AGREEMENT AND PLAN OF REORGANIZATION

AGREEMENT AND PLAN OF REORGANIZATION



by and among



STONE CITY BANCSHARES, INC.
an Indiana corporation,



and


GERMAN AMERICAN BANCORP,
an Indiana corporation,



And joined in by the Shareholders of Stone City Bancshares, Inc.






October 25, 2005

TABLE OF CONTENTS

 

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AGREEMENT AND PLAN OF REORGANIZATION

THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made October 25, 2005, by and between STONE CITY BANCSHARES, INC., an Indiana corporation ("Stone City") and GERMAN AMERICAN BANCORP, an Indiana corporation ("German American"), and has been joined in, solely for the purposes of making the representations and warranties set forth in Article VIII hereof, by the persons who have signed this Agreement as shareholders of Stone City (the "Shareholders").

Recitals

A.            Stone City is a corporation duly organized and existing under the Indiana Business Corporation Law ("IBCL") that is duly registered with the Board of Governors of the Federal Reserve System ("FRB") as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHC Act"). Stone City owns all of the outstanding capital stock of Stone City Bank of Bedford, Indiana ("Stone City Bank"), a corporation duly organized and existing as a bank under the Indiana Financial Institutions Act ("IFIA").

B.            German American is a corporation duly organized and existing under the IBCL that is duly registered as a bank holding company under the BHC Act.

C.            The parties desire to effect a merger transaction whereby, in consideration of the issuance by German American of German American Common Shares (which, together with the accompanying preferred share purchase rights, is hereafter referred to as the "German American Common") and the payment by German American of cash to the stockholders of Stone City (the "Shareholders") in exchange for their shares of common stock of Stone City ("Stone City Common"), Stone City will be merged with and into German American with German American surviving.

D.            The parties intend for the merger to qualify as a reorganization within the meaning of Section 368 and related sections of the Internal Revenue Code of 1986, as amended, for this agreement to constitute a plan or reorganization with the meaning of Treasury Regulation 1.368-1(c), and for the issuance, offer and sale of the German American Common pursuant to this Agreement to be exempt from the registration requirements of the Securities Act of 1933, as amended, under Rule 506 promulgated thereunder, and agree to cooperate and take such actions as may be reasonably necessary to assure such results.

Agreements

In consideration of the premises and the mutual terms and provisions set forth in this Agreement, German American and Stone City (and the Shareholders, solely as to Article VIII hereof) agree as follows:

Article I.

 

TERMS OF THE MERGER & CLOSING

Section 1.1.        The Merger . Pursuant to the terms and provisions of this Agreement, the IBCL and the Plan of Merger attached hereto as Appendix A and incorporated herein by this

 

 

reference (the "Plan of Merger"), Stone City shall merge with and into German American with German American surviving (the "Merger"). Stone City shall be the "Merging Company" in the Merger and its corporate identity and existence, separate and apart from German American, shall cease on consummation of the Merger. German American shall be the "Surviving Company" in the Merger, and its name shall not be changed pursuant to the Merger.

                Section 1.2.          Effect of the Merger . The Merger shall have all the effects provided by the IBCL.

                Section 1.3.         The Merger – Conversion of Shares .

(a)           At the time of filing with the Indiana Secretary of State of appropriate Articles of Merger with respect to the Merger or at such later time as shall be specified by such Articles of Merger (the "Effective Time"), all of the shares of Stone City Common that shall then be issued and outstanding shall, by virtue of the Merger and without any action on the part of the holders thereof, be converted into the right to receive, in the aggregate, (i) newly-issued shares of German American Common (in amounts to be determined pursuant to this Section 1.3 ) (the "Stock Consideration") and (ii) cash in the aggregate amount of $6,400,000, subject to possible downward adjustment as set forth in the next sentence and in Section 1.3(i) (the "Cash Consideration," and, together with the Stock Consideration, the "Merger Consideration"). The Cash Consideration shall be decreased by an amount equal to the amount by which $5,500,000 exceeds the Projected Effective Time Book Value (as defined in Section 4.7 ) of Stone City. In the event that the Projected Effective Time Book Value of Stone City is equal to or exceeds $5,500,000 at such date, there shall be no adjustment to the Cash Consideration on account of the preceding sentence.

(b)           The Merger Consideration shall be allocated according to the provisions of this Section 1.3(b) :

(i)            Election Rights of Holders of Stone City Common Shares . Subject to the provisions of this Section 1.3 , each share of Stone City Common, other than shares canceled pursuant to Section 1.3(f) , issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive (A) the number of shares of German American Common provided for by Section 1.3(b)(ii) , (B) the amount of cash, without interest, provided for by Section 1.3(b)(iii) , or (C) a combination of cash and German American Common determined in accordance with this Section (the "Mixed Consideration"). Elections among cash and German American Common shall be timely made on a form specified by German American for that purpose (a "Form of Election") in accordance with this Section 1.3 .

(ii)           Stock Election . Subject to this Section 1.3(b)(ii) , each record holder of Stone City Common immediately prior to the Effective Time shall be entitled to elect to receive (a "Stock Election") for each of such holder's shares of Stone City Common that number of shares of German American Common that shall be computed pursuant to this Section 1.3(b)(ii) (such number, as so computed, being referred to hereafter as the "Exchange Ratio"). The Exchange Ratio shall be equal to the quotient (carried to the

 

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fourth figure past the decimal point) that is derived by dividing (A) a numerator of $4,600,000 by (B) a denominator equal to the product of multiplying (1) the Stock Election Number (as defined and determined below) by (2) the average, during the 15 trading days ending on the second trading day preceding the Closing Date (as defined by Section 1.6 hereof) (the "Valuation Period") of the daily NASDAQ Official Closing Prices of German American Common as reported by the NASDAQ National Market System (such average being hereafter referred to as the "GABC Market Value"); provided, however, that if the GABC Market Value as so determined would otherwise be (x) less than $12.50, then the GABC Market Value shall be deemed to be $12.50 (unless German American, after its receipt of notice from Stone City given pursuant to Section 6.3 hereof, specifies a lower GABC Market Value that is acceptable to Stone City, in which event such lower figure shall be the GABC Market Value) or (y) more than $15.20, then the GABC Market Value shall be deemed to be $15.20 (unless Stone City, after its receipt of notice from German American given pursuant to Section 6.3 hereof, specifies a higher GABC Market Value that is acceptable to German American, in which event such higher figure shall be the GABC Market Value). The maximum and minimum figures for the GABC Market Value shall be subject to adjustment in accordance with the provisions of Section 1.3(h) of this Agreement. Notwithstanding the foregoing, the aggregate number of shares of Stone City Common that may be converted into the right to receive German American Common in the Merger (the "Stock Election Number") shall be exactly 325, unless a greater number is determined by operation of Section 1.3(i) in which event such greater number shall be deemed the "Stock Election Number" for purposes of this Agreement. If the aggregate number of shares of Stone City Common covered by Stock Elections (the "Stock Election Shares") exceeds the Stock Election Number, then each Stock Election Share shall be converted into the right to receive (A) an adjusted number of shares of German American Common (as so adjusted, the "Adjusted Exchange Ratio"), equal to the product of (1) the Exchange Ratio, and (2) a fraction, carried to four places past the decimal point, the numerator of which shall be the Stock Election Number and the denominator of which shall be the total number of Stock Election Shares and (B) an amount of cash, without interest, equal to the amount by which (1) the product of the GABC Market Value and the Exchange Ratio exceeds (2) the product of the GABC Market Value and the Modified Exchange Ratio.

