Shares, the percentage ownership in the Company represented by their
Shares will increase in proportion to the reduction in the number of Shares
outstanding. See "Schedule A--Directors and Executive Officers." It is currently
expected that after consummation of the Offer the officers, directors, the ESOP,
the MSBP, and the Trust will own, in the aggregate, 49.5% of the outstanding
Shares. Therefore, the Company's officers and directors will be able to exert
greater control over the business affairs and management of the Company than
that which they were able to exert prior to the Offer's consummation. After the
Offer, it will be more difficult to remove directors and change the Company's
management.
7. Interest of Directors and Executive Officers; Transactions
and Arrangements Concerning Shares.
As of April 9, 1998, the Company's directors and executive officers as
a group beneficially owned (including pursuant to options) an aggregate of
209,894 Shares (approximately 28.48% of the outstanding Shares including Shares
issuable upon the exercise of options held by directors and executive officers).
Such ownership includes 92,860 Shares as of April 9, 1998 subject to stock
options which are held by executive officers and directors.
Except as set forth in "Schedule A--Certain Transactions Involving
Shares," neither the Company, nor any subsidiary of the Company nor, to the best
of the Company's knowledge, any of the Company's directors or
17
executive officers, nor any affiliates of any of the foregoing, had any
transactions involving the Shares during the 40 business days prior to the date
hereof.
Except for outstanding options to purchase Shares granted from time to
time over recent years to certain employees (including executive officers) and
directors of the Company pursuant to the Company's stock option plans and except
as otherwise described herein, neither the Company nor, to the best of the
Company's knowledge, any of its directors or executive officers, is a party to
any contract, arrangement, understanding or relationship with any other person
relating, directly or indirectly, to the Offer including, but not limited to,
any contract, arrangement, understanding or relationship concerning the transfer
or the voting of any such securities, joint ventures, loan or option
arrangements, puts or calls, guaranties of loans, guaranties against loss or the
giving or withholding of proxies, consents or authorizations.
The officers and directors have advised the Company that they do not
intend to tender any Shares pursuant to the Offer. Assuming the Company
purchases 222,000 Shares pursuant to the Offer and the sale of Shares to the
Trust, the percentage of Shares outstanding held by executive officers,
directors, the ESOP, the MSBP and the Trust would be approximately 49.5% of the
outstanding Shares immediately after the Offer (including Shares issuable upon
exercise of options held by executive officers and directors).
8. Certain Federal Income Tax Consequences
General. The federal income tax discussion set forth below summarizes
the principal federal income tax consequences to domestic shareholders of sales
of stock pursuant to the Offer and is included for general information only. The
discussion does not address all aspects of federal income taxation that may be
relevant to a particular shareholder nor any relevant foreign, state, local or
other tax laws. Certain shareholders (including, but not limited to, insurance
companies, tax-exempt entities, foreign persons, financial institutions, broker
dealers, employee benefit plans, personal holding companies and persons who
acquired their Shares upon the exercise of employee stock options or as
compensation) may be subject to special rules not discussed below. The
discussion is based on laws, regulations, rulings and court decisions currently
in effect as of the date of this Offer to Purchase, all of which are subject to
change. The Company intends that, under the terms of the Offer, sales of Shares
will be completed in 1998 and shareholders will receive payment for purchased
Shares in 1998. In that event, shareholders will report the sale of Shares
pursuant to the Offer in 1998 for tax purposes. In the event that sales are not
completed this year and/or shareholders receive payments for Shares in 1999,
shareholders may be required to report the sale of Shares pursuant to the Offer
in 1999 for tax purposes. The Company has neither requested nor obtained a
written opinion of counsel or a ruling from the Internal Revenue Service (the
"Service") with respect to the tax matters discussed herein. Prior to tendering
any Shares pursuant to the Offer, each shareholder is strongly advised to
consult with their own tax advisor as to the particular tax consequences of the
Offer to such shareholder, including the application of foreign, state, local,
or other tax laws.
In general, a sale of Shares pursuant to the Offer will be a taxable
transaction for federal income tax purposes. Such sale will constitute a
"redemption" within the meaning of Section 317 of the Internal Revenue Code of
1986, as amended (the "Code"). Each tendering shareholder will recognize either
gain or loss from a sale of Shares or dividend income, depending upon the
application of Section 302 of the Code to the shareholder's particular facts and
circumstances. If the redemption qualifies as a sale of Shares under Section
302, the cash received pursuant to the Offer will be treated as a distribution
from the Company in part or full payment in exchange for the Shares surrendered
("Sale Treatment"). Sale Treatment will result in the shareholder's recognizing
gain or loss equal to the difference between (i) the cash received pursuant to
the Offer and (ii) the shareholder's tax basis in the Shares surrendered. If the
redemption does not qualify for Sale Treatment, the shareholder will not be
treated as having sold Shares but will be treated as having received a dividend
taxable as ordinary income, in an amount equal to the cash received pursuant to
the Offer ("Dividend Treatment").
18
Sale Treatment. Under Section 302 of the Code, a sale of Shares
pursuant to the Offer will be treated as a sale of such Shares for federal
income tax purposes if such sale of Shares (i) results in a "complete
redemption" of all of the shareholder's stock in the Company, (ii) is a
"substantially disproportionate redemption" with respect to the shareholder, or
(iii) is "not essentially equivalent to a dividend" with respect to the
shareholder. In determining whether any of these three tests under Section 302
is satisfied, shareholders must take into account not only Shares that they
actually own, but also any Shares that they are deemed to own pursuant to the
constructive ownership rules of Section 318 of the Code. Pursuant to these
constructive ownership rules, shareholders will be treated as owning a certain
amount of (i) Shares held by certain family members, including the shareholder's
spouse, children, grandchildren, and parents, (ii) Shares owned by certain
trusts of which the shareholder is a beneficiary, (iii) Shares owned by an
estate of which the shareholder is a beneficiary, (iv) Shares owned by any
partnership or "S corporation" in which the shareholder is a partner or
shareholder, (v) Shares owned by any non-S corporation of which the shareholder
owns at least 50% in value of the stock and (vi) Shares that the shareholder can
acquire by exercise of an option or similar right.
A shareholder's sale of Shares pursuant to the Offer will generally
result in a "complete redemption" of all the shareholder's stock in the Company
if, pursuant to the Offer, the Company purchases all of the Shares actually
owned by the shareholder and subsequently the shareholder does not
constructively own any Shares. If the shareholder's sale of Shares pursuant to
the Offer would satisfy the complete redemption requirement but for the
shareholder's constructive ownership of Shares held by certain family members,
such shareholder may, under certain circumstances, be entitled to waive such
constructive ownership, provided the shareholder complies with the provisions of
Section 302(c) of the Code. If the shareholder actually owns no Shares after
selling his or her Shares pursuant to the Offer, constructively owns only Shares
owned by certain family members, and the shareholder qualifies to and does waive
constructive ownership of Shares owned by certain family members, that
redemption of Shares would generally qualify as a "complete redemption."
A shareholder's sale of Shares pursuant to the Offer will generally be
a "substantially disproportionate redemption" with respect to the shareholder if
the percentage of Shares actually and constructively owned by the shareholder
compared to all the outstanding Shares of the Company immediately following the
sale of Shares pursuant to the Offer (treating as not outstanding all Shares
sold by all the shareholders pursuant to the Offer) is less than 80% of the
percentage of Shares actually and constructively owned by the shareholder
compared to all the outstanding Shares of the Company immediately before the
sale of Shares pursuant to the Offer (treating as outstanding all Shares sold by
the shareholders pursuant to the Offer). If the Trust Shares were treated as
outstanding immediately after the redemption, then the sale of Shares pursuant
to the Offer would be "substantially disproportionate" with respect to a
stockholder only if such stockholder's actual and constructive ownership of the
voting stock of the Company after the sale of Shares pursuant to the Offer
(treating the Trust Shares as outstanding) were also less than 80% of the
stockholder's actual and constructive percentage ownership of the voting stock
of the Company immediately before the purchase of Shares pursuant to the Offer
and the issuance of the Trust Shares. This test will be applied to each
shareholder individually, regardless of the effect of the redemption on the
other shareholders.
A shareholder's sale of Shares pursuant to the Offer will generally
"not be essentially equivalent to a dividend" if, as a result of the sale of
Shares pursuant to the Offer, the shareholder experiences a "meaningful
reduction" in his proportionate interest in the Company, including the
shareholder's voting rights, participation in earnings, and liquidation rights
and taking into account the constructive ownership rules. The Service has
indicated in a published ruling that even a small reduction in the proportionate
interest of a small minority shareholder who does not exercise any control over
company affairs may constitute a "meaningful reduction" in the shareholder's
interest in the company. The fact that the redemption fails to qualify as a sale
pursuant to the other two tests is not taken into account in determining whether
the redemption is "not essentially equivalent to a dividend."
Shareholders should be aware that their ability to satisfy any of the
foregoing tests may be affected by proration pursuant to the Offer. Therefore, a
shareholder can be given no assurance, even if he tenders all of his
19
Shares, that the Company will purchase a sufficient number of such Shares to
permit him to satisfy any of the foregoing tests. Shareholders should also be
aware that it is possible that, depending on the facts and circumstances, an
acquisition or disposition of Shares in the market or to other parties as part
of an integrated plan may be taken into account in determining whether any of
the foregoing tests is satisfied. Shareholders are strongly advised to consult
with their own tax advisors with regard to whether acquisitions from sales to
third parties, including market sales, may be so integrated. Subsequent open
market purchases by the Company may also be taken into account in determining
whether any of the foregoing tests is satisfied. It is also possible that the
issuance of the Trust Shares will be taken into account.
If any of the above three tests is satisfied by a tendering
shareholder, such shareholder will recognize gain or loss equal to the
difference between the amount of cash received by the shareholder pursuant to
the Offer and the shareholder's tax basis in the Shares sold. Such gain or loss
must be determined separately for each block of Shares sold (i.e., Shares
acquired at the same time in a single transaction), and will be capital gain or
loss, assuming the Shares were held by the shareholder as a capital asset.
Capital gain or loss will qualify as long-term capital gain or loss if, at the
time the Company accepts the Shares for payment, the Shares were held by the
shareholder for more than eighteen (18) months.
Dividend Treatment. If none of the three foregoing tests are
satisfied, the tendering shareholder generally will be treated as having
received a dividend, taxable as ordinary income, in an amount equal to the total
cash received by the shareholder pursuant to the Offer, provided the Company has
sufficient accumulated or current earnings and profits. The Company expects that
its current and accumulated earnings and profits will be sufficient to cover the
amount of all distributions pursuant to the Offer, if any, that are treated as
dividends. To the extent that the purchase of Shares from any shareholder
pursuant to the Offer is treated as a dividend, such shareholder's tax basis in
any Shares which the shareholder actually or constructively retains after
consummation of the Offer will be increased by the shareholder's tax basis in
the Shares surrendered pursuant to the Offer.
Treatment of Dividend Income for Corporate Shareholders. In the case
of a corporate shareholder, if the cash received for Shares pursuant to the
Offer is treated as a dividend, the dividend income may be eligible for the
dividends-received deduction under Section 243 of the Code. The
dividends-received deduction is subject to certain limitations and may not be
available if the corporate shareholder does not satisfy certain holding period
requirements with respect to the Shares or if the Shares are treated as
"debt-financed portfolio stock." The Company believes that the Offer will not
result in a pro rata distribution to all shareholders. Consequently, dividends
received by corporate shareholders pursuant to the Offer will probably be
treated as "extraordinary dividends" as defined by Section 1059 of the Code.
Corporate shareholders should consult their tax advisors as to the availability
of the dividends-received deduction and the application of Section 1059 of the
Code.
SEE "THE OFFER--PROCEDURES FOR TENDERING SHARES" WITH RESPECT TO THE
APPLICATION OF BACKUP FEDERAL INCOME TAX WITHHOLDING.
9. Dissenters' Rights
No dissenters' rights are available to shareholders in connection with
the Offer under applicable Minnesota law.
THE OFFER
1. Number of Shares; Proration.
Upon the terms and subject to the conditions of the Offer, the Company
will purchase up to 222,000 Shares or such lesser number of Shares as are
validly tendered (and not withdrawn in accordance with "--Withdrawal Rights")
prior to the Expiration Date (as defined below) at prices not in excess of
$21.50 nor less than $19.50 net
20
per Share in cash. The term "Expiration Date" means 5:00 p.m., Eastern time, on
Monday, May 11, 1998, unless and until the Company, in its sole discretion,
shall have extended the period of time during which the Offer will remain open,
in which event the term "Expiration Date" shall refer to the latest time and
date at which the Offer, as so extended by the Company, shall expire. In the
event of an oversubscription of the Offer, Shares tendered at or below the
Purchase Price prior to the Expiration Date will be subject to proration except
for Odd Lots as explained below. The proration period also expires on the
Expiration Date.
The Company will, upon the terms and subject to the conditions of the
Offer, determine the Purchase Price (not greater than $21.50 nor less than
$19.50 per Share) that it will pay for Shares validly tendered pursuant to the
Offer taking into account the number of Shares so tendered and the prices
specified by tendering shareholders. The Company will select a single per Share
Purchase Price that will allow it to buy 222,000 Shares (or such lesser number
as are validly tendered at prices not greater than $21.50 nor less than $19.50
per Share) pursuant to the Offer. The Company reserves the right, in its sole
discretion, to purchase more than 222,000 Shares pursuant to the Offer.
If (i) the Company increases or decreases the price to be paid for
Shares, increases the number of Shares being sought and any such increase in the
number of Shares being sought exceeds 2% of the outstanding Shares, decreases
the number of Shares being sought, or incurs dealer manager soliciting fees and
(ii) the Offer is scheduled to expire less than ten business days from and
including the date that notice of such increase or decrease is first published,
sent or given in the manner specified in "--Extension of the Offer;Termination;
Amendment," the Offer will be extended for at least ten business days from and
including the date of such notice. For purposes of the Offer, a "business day"
means any day other than Saturday, Sunday or federal holiday and consists of the
time period from 12:01 a.m. through 12:00 midnight, Eastern time.
This Offer is conditioned upon, among other things, the Company
obtaining the funds necessary to consummate the Offer and to pay all related
fees and expenses. The Offer is not conditioned on any minimum number of shares
being tendered. See "--Certain Conditions of the Offer."
In accordance with Instruction 5 of the Letter of Transmittal,
shareholders desiring to tender Shares must specify the price, not in excess of
$21.50 nor less than $19.50 per Share, at which they are willing to sell their
Shares to the Company. Shares validly tendered pursuant to the Offer at or below
the Purchase Price and not withdrawn will be purchased at the Purchase Price,
subject to the terms and conditions of the Offer, including the proration
provisions. All Shares tendered and not purchased pursuant to the Offer,
including Shares tendered at prices in excess of the Purchase Price and Shares
not purchased because of proration will be returned to the tendering
shareholders at the Company's expense as promptly as practicable following the
Expiration Date.
Priority of Purchases. Upon the terms and subject to the conditions of
the Offer, if more than 222,000 Shares (or such greater number of Shares as the
Company may elect to purchase) have been validly tendered at prices at or below
the Purchase Price and not withdrawn prior to the Expiration Date, the Company
will purchase validly tendered Shares on the basis set forth below:
(a) first, all Shares tendered and not withdrawn prior to the
Expiration Date by any Odd Lot Holder (as defined below) who:
(1) tenders all Shares beneficially owned by such Odd Lot
Holder at a price at or below the Purchase Price (tenders of less than
all Shares owned by such shareholder will not qualify for this
preference); and
(2) completes the box captioned "Odd Lots" on the Letter of
Transmittal and, if applicable, on the Notice of Guaranteed Delivery;
and
21
(b) second, after purchase of all of the foregoing Shares, all other
Shares validly tendered at prices at or below the Purchase Price and
not withdrawn prior to the Expiration Date, on a pro rata basis (with
appropriate adjustments to avoid purchases of fractional Shares) as
described below.
Odd Lots. For purposes of the Offer, the term "Odd Lots" shall mean
all Shares validly tendered prior to the Expiration Date at prices at or below
the Purchase Price and not withdrawn by any person (an "Odd Lot Holder") who
owned, beneficially or of record, as of the close of business on April 8, 1998
and as of the Expiration Date, an aggregate of fewer than 100 Shares and so
certified in the appropriate place on the Letter of Transmittal and, if
applicable, on the Notice of Guaranteed Delivery. In order to qualify for this
preference, an Odd Lot Holder must tender all such Shares in accordance with the
procedures described in "--Procedures for Tendering Shares." As set forth above,
Odd Lots will be accepted for payment before proration, if any, of the purchase
of other tendered Shares. This preference is not available to partial tenders or
to beneficial or record holders of an aggregate of 100 or more Shares, even if
such holders have separate accounts or certificates representing fewer than 100
Shares. By accepting the Offer, an Odd Lot Holder would not only avoid the
payment of brokerage commissions but also would avoid any applicable odd lot
discounts in a sale of such holder's Shares. Any shareholder wishing to tender
all of such shareholder's Shares pursuant to this Section should complete the
box captioned "Odd Lots" on the Letter of Transmittal and, if applicable, on the
Notice of Guaranteed Delivery.
The Company also reserves the right, but will not be obligated, to
purchase all Shares validly tendered by any shareholder who tendered all Shares
owned, beneficially or of record, at or below the Purchase Price and who, as a
result of proration, would then own, beneficially, an aggregate of fewer than
100 Shares. If the Company exercises this right, it will increase the number of
Shares that it is offering to purchase by the number of Shares purchased through
the exercise of the right.
Proration. In the event that proration of tendered Shares is required,
the Company will determine the proration factor as soon as practicable following
the Expiration Date. Proration for each shareholder tendering Shares, other than
Odd Lot Holders, shall be based on the ratio of the number of Shares tendered by
such shareholder to the total number of Shares tendered by all shareholders,
other than Odd Lot Holders, at or below the Purchase Price. Because of the
difficulty in determining the number of Shares validly tendered (including
Shares tendered by guaranteed delivery procedures, as described in Section 3)
and not withdrawn, and because of the odd lot procedure, the Company does not
expect that it will be able to announce the final proration factor or to
commence payment for any Shares purchased pursuant to the Offer until
approximately seven over-the-counter ("OTC") trading days after the Expiration
Date. The preliminary results of any proration will be announced by press
release as promptly as practicable after the Expiration Date. Shareholders may
obtain such preliminary information from the Information Agent and may be able
to obtain such information from their brokers.
This Offer to Purchase and the related Letter of Transmittal will be
mailed to record holders of Shares and will be furnished to brokers, banks and
similar persons whose names, or the names of whose nominees, appear on the
Company's shareholder list or, if applicable, who are listed as participants in
a clearing agency's security position listing for subsequent transmittal to
beneficial owners of Shares.
2. Procedures for Tendering Shares.
Valid Tender of Shares. For Shares to be validly tendered pursuant to
the Offer, (a) the certificates for such Shares (or confirmation of receipt of
such Shares pursuant to the procedures for book-entry delivery set forth below),
together with a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) including any required signature guarantees
and any other documents required by the Letter of Transmittal, must be received
prior to 5:00 p.m., Eastern time, on the Expiration Date by the Depositary at
one of its addresses set forth on the back cover of this Offer to Purchase or
(b) the tendering shareholder must comply with the guaranteed delivery procedure
set forth below.
22
IN ACCORDANCE WITH INSTRUCTION 5 OF THE LETTER OF TRANSMITTAL,
SHAREHOLDERS DESIRING TO TENDER SHARES PURSUANT TO THE OFFER MUST PROPERLY
INDICATE IN THE SECTION CAPTIONED "PRICE (IN DOLLARS) PER SHARE AT WHICH SHARES
ARE BEING TENDERED" ON THE LETTER OF TRANSMITTAL THE PRICE (IN MULTIPLES OF
$.125) AT WHICH THEIR SHARES ARE BEING TENDERED. SHAREHOLDERS WHO DESIRE TO
TENDER SHARES AT MORE THAN ONE PRICE MUST COMPLETE A SEPARATE LETTER OF
TRANSMITTAL FOR EACH PRICE AT WHICH SHARES ARE TENDERED, PROVIDED THAT THE SAME
SHARES CANNOT BE TENDERED (UNLESS VALIDLY WITHDRAWN PREVIOUSLY IN ACCORDANCE
WITH THE TERMS OF THE OFFER) AT MORE THAN ONE PRICE. IN ORDER TO VALIDLY TENDER
SHARES, ONE AND ONLY ONE PRICE BOX MUST BE CHECKED IN THE APPROPRIATE SECTION ON
EACH LETTER OF TRANSMITTAL.
In addition, Odd Lot Holders who tender all such Shares must complete
the box captioned "Odd Lots" on the Letter of Transmittal and, if applicable, on
the Notice of Guaranteed Delivery, in order to qualify for the preferential
treatment available to Odd Lot Holders as set forth in "--Number of Shares;
Proration."
Signature Guarantees and Method of Delivery. No signature guarantee is
required on the Letter of Transmittal (i) if the Letter of Transmittal is signed
by the registered holder of the Shares (which term, for purposes of this Section
3, shall include any participant in The Depository Trust Company or The
Philadelphia Depository Trust Company (collectively, the "Book-Entry Transfer
Facilities") whose name appears on a security position listing as the owner of
the Shares) tendered therewith and such holder has not completed either the box
entitled "Special Delivery Instructions" or the box entitled "Special Payment
Instructions" on the Letter of Transmittal; or (ii) if Shares are tendered for
the account of a member firm of a registered national securities exchange, a
member of the National Association of Securities Dealers, Inc. or a commercial
bank or trust company having an office, branch or agency in the United States.
In all other cases, all signatures on the Letter of Transmittal must be
guaranteed by an eligible guarantor institution (bank, stockbroker, savings and
loan association or credit union with membership in an approved signature
guarantee medallion program) pursuant to Rule 17Ad-15 promulgated under the
Exchange Act (an "Eligible Institution"). See Instruction 1 of the Letter of
Transmittal. If a certificate for Shares is registered in the name of a person
other than the person executing a Letter of Transmittal, or if payment is to be
made, or Shares not purchased or tendered are to be issued, to a person other
than the registered holder, the certificate must be endorsed or accompanied by
an appropriate stock power, in either case, signed exactly as the name of the
registered holder appears on the certificate, with the signature on the
certificate or stock power guaranteed by an Eligible Institution.
In all cases, payment for Shares tendered and accepted for payment
pursuant to the Offer will be made only after timely receipt by the Depositary
of certificates for such Shares (or a timely confirmation of a book-entry
transfer of such Shares into the Depositary's account at one of the Book-Entry
Transfer Facilities as described above), a properly completed and duly executed
Letter of Transmittal (or manually signed facsimile thereof) and any other
documents required by the Letter of Transmittal. The method of delivery of all
documents, including certificates for Shares, the Letter of Transmittal and any
other required documents, is at the election and risk of the tendering
shareholder. If delivery is by mail, registered mail with return receipt
requested, properly insured, is recommended.
Book-Entry Delivery. The Depositary will establish an account with
respect to the Shares for purposes of the Offer at each Book-Entry Transfer
Facility within two business days after the date of this Offer to Purchase, and
any financial institution that is a participant in a Book-Entry Transfer
Facility's system may make book-entry delivery of the Shares by causing such
facility to transfer Shares into the Depositary's account in accordance with the
Book-Entry Transfer Facility's procedures for transfer. Although delivery of
Shares may be effected through a book-entry transfer into the Depositary's
account at a Book-Entry Transfer Facility, either (i) a properly completed and
duly executed Letter of Transmittal (or a manually signed facsimile thereof)
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Depositary at one of its
addresses set forth on the back cover of this Offer to Purchase prior to the
Expiration Date, or (ii) the
23
guaranteed delivery procedure described below must be followed. Delivery of the
Letter of Transmittal and any other required documents to a book-entry transfer
facility does not constitute delivery to the Depositary.
Backup Federal Income Tax Withholding. To prevent backup federal
income tax withholding on payments made to shareholders for Shares purchased
pursuant to the Offer, each shareholder who does not otherwise establish an
exemption from such withholding must provide the Depositary with the
shareholder's correct taxpayer identification number and provide certain other
information by completing the substitute Form W-9 included in the Letter of
Transmittal. Foreign shareholders may be required to submit Form W-8, certifying
non-United States status, to avoid backup withholding. See Instructions 12 and
13 of the Letter of Transmittal. For a discussion of certain federal income tax
consequences to tendering shareholders, see "Certain Federal Income Tax
Consequences."
Withholding For Foreign Shareholders. The Depositary will withhold
federal income taxes equal to 30% of the gross payments payable to a foreign
shareholder or his agent unless the Depositary determines that an exemption from
or a reduced rate of withholding is available pursuant to a tax treaty or an
exemption from withholding is applicable because such gross proceeds are
effectively connected with the conduct of a trade or business in the United
States. In order to obtain an exemption from or a reduced rate of withholding
pursuant to a tax treaty, a foreign shareholder must deliver to the Depositary a
properly completed Form 1001 (or any related successor form). For this purpose,
a foreign shareholder is a shareholder that is not (i) a citizen or resident of
the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States, any State or any political
subdivision thereof or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of the source of such
income. In order to obtain an exemption from withholding on the grounds that the
gross proceeds paid pursuant to the Offer are effectively connected with the
conduct of a trade or business within the United States, a foreign shareholder
must deliver to the Depositary a properly completed Form 4224 (or any related
successor form). The Depositary will determine a shareholder's status as a
foreign shareholder and eligibility for a reduced rate of, or an exemption from,
withholding by reference to any outstanding certificates or statements
concerning eligibility for a reduced rate of, or exemption from, withholding
(e.g., Form 1001 or Form 4224) unless facts and circumstances indicate that such
reliance is not warranted. A foreign shareholder who has not previously
submitted the appropriate certificates or statements with respect to a reduced
rate of, or exemption from, withholding for which such shareholder may be
eligible should consider doing so in order to avoid excess withholding. A
foreign shareholder may be eligible to obtain a refund of tax withheld if such
shareholder meets one of the three tests for sale treatment described in
"Certain Federal Income Tax Consequences" or is otherwise able to establish that
no tax or a reduced amount of tax is due. Backup withholding generally will not
apply to amounts subject to the 30% or treaty-reduced rate of withholding.
Guaranteed Delivery. If a shareholder desires to tender Shares
pursuant to the Offer and such shareholder's Share certificates are not
immediately available (or the procedures for book-entry delivery cannot be
completed on a timely basis) or if time will not permit all required documents
to reach the Depositary prior to the Expiration Date, such Shares may
nevertheless be tendered, provided that all of the following conditions are
satisfied:
(a) such tender is made by or through an Eligible Institution;
(b) the Depositary receives by hand, mail, telegram or facsimile
transmission, on or prior to the Expiration Date, a properly completed and duly
executed Notice of Guaranteed Delivery substantially in the form the Company has
provided with this Offer to Purchase (specifying the price at which the Shares
are being tendered), including (where required) a signature guarantee by an
Eligible Institution; and
(c) the certificates for all tendered Shares, in proper form for
transfer (or confirmation of book-entry delivery of such Shares into the
Depositary's account at one of the Book-Entry Transfer Facilities), together
with a properly completed and duly executed Letter of Transmittal (or a manually
signed facsimile thereof) and any required signature guarantees or other
documents required by the Letter of Transmittal, are received by the Depositary
within three OTC trading days after the date of receipt by the Depositary of
such Notice of Guaranteed Delivery.
24
If any tendered Shares are not purchased, or if less than all Shares
evidenced by a shareholder's certificates are tendered, certificates for
unpurchased Shares will be returned as promptly as practicable after the
expiration or termination of the Offer or, in the case of Shares tendered by
book-entry delivery at a Book-Entry Transfer Facility, such Shares will be
credited to the appropriate account maintained by the tendering shareholder at
the appropriate Book-Entry Transfer Facility, in each case without expense to
such shareholder.
Employee Stock Ownership Plan. As of April 9, 1998, the ESOP owned
80,639 Shares of which 24,192 Shares were allocated to the accounts of the
participants. Shares allocated to participants' accounts will, subject to the
limitations of the Employee Retirement Income Security Act of 1974, as amended,
and applicable regulations thereunder ("ERISA"), be tendered by the Trustee of
the plan according to the instructions of participants to the Trustee. Decisions
as to whether to tender Shares not allocated to participants' accounts will be
made by the Trustee subject to the terms of the plan and ERISA. The Trustee will
make available to the participants whose accounts hold allocated Shares all
documents furnished to the shareholders in connection with the Offer generally
and will provide additional information in a separate letter with respect to the
operations of the Offer to the participants of the ESOP. Each participant will
also receive a form upon which the participant may instruct the Trustee
regarding the Offer. Each participant may direct that all, some or none of the
Shares allocated to the participant's account be tendered. Participants will
also be afforded withdrawal rights. See "--Withdrawal Rights."
Under ERISA the Company will be prohibited from purchasing any Shares
from the ESOP (including Shares allocated to the accounts of participants) if
the Purchase Price is less than the prevailing market price of the Shares on the
date the Shares are accepted for payment pursuant to the Offer.
Company Stock Bonus Plan. As of April 9, 1998, the MSBP owned 28,629
Shares of which 17,534 Shares were allocated to the accounts of the
participants. Shares allocated to participants will, subject to the limitations
of ERISA, be tendered by the Trustee of the plan according to the instructions
of participants to the Trustee. Decisions as to whether to tender Shares not
allocated to participants' accounts will be made by the Trustee subject to the
terms of the plan and ERISA. The Trustee will make available to the participants
whose accounts hold allocated Shares all documents furnished to the shareholders
in connection with the Offer generally and will provide additional information
in a separate letter with respect to the operations of the Offer to the
participants of the MSBP. Each participant will also receive a form upon which
the participant may instruct the Trustee regarding the Offer. Each participant
may direct that all, some or none of the Shares allocated to the participant be
tendered. Participants will also be afforded withdrawal rights. See
"--Withdrawal Rights."
Company Stock Option Plans. The Company is not offering, as part of
the Offer, to purchase any of the options outstanding under the Company's stock
option plans and tenders of such options will not be accepted. In no event are
any options to be delivered to the Depositary in connection with a tender of
Shares hereunder. An exercise of an option cannot be revoked even if Shares
received upon the exercise thereof and tendered in the Offer are not purchased
in the Offer for any reason.
401(k) Profit Sharing Plan. Participants in the Profit Sharing Plan
who wish to have the plan's trustees tender Shares attributable to their
participant-directed investment accounts should so indicate by completing,
executing and returning to the Depositary the election form included in the
notice sent to such participants. Participants in the plan may not use the
Letter of Transmittal to direct the tender of the Shares attributed to their
accounts, but must use the separate election form sent to them. Participants in
the plan are urged to read the separate election form and related materials
carefully.
Determination of Validity; Rejection of Shares; Waiver of Defects; No
Obligation to Give Notice of Defects. All questions as to the number of Shares
to be accepted, the price to be paid therefor and the validity, form,
eligibility (including time of receipt) and acceptance of any tender of Shares
will be determined by the Company, in its sole discretion, and its determination
shall be final and binding on all parties. The Company reserves the absolute
right to reject any or all tenders of any Shares that it determines are not in
appropriate form or the acceptance for payment of or payment for which may be
unlawful. The Company also reserves the absolute right to waive any of the
conditions of the Offer or any defect or irregularity in any tender with respect
to any particular
25
Shares. No tender of Shares will be deemed to have been validly made until all
defects or irregularities have been cured by the tendering shareholder or waived
by the Company. None of the Company, the Depositary, the Information Agent or
any other person shall be obligated to give notice of any defects or
irregularities in tenders, nor shall any of them incur any liability for failure
to give any such notice.
Tendering Shareholder's Representation and Warranty; Company's
Acceptance Constitutes an Agreement. A tender of Shares pursuant to any of the
procedures described above will constitute the tendering shareholder's
acceptance of the terms and conditions of the Offer, as well as the tendering
shareholder's representation and warranty to the Company that (a) such
shareholder has a net long position in the Shares being tendered within the
meaning of Rule 14e-4 promulgated by the Commission under the Exchange Act and
(b) the tender of such Shares complies with Rule 14e-4. It is a violation of
Rule 14e-4 for a person, directly or indirectly, to tender Shares for such
person's own account unless, at the time of tender and at the end of the
proration period, the person so tendering (i) has a net long position equal to
or greater than the amount of (x) Shares tendered or (y) other securities
convertible into or exchangeable or exercisable for the Shares tendered and will
acquire such Shares for tender by conversion, exchange or exercise and (ii) will
cause such Shares to be delivered in accordance with the terms of the Offer.
Rule 14e-4 provides a similar restriction applicable to the tender or guarantee
of a tender on behalf of another person. The Company's acceptance for payment of
Shares tendered pursuant to the Offer will constitute a binding agreement
between the tendering shareholder and the Company upon the terms and subject to
the conditions of the Offer.
3. Withdrawal Rights.
Except as otherwise provided in this Section 4, the tender of Shares
pursuant to the Offer is irrevocable. Shares tendered pursuant to the Offer may
be withdrawn at any time prior to the Expiration Date and, unless theretofore
accepted for payment by the Company pursuant to the Offer, may also be withdrawn
at any time after 12:00 midnight, Eastern time, on Monday, June 8, 1998.
For a withdrawal to be effective, a notice of withdrawal must be in
written, telegraphic or facsimile transmission form and must be received in a
timely manner by the Depositary at one of its addresses set forth on the back
cover of this Offer to Purchase. Any such notice of withdrawal must specify the
name of the tendering shareholder, the name of the registered holder, if
different, the number of Shares tendered and the number of Shares to be
withdrawn. If the certificates for Shares to be withdrawn have been delivered or
otherwise identified to the Depositary, then, prior to the release of such
certificates, the tendering shareholder must also submit the serial numbers
shown on the particular certificates evidencing the Shares to be withdrawn and
the signature on the notice of withdrawal must be guaranteed by an Eligible
Institution (except in the case of Shares tendered by an Eligible Institution).
If Shares have been tendered pursuant to the procedure for book-entry delivery
set forth in "-- Procedures for Tendering Shares," the notice of withdrawal also
must specify the name and the number of the account at the applicable Book-Entry
Transfer Facility to be credited with the withdrawn Shares and otherwise comply
with the procedures of such facility. None of the Company, the Depositary, the
Information Agent or any other person shall be obligated to give notice of any
defects or irregularities in any notice of withdrawal nor shall any of them
incur liability for failure to give any such notice. All questions as to the
form and validity (including time of receipt) of notices of withdrawal will be
determined by the Company, in its sole discretion, which determination shall be
final and binding on all parties.