(iii)          Cash Election . Subject to this Section 1.3(b)(iii) , each record holder of Stone City Common immediately prior to the Effective Time shall be entitled to elect to receive cash, without interest (a "Cash Election"), in an amount equal to $14,222.22 per share of Stone City Common (except that, if $5,500,000 exceeds the Projected Effective Time Book Value (as defined in Section 4.7 ) of Stone City, then the per share amount shall be reduced by the quotient derived by dividing the amount of such excess by 450) (such per share amount, as it may be reduced pursuant to this sentence, is hereafter referred to as the "Per Share Cash Amount"). Notwithstanding the foregoing, the aggregate number of shares of Stone City Common that may be converted into the right to receive Cash Consideration in the Merger (the "Cash Election Number") shall be exactly 450, unless a lesser number is determined by operation of Section 1.3(i) , in which event such lesser number shall be deemed the "Cash Election Number" for purposes of this Agreement. If the aggregate number of shares of Stone City Common covered by Cash Elections (the "Cash Election Shares") exceeds the Cash Election Number, then

 

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each Cash Election Share shall be converted into the right to receive (A) an adjusted amount in cash, without interest (as so adjusted, the "Adjusted Per Share Cash Amount"), equal to the product of (1) the Per Share Cash Amount, and (2) a fraction, carried to four places past the decimal point, the numerator of which shall be the Cash Election Number and the denominator of which shall be the total number of Cash Election Shares and (B) a number of shares of German American Common, carried to the fourth figure past the decimal point, equal in value (based on the GABC Market Value) to the amount by which the Per Share Cash Amount exceeds the Adjusted Per Share Cash Amount.

(iv)          Mixed Election . Subject to the immediately following sentence, each record holder of Stone City Common immediately prior to the Effective Time shall be entitled to elect to receive German American Common for part of such holder's Stone City Common and cash for the remaining part of such holder's Stone City Common (the "Mixed Election" and, collectively with the Stock Election and the Cash Election, the "Election"). Notwithstanding the foregoing, the aggregate number of shares of Stone City Common that may be converted into the right to receive the Per Share Cash Amount shall be fixed at the Cash Election Number and the aggregate number of shares of Stone City Common that may be converted into the right to receive German American Common at the Exchange Ratio shall be fixed at the Stock Election Number. Mixed Elections shall be made on a Form of Election. With respect to each holder of Stone City Common who makes a Mixed Election, the Stone City Common that such holder elects to be converted into the right to receive the Per Share Cash Amount shall be treated as Cash Election Shares for purposes of the provisions contained in Section 1.3(b)(iii) , and the Stone City Common such holder elects to be converted into the right to receive German American Common Shares shall be treated as Stone City Common with respect to which Stock Elections are made for purposes of the provisions contained in Section 1.3(b)(ii) .

(v)           Form of Election . To be effective, a Form of Election must be properly completed, signed and submitted by 5:00 p.m., local time, on the last business day before the Closing Date (the "Election Deadline") to German American's Exchange Agent (as defined by Section 1.5 ) and accompanied by the certificate or certificates (the "Certificates") representing the Stone City Common as to which the election is being made (or by an appropriate guarantee of delivery of such Certificates signed by a firm that is a member of any registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or a bank, broker, dealer, credit union, savings association or other entity that is a member in good standing of the Securities Transfer Agent's Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program). All elections may be revoked until the Election Deadline in writing by the record holders submitting Forms of Election. German American shall have the discretion, which it may delegate in whole or in part to the Exchange Agent, to determine whether Forms of Election have been properly completed, signed and submitted or revoked and to disregard immaterial defects in Forms of Election. The decision of German American (or the Exchange Agent) in such matters shall be conclusive and binding. Neither German American nor the Exchange Agent shall be under any obligation to notify any person of any defect in a Form of Election submitted to the Exchange Agent. The Exchange Agent shall also

 

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make all computations contemplated by this Section 1.3 , and all such computations shall be conclusive and binding on the holders of Stone City Common.

(vi)          Deemed Mixed Election . If (A) the Exchange Agent does not receive prior to the Election Deadline a Form of Election from a holder of Stone City Common with respect to any or all of such holder's shares, or (B) German American or the Exchange Agent shall determine that any purported Election was not properly made, the shares as to which no Form of Election has been timely received or that are subject to such improperly made Election shall be treated for purposes of this Section 1.3 as if such holder elected to make a Mixed Election to receive German American Common and cash in amounts which are equal to such holder's pro rata share of the total number of shares of German American Common and the total amount of the Cash Consideration paid to all holders of Stone City Common pursuant to this Section 1.3 .

(vii)        Distribution of Forms of Election . German American and Stone City shall each use all reasonable best efforts to cause copies of the Form of Election to be mailed to the record holders of the Stone City Common not less than fifteen (15) business days prior to the Closing Date.

(c)           The shares of German American issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding shares of German American.

(d)           At the Effective Time, the shares of common stock of Stone City Bank issued and outstanding immediately prior to the Effective Time shall be deemed unchanged by the Merger and shall be deemed owned by the Surviving Company.

(e)           No fractional shares of German American Common shall be issued and, in lieu thereof, any Shareholder who would otherwise be entitled to a fractional share interest (after taking into account all shares of Stone City Common held by such holder) shall be paid an amount in cash equal to the product of such fractional share and the GABC Market Value.