Withdrawals may not be rescinded and any Shares withdrawn will
thereafter be deemed not validly tendered for purposes of the Offer. However,
withdrawn Shares may be retendered prior to the Expiration Date by again
following one of the procedures described in "--Procedures for Tendering
Shares."
If the Company extends the Offer, is delayed in its purchase of Shares
or is unable to purchase Shares pursuant to the Offer for any reason, then,
without prejudice to the Company's rights under the Offer, the Depositary may,
subject to applicable law, retain tendered Shares on behalf of the Company, and
such Shares may not be withdrawn except to the extent tendering shareholders are
entitled to withdrawal rights as described in this Section 4.
26
4. Price Range of Shares; Dividends.
Until March 17, 1998, the Shares were listed and quoted on the on the
Nasdaq SmallCap Market. The Shares currently trade in the over-the-counter
market with quotations available through the OTC Electronic Bulletin Board. The
following table sets forth, for the periods indicated, the high and low closing
per Share sales price as published by the Nasdaq statistical report, (except for
information subsequent to March 17, 1998) and the cash dividends paid per Share
in each such fiscal quarter.
Dividends
Paid
Fiscal Year High Low Per Share
- ----------- ---- --- ---------
1996:
1st Quarter............................. $12.00 $11.00 $ --
2nd Quarter............................. 12.25 11.25 0.08
3rd Quarter............................. 12.00 11.00 --
4th Quarter............................. 12.75 10.75 0.08
1997:
1st Quarter............................. 12.75 11.75 --
2nd Quarter............................. 15.50 12.25 0.08
3rd Quarter............................. 15.63 14.00 --
4th Quarter............................. 17.50 14.50 0.08
1998:
1st Quarter............................. 19.75 16.38 --
2nd Quarter............................. 20.00 17.00 0.08
3rd Quarter (through April 9, 1998)..... 18.50 18.50 --
On March 31, 1998, the last full trading day on which a sale was
reported prior to the commencement of the Offer, the closing per Share sales
price was $18.50. Shareholders are urged to obtain current market quotations for
the Shares. For trading information regarding the Shares, shareholders may call
MacKenzie Partners, Inc. at 1-800-322-2885.
27
5. Purchase of Shares and Payment of Purchase Price.
Upon the terms and subject to the conditions of the Offer, the Company
will determine the Purchase Price it will pay for the Shares validly tendered
and not withdrawn prior to the Expiration Date, taking into account the number
of Shares so tendered and the prices specified by tendering shareholders, and
will accept for payment and pay for (and thereby purchase) Shares validly
tendered at prices at or below the Purchase Price as promptly as practicable
following the Expiration Date. For purposes of the Offer, the Company will be
deemed to have accepted (and therefor purchased) Shares which are tendered at or
below the Purchase Price and not withdrawn (subject to the proration provisions
of the Offer) when, as and if it gives oral or written notice to the Depositary
of its acceptance of such Shares for payment pursuant to the Offer.
Upon the terms and subject to the conditions of the Offer, promptly
following the Expiration Date the Company will accept for payment and pay a
single per Share Purchase Price for 222,000 Shares (subject to increase or
decrease as provided in "--Extension of the Offer; Termination; Amendment") or
such lesser number of Shares as are validly tendered at prices not in excess of
$21.50 nor less than $19.50 per Share and not withdrawn as permitted in
"--Withdrawal Rights."
The Company will pay for Shares purchased pursuant to the Offer by
depositing the aggregate Purchase Price therefor with the Depositary, which will
act as agent for tendering shareholders for the purpose of receiving payment
from the Company and transmitting payment to the tendering shareholders.
In the event of proration, the Company will determine the proration
factor and pay for those tendered Shares accepted for payment as soon as
practicable after the Expiration Date; however, the Company does not expect to
be able to announce the final results of any proration and commence payment for
Shares purchased until approximately seven OTC trading days after the Expiration
Date. Certificates for all Shares tendered and not purchased, including all
Shares tendered at prices in excess of the Purchase Price and Shares not
purchased due to proration, will be returned (or, in the case of Shares tendered
by book-entry delivery, such Shares will be credited to the account maintained
with the Book-Entry Transfer Facility by the participant therein who so
delivered such Shares) to the tendering shareholder as promptly as practicable
after the Expiration Date without expense to the tendering shareholders. Under
no circumstances will interest on the Purchase Price be paid by the Company by
reason of any delay in making payment.
The Company will pay all stock transfer taxes, if any, payable on the
transfer to it of Shares purchased pursuant to the Offer. If, however, payment
of the Purchase Price is to be made to, or (in the circumstances permitted by
the Offer) if unpurchased Shares are to be registered in the name of, any person
other than the registered holder, or if tendered certificates are registered in
the name of any person other than the person signing the Letter of Transmittal,
the amount of all stock transfer taxes, if any (whether imposed on the
registered holder or such other person), payable on account of the transfer to
such person will be deducted from the Purchase Price unless evidence
satisfactory to the Company of the payment of the stock transfer taxes, or
exemption therefrom, is submitted. See Instruction 7 of the Letter of
Transmittal.
ANY TENDERING SHAREHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE FULLY,
SIGN AND RETURN TO THE DEPOSITARY THE SUBSTITUTE FORM W-9 INCLUDED IN THE LETTER
OF TRANSMITTAL MAY BE SUBJECT TO REQUIRED BACKUP FEDERAL INCOME TAX WITHHOLDING.
SEE "-- PROCEDURES FOR TENDERING SHARES" AND INSTRUCTION 12 OF THE LETTER OF
TRANSMITTAL. ALSO SEE "-- PROCEDURES FOR TENDERING SHARES" REGARDING FEDERAL
INCOME TAX CONSEQUENCES FOR FOREIGN SHAREHOLDERS.
6. Certain Conditions of the Offer.
Notwithstanding any other provision of the Offer, the Company shall
not be required to accept for payment, purchase or pay for any Shares tendered,
and may terminate or amend the Offer or may postpone the acceptance
28
for payment of, or the purchase of and the payment for Shares tendered, subject
to Rule 13e-4(f) under the Exchange Act (see "-- Extension of the Offer;
Termination; Amendment"), if (i) the Financing Condition has not been satisfied
or (ii) at any time on or after April 13, 1998 and prior to the time of payment
for any such Shares any of the following events shall have occurred (or shall
have been determined by the Company to have occurred) which, in the Company's
reasonable judgment in any such case and regardless of the circumstances giving
rise thereto (including any action or omission to act by the Company), makes it
inadvisable to proceed with the Offer or with such acceptance for payment or
payment:
(a) there shall have been threatened, instituted or pending any action
or proceeding by any government or governmental, regulatory or administrative
agency or authority or tribunal or any other person, domestic or foreign, or
before any court or governmental, regulatory or administrative authority or
agency or tribunal, domestic or foreign, which: (1) challenges the making of the
Offer, the acquisition of Shares pursuant to the Offer or otherwise relates in
any manner to the Offer or (2) in the Company's reasonable judgment, could
materially affect the business, condition (financial or other), income,
operations or prospects of the Company and its subsidiaries, taken as a whole,
or otherwise materially impair in any way the contemplated future conduct of the
business of the Company or any of its subsidiaries or materially impair the
Offer's contemplated benefits to the Company; or
(b) there shall have been any claim, action or proceeding threatened,
pending or taken, or any consent, license, authorization, permit or approval
withheld, or any law, statute, rule, regulation, judgment, order or injunction
threatened, proposed, sought, promulgated, enacted, entered, enforced or deemed
to be applicable to the Offer or the Company, by or before any court or any
government or governmental, regulatory or administrative agency or authority
(federal, state, local or foreign) or tribunal, domestic or foreign, which, in
the reasonable judgment of the Company, could or might directly or indirectly
(i) make the acceptance for payment of, or payment for, some or all of the
Shares illegal or otherwise restrict or prohibit the consummation of the Offer,
(ii) delay or restrict the ability of the Company, or render the Company unable,
to accept for payment or pay for some or all of the Shares, (iii) materially
affect the business, condition (financial or other), income, operations or
prospects of the Company and its subsidiaries, taken as a whole, or otherwise
materially impair in any way the contemplated future conduct of the business of
the Company or any of its subsidiaries, or (iv) materially impair the
contemplated benefits of the Offer to the Company; or
(c) there shall have occurred any of the following events: (i) the
commencement of any state of war, international crisis or national emergency;
(ii) the declaration of any banking moratorium or suspension of payments by
banks in the United States or any limitation on the extension of credit by
lending institutions in the United States; (iii) any general suspension of
trading or limitation of prices for securities on any securities exchange or in
the over-the-counter market in the United States; (iv) any significant adverse
change in the market price of the Shares or any change in the general political,
market, economic or financial conditions in the United States or abroad that
could have a material adverse effect upon the trading of the Shares; (v) in the
case of any of the foregoing existing at the time of the commencement of the
Offer, in the reasonable judgment of the Company, a material acceleration or
worsening effect thereof; or (vi) any decline in either the Dow Jones Industrial
Average or the Standard and Poor's Index of 500 Industrial Companies by an
amount in excess of 10% measured from the close of business on April 9, 1998; or
(d) a tender or exchange offer with respect to some or all of the
Shares (other than the Offer), or a merger or acquisition proposal for the
Company, shall have been proposed, announced or made by another person or shall
have been publicly disclosed, or the Company shall have learned that any person
or "group" (within the meaning of Section 13(d)(3) of the Exchange Act), shall
have acquired or proposed to acquire beneficial ownership of more than five
percent of the outstanding Shares, or any new group shall have been formed that
beneficially owns more than five percent of the outstanding Shares; or
(e) there shall have occurred any event which, in the reasonable
judgment of the Company, has resulted in an actual or threatened material
adverse change in the business, financial condition, assets, income, operations,
prospects or stock ownership of the Company or which may adversely affect the
value of the Shares;
29
and, in the reasonable judgment of the Company, such event makes it inadvisable
to proceed with the Offer or with acceptance for payment of or payment for any
Shares.
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances (including any
action or inaction by the Company) giving rise to any such condition, and may be
waived by the Company, in whole or in part, at any time and from time to time in
its sole discretion. The Company's failure at any time to exercise any of the
foregoing rights shall not be deemed a waiver of any such right and each such
right shall be deemed an ongoing right which may be asserted at any time and
from time to time. Any determination by the Company concerning the events
described above will be final and binding on all parties.
7. Extension of the Offer; Termination; Amendment.
The Company expressly reserves the right, in its sole discretion, at
any time and from time to time, and regardless of whether or not any of the
events set forth in "-- Certain Conditions of the Offer" shall have occurred or
been determined by the Company to have occurred, (a) to extend the period of
time during which the Offer is open by giving oral or written notice of such
extension to the Depositary and making a public announcement thereof no later
than 9:00 a.m., Eastern time, on the next business day after the previously
scheduled Expiration Date, and (b) to amend the Offer in any respect (including,
without limitation, by increasing or decreasing the range of prices it may pay
for Shares or the number of Shares being sought in the Offer) by giving oral or
written notice of such amendment to the Depositary and, as promptly as
practicable thereafter, making a public announcement thereof. If (i) the Company
increases or decreases the price to be paid for Shares, increases or decreases
the number of Shares being sought in the Offer or incurs dealer manager
soliciting fees and, in the event of an increase in the number of Shares being
sought, such increase exceeds two percent of the outstanding Shares and (ii) the
Offer is scheduled to expire at any time earlier than the expiration of a period
ending on the tenth business day from, and including, the date that such notice
of an increase or decrease is first published, sent or given in the manner
specified in this Section 7, the Offer will, at least, be extended until the
expiration of such period of ten business days. The Company also expressly
reserves the right, in its sole and absolute discretion, to terminate the Offer
and not to accept for payment or pay for Shares upon the occurrence of any of
the conditions specified in "--Certain Conditions of the Offer" by giving oral
or written notice of such termination to the Depositary and, as promptly as
practicable thereafter, making a public announcement thereof. Without limiting
the manner in which the Company may choose to make a public announcement, except
as required by applicable law (including Rule 13e- 4(e)(2) under the Exchange
Act), the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement other than by making a release to the
Dow Jones News Service. The rights reserved by the Company in this paragraph are
in addition to the Company's rights under "--Certain Conditions of the Offer."
Payment for Shares accepted for payment pursuant to the Offer may be delayed in
the event of proration due to the difficulty of determining the number of
validly tendered Shares. See "--Number of Shares; Proration" and "--Purchase of
Shares and Payment of Purchase Price."
8. Source and Amount of Funds.
Assuming that the Company purchases 222,000 Shares pursuant to the
Offer at a price of $21.50 per Share, the cost to the Company (including all
fees and expenses relating to the Offer), is estimated to be approximately
$4,858,000. The Company plans to obtain substantially all the funds needed for
the Offer from a dividend from the Association of $4,650,000. The Association
filed a Notice of Capital Distribution (the "Notice") with the OTS, regarding
the dividend, on April 7, 1998. Pursuant to OTS regulations, the OTS could
object to the dividend within 30 days of the filing of the Notice. The Company
intends to obtain the remaining funds necessary to consummate the Offer through
short-term borrowings.
The terms of any short-term borrowings will depend upon market
conditions and other factors prevailing at the time or times of borrowing. The
Company expects that, under current circumstances and market conditions, such
short-term borrowings (i) would have a maturity of between approximately six and
nine months, (ii) would involve an effective interest cost to the Company of
approximately 10.25% per annum, and (iii) would be repaid from dividends from
the Association paid out of earnings or from the proceeds of other borrowings by
the Company.
30
9. Certain Information Concerning The Company
General. The Company is the holding company for the Association which
was originally chartered in 1934. The Association is primarily engaged in the
business of attracting deposits from the general public and using those
deposits, together with other funds, to originate loans secured by first
mortgages on owner-occupied, one-to four-family residences in its market area,
and to purchase investment securities. The Association's loan portfolio
predominantly consists of both adjustable-rate and fixed-rate mortgage loans
secured by single family residences, and to a much lesser extent, the
Association also originates commercial mortgage, construction and consumer
loans.
The business of the Association is conducted through its only office
in Little Falls, Morrison County, Minnesota.
The Association is subject to examination by the OTS and the Federal
Deposit Insurance Corporation. The Company, as a federal savings and loan
holding company, is subject to examination by the OTS.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Set forth below is certain selected consolidated financial information
with respect to the Company, excerpted or derived from the audited financial
statements for the years ended September 30, 1997 and 1996 and from the
unaudited financial statements for the three months ended December 31, 1997 and
1996 included in Annex II to this Offer to Purchase. The selected information
below is qualified in its entirety by reference to such consolidated financial
statements and the financial information and related notes contained therein.
Mississippi View Holding Company
Summary Historical Financial Information
At December 31, At September 30,
---------------------------------------------------------------------------------------
1997 1996 1997 1996(1)
---------------------------------------------------------------------------------------
(Dollars in thousands)
Selected Financial Condition
and Other Data
Total assets......................... $68,619 $70,329 $68,546 $70,011
Loans receivable, net................ 44,493 43,857 44,475 43,070
Mortgage-backed securities........... 4,318 4,543 5,064 4,857
Investment securities................ 14,538 17,139 15,956 17,323
Cash and cash equivalents............ 3,471 2,898 1,105 2,584
Deposits............................. 54,867 56,342 55,184 56,531
Total shareholders' equity........... 12,476 13,035 12,068 12,440
31
Three Months Ended December 31, Year Ended September 30,
-------------------------------------------------------------------------------------
1997 1996 1997 1996(1)
-------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Interest income...................... $1,272 $1,293 $5,165 $5,173
Interest expense..................... 626 634 2,502 2,531
Net interest income.................. 646 659 2,663 2,642
Provision for credit losses.......... -- -- -- 4
Noninterest income................... 42 38 202 351
Noninterest expense.................. 402 439 1,667 2,056
Income tax expense................... 109 84 458 374
Net income .......................... 177 173 740 559
Net income per share................. 0.27 0.22 0.96 0.66
Dividends per share.................. -- -- 0.16 0.16
Book value per share................. 16.85 15.25 16.30 14.17
At or For Three Months Ended At or For Year Ended
December 31, September 30,
----------------------------------------------------------------------------------------------
1997(1) 1996(1) 1997 1996(2)
----------------------------------------------------------------------------------------------
Selected financial ratios:
Return on average assets............. 1.07% 1.00% 1.08% 0.80%
Return on average equity............. 6.36 5.64 6.18 4.23
Dividend payout ratio................
Shareholders' equity/total assets.... 18.18 18.53 17.61 17.77
Allowance for loan losses/loans
receivable, net...................... 1.94 2.00 1.93 2.03
Ratios of Earnings to Fixed
Charges(3):
Excluding interest on deposits..... -- -- -- --
Including interest on deposits..... 0.46x 0.41x 0.48x 0.37x
(footnotes on following page)
32
- ------------------
(1) The ratios for the three month periods are annualized.
(2) The Federal Deposit Insurance Corporation has imposed a special
assessment on the Savings Association Insurance Fund members based on
deposits as of March 31, 1995. The Association paid an assessment of
$362,000 on September 30, 1996, which was required to be accrued and
expended for the quarter ended September 30, 1996.
(3) The consolidated ratio of earnings to fixed charges has been computed
by dividing income before income taxes, cumulative effect of changes
in accounting principles and fixed charges by fixed charges. Fixed
charges represent all interest expense (ratios are presented both
excluding and including interest on deposits). There were no
amortization of notes and debentures expense nor any portion of net
rental expense which was deemed to be equivalent to interest on debt.
Interest expense (other than on deposits) includes interest on notes,
federal funds purchased and securities sold under agreements to
repurchase, and other funds borrowed.
33
SELECTED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information of the Company
for the three months ended December 31, 1997 and the fiscal year ended September
30, 1997 show the effects of (i) the purchase of 222,000 Shares pursuant to the
Offer and (ii) the sale of Shares to the Trust equal to the Purchase Price in
exchange for a Note in an aggregate principal amount of $1,214,750. The balance
sheet data give effect to the purchase of Shares pursuant to the Offer as if it
had occurred as of the date of the balance sheet. The pro forma financial
information should be read in conjunction with the audited financial statements
and related notes thereto for the year ended September 30, 1997 and the
unaudited financial statements for the three months ended December 31, 1997
contained in Annex II to this Offer to Purchase. The pro forma financial
information does not purport to be indicative of the results that would actually
have been attained had the purchases of the Shares and the issuance of Shares to
the Trust been completed at the dates indicated or that may be attained in the
future.
Mississippi View Holding Company
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Three Months Ended December 31, 1997
(Dollars in thousands, except per share data)
Shares Purchased at
----------------------------
$19.50 $21.50
per Share per Share
--------- ---------
Interest income.................................. $ 1,216 $1,212
Interest expense (3)............................. 626 631
--- ---
Net interest income......................... 590 581
Provision for credit losses...................... -- --
---- ----
Net interest income after provision
for credit losses......................... 590 581
Noninterest income............................... 42 42
Noninterest expenses............................. 402 402
----- -----
Income before income taxes....................... 230 221
Income tax expense (3)........................... 87 83
----- -----
Net income.................................. $ 143 $ 138
====== ======
Basic earnings per share.................... $ 0.29 $ 0.28
====== ======
Diluted earnings per share.................. $ 0.26 $ 0.25
====== ======
Weighted average shares outstanding (2).......... 489,441 489,441
Ratio of earnings to fixed charges
Excluding interest on deposits............... -- 41.4x
Including interest on deposits................... 0.37x 0.35x
See Notes to Unaudited Proforma Financial Information on page 38
34
Mississippi View Holding Company
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Year Ended September 30, 1997
(Dollars in thousands, except per share data)
Shares Purchased at
--------------------------
$19.50 $21.50
per Share per Share
--------- ---------
Interest income..................................... $ 4,900 $ 4,884
Interest expense (3)................................ 2,502 2,523
------- -------
Net interest income............................ 2,398 2,361
Provision for credit losses......................... -- --
------ ------
Net interest income after provision
for credit losses........................... 2,398 2,361
Noninterest income.................................. 202 202
Noninterest expenses................................ 1,668 1,668
------- --------
Income before income taxes.......................... 933 895
Income tax expense (3).............................. 352 337
------ ------
Net income..................................... $ 581 $ 558
====== =======
Basic earnings per share....................... $ 0.96 $ 0.92
====== =======
Diluted earnings per share..................... $ 0.92 $ 0.88
====== =======
Weighted average shares outstanding (2)............. 604,372 604,372
Ratio of earnings to fixed charges
Excluding interest on deposits................... -- 42.0x
Including interest on deposits................... 0.37x 0.35x
See Notes to Unaudited Proforma Financial Information on page 38
35
Mississippi View Holding Company
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1997
(Dollars in thousands, except per share data)
Shares Purchased at
-------------------------------
$19.50 $21.50
per Share per Share
--------- ---------
ASSETS
Cash and cash equivalents (3)................................... $ 580 $ 655
Certificates of Deposit in other financial institutions......... 4,755 4,755
Mortgage backed securities held to maturity .................... 1,924 1,924
Securities available for sale (3)............................... 7,553 7,232
Mortgage backed securities available for sale................... 2,394 2,394
Loans receivable, net........................................... 44,493 44,493
Other assets.................................................... 2,450 2,450
------- -------
Total assets............................................... $64,149 $63,904
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits...................................................... $54,867 $54,867
Borrowings (3)................................................ -- 208
Other liabilities............................................. 1,253 1,250
------- -------
Total liabilities.......................................... 56,120 56,325
Shareholders' equity
Common stock.................................................. 101 101
Paid in capital............................................... 7,566 7,566
Retained earnings (7)......................................... 7,881 7,875
Unrealized loss on securities available for sale.............. 1,287 1,287
Treasury stock (1)(2)(4)...................................... (6,917) (7,248)
Unearned ESOP/MSBP............................................ (787) (787)
Unearned stock compensation (8)............................... (1,102) (1,215)
-------- --------
Total shareholders' equity................................. 8,029 7,579
-------- -------
Total liabilities and equity............................... $ 64,149 $ 63,904
======= =======
Shareholders' equity/total assets............................ 12.52% 11.86%
Book value per common share.................................. $13.97 $13.19
See Notes to Unaudited Proforma Financial Information on page 38
36
Mississippi View Holding Company
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1997
(Dollars in thousands, except per share data)
Shares Purchased at
----------------------------------
$19.50 $21.50
per Share per Share
--------- ---------
ASSETS
Cash and cash equivalents (3)..................................... $ 505 $ 552
Certificate of Deposit in other financial institutions............ 4,755 4,755
Mortgage backed securities held to maturity ...................... 2,650 2,650
Securities available for sale (3)................................. 6,471 6,150
Mortgage backed securities available for sale..................... 2,413 2,413
Loans receivable, net............................................. 44,610 44,610
Other assets...................................................... 2,463 2,463
------- -------
Total assets................................................. $ 63,867 $ 63,594
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits........................................................ $ 55,184 $ 55,184
Borrowings (3).................................................. -- 208
Other liabilities............................................... 1,189 1,174
------- -------
Total liabilities............................................ 56,373 56,566
Shareholders' equity
Common stock.................................................... 101 101
Paid in capital................................................. 7,540 7,540
Retained earnings (7)........................................... 7,578 7,556
Unrealized loss on securities available for sale................ 1,111 1,111
Treasury stock (1)(2)(4)........................................ (6,917) (7,248)
Unearned ESOP/MSBP.............................................. (816) (816)
Unearned stock compensation (8)................................. (1,102) (1,215)
------- -------
Total Shareholders' equity................................... 7,495 7,028
------- -------
Total liabilities and equity................................. $ 63,867 $ 63,594
======= =======
Shareholders' equity/total assets................................ 11.74% 11.05%
Book value per common share...................................... $ 13.04 $ 12.23
See Notes to Unaudited Proforma Financial Information on page 38
37
Mississippi View Holding Company
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(1) The proforma financial information reflects the repurchase of 222,000
Shares of stock at $19.50 and $21.50 per Share, as appropriate.
(2) The balance sheet data give effect to the purchase of Shares as of the
balance sheet date. The income statement data give effect to the
purchase of Shares as of the beginning of each period presented.
(3) The funds used to purchase Shares were considered to have been
obtained from cash and cash equivalents and securities available for
sale. In addition, borrowings will be obtained if Shares are purchased
at $21.50 per Share. The pro forma data assumes a rate of interest of
4.47% for cash and cash equivalents, 6.13% for securities available
for sale, a borrowing at a rate of 10.25% and a tax rate of 40%. The
income statement data reflects the decrease in investment income as if
cash was used to purchase the common stock at the beginning of the
period.
(4) Effect has been given to costs to be incurred in connection with the
Offer, which are estimated to be $85,000. Such costs will be
capitalized as part of the costs of the stock purchased.
(5) Reflects the sale of Shares having a value of $1,101,750 and
$1,214,750, based on a Purchase Price of $19.50 and $21.50 per Share,
respectively, to the Trust. The obligation of the Trust to the Company
is reflected in shareholders' equity as unearned compensation in the
accompanying pro forma financial information.
(6) Net income after tax effect on earnings as a result of pro forma
effect of repurchase.
(7) After tax effect of reduced earnings due to the loss of interest
income resulting from the sale of cash and cash equivalents and
securities available for sale.
(8) Assumes purchase of 56,500 shares by the Trust.
38
10. Effects of the Offer on the Market for Shares; Registration under
the Exchange Act.
The Shares are not currently "margin securities" under the rules of
the Federal Reserve Board. The Company believes that, following the purchase of
Shares pursuant to the Offer, the Shares will continue to not be "margin
securities" for purposes of the Federal Reserve Board's margin regulations.
The Savings and Loan Holding Company Act and the Change in Bank
Control Act each set forth thresholds with respect to the ownership of voting
shares of a savings and loan holding company of 5% to 10%, respectively, over
which the owner of such voting shares may be determined to control such savings
and loan holding company. If, as a result of the Offer, the ownership interest
of any shareholder in the Company is increased over these thresholds, such
shareholder may be required to reduce its ownership interest in the Company or
file a notice with regulators. Each shareholder whose ownership interest may be
so increased is urged to consult the shareholder's own legal counsel with
respect to the consequences to the shareholder of the Offer.
The Company is required to file periodic reports with the Commission
pursuant to Section 13 of the Exchange Act. Regardless of the results of the
Offer the Company plans to apply to the Commission to suspend this duty since
the number of its shareholders is currently less than 300 holders of record.
Termination of the Company's reporting duty would substantially reduce the
public information available concerning the Company. Such termination will,
however, decrease the Company's non-interest expenses.
11. Fees and Expenses.
The Company has retained MacKenzie Partners, Inc. to act as
Information Agent and Registrar and Transfer Company to act as Depositary in
connection with the Offer. The Information Agent may contact holders of Shares
by mail, telephone, telegraph and personal interviews and may request brokers,
dealers and other nominee shareholders to forward materials relating to the
Offer to beneficial owners. The Information Agent and the Depositary will each
receive reasonable and customary compensation for their respective services and
will be reimbursed by the Company for certain reasonable out-of-pocket expenses,
including attorneys' fees.
No fees or commissions will be payable to brokers, dealers or other
persons (other than fees to the Information Agent and the Depositary as
described above) for soliciting tenders of Shares pursuant to the Offer. The
Company will, however, upon request, reimburse brokers, dealers and commercial
banks for customary mailing and handling expenses incurred by such persons in
forwarding the Offer to Purchase and related materials to the beneficial owners
of Shares held by any such person as a nominee or in a fiduciary capacity. No
broker, dealer, commercial bank or trust company has been authorized to act as
the agent of the Company, the Information Agent or the Depositary for purposes
of the Offer. The Company will pay or cause to be paid all stock transfer taxes,
if any, on its purchase of Shares except as otherwise provided in Instruction 7
in the Letter of Transmittal.
The estimated costs and fees to be paid by the Company in connection
with the Offer are as follows:
Financial advisor fees................ $20,000
Accounting fees....................... 600
Legal fees............................ 30,000
Commission filing fees................ 955
Printing and mailing expenses......... 18,000
Depositary fees....................... 7,500
Information agent fees................ 5,000
Miscellaneous......................... 2,945
------
Total................................. $85,000
=======
39
ADDITIONAL INFORMATION
The Company is currently subject to the informational filing
requirements of the Exchange Act and, in accordance therewith, is obligated to
file reports and other information with the Commission relating to its business,
financial condition and other matters. Information, as of particular dates,
concerning the Company's directors and officers, their remuneration, options
granted to them, the principal holders of the Company's securities and any
material interest of such persons in transactions with the Company is required
to be disclosed in proxy statements distributed to the Company's shareholders
and filed with the Commission. Such reports, proxy statements and other
information are available for inspection at the public reference facilities of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549; and for inspection and copying at the regional offices of the Commission,
located at Suite 1400, Citicorp Center, 14th Floor, 500 West Madison Street,
Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material may also be obtained by mail, upon payment
of the Commission's customary charges, from the Commission's principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains a Web site on the World Wide Web at http:\www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
MISCELLANEOUS
The Company is not aware of any jurisdiction where the making of the
Offer is not in compliance with applicable law. If the Company becomes aware of
any jurisdiction where the making of the Offer is not in compliance with any
valid applicable law, the Company will make a good faith effort to comply with
such law. If, after such good faith effort, the Company cannot comply with such
law, the Offer will not be made to (nor will tenders be accepted from or on
behalf of) the holders of Shares residing in such jurisdiction.
Pursuant to Rule 13e-3 and Rule 13e-4 under the Exchange Act, the
Company has filed with the Commission a Rule 13e-3 Transaction Statement and an
Issuer Tender Offer Statement on Schedule 13E-4 which contain additional
information with respect to the Offer. Such Schedule 13E-3 and Schedule 13E-4,
including the exhibits and any amendments thereto, may be examined, and copies
may be obtained, at the same places and in the same manner as is set forth in
"Additional Information" with respect to information concerning the Company.
Mississippi View Holding Company
April 13, 1998
40
Schedule A
1. Directors and Executive Officers
The following table sets forth certain information about the Company's
directors and executive officers as of March 31, 1998.
Number of Shares Percent of Percent of Shares
Name and Address(1) Principal Occupation Beneficially Owned Shares After Offer
------------------- -------------------- ------------------ ---------- -----------
DIRECTORS
Neil Adamek Farmer 27,169(2)(4)(5)(9) 3.69% 4.76%
Thomas J. Leiferman Bank & Company President 68,526(2)(8) 9.30 11.99
Wallace R. Mattock Retired (past Bank President) 17,869(2)(3)(4)(5) 2.43 3.13
Gerald Peterson Businessman 40,944(2)(4)(5)(6) 5.56 7.17
Peter Vogel Attorney 9,719(2)(4)(5)(7) 1.32 1.70
NON-DIRECTOR EXECUTIVE OFFICERS
Larry D. Hartwig Treasurer & Controller of 34,672(10) 4.71 6.07
Bank & Company
Mary Ann Karnowski Secretary of Bank & 22,103(11) 3.00 3.87
Company
- --------------
(1) The address of the individuals listed above is 35 East Broadway,
Little Falls, Minnesota. Each of the individuals listed above is a
citizen of the United States of America.
(2) Excludes 80,639 Shares of Common Stock (56,447 currently unallocated)
held under the ESOP Committee for which such specified individual (or
certain individuals in the named group) serves as a member of the ESOP
Committee or as an ESOP Trustee. Excludes 28,629 unvested and unawared
Shares of Common Stock held by the MSBP for which such specified
individuals (or certain individual in the named group) serves as
member of the MSBP Committee or as an MSBP Trustee. Such individuals
disclaim beneficial ownership with respect to such Shares held in a
fiduciary capacity.
(3) Includes 75 Shares jointly owed by Mr. Mattock with his son, which Mr.
Mattock may be deemed to beneficially own.
(4) Includes 2,015 and 4,389 options each to purchase Shares of Common
Stock pursuant to 1995 and 1997 stock option plans, respectively,
exercisable within 60 days of March 31, 1998.
(5) Includes 1,209 Shares each of restricted Common Stock granted, but not
vested, pursuant to the MSBP.
(6) Includes 6,250 Shares owned by the spouse of Mr. Peterson, and 25
Shares held in trust by Mr. Peterson under the Uniform Gifts to Minors
Act for the benefit of Mr. Peterson's minor grandchild, which Mr.
Peterson may be deemed to beneficially own.
(7) Includes 50 Shares held in trust by Mr. Vogel under the Uniform Gifts
to Minors Act for the benefit of Mr. Vogel's minor children, which
Shares Mr. Vogel may be deemed to beneficially own.
(8) Includes (i) 1,050 Shares held in trust by Mr. Leiferman under the
Uniform Gifts to Minors Act for the benefit of Mr. Leiferman's minor
children; (ii) 4,881 Shares held in an individual retirement account
for the benefit of Mr. Leiferman; (iii) 6,508 Shares held in the ESOP
and allocated for the benefit of Mr. Leiferman; and (iv) 7,407 Shares
held in a 401(k) Trust for the benefit of Mr. Leiferman, which Mr.
Leiferman may be deemed to beneficially own. Includes 10,079 and
21,943 options to purchase Shares of Common Stock pursuant to the 1995
and 1997 stock option plans, respectively, exercisable within 60 days
of March 31, 1998 and 6,047 Shares of restricted Common Stock granted,
but not vested, pursuant to the MSBP.
(9) Includes 402 Shares owned by Mr. Adamek's spouse, which Shares Mr.
Adamek may be deemed to beneficially own.
(10) Includes (i) 600 Shares held in trust by Mr. Hartwig under the Uniform
Gifts to Minors Act for the benefit of Mr. Hartwig's minor children;
(ii) 4,323 Shares held in an individual retirement account for the
benefit of Mr. Hartwig; (iii) 2,780 Shares held in the ESOP and
allocated for the benefit of Mr. Hartwig; and (iv) 5,920 Shares held
in a 401(k) Trust for the benefit of Mr. Hartwig, which Mr. Hartwig
may be deemed to beneficially own. Includes 5,039 and 10,971 options
to purchase Shares of Common Stock pursuant to the 1995 and 1997 stock
option plans, respectively, exercisable within 60 days of March 31,
1998 and 3,023 Shares of restricted Common Stock granted, but not
vested, pursuant to the MSBP.
(11) Includes (i) 25 Shares jointly owned by Ms. Karnowski with her son,
(ii) 1,000 Shares held in an individual retirement account for the
benefit of Ms. Karnowski; (iii) 2,080 Shares held in the ESOP and
allocated for the benefit of Ms.
A-1
Karnowski; (iv) 2,159 Shares held in a 401(k) Trust for the benefit of
Ms. Karnowski, which Ms. Karnowski may be deemed to beneficially own.