(f)            At the Effective Time, each share of Stone City Common, if any, held in the treasury of Stone City or by any direct or indirect subsidiary of Stone City (other than shares held in trust accounts for the benefit of others or in other fiduciary, nominee or similar capacities) immediately prior to the Effective Time shall be canceled and shall cease to exist, and no consideration shall be delivered in exchange therefor.

(g)           At the Effective Time, all of the outstanding shares of Stone City Common, by virtue of the Merger and without any action on the part of the holders thereof, shall no longer be outstanding and shall be canceled and retired and shall cease to exist, and each holder of any Certificate or Certificates which immediately prior to the Effective Time represented outstanding shares of Stone City Common shall thereafter cease to have any rights with respect to such shares, except the right of such holders to receive, without interest, either (i) certificates for the shares of German American Common, or (ii) the cash payment to which such holder is entitled, or (iii) both such certificates and such cash

 

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payment, upon the surrender of such Certificate or Certificates in accordance with Section 1.5 .

(h)           If (i) German American shall hereafter declare a stock dividend or other distribution of property or securities (other than a cash dividend) upon the German American Common or shall subdivide, split up, reclassify or combine the German American Common, and (ii) the record date for such transaction is prior to the date on which the Effective Time occurs, appropriate adjustment or adjustments will be made to the Stock Consideration and the Exchange Ratio.

(i)            The parties to this Agreement intend that the transactions contemplated herein be treated as a reorganization within the meaning of Section 368(a) of the Code. Accordingly, notwithstanding any other provision contained in this Agreement, if the aggregate amount of German American Common provided to the Shareholders is not sufficient to satisfy the "continuity of interest" requirement set forth in Section 1.368-1(e) of the Treasury Regulations (which generally would require that at least forty percent (40%) of the aggregate amounts paid to the Shareholders in connection with the Merger consist of German American Common), then the amount of the Cash Consideration and the Stock Consideration each shall be adjusted in a manner sufficient to satisfy the aforementioned requirement under the Treasury Regulations; provided, however, that the aggregate amount of the consideration provided to the Shareholders shall not be increased as the result of such adjustment. All determinations and adjustments, if any, that may be required under this paragraph shall be made by German American in its sole discretion; provided, however, that no determination or adjustment made by German American pursuant to this Section 1.3(i) will be binding upon Stone City without Stone City's prior written consent, which consent shall not unreasonably be withheld. Stone City acknowledges that actions taken pursuant to this Section 1.3(i) shall not provide the basis for any obligation for German American to pay a Break-up Fee pursuant to Article VII .

Section 1.4.        The Closing . The closing of the Merger (the "Closing") shall take place on the Closing Date described in Section 1.6 of this Agreement, and at such time and at such place as the parties may determine.

                  Section 1.5.       Exchange Procedures; Surrender of Certificates .

(a)           German American shall appoint an exchange agent for the Merger. German American may appoint a third party or itself to act as exchange agent in the Merger (either such third party or German American, as applicable, is referred to herein as the "Exchange Agent").

(b)           At least fifteen (15) business days before the Closing Date, the Exchange Agent shall provide to each of the Shareholders, together with the Form of Election, a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon the proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as German American may reasonably specify) (each such letter the "Merger Letter of Transmittal") and instructions for use in effecting the surrender of the Certificates in exchange for the

 

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Merger Consideration. Provided that such Shareholder has surrendered to the Exchange Agent at least one business days prior to the Closing Date his or her Certificate(s), together with a Merger Letter of Transmittal duly executed and any other required documents, the Exchange Agent shall deliver to each of the Shareholders at the Closing the applicable aggregate amount and type of Merger Consideration. No interest on the Merger Consideration issuable upon the surrender of the Certificates shall be paid or accrued for the benefit of holders of Certificates if the Merger Consideration is not paid on the Closing Date due to delay in the surrender of required documentation to the Exchange Agent. If the Merger Consideration is to be issued or paid to a person other than a person in whose name a surrendered Certificate is registered, it shall be a condition of issuance that the surrendered Certificate shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such issuance shall pay to the Exchange Agent any required transfer or other taxes or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. German American reserves the right in all cases to require that a surety bond on terms and in an amount satisfactory to German American be provided to German American at the expense of the Shareholder in the event that such Shareholder claims loss of a Certificate and requests that German American waive the requirement for surrender of such Certificate.

(c)           No dividends that are otherwise payable on shares of German American Common constituting the Merger Consideration shall be paid to persons entitled to receive such shares of German American Common until such persons surrender their Certificates. Upon such surrender, there shall be paid to the person in whose name the shares of German American Common shall be issued any dividends which shall have become payable with respect to such shares of German American Common (without interest and less the amount of taxes, if any, which may have been imposed thereon), between the Effective Time and the time of such surrender.

Section 1.6.        The Closing Date . The Closing shall take place on the last business day of the month during which each of the conditions in Section 6.1(d) and Section 6.2(d) is satisfied or waived by the appropriate party, or on such later or earlier date as Stone City and German American may agree (the "Closing Date"). If the Closing occurs during December 2005, the parties shall use their best efforts to hold the Closing on December 29, 2005. The parties shall use their best efforts to cause the Effective Time of the Merger to be as of January 1, 2006; provided, however, that if the Closing Date is later than January 1, 2006, the parties will use their best efforts to cause the Effective Time of the Merger to be as of the first day of the calendar month that follows the month in which the Closing occurs.

	Section 1.7.		Actions At Closing .
	(a)	At the Closing, Stone City shall deliver to German American:

(i)           a certified copy of the Articles of Incorporation and Bylaws of Stone City, as amended, and a certified copy of the Articles of Incorporation and Bylaws of Stone City Bank, as amended;

 

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(ii)          a certificate signed by the chief executive officer of Stone City stating, to the best of his knowledge and belief, after due inquiry, that (A) each of the representations and warranties contained in Article II hereof is true and correct in all material respects at the time of the Closing with the same force and effect as if such representations and warranties had been made at Closing, and (B) Stone City has performed and complied in all material respects, unless waived by German American, with all of its obligations and agreements required to be performed hereunder prior to the Closing Date;

(iii)         certified copies of the resolutions of Stone City's Board of Directors, approving and authorizing the execution of this Agreement and the Plan of Merger and authorizing the consummation of the Merger;

(iv)         a certificate of the Indiana Secretary of State, dated a recent date, stating that Stone City and Stone City Bank are duly organized and exist under the IBCL and IFIA, respectively; and

(v)          the legal opinion of Jenkens & Gilchrist, counsel for Stone City, to the effect set forth as Exhibit 1.8(a)(v).