Includes 4,031 and 8,777 options to purchase Shares of Common Stock
pursuant to the 1995 and 1997 stock option plans, respectively,
exercisable within 60 days of March 31, 1998, and 2,419 Shares of
restricted Common Stock granted, but not vested, pursuant to the MSBP.
2. Principal Shareholders
The following table lists the name and address of each person who, to
the best knowledge of the Company, owned beneficially (as determined in
accordance with the rules and regulations of the Commission) more than 5% of the
Common Stock as of March 31, 1998.
Name and Address Number of Shares Beneficially Owned Percent of Class
---------------- ----------------------------------- ----------------
John Hancock Advisers, Inc. 85,000(1) 11.54%
101 Huntington Avenue
Boston, Massachusetts 021199
Wellington Management Company 89,200(1)(2) 12.11%
75 State Street
Boston, Massachusetts 02109
Community Federal Savings and Loan 80,639(3) 10.94%
Association of Little Falls Employee
Stock Ownership Plan ("ESOP")
35 East Broadway
Little Falls, Minnesota 56345
- --------------
(1) Based on a Schedule 13G filed in February 1998.
(2) Includes 89,200 shares of Common Stock beneficially owned by Bay Pond
Partners, L.P. which maintains the same business address as Wellington
Management Company.
(3) The ESOP purchased such shares for the executive benefit of plan
participants with funds borrowed from the Company and are held in
trust.
In addition to Shares held by the directors and officers of the
Company, the MSBP holds 28,629 Shares, or approximately 3.89% of the Common
Stock outstanding.
3. Certain Transactions Involving Shares
During the 40 business days prior to April 13, 1998, the Company and
its executive officers and directors effected transactions in the Shares as
follows:
Person Who Number Average Price
Effected of Per
Date Transaction Shares Share Nature of Transaction
---- ----------- ------ ----- ---------------------
March 19, 1998 Company 3,379 $17.75 Open market stock repurchase
A-2
4. Previous Stock Repurchases
Since October 1, 1995, the Company has purchased 271,128 Shares of
Common Stock at a range of prices of $11.25 to $17.75. The average purchase
price for each quarterly period since October 1, 1995 is disclosed below.
Fiscal Year Average Purchase Price
----------- ----------------------
1996:
1st Quarter.................................... N/A
2nd Quarter.................................... $12.04
3rd Quarter.................................... 11.56
4th Quarter.................................... 11.76
1997:
1st Quarter.................................... 11.96
2nd Quarter.................................... 12.38
3rd Quarter.................................... N/A
4th Quarter.................................... 17.18
1998:
1st Quarter.................................... N/A
2nd Quarter.................................... 17.75
A-3
Annex I
[FINPRO LETTERHEAD]
April 9, 1998
Board of Directors
Mississippi View Holding Company
35 East Broadway
Little Falls, Minnesota 56345
Members of the Board:
You have requested our opinion, as an independent financial analyst to the
common shareholders of Mississippi View Holding Company and its wholly owned
subsidiary Community Federal Savings and Loan Association of Little Falls,
Little Falls, Minnesota (the "Bank"), as to the fairness, from a financial point
of view to the common shareholders of the Bank, of the terms of the proposed
Tender Offer.
As part of its banking analysis business, FinPro, Inc. is continually engaged in
the valuation of bank, bank holding company and thrift securities in connection
with mutual-to-stock conversions, stock repurchases and mergers and acquisitions
nationwide.
In rendering its opinion, FinPro reviewed certain publicly available information
concerning the Company, including it's audited financial statements and annual
reports. FinPro considered many factors in making its evaluation. In arriving at
its Opinion regarding the fairness of the transaction, FinPro reviewed: (i) the
Tender Offer; (ii) the most recent external auditor's reports to the Boards of
Directors; (iii) the December 31, 1997 Report of Condition and Income; (iv) the
most recent regulatory report, compliance report and Community Reinvestment Act
Report; (v) the most recent annual report (10k); (vi) the internal loan
classification list, OREO list and Delinquency list; (vii) details on stock
price performance; (viii) the budget and long range operating plan; and (ix)
details on the ESOP and RRP plans. FinPro conducted an off-site review of the
Company's historical performance and current financial condition.
We have also had discussions with the management of the Bank regarding its
financial results and have analyzed the most current financial data available on
the Bank. We also considered such other information, financial studies, analyses
and investigations, and economic and market criteria which we deemed relevant.
We also considered: (a) a transaction summary of the financial terms of the
Modified Dutch Auction, including the aggregate consideration relative to fully
diluted book value, fully diluted earnings, fully diluted assets, and deposit
liabilities of the Bank; (b) the financial terms, financial condition, operating
performance, and market areas of other recently completed mergers and
acquisitions of comparable financial institution entities, including evaluating
Midwest transactions both generally and specifically, along with trading and
financial multiples of comparable institutions; and (c) discounted cash flow
analyses for the Bank, incorporating the current business plan and future
prospects. We also considered the reduced marketability characteristics of the
Bank's Common Stock and the earnings in the future. The results of these
analyses and the other factors considered were evaluated as a whole, with the
aggregate results indicating a range of financial parameters utilized to assess
the consideration as described in the Tender Offer.
I-1
We have not independently verified any of the information reviewed by us and
have relied on its being complete and accurate in all material respects. In
addition, we have not made an independent evaluation of the assets of the Bank.
In reaching our opinion we took into consideration the financial benefits of the
proposed transaction to all the Bank's shareholders. Based on all factors that
we deem relevant and assuming the accuracy and completeness of the information
and data provided to us by the Bank, it is our opinion as of April 9, 1998, that
the proposed transaction is fair and equitable to all of the Bank's shareholders
from a financial point of view.
Respectfully submitted,
FinPro, Inc.
Liberty Corner, New Jersey
By /s/Donald J. Musso
----------------------------
Donald J. Musso
President
I-2
Annex II
INDEX TO FINANCIAL STATEMENTS
Mississippi View Holding Company
First Quarter 1998 Financial Statements
Consolidated Statements of Financial Condition (Unaudited)
as of December 31, 1997 and December 31, 1996............................II-2
Consolidated Statements of Income (Unaudited)
for the Three Months Ended December 31, 1997 and 1996....................II-3
Consolidated Statements of Cash Flows
(Unaudited) for the Three Months Ended
December 31, 1997 and 1996...............................................II-4
Notes to Consolidated Financial
Statements (Unaudited)...................................................II-6
Annual Financial Statements
Independent Auditor's Report..............................................II-8
Consolidated Statements of Financial Condition
as of September 30, 1997 and 1996........................................II-9
Consolidated Statements of Income for the
Years Ended September 30, 1997, 1996,
and 1995................................................................II-10
Consolidated Statements of Shareholder's
Equity for the Years Ended September 30,
1997, 1996 and 1995.....................................................II-11
Consolidated Statements of Cash Flows
for the Years Ended September 30, 1997,
1996 and 1995...........................................................II-12
Notes to Consolidated Financial Statements...............................II-14
II-1
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
1997 SEPTEMBER 30,
(UNAUDITED) 1997
------------ -------------
ASSETS
Cash and cash equivalents:
Cash and due from banks.......................................................... $ 407,159 $ 214,934
Interest bearing deposits with banks............................................. 3,063,423 889,660
Securities available for sale, at fair value....................................... 11,526,081 12,963,344
Securities held to maturity, at amortized cost..................................... 6,679,180 7,405,466
FHLB stock, at cost................................................................ 650,700 650,700
Loans held for sale................................................................ -- 135,550
Loans receivable, net of allowance for loan losses of $861,953 in 1998 and
$861,170 in 1997................................................................. 44,493,413 44,474,809
Accrued interest receivable........................................................ 426,913 437,548
Premises and equipment............................................................. 785,805 806,900
Other assets....................................................................... 586,117 567,539
------------ -------------
Total assets................................................................ 68,618,791 68,546,450
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits.................................................................. $ 4,329,750 4,408,558
Savings deposits................................................................. 14,325,889 14,525,018
Time deposits.................................................................... 36,211,228 36,250,011
Total deposits.............................................................. 54,866,867 55,183,587
Advances from borrowers for taxes and insurance.................................. 52,239 107,038
Accrued income taxes............................................................. 67,245 66,352
Deferred tax liability........................................................... 650,869 525,353
Other liabilities................................................................ 505,446 596,216
------------ -------------
Total liabilities........................................................... 56,142,666 56,478,546
------------ -------------
Shareholders' equity:
Serial preferred stock, no par value; 5,000,000 shares authorized, no shares
issued........................................................................ -- --
Common stock, $.10 par value, 10,000,000 shares authorized; 1,007,992 shares
issued; 656,629 and 653,151 shares outstanding................................ 100,799 100,799
Paid in capital.................................................................. 7,565,816 7,540,218
Treasury stock (267,749 and 267,749 shares), at cost............................. (3,605,111) (3,605,111)
Retained earnings, substantially restricted...................................... 7,914,162 7,737,458
Unearned ESOP shares (56,447 and 58,463 shares), at cost......................... (483,330) (498,012)
Unearned MSBP shares (27,167 and 28,629 shares), at cost......................... (303,206) (317,954)
Unrealized appreciation on available-for-sale securities, net of tax............. 1,286,995 1,110,506
Total shareholders' equity.................................................. 12,476,125 12,067,904
------------ -------------
Total liabilities and shareholders' equity.................................. $ 68,618,791 $ 68,546,450
------------ -------------
------------ -------------
The accompanying notes are an integral part of these consolidated financial
statements.
II-2
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
Interest income:
Loans receivable................................................................. $ 973,457 $ 942,489
Securities available for sale.................................................... 171,696 173,997
Securities held to maturity...................................................... 126,754 176,451
----------- -----------
Total interest income....................................................... 1,271,907 1,292,937
----------- -----------
Interest Expense:
Demand deposits.................................................................. 9,451 9,973
Savings deposits................................................................. 102,312 94,223
Time deposits.................................................................... 514,287 530,099
----------- -----------
Total interest expense...................................................... 626,050 634,295
----------- -----------
Net interest income.............................................................. 645,857 658,642
----------- -----------
Provision for loan losses........................................................ -- --
Net interest income after provision for loan loss........................... 645,857 658,642
----------- -----------
Noninterest Income:
Other fees and service charges................................................... 17,458 13,989
Gain on sale of loans............................................................ 2,535 2,246
Other............................................................................ 22,196 21,282
----------- -----------
Total noninterest income.................................................... 42,189 37,517
----------- -----------
Noninterest expense:
Compensation and employee benefits............................................... 257,785 225,574
Occupancy........................................................................ 22,771 21,933
Deposit insurance premium........................................................ 14,677 38,185
Data processing.................................................................. 18,541 21,402
Advertising...................................................................... 6,828 8,086
Real estate owned expense, net................................................... 335 346
Other............................................................................ 81,213 123,294
----------- -----------
Total noninterest expense................................................... 402,150 438,820
----------- -----------
Income before income taxes......................................................... 285,896 257, 339
Income tax expense................................................................. 109,192 84, 074
Net income......................................................................... $ 176,704 $ 173,265
Basic earnings per share........................................................... $ 0.27 $ 0.22
Diluted earnings per share......................................................... $ 0.24 $ 0.22
Dividends declared during the period............................................... $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
II-3
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
Interest received on loans and investments....................................... $ 1,273,811 $ 1,256,833
Interest paid.................................................................... (626,012) (634,127)
Other fees, commissions, and income received..................................... 58,664 61,506
Cash paid to suppliers, employees and others..................................... (438,359) (781,205)
Contributions to charities....................................................... (1,727) (3,749)
Income taxes paid................................................................ (94,037) --
Loans originated for sale........................................................ (232,783) (170,400)
Proceeds from sale of loans...................................................... 370,868 231,391
Net cash provided by operating activities................................... 310,425 (39,751)
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities....................................... (882,527) --
Proceeds from maturities of available-for-sale securities........................ 2,610,643 632,860
Purchases of held-to-maturity securities......................................... (889,000) (988,000)
Proceeds from maturities of held-to-maturity securities.......................... 1,615,033 1,951,990
Loan originations and principal payments on loans, net........................... (21,535) (677,459)
Purchases of property and equipment.............................................. (3,621) (12,266)
Net cash provided by (used in) investing activities......................... 2,428,993 907,125
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in non-interest bearing demand and savings deposit
accounts...................................................................... (278,075) 247,000
Net (decrease) increase in time deposits......................................... (38,682) (436,058)
Net (decrease) increase in mortgage escrow funds................................. (54,800) (88,154)
Acquisition of treasury stock.................................................... -- (275,000)
Net increase in unearned MSBP shares............................................. (1,873) (912)
Net cash used by financing activities....................................... (373,430) (553,124)
----------- -----------
Net (decrease) increase in cash and cash equivalents............................... 2,365,988 314,250
Cash and cash equivalents at beginning of year..................................... 1,104,594 2,583,654
----------- -----------
Cash and cash equivalents at end of year........................................... $ 3,470,582 $ 2,897,904
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
II-4
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Income....................................................................... $ 176,704 $ 173,265
Adjustments:
Provision for losses on loans and real estate................................. -- --
Depreciation.................................................................. 24,716 20,951
Non-cash dividends............................................................ (1,385) (1,319)
ESOP fair value adjustment.................................................... 11,515 4,451
Amortization of ESOP compensation............................................. 14,681 14,359
Amortization of MSBP compensation............................................. 16,622 16,622
Tax benefit of MSBP vesting activities........................................ 14,083 3,052
Net amortization and accretion of premiums and discounts on securities........ 4,934 993
Net loan fees deferred and amortized.......................................... 2,932 10,334
Net mortgage loan servicing fees deferred..................................... 430 363
(Increase) decrease in:
Loans held for sale......................................................... 135,550 58,745
Accrued interest receivable................................................. 10,634 (26,552)
Prepaid income tax.......................................................... -- (71,640)
Deferred tax asset.......................................................... -- 163,903
Other assets................................................................ (19,008) 31,873
Increase (decrease) in:
Accrued interest payable.................................................... 38 168
Accrued income taxes........................................................ 8,749 (8,272)
Other liabilities........................................................... (90,770) (431,047)
----------- -----------
Net cash provided by operating activities..................................... $ 310,425 $ (39,751)
----------- -----------
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Noncash dividends................................................................ $ 1,385 $ 1,319
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
II-5
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
NOTE 1: PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
month period ended December 31, 1997, include the accounts of Mississippi View
Holding Company (the 'Company') and its wholly owned subsidiary Community
Federal Savings & Loan Association of Little Falls (the 'Association'). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
NOTE 2: BASIS OF PRESENTATION
General: The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and instructions per Form 10-QSB.
Accordingly, they do not include all information and disclosures required by
generally accepted accounting principles for complete financial statements. The
accompanying consolidated financial statements do not purport to contain all the
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances and should be
read with the fiscal 1997 consolidated financial statements and notes of
Mississippi View Holding Company and Subsidiary included in their annual audit
report for the year ended September 30, 1997.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentations have been
included. The results of operations for the three month period ended December
31, 1997, are not necessarily indicative of the results that may be expected for
the entire fiscal year or any other period.
Reclassification: Certain items previously reported have been reclassified
to conform with the current period's reporting format.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, 'Reporting Comprehensive Income'--issued June 1997,
establishes standards for reporting and displaying comprehensive income and its
components in general-purpose financial statements. Comprehensive income
includes net income and several other items that current accounting standards
require to be recognized outside of net income. This statement requires entities
to display comprehensive income and its components in the financial statements
with presentation of the accumulated balances of other comprehensive income
reported in stockholder's equity separately from retained earnings and
additional paid-in capital. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods that are presented for comparative purposes is required.
SFAS No. 131, 'Disclosures about Segments of Enterprise and Related
Information'--issued June 1997, requires public business enterprises to report
information about their operating segments in a complete set of financial
statements to shareholders. This statement also requires entities to report
enterprise-wide information about their products and services, their activities
in different geographic areas, and their reliance on major customers. Certain
segment information is also to be reported in interim financial statements. The
basis for determining an enterprise's operating segments is the manner in which
management operates the business. Specifically, financial information is
required to be reported on the basis that is used internally by the enterprise's
chief operating decision maker in making decisions related to resource
allocation and segment performance. SFAS No. 131 is effective for financial
statements for years beginning after December 31, 1997.
Management believes adoption of the above-described Statements will not
have a material effect on financial position and the results of operations, nor
will adoption require additional capital resources.
II-6
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary restated, to
conform to the Statement 128 requirements.
The following tables set forth the computation of basic and diluted
earnings per share:
FOR THE
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1997 1996
-------- --------
Numerator:
Net income--Numerator for basic earnings per share and diluted earnings per
share--income available to common shareholders............................. $176,704 $173,265
Denominator:
Denominator for basic earnings per shares--weighted-average shares............ 654,941 771,742
Effect of dilutive securities: stock options and employee stock-based
compensation............................................................. 68,243 8,760
Denominator for diluted earnings per share--adjusted weighted-average shares
and assumed conversions.................................................... 723,184 780,502
Basic earnings per share........................................................ $ 0.27 $ 0.22
Diluted earnings per share...................................................... $ 0.24 $ 0.22
II-7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Mississippi View Holding Company and Subsidiary
Little Falls, Minnesota 56345
We have audited the accompanying consolidated statements of financial condition
of Mississippi View Holding Company and Subsidiary (the Company) as of September
30, 1997 and 1996, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the two years then ended. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mississippi View
Holding Company and Subsidiary as of September 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the two years
then ended, in conformity with generally accepted accounting principles.
BERTRAM COOPER & CO., LLP
Waseca, Minnesota
October 29, 1997
II-8
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
ASSETS
Cash and cash equivalents:
Cash and due from banks.......................................................... $ 214,934 $ 317,777
Interest bearing deposits with banks............................................. 889,660 2,265,877
Securities available-for-sale, at fair value....................................... 12,963,344 12,235,145
Securities held-to-maturity, at amortized cost (fair value of $7,470,314 for 1997
and $9,320,741 for 1996)......................................................... 7,405,466 9,294,092
FHLB stock, at cost................................................................ 650,700 650,700
Loans held for sale................................................................ 135,550 178,663
Loans receivable, net of allowance for loan losses of $861,170 in 1997 and
$877,094 in 1996................................................................. 44,474,809 43,070,281
Accrued interest receivable........................................................ 437,548 450,327
Premises and equipment............................................................. 806,900 788,846
Deferred tax asset (net of valuation allowance).................................... -- 163,903
Other assets....................................................................... 567,539 595,208
----------- -----------
Total assets.................................................................. $68,546,450 $70,010,819
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits.................................................................. $ 4,408,558 $ 4,471,137
Savings deposits................................................................. 14,525,018 14,087,832
Time deposits.................................................................... 36,250,011 37,972,225
----------- -----------
Total deposits................................................................ 55,183,587 56,531,194
----------- -----------
Advances from borrowers for taxes and insurance.................................... 107,038 138,530
Accrued income taxes............................................................... 66,352 --
Deferred tax liability............................................................. 525,353 --
Other liabilities.................................................................. 596,216 900,850
----------- -----------
Total liabilities............................................................. 56,478,546 57,570,574
----------- -----------
Shareholders' equity:
Serial preferred stock, no par value, 5,000,000 shares authorized, no shares
issued........................................................................... -- --
Common stock, $.10 par value, 10,000,000 shares authorized; 1,007,992 shares
issued, 653,151 and 776,713 outstanding.......................................... 100,799 100,799
Paid in capital.................................................................... 7,540,218 7,510,397
Treasury stock (267,749 and 130,278 shares), at cost............................... (3,605,111) (1,536,689)
Retained earnings, substantially restricted........................................ 7,737,458 7,116,646
Unearned ESOP shares (58,463 and 66,527 shares) at cost............................ (498,012) (566,736)
Unearned MSBP shares (28,629 and 34,474 shares) at cost............................ (317,954) (387,412)
Net unrealized gain on available-for-sale securities, net of tax of $740,337 in
1997 and $135,494 in 1996........................................................ 1,110,506 203,240
----------- -----------
Total shareholders' equity.................................................... 12,067,904 12,440,245
----------- -----------
Total liabilities and shareholders' equity.................................... $68,546,450 $70,010,819
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements
II-9
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------------
1997 1996
---------- ----------
Interest income:
Loans receivable.................................................................... $3,817,212 $3,703,652
Securities available-for-sale....................................................... 740,781 528,912
Securities held-to-maturity......................................................... 606,933 940,865
---------- ----------
Total interest income............................................................ 5,164,926 5,173,429
---------- ----------
Interest expense:
Demand deposits..................................................................... 36,963 37,345
Savings deposits.................................................................... 394,811 330,357
Time deposits....................................................................... 2,070,092 2,163,841
---------- ----------
Total interest expense........................................................... 2,501,866 2,531,543
---------- ----------
Net interest income................................................................. 2,663,060 2,641,886
Provision for loan losses........................................................... -- 3,725
---------- ----------
Net interest income after provision for loan losses.............................. 2,663,060 2,638,161
---------- ----------
Noninterest income:
Other fees and service charges...................................................... 79,022 70,603
Gain on sale of loans............................................................... 17,372 74,142
Net gain on sale of foreclosed real estate.......................................... 12,848 17,394
Contingency recovery................................................................ -- 81,023
Other............................................................................... 92,818 107,516
---------- ----------
Total noninterest income......................................................... 202,060 350,678
---------- ----------
Noninterest expenses:
Compensation and employee benefits.................................................. 963,690 919,565
Occupancy........................................................................... 94,829 87,856
Deposit insurance assessment........................................................ -- 362,557
Deposit insurance premiums.......................................................... 76,073 150,091
Data processing..................................................................... 83,254 75,996
Advertising......................................................................... 27,201 30,787
Foreclosed real estate expense, net................................................. 1,415 5,053
Other............................................................................... 421,081 424,066
---------- ----------
Total noninterest expense........................................................ 1,667,543 2,055,971
---------- ----------
Income before income taxes............................................................ 1,197,577 932,868
Income tax expense.................................................................... 457,862 374,100
---------- ----------
Net income............................................................................ $ 739,715 $ 558,768
---------- ----------
---------- ----------
Earnings per share of common stock.................................................... $ 0.96 $ 0.66
---------- ----------
---------- ----------
Weighted averages common shares outstanding........................................... 746,484 851,025
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements
II-10
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RETAINED UNALLOCATED
ADDITIONAL EARNINGS COMMON
COMMON PAID-IN TREASURY SUBSTANTIALLY STOCK HELD
STOCK CAPITAL STOCK RESTRICTED BY ESOP
-------- ---------- ----------- ------------- -----------
Balance, September 30, 1995............................. $100,799 $7,494,971 $ -- $ 6,697,907 $(644,441)
Treasury stock acquired............................... -- -- (1,536,689) -- --
Net earnings for the year ended September 30, 1996.... -- -- -- 558,768 --
Dividend paid $0.16/share............................. -- -- -- (140,029) --
Fair value adjustment of ESOP shares net of taxes of
$10,284............................................. -- 15,426 -- -- --
Allocated ESOP shares................................. -- -- -- -- 77,705
MSBP shares acquired, net of earned shares in the
amount of $71,217................................... -- -- -- -- --
Net change in unrealized gain on available-for-sale
securities, net of taxes of $46,318................. -- -- -- -- --
-------- ---------- ----------- ------------- -----------
Balance, September 30, 1996............................. $100,799 $7,510,397 $(1,536,689) $ 7,116,646 $(566,736)
-------- ---------- ----------- ------------- -----------
Treasury stock acquired............................... -- -- (2,068,422) -- --
Net earnings for the year ended September 30, 1997.... -- -- -- 739,715 --
Dividend paid $0.16/share............................. -- -- -- (118,903) --
Fair value adjustment of ESOP shares net of taxes of
$17,846............................................. -- 26,769 -- -- --
Allocated ESOP shares................................. -- -- -- -- 68,724
MSBP shares earned.................................... -- -- -- -- --
Effect of tax adjustment for vested MSBP shares....... -- 3,052 -- -- --
Net change in unrealized gain on available-for-sale
securities, net of taxes of $740,337................ -- -- -- -- --
-------- ---------- ----------- ------------- -----------
Balance, September 30, 1997............................. $100,799 $7,540,218 $(3,605,111) $ 7,737,458 $(498,012)
-------- ---------- ----------- ------------- -----------
-------- ---------- ----------- ------------- -----------
UNREALIZED
UNALLOCATED GAIN ON
COMMON SECURITIES
STOCK HELD AVAILABLE
FOR MSBP FOR SALE TOTAL
----------- ---------- -----------
Balance, September 30, 1995............................. $ -- $ 133,763 $13,782,999
Treasury stock acquired............................... -- -- (1,536,689)
Net earnings for the year ended September 30, 1996.... -- -- 558,768
Dividend paid $0.16/share............................. -- -- (140,029)
Fair value adjustment of ESOP shares net of taxes of
$10,284............................................. -- -- 15,426
Allocated ESOP shares................................. -- -- 77,705
MSBP shares acquired, net of earned shares in the
amount of $71,217................................... (387,412) -- (387,412)
Net change in unrealized gain on available-for-sale
securities, net of taxes of $46,318................. -- 69,477 69,477
----------- ---------- -----------
Balance, September 30, 1996............................. $(387,412) $ 203,240 $12,440,245
----------- ---------- -----------
Treasury stock acquired............................... -- -- (2,068,422)
Net earnings for the year ended September 30, 1997.... -- -- 739,715
Dividend paid $0.16/share............................. -- -- (118,903)
Fair value adjustment of ESOP shares net of taxes of
$17,846............................................. -- -- 26,769
Allocated ESOP shares................................. -- -- 68,724
MSBP shares earned.................................... 69,458 -- 69,458
Effect of tax adjustment for vested MSBP shares....... -- -- 3,052
Net change in unrealized gain on available-for-sale
securities, net of taxes of $740,337................ -- 907,266 907,266
----------- ---------- -----------
Balance, September 30, 1997............................. $(317,954) $1,110,506 $12,067,904
----------- ---------- -----------
----------- ---------- -----------
The accompanying notes are an integral part of these consolidated financial
statements
II-11
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
Interest received on loans and investments........................................ $ 5,146,533 $ 5,212,957
Interest paid..................................................................... (2,499,878) (2,532,101)
Other fees, commissions, and income received...................................... 285,085 299,433
Cash paid to suppliers, employees and others...................................... (1,704,523) (1,350,252)
Contributions to charities........................................................ (29,482) (7,869)
Income taxes paid................................................................. (298,000) (643,219)
Loans originated for sale......................................................... (1,744,089) (2,455,977)
Proceeds from sale of loans....................................................... 1,742,622 4,487,415
----------- -----------
Net cash provided by operating activities...................................... 898,268 3,010,387
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities........................................ (5,311,916) (6,547,147)
Proceeds from maturities of available-for-sale securities......................... 6,074,554 1,356,285
Purchases of held-to-maturity securities.......................................... (4,755,000) (4,694,532)
Proceeds from maturities of held-to-maturity securities........................... 6,641,854 9,295,315
Loan originations and principal payments on loans, net............................ (1,375,500) (2,123,430)
Purchases of property and equipment............................................... (109,049) (10,936)
Proceeds from sale of foreclosed real estate...................................... 12,848 17,394
----------- -----------
Net cash provided by (used in) investing activities............................ 1,177,791 (2,707,051)
----------- -----------
Cash flows from financing activities:
Net increase in non-interest bearing demand and savings deposit accounts.......... 375,500 398,025
Net (decrease) increase in time deposits.......................................... (1,722,125) 1,213,396
Net (decrease) in mortgage escrow funds........................................... (31,492) (49,168)
Dividend on unallocated ESOP shares............................................... 10,322 11,612
Acquisition of treasury stock..................................................... (2,068,422) (1,536,689)
Acquistion of unearned MSBP shares................................................ -- (453,899)
Dividends paid.................................................................... (118,902) (140,029)
----------- -----------
Net cash used by financing activities............................................... (3,555,119) (556,752)
----------- -----------
Net (decrease) in cash and cash equivalents......................................... (1,479,060) (253,416)
Cash and cash equivalents at beginning of year...................................... 2,583,654 2,837,070
----------- -----------
Cash and cash equivalents at end of year............................................ $ 1,104,594 $ 2,583,654
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements
II-12
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
FOR THE YEAR ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income..................................................................... $ 739,715 $ 558,768
Adjustments:
Provision for losses on loans and real estate................................ -- 3,725
Depreciation................................................................. 90,995 83,771
Federal Home Loan Bank stock dividends....................................... -- (12,800)
Reinvested dividends......................................................... (5,421) (5,071)
ESOP fair value adjustment................................................... 26,768 15,426
Amortization of ESOP compensation............................................ 58,403 66,092
Amortization of MSBP compensation............................................ 66,487 66,487
Tax benefit of MSBP vesting activities....................................... 3,052 --
Net amortization and accretion of premiums and discounts on
securities................................................................ 28,466 38,211
Net (gains) on sales of foreclosed real estate............................... (12,848) (17,393)
Net loan fees deferred and amortized......................................... 32,924 14,291
Net mortgage loan servicing fees deferred.................................... 2,112 (11,611)
Net increase in unearned MSBP shares......................................... 2,971 --
Contingency recovery......................................................... -- (81,023)
(Increase) decrease in:
Loans held for sale....................................................... (18,839) 2,014,650
Accrued interest receivable............................................... 12,780 78,598
Prepaid income tax........................................................ 23,892 (23,892)
Deferred tax asset........................................................ 163,903 (119,721)
Other assets.............................................................. 1,664 (6,639)
Increase (decrease) in:
Accrued interest payable.................................................. (983) (558)
Accrued income tax........................................................ (13,139) (115,222)
Other liabilities......................................................... (304,634) 464,298
----------- -----------
Net cash provided by operating activities................................. $ 898,268 $ 3,010,387
----------- -----------
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Federal Home Loan Bank stock dividends......................................... $ -- $ 12,800
Refinancings of sales of foreclosed real estate................................ -- 37,200
Transfers from loans to real estate acquired through foreclosure............... -- 4,989
Reinvested dividends........................................................... 5,421 5,071
Transfer of debt securities to available-for-sale from securities
held-to-maturity............................................................. -- 2,449,446
Transfers of loans held for investment to loans held for sale.................. -- 2,135,339
The accompanying notes are an integral part of these consolidated financial
statements
II-13
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the significant accounting policies Mississippi
View Holding Company (the Company) follows in presenting its financial
statements.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary Community Federal
Savings and Loan Association (the Association). All significant intercompany
transactions and balances are eliminated in consolidation. Certain amounts in
the financial statements for the prior year have been reclassified to conform to
current financial statement presentation.
Nature of Business--The Company is a unitary thrift holding company whose
subsidiary provides financial services. The Association's business is that of a
financial intermediary and consists primarily of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to make mortgage loans secured by residential real estate and other
consumer loans. At September 30, 1997, the Association operated one retail
banking office in Minnesota. The Association is subject to significant
competition from other financial institutions, and is also subject to regulation
by certain federal regulatory agencies and undergoes periodic examinations by
those regulatory agencies.
Use of Estimates--In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheets,
and income and expenses for the period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
A substantial portion of the Association's loans are collateralized by real
estate in local markets (see Note 13). In addition, foreclosed real estate is
located in the same market area. Accordingly, the ultimate collectibility of a
substantial portion of the Association's loan portfolio and the recovery of a
substantial portion of the carrying amount of foreclosed real estate are
susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
Association's allowance for losses on loans and foreclosed real estate. These
agencies may require the Association to recognize additions to the allowance
based on their judgments about information available to them at the time of
their examination.
Cash Equivalents--Cash equivalents of $300,000 and $1,000,000 at September
30, 1997 and 1996, respectively, consist of certificates of deposit, and funds
due from banks. For purposes of the statements of cash flows, the Association
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
Investment Securities--The Company classifies its investments, including
debt securities, marketable equity securities, mortgage-backed securities, and
mortgage related securities in one of three catagories: held-to-maturity,
trading and available-for-sale. Debt securities that the Company has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost. The Company does not engage in
securities trading, therefore, the balance of its debt securities and all equity
securities are classified as available-for-sale. The Company classifies debt
securities as available-for-sale when it determines that such securities may be
sold at a future date or if there are foreseeable circumstances under which the
Company would sell such securities.
II-14
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Securities designated as available-for-sale are recorded at fair value.
Changes in the fair value of securities available-for-sale are included in
shareholders' equity as unrealized holding gains or losses net of the related
tax effect. Unrealized losses on available-for-sale securities or
held-to-maturity securities reflecting a decline in value judged to be other
than temporary are charged to income. Realized gains or losses on
available-for-sale securities are computed on a specific identification basis.
Premiums and discounts on debt and mortgage-backed securities are amortized
to expense or accreted to income over the estimated life of the respective
security using a method that approximates the level yield method.
The Association, as a member of the Federal Home Loan Bank System, is
required to maintain an investment in capital stock of the Federal Home Loan
Bank of Des Moines. Because no ready market exists for this stock, and it has no
quoted market value, the Association's investment in this stock is carried at
cost.
Loans Held for Sale--Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income.
Loans Receivable--Loans receivable that management has the intent and
ability to hold for the forseeable future or until maturity or pay-off are
reported at their outstanding principal balance adjusted for any charge-offs,
the allowance for loan losses, and any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans. Discounts and
premiums on purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on purchased
consumer loans are recognized over the expected lives of the loans using the
level yield method.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Association's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and current economic conditions. Loans are considered impaired if
full principal and interest payments are not anticipated to be made in
accordance with the contractual terms. Impaired loans are carried at the present
value of expected future cash flows discounted at the loan's effective interest
rate or at the fair value of the collateral if the loan is collateral dependent.
A portion of the allowance for loan losses is allocated to impaired loans if the
value of such loans is deemed to be less than the unpaid balance. If these
allocations cause the allowance for loan losses to require an increase, such an
increase is reported as a component of the provision for loan losses.
Uncollectible interest on loans contractually past due for three months is
charged off or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued and income is subsequently recognized only to
the extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments returns to
normal, in which case the loan is returned to accrual status.
Loan origination fees and certain direct origination costs are capitalized
with the net fee or cost recognized as an adjustment to interest income using
the interest method.
Mortgage Servicing Rights--The Association adopted Statement of Financial
Accounting Standards (SFAS) No. 125, 'Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities' for transactions entered
into after December 31, 1996. SFAS No. 125 established accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on the consistent application of the financial-components
approach. This approach requires the recognition of financial assets and
servicing assets that are controlled by the reporting entity, and the
derecognition of financial assets and liabilities
II-15
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
when control is extinguished. Liabilities and derivatives incurred or obtained
by transferors in conjunction with the transfer of financial assets are measured
at fair value, if practicable. Servicing assets and other retained interests in
transferred assets are measured by allocating the carrying amount between the
assets sold and the interest retained, based on their relative fair value. The
adoption of SFAS No. 125 did not have a material effect on the Association's
operations for the year ended September 30, 1997.