(b)

At the Closing, German American shall deliver to Stone City:

(i)           a certificate signed by the Chief Executive Officer of German American stating, to the best of his knowledge and belief, after due inquiry, that (A) each of the representations and warranties contained in Article III is true and correct in all material respects at the time of the Closing with the same force and effect as if such representations and warranties had been made at Closing and (B) German American has performed and complied in all material respects, unless waived by Stone City, with all of its obligations and agreements required to be performed hereunder prior to the Closing Date;

(ii)          a certified copy of the resolutions of German American's Board of Directors authorizing the execution of this Agreement and the Plan of Merger and the consummation of the Merger;

(iii)        the legal opinion of Ice Miller, counsel for German American, in the form attached hereto as Exhibit 1.8(b)(iii); and

(iv)         certificates of the Indiana Secretary of State, dated a recent date, stating that German American exists under the IBCL.

(c)           At the Closing, German American shall cause the Exchange Agent (subject to the prior acceptance for filing under the IBCL by the Indiana Secretary of State of the Articles of Merger) to deliver to those of the Shareholders who are present at the Closing (in person or by representative) and who shall have timely delivered their Certificates, Letters of Transmittal and other required documents to the Exchange Agent as contemplated by Section 1.5 , certificates representing shares of German American Common, and/or checks payable to such Shareholders, representing the Merger

 

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Consideration to which such Shareholders are entitled. All such German American certificates and checks shall be dated as of the date of the Effective Time (if later than the Closing Date).

(d)           At the Closing, German American and Stone City shall execute and/or deliver to one another such other documents and instruments, and take such other actions as shall be necessary or appropriate to consummate the Merger, including the presentation of Articles of Merger (including the Plan of Merger with the blank provisions completed in accordance with the provisions of Article I of this Agreement) to the Indiana Secretary of State for filing under the IBCL, accompanied by the appropriate fee.

Article II.

 

REPRESENTATIONS AND WARRANTIES OF STONE CITY

Stone City hereby makes the following representations and warranties to German American:

Section 2.1.

Organization and Capital Stock .

(a)           Stone City is a corporation duly organized and validly existing under the IBCL and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted.

(b)           Stone City Bank is a corporation duly organized and validly existing under the IFIA and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted.

(c)           Stone City has authorized capital stock of 1,000 shares of Stone City Common, no par value, of which, as of the date of this Agreement, 775 shares are issued and outstanding. All such shares of Stone City Common are duly and validly issued and outstanding, fully paid and non-assessable. None of the outstanding shares of Stone City Common has been issued in violation of any preemptive rights of the current or past shareholders of Stone City or in violation of any applicable federal or state securities laws or regulations.

(d)           Stone City Bank has authorized capital stock of 120,000 shares of common stock, $10.00 par value, all of which shares are issued and outstanding ("Stone City Bank Common"). All of such shares of Stone City Bank Common are duly and validly issued and outstanding and are fully paid and nonassessable except to the extent such shares may be deemed assessable under 12 U.S.C. Section 1831o. None of the outstanding shares of Stone City Bank Common has been issued in violation of any preemptive rights of the current or past shareholders of Stone City Bank or in violation of any applicable federal or state securities laws or regulations.

(e)           There are no shares of capital stock or other equity securities of Stone City or Stone City Bank authorized, issued or outstanding and there are no outstanding options, warrants, rights to subscribe for, calls, puts, or commitments of any character whatsoever

 

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relating to, or securities or rights convertible into or exchangeable for, shares of the capital stock of Stone City or Stone City Bank, or contracts, commitments, understandings or arrangements by which Stone City or Stone City Bank are or may be obligated to issue additional shares of its capital stock or options, warrants or rights to purchase or acquire any additional shares of its capital stock.

(f)            Except as otherwise disclosed in a confidential writing delivered by Stone City to German American concurrently with the execution of this Agreement (the "Disclosure Schedule"), each of the Shareholders owns, beneficially and of record, good and valid title to the number of shares of Stone City Common listed on Schedule 2.01(f), free and clear of any mortgage, pledge, assessment, security interest, lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or any conditional sale contract, title retention contract or other contract to give any of the foregoing. Except for this Agreement or as disclosed in the Disclosure Schedule, none of the Shareholders is a party to any contracts, commitments, understandings or arrangements, whether with or among each other or with any third party, pursuant to which any other person has any option, warrant, right to subscribe for, voting right, proxy, call, put, or other right of any character whatsoever relating to his or her shares of Stone City Common, and any such contracts, commitments, understandings or arrangements that may exist as of the date of this Agreement (as disclosed in the Disclosure Schedule) will be terminated or otherwise be of no further force and effect as of the Effective Time.

Section 2.2.        Authorization; No Defaults . The Boards of Directors of Stone City has, by all appropriate action, approved this Agreement, the Plan of Merger and the Merger, and have authorized the execution of this Agreement and the Plan of Merger on their behalf by their duly authorized officers and the performance by Stone City and Stone City Bank of their respective obligations hereunder. Nothing in the Articles of Incorporation or Bylaws of Stone City, as amended, or the Articles of Incorporation or Bylaws of Stone City Bank, as amended, or in any material agreement or instrument, or any decree, proceeding, law or regulation (except as specifically referred to in or contemplated by this Agreement) by or to which Stone City or Stone City Bank is bound or subject, would prohibit Stone City from consummating, or would be violated or breached by Stone City's consummation of, this Agreement, the Merger and other transactions contemplated herein on the terms and conditions herein contained. This Agreement has been duly and validly executed and delivered by Stone City and constitutes a legal, valid and binding obligation of Stone City, enforceable against Stone City in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, and similar laws of general applicability relating to or affecting creditors' rights or by general equity principles. No corporate acts or proceedings, other than those already taken, are required by law to be taken by Stone City to authorize the execution, delivery and performance, of this Agreement. Neither Stone City nor Stone City Bank is, nor will be by reason of the consummation of the transactions contemplated herein, in material default under or in material violation of any provision of, nor will the consummation of the transactions contemplated herein afford any party a right to accelerate any indebtedness under, its certificate of incorporation, charter or bylaws, any material promissory note, indenture or other evidence of indebtedness or security therefor, or any material lease, contract, or other commitment or agreement to which it is a party or by which it or its property is bound.

 

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Section 2.3.        Subsidiaries . Except as disclosed on the Disclosure Schedule, and except for the ownership by Stone City of all the capital stock of Stone City Bank, to the knowledge of Stone City, neither Stone City nor Stone City Bank has (or has had at any time in the last five years) any direct or indirect ownership interest in any corporation, partnership, limited liability company, joint venture or other business.

Section 2.4.

Financial Information.

(a)           Stone City has furnished to German American the consolidated balance sheets of Stone City as of December 31, 2003 and 2004, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years then ended, together with the unqualified opinion thereon of Sallee & Company, independent certified public accountants. Such financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be reflected in the notes thereto), and fairly present the consolidated financial position and the consolidated results of operations, changes in shareholders' equity and cash flows of Stone City in all material respects as of the dates and for the periods indicated. Stone City has also furnished to German American a consolidated balance sheet of Stone City (unaudited) as of June 30, 2005, without footnote disclosures (the "June 30 Balance Sheet"), which June 30 Balance Sheet was prepared in accordance with generally accepted accounting principles applied on a consistent basis (except that such June 30 Balance Sheet does not include required footnote disclosures), and fairly presents the consolidated financial position of Stone City in all material respects as of June 30, 2005.

(b)           Stone City has furnished to German American Stone City Bank's Consolidated Reports of Condition and Income as filed with the Federal Deposit Insurance Corporation ("FDIC") for the year ended December 31, 2004 and the periods ended March 31, 2005, and June 30, 2005 (the "Call Reports"). The Call Reports were prepared in accordance with the applicable regulatory instructions on a consistent basis with previous such reports, and fairly present the financial position and results of operations of Stone City Bank in all material respects as of the dates and for the periods indicated, subject, however, to normal recurring year-end adjustments, none of which were material. The Call Reports and the consolidated financial statements of Stone City described in Section 2.4(a) are hereinafter referred to as the "Stone City Financial Statements."

(c)           Neither Stone City nor Stone City Bank has any material liability, fixed or contingent, except to the extent set forth in the Stone City Financial Statements or incurred in the ordinary course of business since December 31, 2004.

(d)           Stone City does not engage in the lending business (except by and through Stone City Bank) or any other business or activity other than that which is incident to its ownership of all the capital stock of Stone City Bank, the ownership of certain branch real estate that is leased to Stone City Bank, and the ownership of certain investments and certain life insurance on the life of one of its officers, and to the knowledge of Stone City and, except as disclosed on Schedule 2.04(d), does not own any investment securities (except the capital stock of Stone City Bank). A schedule of the assets of Stone City (parent company) (other than the capital stock of Stone City Bank) and of their respective

 

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book values is attached as Schedule 2.04(d), which Schedule 2.04(d) sets forth each asset and its value with particularity (except the assets associated with the Stone City Bank branch owned by Stone City may be aggregated into the categories of Land, Building and Equipment).

Section 2.5.        Absence of Changes . Since December 31, 2004, there has not been any material adverse change in the financial condition, the results of operations or the business of Stone City or Stone City Bank, taken as a whole.

Section 2.6.        Absence of Agreements with Banking Authorities . Except as disclosed in the Disclosure Schedule, neither Stone City nor Stone City Bank is subject to any order (other than orders applicable to bank holding companies or banks generally) and neither is a party to any agreement or memorandum of understanding with (or resolution of its Board of Directors adopted at the suggestion of) any federal or state agency charged with the supervision or regulation of banks or bank holding companies, including without limitation, the FDIC, the FRB and the DFI.

	Section 2.7.		Tax Matters .
	(a)	The following definitions shall apply for purposes of this Section 2.7 :

(i)           "Signing Date" means the date on which the parties enter into this Agreement.

(ii)          "Tax" or "Taxes" means and includes all federal, foreign, state, local or other income, net income, intangibles, tangible asset, alternative or add-on minimum, gross receipt, gains, capital stock, transfer, transactions, stock transfer, registration, payroll, value added, estimated, stamp, sales, use, ad valorem, franchise, profits, net worth, insurance, license, withholding, payroll, employment, unemployment, social security (or similar), excise, severance, single business tax, processing, production, occupation, premium, property, real estate, occupancy, unclaimed property, environmental (including taxes under Section 59A of the Code), windfall profit, custom, duty and any other taxes, fees, imposts, levies, duties, impositions, assessments or charges of any kind whatsoever, together with any interest, penalties and additions imposed with respect to such amounts, imposed or charged by any governmental entity or Tax Authority.

(iii)        "Tax Authority" means any national, federal, state, local or foreign governmental, regulatory or administrative authority, agency, department or arbitral body of any country or political subdivision thereof having responsibility for the imposition of any Tax.

(iv)         "Tax Return" means and include all returns, statements, declarations, estimates, reports, information returns, schedules, forms, exhibits, coupons and any other documents (including all affiliated, consolidated, combined or unitary versions of the same) including all related or supporting information filed or required to be filed with any governmental entity or Tax Authority, in connection with the determination, assessment,

 

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reporting, payment, collection, or administration of any Taxes, and including any amendment thereof.

(v)          "Transfer Tax" or "Transfer Taxes" means any and all sales, use, transfer, stamp, documentary, gains and other similar Taxes, and any transfer, recording or similar fees and charges, imposed in connection with the consummation of the transactions contemplated by this Agreement.

(b)           Stone City has timely filed all Tax Returns that it was required to file with respect to all Tax periods that have ended on or before the Signing Date and all such Tax Returns are true, correct and complete in all material respects.

(c)           All Taxes that are due and payable by Stone City with respect to all Tax periods that end on or before the Signing Date have been paid. All Taxes that were accrued as of June 30, 2005, for any Tax period that ended before that date, but were not then due and payable, and all Taxes with respect to any Tax period that began before June 30, 2005, and ends or ended thereafter, to the extent such Taxes were attributable to the portion of such period ending on June 30, 2005, are reflected as liabilities on the June 30, 2005 Balance Sheet (except to the extent any such Taxes are reflected in the reserve for deferred Taxes established to reflect timing differences between book and Tax income).

(d)           Stone City has not requested any extension of time within which to file any Tax Return that is currently pending or has been granted and is currently in effect. Stone City has not waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to a Tax audit, review or other assessment or deficiency.

(e)           There are no liens for Taxes upon the assets of Stone City except liens for current Taxes not yet due and payable.

(f)            Stone City has withheld Taxes required to be withheld under all applicable Tax laws, including withholding with respect to sales and use taxes and compensation paid to any employee, independent contractor, creditor or Shareholder or other third-party and the amounts withheld have been properly and timely paid over to the appropriate Tax Authorities. Stone City has not received any notice (written or oral) from the Internal Revenue Service or any other Tax Authority indicating that it would be required to backup withhold pursuant to Section 3406 of the Internal Revenue Code of 1986, as amended (the "Code") or any comparable provision of state Tax law with respect to the payments made by the Company to the Shareholders in transactions that are a part of or specifically contemplated by this Agreement.