Foreclosed Real Estate--Real estate properties acquired through, or in lieu
of, loan foreclosure are initially recorded at the lower of the related unpaid
loan balance or fair value of the property, less estimated costs to sell, at the
date of foreclosure. Costs relating to development and improvement of property
are capitalized, whereas costs relating to the holding of property are expensed.
Valuations are periodically performed by management and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its estimated fair value less estimated costs to sell.
Premises and Equipment--Land is carried at cost. Building, furniture and
equipment are carried at cost less accumulated depreciation. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets, which range from five to forty years.
Income Taxes--Deferred income taxes are recognized for the tax consequences
of temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date. The measurement of deferred tax assets is reduced, if necessary,
by the amount of any tax benefits that, based on available evidence, are not
expected to be realized. The effect of a change in the beginning-of-the-year
balance of a valuation allowance that results from a change in judgment about
the realizability of deferred tax assets is included in income.
The Company files consolidated income tax returns with the Association and
they have entered into a tax sharing agreement which provides that the
Association will pay to the Company, or receive a refund from the Company, as if
the Associations portion of income tax liability or benefit was separately
determined based on the Association's taxable income or loss.
Earnings Per Share--Earnings per share of common stock has been determined
by dividing net income by the weighted average number of shares of common stock
and common stock equivalents outstanding during the year. Stock options are
regarded as common stock equivalents computed using the treasury stock method.
Shares acquired by the employee stock ownership plan are not considered in the
weighted average shares outstanding until shares are committed to be released to
an employee's individual account or have been earned. The difference between
primary and fully diluted earnings per share is not material.
Treasury Stock--Treasury stock is recorded at cost. In the event of a
subsequent reissue, the treasury stock account will be reduced by the cost of
such stock on the average cost basis with any excess proceeds credited to
addional paid-in capital. Treasury stock is available for general corporate
purposes.
Stock-Based Compensation--SFAS No. 123, 'Accounting for Stock-Based
Compensation,' establishes a new fair value-based accounting method for
stock-based compensation plans. As permitted by SFAS No. 123, management has
elected to continue measuring compensation costs based on the intrinsic value
method as prescribed by APB Opinion No. 25, 'Accounting for Stock Issued to
Employees.' See Footnote No. 10 for proforma disclosure of net income and
earnings per share as if the fair value method had been adopted.
Fair Values of Financial Instruments--SFAS No. 107, 'Disclosures about Fair
Value of Financial Instruments,' requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are
II-16
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimated
cannot be substantiated by comparison to to independent markets and, in many
cases, could not be realized in immediate settlement of the instruments. SFAS
No. 107 excludes certain financial instruments and all nonfinancial assets and
liabilities from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures, as presented in Note 12:
Cash and cash equivalents: The carrying amounts of cash and cash
equivalents approximates fair value.
Debt and equity securities: Fair values for debt and equity securities
are based on quoted market prices, where available. If quoted market prices
are not available, fair values are based on quoted market prices of
comparable instruments.
FHLB stock: The carrying amount of FHLB stock approximates fair value.
Loans: For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate
commercial real estate, rental property mortgage loans, and commercial and
industrial loans) are estimated using discounted cash flow analyses, based
on interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality giving consideration to estimated
prepayment and credit loss factors. Loan fair value estimates include
judgments regarding future expected loss experience and risk
characteristics. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values, where
applicable.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates fair value.
Deposits: The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). Fair values for time deposits are
estimated using a discounted cash flow calculation that applies interest
rates currently offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits. The carrying amount of
accrued interest payable approximates fair value.
Advance payments by borrowers for taxes and insurance (escrow
accounts): The carrying amount of escrow accounts approximate fair value.
Loan commitments: Commitments to extend credit were evaluated and fair
value was estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The carrying value and
fair value of commitments to extend credit are not considered material for
disclosure.
II-17
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 2. DEBT AND EQUITY SECURITIES
The amortized costs and fair values of debt and equity securities are
summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
SEPTEMBER 30, 1997:
Securities available-for-sale:
Debt securities:
U.S. Government and agency obligations.... $ 8,566,851 $ 36,481 $(12,322) $ 8,591,010
Mortgage-backed securities................ 2,401,673 11,657 (19) 2,413,311
----------- ---------- ---------- -----------
Subtotal............................. 10,968,524 48,138 (12,341) 11,004,321
----------- ---------- ---------- -----------
Equity securities:
Mutual fund.................................. 92,325 596 -- 92,921
Stock in FHLMC............................... 51,653 1,814,449 -- 1,866,102
----------- ---------- ---------- -----------
Subtotal............................. 143,978 1,815,045 -- 1,959,023
----------- ---------- ---------- -----------
Total........................................ $11,112,502 $1,863,183 $(12,341) $12,963,344
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Securities held-to-maturity:
Certificates of deposit...................... $ 4,755,000 $ -- $ -- $ 4,755,000
Mortgage-backed securities................... 2,650,466 87,715 (22,867) 2,715,314
----------- ---------- ---------- -----------
Total........................................ $ 7,405,466 $ 87,715 $(22,867) $ 7,470,314
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
SEPTEMBER 30, 1996:
Securities available-for-sale:
Debt securities:
U.S. Government and agency obligations.... $10,361,165 $ 21,133 $(47,513) $10,334,785
Mortgage-backed securities................ 1,396,690 -- (19,107) 1,377,583
----------- ---------- ---------- -----------
Subtotal............................. 11,757,855 21,133 (66,620) 11,712,368
----------- ---------- ---------- -----------
Equity securities:
Mutual fund............................... 86,903 -- (33) 86,870
Stock in FHLMC............................ 51,653 384,254 -- 435,907
----------- ---------- ---------- -----------
Subtotal............................. 138,556 384,254 (33) 522,777
----------- ---------- ---------- -----------
Total..................................... $11,896,411 $ 405,387 $(66,653) $12,235,145
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Securities held-to-maturity:
U.S. Government and agency obligations....... $ 1,749,672 $ 172 $ (2,031) $ 1,747,813
Certificates of deposit...................... 4,065,000 -- -- 4,065,000
Mortgage-backed securities................ 3,479,420 75,648 (47,140) 3,507,928
----------- ---------- ---------- -----------
Total........................................ $ 9,294,092 $ 75,820 $(49,171) $ 9,320,741
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
There were no sales of securities during the two years ended September 30,
1997 and 1996.
The amortized cost and estimated market value of debt securities at
September 30, 1997, by contractual maturity, are shown below. Mortgage-backed
securities have been aggregated and disclosed separately, rather
II-18
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997 AND 1996
NOTE 2. DEBT AND EQUITY SECURITIES--(CONTINUED)
than allocated over several maturity groupings, since they lack a single
maturity date and because borrowers retain the right to prepay the obligation.
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------------ --------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ----------- -----------
Due in one year or less................................ $ -- $ -- $ 5,200,006 $ 5,214,434
Due from one to five years............................. -- -- 2,510,207 2,528,845
Due from five to ten years............................. -- -- 501,291 501,961
Due after ten years.................................... -- -- 355,347 345,770
---------- ---------- ----------- -----------
Subtotal............................................. -- -- 8,566,851 8,591,010
Mortgage-backed securities............................. 2,650,466 2,715,314 2,401,673 2,413,311
---------- ---------- ----------- -----------
Total................................................ $2,650,466 $2,715,314 $10,968,524 $11,004,321
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
NOTE 3. LOANS RECEIVABLE
Loans receivable at September 30, 1997 and 1996 consist of the following:
1997 1996
----------- -----------
Secured by 1-4 family residences............................... $39,863,763 $37,623,209
Secured by other real estate................................... 2,831,392 3,964,195
Construction................................................... 953,265 626,900
Consumer and other............................................. 2,053,921 1,916,165
Loans secured by deposits...................................... 212,790 281,115
----------- -----------
Total loans receivable....................................... 45,915,131 44,411,584
Less:
Undisbursed portion of mortgage loans........................ (309,781) (227,762)
Allowance for loan losses.................................... (861,170) (877,094)
Deferred loan fees........................................... (269,371) (236,447)
----------- -----------
Loans receivable, net..................................... $44,474,809 $43,070,281
----------- -----------
----------- -----------
A summary of the activity in the allowance for loan losses is as follows:
YEARS ENDED
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
Balance, beginning of period.......................................... $877,094 $962,086
Provision for losses.................................................. -- 3,725
Charge offs........................................................... (17,017) (92,213)
Recoveries............................................................ 1,093 3,496
-------- --------
Balance, end of period................................................ $861,170 $877,094
-------- --------
-------- --------
In the ordinary course of business, the Association has granted loans to
certain executive officers, directors and their related interests. Related party
loans are made on substantially the same terms as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
the normal risk of collectibility. The aggregate dollar amount of these loans
was approximately $124,000 and $140,000 at September 30, 1997 and 1996,
respectively.
II-19
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. FORECLOSED REAL ESTATE
Foreclosed real estate acquired in settlement of loans consists of the
following:
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
Real estate acquired by foreclosure............................................. $ 15,700 $ 15,700
Less allowance for losses....................................................... 15,700 15,700
-------- --------
Foreclosed real estate, net................................................... $ -- $ --
-------- --------
-------- --------
Activity in the allowance for losses on foreclosed real estate is as
follows:
YEARS ENDED
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
Beginning balance............................................................... $ 15,700 $ 25,187
Provision charged to income..................................................... -- --
Charge-offs..................................................................... -- (9,487)
Recoveries...................................................................... -- --
-------- --------
Ending balance.................................................................. $ 15,700 $ 15,700
-------- --------
-------- --------
NOTE 5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balance of
loans serviced for others was $2,351,000 and $2,823,000 at September 30, 1997
and 1996, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits were approximately $4,700 and $13,300
at September 30, 1997 and 1996, respectively.
Capitalized mortgage servicing rights included in other assets are
summarized as follows:
YEARS ENDED
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
Beginning balance, net of accumulated amortization.............................. $ 11,600 $ --
Amounts capitalized............................................................. -- 12,700
Amortization.................................................................... 2,100 1,100
Valuation adjustments........................................................... -- --
-------- --------
Balance, end of period.......................................................... $ 9,500 $ 11,600
-------- --------
-------- --------
NOTE 6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30, 1997 and 1996 is summarized as
follows:
1997 1996
-------- --------
Investment securities........................................................... $152,279 $164,382
Mortgage-backed securities...................................................... 38,569 41,500
Loans receivable................................................................ 246,700 244,445
-------- --------
Total......................................................................... $437,548 $450,327
-------- --------
-------- --------
II-20
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. PREMISES AND EQUIPMENT
Premises and equipment at September 30, 1997 and 1996 consists of the
following:
1997 1996
---------- ----------
Land........................................................................ $ 98,840 $ 98,840
Office building............................................................. 797,008 790,702
Furniture and equipment..................................................... 541,618 463,914
---------- ----------
Total..................................................................... 1,437,466 1,353,456
Less accumulated depreciation............................................... (630,566) (564,610)
---------- ----------
Premises and equipment, net............................................... $ 806,900 $ 788,846
---------- ----------
---------- ----------
NOTE 8. DEPOSITS
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $2,489,000 and $2,434,000 at September 30, 1997
and 1996, respectively. Deposited amounts in excess of $100,000 per account are
not insured by the Savings Association Insurance Fund.
At September 30, 1997, the scheduled maturities of time deposits, for the
fiscal years ended, are as follows:
1998................................................................. $27,624,960
1999................................................................. 8,424,248
2000................................................................. 99,744
2001................................................................. 101,059
Thereafter........................................................... --
-----------
Total.............................................................. $36,250,011
-----------
-----------
Deposits by related parties were approximately $1,014,000 and $803,000 at
September 30, 1997 and 1996, respectively.
The Association provides collateral to various local governmental units as
required by State statute on savings and certificate accounts with balances
greater than $100,000. The collateral pledged against these deposits consisted
of mortgage-backed securities totaling $961,363 and $1,101,623 as of September
30, 1997 and 1996, respectively.
NOTE 9. INCOME TAXES
Income tax expense (benefit) applicable to operations include current and
deferred taxes as follows:
YEARS ENDED
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
CURRENT
Federal.................................................................... $279,700 $367,539
State...................................................................... 93,750 126,283
-------- --------
Subtotal................................................................ 373,450 493,822
-------- --------
DEFERRED
Federal.................................................................... 63,310 (89,790)
State...................................................................... 21,102 (29,932)
-------- --------
Subtotal................................................................ 84,412 (119,722)
-------- --------
Total income tax provision................................................... $457,862 $374,100
-------- --------
-------- --------
II-21
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. INCOME TAXES--(CONTINUED)
The State of Minnesota follows the Internal Revenue Code for the
determination of taxable income in connection with temporary differences. The
State portion of deferred tax assets and liabilities is approximately 25%.
Temporary differences between financial statement carrying amounts and the tax
basis of assets and liabilities that create deferred tax assets and liabilities
are as follows:
SEPTEMBER 30,
-----------------------
1997 1996
---------- ---------
Deferred tax assets:
General loan loss allowance................................................ $ 278,044 $ 350,838
Deferred loan fees......................................................... 107,748 94,579
Deferred compensation...................................................... 140,875 129,278
Accrual adjustments........................................................ 16,847 --
SAIF assessment............................................................ -- 145,023
---------- ---------
543,514 719,718
Less valuation allowance..................................................... (68,679) (162,000)
---------- ---------
Subtotal................................................................... 474,835 557,718
---------- ---------
Deferred tax liabilities:
Excess tax reserves........................................................ 115,768 115,768
Unrealized gains on available-for-sale securities.......................... 740,337 135,494
FHLB stock dividends....................................................... 99,680 99,680
Mortgage servicing assets.................................................. 3,800 4,644
Depreciation and basis adjustment.......................................... 40,604 38,229
---------- ---------
Subtotal................................................................... 1,000,189 393,815
---------- ---------
---------- ---------
Net deferred tax (liability) asset........................................... $ (525,354) $ 163,903
---------- ---------
---------- ---------
The Association has paid sufficient income taxes in prior carryback years
which would enable it to recover the balance of the net deferred tax assets,
therefore, no additional valuation allowance was required at September 30, 1997
and 1996.
Actual income tax expense varied from 'expected' tax expense (computed by
applying the United States federal corporate income tax rate of 34 percent to
earnings before taxes) as follows:
YEARS ENDED
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
Computed 'expected' tax expense:............................................. $407,000 $317,200
Increase (reduction) in income tax resulting from:
State income taxes, net of federal tax benefit............................. 76,000 63,600
Other (net)................................................................ (25,138) (6,700)
-------- --------
Total income tax expense..................................................... $457,862 $374,100
-------- --------
-------- --------
Savings and loan associations were allowed a bad debt deduction, in
determining income tax for tax purposes, based on specified experience formulas
or a percentage of taxable income before such deduction. On August 21, 1996
legislation was signed into law which repealed the percentage of taxable income
method for the tax bad debt deduction. The repeal is effective for the
Association's taxable year beginning October 1, 1996. In addition, the
legislation requires the Association to include in taxable income its tax bad
debt reserves in excess of its base year reserves (pre-1988 reserves) over a
six, seven, or eight year period depending upon the attainment of certain loan
origination levels. Since the percentage of taxable income method for the tax
bad debt deduction and the corresponding increase in the tax bad debt reserve in
excess of base year have been recorded as temporary differences, this change in
the tax law will not effect the Company's statement of operations.
II-22
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. INCOME TAXES--(CONTINUED)
Retained earnings at September 30, 1996, includes approximately $1,459,000
of pre-1988 reserves, for which no deferred income tax liability, approximately
$584,000, has been recognized. This amount represents an allocation of income to
bad debt deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debt losses or adjustments from carryback of net
operating losses would create income for tax purposes only, which would be
subject to the then current corporate income tax rate.
NOTE 10. EMPLOYEE BENEFIT PLANS
Salary Continuation Plan
The Association has adopted a directors' consultation and retirement plan.
Benefits related to services are expensed under the plan vesting schedule. The
Association adopted an insured executive supplemental retirement plan and the
estimated benefits will be accrued over the expected remaining years of
employment. The compensation expense related to these plans amounted to $31,663
and $29,892 for the years ended September 30, 1997 and 1996, respectively.
Salary Reduction Plan
The Association maintains a salary reduction plan (401(k) Plan) which
covers qualifying all full time employees. Company contributions are determined
anually by the Board of Directors. The Company's expense related to this plan
was $-0- and $1,042 for the years ended September 30, 1997 and 1996,
respectively.
Employee Stock Ownership Plan
The Association established an Employee Stock Ownership Plan (ESOP)
covering all employees over the age of 21, with at least one year of service who
work at least 1,000 hours during the plan year. The ESOP borrowed funds from the
Company to purchase a total of 80,639 shares of the Company's common stock. The
loan is collateralized by the common stock. Contributions by the Association are
used to repay the loan with shares being released from the Company's lien
proportional to the loan repayment. Annually, on December 31, the released
shares are allocated to the participants in the same proportion as their wages
bear to the total compensation of all of the participants.