(g)           There is no material dispute or claim concerning any Tax liability of Stone City either (1) claimed or raised by any authority in writing or (2) as to which any of the Shareholders or the directors or officers of Stone City has knowledge based upon personal contact or correspondence with any agent of such Tax Authority. Neither Stone City nor any Shareholder, director, officer or employee responsible for Taxes reasonably expects any Tax Authority to assess any additional Taxes to Stone City with respect to any Tax period for which Tax Returns have been filed, except with respect to any Taxes

 

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that are adequate reserved for or accrued, in accordance with generally accepted accounting principles, consistently applied ("GAAP"), on the June 30 Balance Sheet (as such liabilities or reserves are adjusted for the passage of time through the Signing Date in accordance with the past custom and practice of Stone City in filing its Tax Returns), or (i) such deficiency or claim is being contested in good faith by appropriate proceedings, (ii) no such accrual is required by GAAP and (iii) the nature and amount of the disputed Tax is set forth on Schedule 2.7(g). Stone City has disclosed on its federal income Tax Returns all positions taken that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662 of the Code.

(h)           Stone City has delivered to German American correct and complete copies of all Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by Stone City for the calendar years 2001-2005.

(i)            The unpaid Taxes of Stone City (i) did not, as of June 30, 2005, exceed the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and tax income) set forth on the face of the June 30 Balance Sheet (rather than in any notes thereto) and (ii) do not exceed such reserve as adjusted for the passage of time through the Signing Date in accordance with the past custom and practice of Stone City in filing its Tax Returns.

(j)            Stone City does not have any requests for rulings pending with any Tax Authority.

(k)           Stone City has not agreed to, nor is required to make, any adjustment pursuant to Section 481(a) of the Code by reason of a change in accounting method initiated by Stone City and neither the IRS nor any other Tax Authority has proposed any such adjustment or change in accounting method.

(l)            Stone City is not a "United States Real Property Holding Corporation" within the meaning of Section 897(c) of the Code.

Section 2.8.       Absence of Litigation . There is no material litigation, claim or other proceeding pending or, to the knowledge of Stone City, threatened, before any judicial, administrative or regulatory agency or tribunal, to which Stone City or Stone City Bank is a party or to which any of their properties are subject.

Section 2.9.

Employment Matters .

(a)           Except as disclosed in the Disclosure Schedule, neither Stone City nor Stone City Bank is a party to or bound by any material contract, arrangement or understanding (written or otherwise) for the employment, retention or engagement of any past or present officer, employee, agent, consultant or other person or entity which, by its terms, is not terminable by Stone City or Stone City Bank, respectively, on thirty (30) days' written notice or less without the payment of any amount by reason of such termination.

(b)           Stone City and Stone City Bank are and have been in material compliance with all applicable laws respecting employment and employment practices, terms and conditions

 

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of employment and wages and hours, including, without limitation, any such laws respecting employment discrimination and occupational safety and health requirements, and (i) neither Stone City nor Stone City Bank is engaged in any unfair labor practice; (ii) there is no unfair labor practice complaint against Stone City or Stone City Bank pending or, to the knowledge of Stone City, threatened before the National Labor Relations Board; (iii) there is no labor dispute, strike, slowdown or stoppage actually pending or, to the knowledge of Stone City, threatened against or directly affecting Stone City or Stone City Bank; and (iv) neither Stone City nor Stone City Bank has experienced any material work stoppage or other material labor difficulty during the past five (5) years.

(c)           Except as set forth in the Disclosure Schedule, neither the execution nor the delivery of this Agreement, nor the consummation of any of the transactions contemplated hereby, will (i) result in any payment (including without limitation severance, unemployment compensation or golden parachute payment) becoming due to any director or employee of Stone City or Stone City Bank from either of such entities, (ii) increase any benefit otherwise payable under any of their employee plans or (iii) result in the acceleration of the time of payment of any such benefit. No amounts paid or payable by Stone City or Stone City Bank to or with respect to any employee or former employee of Stone City of Stone City Bank will fail to be deductible for federal income tax purposes by reason of Section 280G of the Internal Revenue Code of 1986, as amended ("Code") or otherwise.

Section 2.10.     Reports. Since January 1, 2003, Stone City and Stone City Bank have, to their knowledge, filed all reports, notices and other statements, together with any amendments required to be made with respect thereto, if any, that were required to be filed with (i) the Securities and Exchange Commission ("SEC"), (ii) the FRB, (iii) the FDIC, (iv) the DFI, and (vi) any other governmental authority with jurisdiction over Stone City or Stone City Bank. As of their respective dates, each of such reports and documents, including the financial statements, exhibits and schedules thereto, complied in all material respects with the relevant statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed.

Section 2.11.      Investment Portfolio . All United States Treasury securities, obligations of other United States Government agencies and corporations, obligations of States and political subdivisions of the United States and other investment securities held by Stone City Bank, as reflected in the Call Reports, are carried on the books of Stone City Bank in accordance with generally accepted accounting principles, consistently applied. Stone City Bank does not engage in activities that would require that it establish a trading account under applicable regulatory guidelines and interpretations.

Section 2.12.     Loan Portfolio . All loans and discounts shown in the Call Reports, or which were entered into after June 30, 2005, but before the Closing Date, were and will be made in all material respects for good, valuable and adequate consideration in the ordinary course of the business of Stone City Bank, in accordance in all material respects with Stone City Bank's lending policies and practices unless otherwise approved by Stone City Bank's Board of Directors, and are not subject to any material defenses, set offs or counterclaims, including without limitation any such as are afforded by usury or truth in lending laws, except as may be provided by bankruptcy, insolvency or similar laws or by general principles of equity. The notes

 

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or other evidences of indebtedness evidencing such loans and all forms of pledges, mortgages and other collateral documents and security agreements are and will be, in all material respects, enforceable, valid, true and genuine. Stone City Bank has in all material respects complied and will through the Closing Date continue to comply in all material respects with all laws and regulations relating to such loans, or to the extent there has not been such compliance, such failure to comply will not materially interfere with the collection of any such loan. Except as disclosed in the Disclosure Schedule, Stone City Bank has not sold, purchased or entered into any loan participation arrangement except where such participation is on a pro rata basis according to the respective contributions of the participants to such loan amount. Stone City has no knowledge that any condition of property in which Stone City Bank has an interest as collateral to secure a loan or that is held as an asset of any trust violates the Environmental Laws (defined in Section 2.15 ) in any material respect or obligates Stone City, or Stone City Bank, or the owner or operator of such property to remedy, stabilize, neutralize or otherwise alter the environmental condition of such property.

Section 2.13.

ERISA .

(a)           The Disclosure Schedule lists all "employee benefit plans," as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and all retirement, stock, stock option, welfare benefit, savings, deferred compensation, incentive compensation, paid time off, severance pay, salary continuation, disability, fringe benefit and other employee benefit arrangements, plans, policies, or practices maintained, contributed to, or required to be contributed by Stone City, Stone City Bank or any ERISA Affiliate (as hereinafter defined) or with respect to which Stone City, Stone City Bank or any ERISA Affiliate may have any liability (referred to individually as a "Plan" and collectively as the "Plans," unless otherwise specifically provided herein). For purposes of this Section 2.13 , the term "ERISA Affiliate" means any person, entity, any trade or business (whether or not incorporated) that is treated as a single employer with Stone City or Stone City Bank under Section 414 of the Code. During the past sixty months, neither Stone City, Stone City Bank nor any ERISA Affiliate has maintained any employee welfare benefit plan or any employee pension benefit plan except for those Plans listed on the Disclosure Schedule. Except as disclosed on the Disclosure Schedule, neither Stone City nor Stone City Bank has amended any employee welfare plan or any employee pension benefit plan listed on the Disclosure Schedule since December 31, 2003.

(b)           As applicable, with respect to each of the Plans, Stone City has delivered to German American true and complete copies of (i) all plan documents (including all amendments and modifications thereof) and in the case of an unwritten Plan, a written description thereof, and in either case all material related agreements including the trust agreement and amendments thereto, insurance contracts, and investment management agreements; (ii) the last three filed Form 5500 series and all schedules thereto; (iii) the current summary plan descriptions and all material modifications thereto; (iv) the three most recent actuarial reports, financial statements and trustee reports; and (v) copies of all private letter rulings, requests and determination letters issued with respect to the Plans and filings, summaries of self-corrections or applications made under the Employee Plans Compliance Resolution System (as set forth in Revenue Procedure 2003-44, and any

 

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successor thereto) or the Voluntary Fiduciary Correction or Delinquent Filer Voluntary Compliance programs with respect to the Plans within the past five years.

(c)           All Plans listed on the Disclosure Schedule comply in form and in operation in all material respects with all applicable requirements of law and regulation, including but not limited to the Code and ERISA. Except as listed on the Disclosure Schedule, all "employee pension benefit plans," within the meaning of Section 3(2) of ERISA ("Pension Plan"), maintained by Stone City, Stone City Bank or any ERISA Affiliate and which are intended to meet the qualification requirements of Section 401(a) of the Code have met such requirements at all times and have been and continue to be tax exempt under Section 501(a) of the Code, and a favorable determination as to the qualification under the Code of each plan and each amendment thereto has been made by the Internal Revenue Service. Except as disclosed in the Disclosure Schedule, neither Stone City nor Stone City Bank nor any of their ERISA Affiliates has (i) become subject to any disallowance of deductions under Sections 419 or 419(A) of the Code; (ii) incurred any liability for excise tax under Sections 4972, 4975, or 4976 of the Code or any liability or penalty under ERISA; or (iii) breached any of the duties or failed to perform any of the obligations imposed upon the fiduciaries or plan administrators under Title I or ERISA.

(d)           Neither Stone City nor Stone City Bank nor any of their ERISA Affiliates would have any liability or contingent liability if any Plan listed on the Disclosure Schedule (including without limitation the payment by Stone City or Stone City Bank of premiums for health care coverage for active employees or retirees) were terminated or if Stone City or Stone City Bank were to cease its participation therein. Except as disclosed in the Disclosure Schedule, neither Stone City nor Stone City Bank nor any of their ERISA Affiliates or persons acting on their behalf have made any written or oral promises or statements to employees or retirees who are now living which might reasonably have been construed by them as promising "lifetime" or other vested rights to benefits under any Plan that cannot be unilaterally terminated or modified by Stone City Bank, Stone City or an ERISA Affiliates at their discretion at any time without further obligation.

(e)           No Plan is (or at any time has been) subject to Title IV of ERISA or Section 412 of the Code. Except as disclosed in the Disclosure Schedule, in the case of each Plan listed in the Disclosure Schedule which is a defined benefit plan (within the meaning of Section 3(35) of ERISA), the net fair market value of the assets held to fund such Plan equals or exceeds the present value of all accrued benefits thereunder, both vested and nonvested, as determined in accordance with an actuarial costs method acceptable under Section 3(31) of ERISA.

(f)            On a timely basis, Stone City, Stone City Bank and each ERISA Affiliate have made all contributions or payments to or under each Plan listed in the Disclosure Schedule as required pursuant to each such Plan, any collective bargaining agreements or other provision for reserves to meet contributions and payments under such Plans which have not been made because they are not yet due.

 

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(g)           No Plan listed in the Disclosure Schedule has ever acquired or held any "employer security" or "employer real property" (each as defined in Section 407(d) of ERISA).

(h)           Neither Stone City nor Stone City Bank nor any of their ERISA Affiliates has ever contributed or is obligated to contribute under any "multi-employer plan" (as defined in Section 3(37) of ERISA).

(i)            Stone City, Stone City Bank and each of their ERISA Affiliates have complied with all requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") to the extent so required. Except as listed in the Disclosure Schedule, neither Stone City nor Stone City Bank nor any of their ERISA Affiliates provides or is obligated to provide health or welfare benefits to any current or future retired or former employee other than any benefits required to be provided under COBRA.

(j)            There are no pending audits or investigations by any governmental agency involving the Plans, and no threatened or pending claims (except for individual claims for benefits payable in the normal operation of the Plans), suits or proceedings involving any Plan, any fiduciary thereof or service provider thereto, nor is there any reasonable basis for any such claim, suit or proceeding.

(k)           Within the six-month period preceding the Closing Date, there has been no amendment to, announcement by Stone City, Stone City Bank or any ERISA Affiliate relating to, or change in employee participation or coverage under, any Plan which would increase materially the expense of maintaining such Plan above the level of the expense incurred therefor for the most recent fiscal year, except for increases directly resulting from an increase in the number of persons employed by Stone City, Stone City Bank or any ERISA Affiliate or promotions of existing employees in the ordinary course of business consistent with past practice.