The Company presents these financial statements in accordance with the
AICPA Statement of Position (SOP) No. 93-6, 'Employers' Accounting for Employee
Stock Ownership Plans.' The price of the shares issued and unreleased are
charged to unearned compensation, a contra-equity account, and shares released
are reported as compensation expense equal to the current market value price of
the released shares. Dividends paid on allocated shares are charged to retained
earnings and those on unallocated shares are charged to expense.
The following table presents the components of the ESOP shares:
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
Allocated shares................................................................ 16,128 8,064
Commited to be released shares.................................................. 6,048 6,048
Unreleased shares............................................................... 58,463 66,527
-------- --------
Total ESOP shares............................................................... 80,639 80,639
-------- --------
-------- --------
Fair value of unreleased shares................................................. $993,871 $848,219
-------- --------
-------- --------
Compensation expense recorded................................................... $105,127 $ 94,003
-------- --------
-------- --------
II-23
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. EMPLOYEE BENEFIT PLANS--(CONTINUED)
Management Stock Bonus Plan (MSBP)
The Company has adopted a MSBP for directors and management to enable the
Association to attract and retain experienced and capable personnel in key
positions of responsibility. A total of 29,224 shares were awarded in the form
of restricted stock payable over a five year vesting period and 11,095 shares
were reserved for future awards. The Company acquired the MSBP shares in fiscal
1996 in an open market purchase at a cost of $458,629, which was initially
recorded as unearned compensation in a contra shareholders' equity account. The
Company recognizes compensation expense pro rata over the vesting period which
amounted to $66,663 and $66,487 for fiscal 1997 and 1996, respectively.
Stock Option Plan
In September, 1995 the Company adopted a stock option plan, the 1995 Stock
Option Plan (the SOP). During 1995, options exercisable for 73,072 shares of the
Company's common stock were granted to certain officers and directors at an
exercise price of $11.375 per share. The options vest over a five year period
and may be exercised within 10 years of the grant date. In January 1997, a
second option plan, the 1997 Stock Option and Incentive Plan was adopted. In
1997, options exercisable for 63,636 shares of the Company's common stock were
granted to certain officers and directors at an exercise price of $13.00 per
share. The options vest over a two year period and may be exercised within 10
years of the grant date. All options granted in the 1997 Stock Option Plan have
dividend equivalent rights associated with such options.
The Company uses the intrinsic value method as described in APB Opinion No.
25 and related interpretations to account for its stock incentive plans.
Accordingly, no compensation cost has been recognized for the fixed option plan.
There are no charges or credits to expense with respect to the granting or
exercise of options since the options were issued at fair value on the
respective grant dates. Had compensation cost for the Company's stock-based
plans been determined in accordance with the fair value method recommended by
SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the proforma amounts indicated below:
1997 1996
-------- --------
Net income:
As reported................................................................... $739,715 $558,768
Pro forma..................................................................... 614,602 519,471
Earnings per common share and common share equivalent:
As reported................................................................... $ 0.96 $ 0.66
Pro forma..................................................................... 0.82 0.61
The above disclosed pro forma effects of applying SFAS No. 123, to
compensation costs, may not be representative of the effects on reported pro
forma net income for future years.
The fair value for each option grant is estimated on the date of the grant
using the Black Scholes Model. The model incorporates the following assumptions:
1997 1996
------ ------
Risk-free interest rate............................................................ 5.60% 6.08%
Expected life...................................................................... 10 Yrs. 10 Yrs.
Expected volatility................................................................ 19.00% 20.00%
Expected dividends................................................................. 2.00% None
II-24
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The fair value of the granted 1995 options granted in 1995 was $4.48 per
option. The fair value of the options granted in 1997 was $3.51 per options. A
summary of stock option activity under the SOP's are detailed below:
WEIGHTED
OPTIONS AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
--------- ----------- --------
September 30, 1994.................................................. None None --
Plan adopted........................................................ 100,799 -- $11.375
Granted September 27, 1995.......................................... (73,072) 73,072 11.375
--------- ----------- --------
September 30, 1995.................................................. 27,727 73,072 11.375
Exercised........................................................... -- -- --
Forfeited........................................................... -- -- --
--------- ----------- --------
September 30, 1996.................................................. 27,727 73,072 11.375
Plan adopted........................................................ 87,771 -- 13.000
Granted January 22, 1997............................................ (63,636) 63,636 13.000
Exercised........................................................... -- -- --
Forfeited........................................................... -- -- --
--------- ----------- --------
September 30, 1997.................................................. 51,862 136,708 $12.131
--------- ----------- --------
--------- ----------- --------
The following table summarizes information about stock options outstanding
at September 30, 1997:
OPTIONS OUTSTANDING
- ------------------------------------------
WEIGHTED AVG. OPTIONS
REMAINING EXERCISABLE
NUMBER EXERCISE CONTRACTUAL ------------------
OUTSTANDING PRICE LIFE IN YEARS NUMBER PRICE
- ----------- -------- ------------- ------ -------
73,072 $ 11.375 8.0 Yrs. 29,224 $11.375
63,636 $ 13.000 9.1 Yrs. 31,813 $13.000
- ----------- ------
136,708 61,037
- ----------- ------
- ----------- ------
NOTE 11. COMMITMENTS
Loans serviced for FNMA, in the amount of $480,474 at September 30, 1997,
were sold subject to recourse provisions which require the Association to buy
back any loan which is delinquent more than ninety days. The Association also
sold loans and related servicing subject to recourse provisions which expire in
March 1998 in the amount of $910,350 at September 30, 1997. The Association has
not incurred any losses on loans sold with recourse provisions.
NOTE 12. FINANCIAL INSTRUMENTS
The Association is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments are commitments to extend credit and
involve, to varying degrees, elements of credit risk in excess of the amount
recognized on the balance sheet.
The Association's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Association uses
the same credit policies in making commitments as it does for on-balance sheet
instruments.
II-25
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. FINANCIAL INSTRUMENTS--(CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Commitments to extend credit which represent
credit risk totaled $660,750 for loans ($481,650 at fixed rates and $179,100 at
adjustable rates) and $1,292,196 unused lines of credit at September 30, 1997.
Commitments to sell loans amounted to $237,300 at September 30, 1997.
The estimated fair values of the Company's financial instruments are as
follows:
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
Financial assets:
Cash and cash equivalents............... $ 1,104,594 $ 1,104,594 $ 2,583,654 $ 2,583,654
Investment securities................... 20,368,810 20,433,657 21,529,237 21,555,886
FHLB stock.............................. 650,700 650,700 650,700 650,700
Loans receivable........................ 44,610,359 46,246,918 43,248,944 44,201,216
Accrued interest receivable............. 437,548 437,548 450,327 450,327
Financial liabilities:
Deposits................................ 55,183,587 55,209,196 56,531,194 56,538,374
Advance payments by borrowers
(escrows)............................ 107,038 107,038 138,530 138,530
NOTE 13. SIGNIFICANT GEOGRAPHIC CONCENTRATION OF CREDIT RISK
A significant portion of the Association's loans receivable are to
borrowers located in Little Falls, Minnesota, and the surrounding counties. This
geographic concentration amounted to approximately 95% of the total loans
receivable balance for the years ended September 30, 1997 and 1996.
NOTE 14. STOCKHOLDERS EQUITY AND REGULATORY MATTERS
On March 23, 1995, the Association converted from a mutual association to a
stock association pursuant to a Plan of Conversion, (the Conversion) via the
issuance of common stock. In conjunction with the Conversion, the Company sold
1,007,992 shares of common stock which, after giving effect to offering expenses
of $471,714, resulted in net proceeds of $7.6 million which included an order
for 20,159 shares of stock in the amount of $161,272 from the Employee Stock
Ownership Plan (ESOP). Pursuant to the Conversion, the Association transferred
all of its outstanding shares to its newly organized holding company. On March
24, 1995 the Association's ESOP purchased an additional 60,480 shares in the
open market, in the amount of $529,200. The ESOP's purchases were funded through
a loan from the Company.
Upon the Conversion, the preexisting liquidation rights of the mutual stock
association members were unchanged. Such rights will be accounted for by the
Company for the benefit of such depositors in proportion to their liquidation
interests as of either the Eligibility Record Date or the Supplemental
Eligibility Record Date as defined in the Conversion.
Subsequent to the Conversion, neither the Company nor the Association may
declare or pay cash dividends on any of their shares of common stock if the
effect would be to reduce shareholders' equity below applicable regulatory
capital requirements or if such declaration of payment would otherwise violate
regulatory requirements.
II-26
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. STOCKHOLDERS EQUITY AND REGULATORY MATTERS--(CONTINUED)
The Association is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision (OTS). Failure to meet minimum
capital requirements can initiate certain mandatory--and possible additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgements by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined in the regulation), to
risk-weighted assests (as defined), and of tangible and Tier 1 capital (as
defined) to adjusted total assets (as defined). Management believes, as of
September 30, 1997, that the Association meets all of capital adequacy
requirements to which it is subject.
As of September 30, 1997 and 1996, the most recent notification from the
OTS categorized the Association as 'well capitalized' under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Association must maintain minimum total risk-based, Tier 1 risk-based, Tier
1 leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Association's
category.
The Association's actual regulatory capital amounts, with reconcilation to
the Company's capital investment in the Association determined in accordance
with generally accepted accounting principles (GAAP), and ratios as of September
30, 1997 and 1996, are also presented in the following tables (in thousands):
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
------------------ ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ ------- ------ -------
GAAP capital, September 30, 1997............. $11,998
Less: Unrealized gains on securities
available-for-sale......................... (1,111)
Excess mortgage servicing rights............. (1)
-------
Tangible capital and ratio to adjusted total
assets..................................... $10,886 16.3% $1,000 1.50%
------- ------- ------ -------
Tier 1 (Core) capital and ratio to adjusted
total assets............................... $10,886 16.3% $2,000 3.0% $3,335 5.0%
------- ------- ------ ------- ------ -------
Tier 1 capital and ratio to risk-weighted
assets..................................... $10,886 31.9% $1,365 4.0% $2,047 6.0%
------- ------- ------ ------- ------ -------
Tier 2 capital, allowance for loan losses.... 432
-------
Total risk-based capital and ratio to risk-
weighted assets, September 30, 1997........ $11,318 33.2% $2,730 8.0% $3,412 10.0%
------- ------- ------ ------- ------ -------
------- ------- ------ ------- ------ -------
II-27
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. STOCKHOLDERS EQUITY AND REGULATORY MATTERS--(CONTINUED)
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
------------------ ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ ------- ------ -------
GAAP capital, September 30, 1996............. $10,643
Less: Unrealized gains on securities
available-for-sale......................... (238)
Excess mortgage servicing rights............. (1)
-------
Tangible capital and ratio to adjusted total
assets..................................... $10,404 14.9% $1,046 1.50%
------- ------- ------ -------
Tier 1 (Core) capital and ratio to adjusted
total assets............................... $10,404 14.9% $2,092 3.0% $3,487 5.0%
------- ------- ------ ------- ------ -------
Tier 1 capital and ratio to risk-weighted
assets..................................... $10,404 30.5% $1,366 4.0% $2,049 6.0%
------- ------- ------ ------- ------ -------
Tier 2 capital, allowance for loan losses.... 430
-------
Total risk-based capital and ratio to risk-
weighted assets, September 30, 1996........ $10,834 31.7% $2,733 8.0% $3,416 10.0%
------- ------- ------ ------- ------ -------
------- ------- ------ ------- ------ -------
NOTE 15. EFFECTS OF NEW FINANCIAL ACCOUNTING STANDARDS
SFAS No. 128, 'Earnings Per Share'--issued February 1997, establishes
standards for computing and presenting earnings per share (EPS). It simplifies
prior standards by replacing primary earnings per share with basic earnings per
share and by altering the calculation of diluted EPS, which replaces fully
diluted EPS. SFAS No. 128 is effective for financial statements issued after
December 15, 1997, including interim periods.
SFAS No. 130, 'Reporting Comprehensive Income'--issued June 1997,
establishes standards for reporting and displaying comprehensive income and its
components in general-purpose financial statements. Comprehensive income
includes net income and several other items that current accounting standards
require to be recognized outside of net income. This statement requires entities
to display comprehensive income and its components in the financial statements
with presentation of the accumulated balances of other comprehensive income
reported in stockholders' equity separately from retained earnings and
additional paid-in capital. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods that are presented for comparative purposes is required.
SFAS No. 131, 'Disclosures about Segments of Enterprise and Related
Information'--issued June 1997, requires public business enterprises to report
information about their operating segments in a complete set of financial
statements to shareholders. This statement also requires entities to report
enterprise-wide information about their products and services, their activities
in different geographic areas, and their reliance on major customers. Certain
segment information is also to be reported in interim financial statements. The
basis for determining an enterprise's operating segments is the manner in which
management operates the business. Specifically, financial information is
required to be reported on the basis that it is used internally by the
enterprise's chief operating decision maker in making decisions related to
resource allocation and segment performance. SFAS No. 131 is effective for
financial statements for years beginning after December 31, 1997.
Management believes adoption of the above-described Statements will not
have a material effect on financial position and the results of operations, nor
will adoption require additional capital resources.
II-28
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. PARENT ONLY CONDENSED FINANCIAL INFORMATION
This information should be read in conjunction with the other Notes to
Consolidated Financial Statements. On March 23, 1995 the Company issued $7.6
million of common stock and contributed one-half of the net proceeds to the
Association as equity capital. Shareholders' equity differs from the
consolidated statements primarily by the amount of consolidating ESOP
adjustments.
STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
ASSETS
Cash and cash equivalents.......................................................... $ 24,203 $ 61,525
Investment in Association subsidiary............................................... 11,998,136 10,642,889
Loan to Association subsidiary..................................................... 65,000 1,725,000
Loan to Association ESOP........................................................... 542,056 609,813
Tax benefit due from subsidiary.................................................... 40,781 33,235
Total.................................................................... 12,670,176 13,072,462
LIABILITIES AND SHAREHOLDERS EQUITY
Other liabilities.................................................................. $ 111,961 $ 70,210
Shareholders' equity............................................................... 12,558,215 13,002,252
Total.................................................................... $12,670,176 $13,072,462
STATEMENT OF INCOME
FOR THE YEAR ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
Interest from:
Association's subsidiary loan.................................................... $ 80,148 $ 151,949
Association's ESOP loan.......................................................... 47,137 54,101
Dividends from Association subsidiary............................................ 450,000 200,000
----------- -----------
Total income............................................................. 577,285 406,050
Expenses:
Non-interest expenses............................................................ 272,672 234,402
Income tax (benefit)............................................................. (58,435) (11,679)
----------- -----------
Total expenses........................................................... 214,237 222,723
----------- -----------
Income before equity in undistributed net income of Association subsidiary......... 363,048 183,327
Equity in undistributed net income of Association subsidiary....................... 828,442 577,217
----------- -----------
Net income......................................................................... $ 1,191,490 $ 760,544
----------- -----------
----------- -----------
II-29
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. PARENT ONLY CONDENSED FINANCIAL INFORMATION--(CONTINUED)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
Net income.......................................................................... $ 1,191,490 $ 760,544
Adjustments:
Equity in undistributed net income of subsidiary.................................. (828,442) (577,217)
ESOP fair value adjustment, net of taxes.......................................... 26,768 15,426
Increase in income tax benefit due from subsidiary................................ (3,499) (33,235)
Increase in deferred income taxes................................................. (4,047) --
(Decrease) in accrued income taxes................................................ -- (160)
Increase in other liabilities..................................................... 41,750 70,210
----------- -----------
Net cash provided by operations..................................................... 424,020 235,568
----------- -----------
Cash flows from investing activities:
Subsidiary loan proceeds.......................................................... 1,660,000 1,375,000
Purchase of treasury stock........................................................ (2,068,422) (1,536,689)
----------- -----------
Net cash used in investing activities............................................. (408,422) (161,689)
----------- -----------
Cash flows from financing activities:
Payment of cash dividend.......................................................... (120,677) (141,804)
Principal received on ESOP loan................................................... 67,757 80,660
----------- -----------
Net cash used in financing activities............................................... (52,920) (61,144)
----------- -----------
(Decrease) increase in cash and cash equivalents.................................... (37,322) 12,735
Cash and cash equivalents
Beginning of year................................................................. 61,525 48,790
----------- -----------
End of year....................................................................... $ 24,203 $ 61,525
----------- -----------
----------- -----------
II-30
Manually signed photocopies of the Letter of Transmittal will be accepted
from Eligible Institutions. The Letter of Transmittal and certificates for
Shares and any other required documents should be sent or delivered by each
shareholder or his or her broker, dealer, commercial bank, trust company or
nominee to the Depositary at one of its addresses set forth below.
THE DEPOSITARY FOR THE OFFER IS:
REGISTRAR AND TRANSFER COMPANY
By Mail/Overnight Delivery: By Hand Only:
10 Commerce Drive c/o The Depository Trust Co.
Cranford, New Jersey 07016 Transfer Agent Drop
55 Water Street, 1st Floor
New York, New York 10041-0099
By Facsimile Transmission:
(Eligible Institutions Only)
(908) 497-2313
Any questions or requests for assistance or additional copies of this Offer
to Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery may
be directed to the Information Agent at the telephone numbers and location
listed below. Shareholders may also contact their local broker, dealer,
commercial bank or trust company for assistance concerning the Offer.
THE INFORMATION AGENT FOR THE OFFER IS:
MACKENZIE PARTNERS, INC. LOGO
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (Call Collect)
Call Toll Free
(800) 322-2885