(l)            Except as disclosed in the Disclosure Schedule, the Merger will not result in the payment, vesting or acceleration of any benefit under any Plan sponsored or contributed to by Stone City, Stone City Bank or any ERISA Affiliate. No Plan provides for "parachute payments" within the meaning of Section 280G of the Code.

Section 2.14.     Title to Properties; Insurance . Stone City and Stone City Bank have marketable title, insurable at standard rates, free and clear of all liens, charges and encumbrances (except taxes which are a lien but not yet payable and liens, charges or encumbrances reflected in the Stone City Financial Statements and easements, rights-of-way, and other restrictions which are not material and, in the case of Other Real Estate Owned, as such real estate is internally classified on the books of Stone City Bank, rights of redemption under applicable law) to all real properties reflected on the Stone City Financial Statements as being owned by Stone City or Stone City Bank, respectively. All material leasehold interests used by Stone City and Stone City Bank in their respective operations are held pursuant to lease agreements which are valid and enforceable in accordance with their terms. All such properties owned by Stone City or Stone City Bank comply in all material respects with all applicable private agreements, zoning

 

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requirements and other governmental laws and regulations relating thereto and there are no condemnation proceedings pending or, to the knowledge of Stone City, threatened with respect to such properties. Stone City and Stone City Bank have valid title or other ownership or use rights under licenses to all material intangible personal or intellectual property used by Stone City and Stone City Bank in their respective businesses free and clear of any claim, defense or right of any other person or entity which is material to Stone City's and/or Stone City Bank's ownership or use rights to such property, subject only to rights of the licensor pursuant to applicable license agreements, which rights do not materially adversely interfere with the use or enjoyment of such property. All insurable properties owned or held by Stone City or Stone City Bank are insured in such amounts, and against fire and other risks insured against by extended coverage and public liability insurance, as is customary with companies of the same size and in the same business.

Section 2.15.

Environmental Matters .

(a)           As used in this Agreement, "Environmental Laws" means all local, state and federal environmental laws, rules, regulations and guidelines in all jurisdictions in which Stone City or Stone City Bank has done business or owned property, including, without limitation, the Federal Resource Conservation and Recovery Act, the Federal Comprehensive Environmental Response, Compensation and Liability Act, the Federal Clean Water Act, and the Federal Clean Air Act. As used in this Agreement, "Hazardous Materials" means any pollutants, contaminants, by-products, wastes, dangerous, toxic or hazardous substances, constituents, compounds or chemicals (including, without limitation, petroleum or any by-products or fractions thereof, any form of natural gas, lead, asbestos and asbestos-containing materials, building construction materials and debris, mold, microbial contamination, polychlorinated biphenyls ("PCBs") and PCB-containing equipment, radon and other radioactive elements, ionizing radiation, electromagnetic field radiation and other non-ionizing radiation, pesticides, explosives, flammables, corrosives and urea formaldehyde foam) and any other pollutants, contaminants, by-products, wastes, dangerous, toxic or hazardous substances, constituents, compounds or chemicals that are regulated by, or may form the basis of liability under, any Environmental Law and includes the meanings of all such terms in or under any Environmental Law.

(b)           Except as disclosed in the Disclosure Schedule or in the environmental reports generated pursuant to Section 4.1(a)(xv) or Section 4.4 , to the knowledge of Stone City, neither (i) the conduct by Stone City and Stone City Bank of operations at any property, nor (ii) any condition of any property owned by Stone City or Stone City Bank within the past ten (10) years and used in their business operations, nor (iii) to the knowledge of Stone City the condition of any property owned by them within the past ten (10) years but not used in their business operations, nor (iv) to the knowledge of Stone City or Stone City Bank the condition of any property held by them as a trust asset within the past ten (10) years, violates or violated Environmental Laws in any material respect, and no condition or event has occurred with respect to any such property that, with notice or the passage of time, or both, would constitute a material violation of Environmental Laws or obligate (or potentially obligate) Stone City or Stone City Bank to remedy, stabilize, neutralize or otherwise alter the environmental condition of any such property. Neither "

 

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Stone City nor Stone City Bank has received any notice from any person or entity that Stone City or Stone City Bank or the operation of any facilities or any property owned by either of them, or held as a trust asset, are or were in material violation of any Environmental Laws such that either of them is responsible (or potentially responsible) for the cleanup of any pollutants, contaminants, or Hazardous Materials at, on or beneath any such property, or notice of claims, administrative actions, information requests or suits pending, or to the knowledge of Stone City or Stone City Bank, threatened, relating to any actual or potential material violation, liability or obligation by either of them with respect to Environmental Laws. All Hazardous Materials used by Stone City or Stone City Bank or stored at any property owned by them within the past ten years or any property held by them in trust have been used and disposed of in material compliance with, and as would not reasonably be expected to result in material liability under, any Environmental Laws. To the knowledge of Stone City or Stone City Bank, there have not been in the past, and are not now, any Hazardous Materials that have been released on or under or are mitigating to or from any property owned by Stone City or Stone City Bank within the past ten years or any property held by them in trust. Stone City and Stone City Bank are not subject to any consent orders from any governmental authority or any indemnity or other agreement with any third party relating to obligations, costs or liabilities arising under any Environmental Law. To the knowledge of Stone City or Stone City Bank, there have not been in the past, and are not now, any underground tanks or physical structures or vessels holding Hazardous Materials at, on or under any property owned by Stone City or Stone City Bank within the past ten years or any property held by them in trust, including treatment or storage tanks, sumps, lagoons, basins or water, gas or oil wells.

Section 2.16.     Compliance with Law . Stone City and Stone City Bank each have all material licenses, franchises, permits and other governmental authorizations that are legally required to enable them to conduct their respective businesses as presently conducted and are in compliance in all material respects with all applicable laws and regulations.

Section 2.17.     Brokerage . Except as set forth in the Disclosure Schedule, there are no claims, agreements, arrangements, or understandings (written or otherwise) for brokerage commissions, finders' fees or similar compensation in connection with the Merger payable by Stone City or Stone City Bank.

Section 2.18.      Material Contracts . Except as set forth in the Disclosure Schedule, neither Stone City nor Stone City Bank is a party to or bound by any oral or written (i) material agreement, contract or indenture under which it has borrowed or will borrow money (not including federal funds and money deposited, including without limitation, checking and savings accounts and certificates of deposit and borrowings from the FHLBB and the FRB); (ii) material guaranty of any obligation for the borrowing of money or otherwise, excluding endorsements made for collection and guarantees made in the ordinary course of business and letters of credit issued in the ordinary course of business; (iii) material contract, arrangement or understanding with any present or former officer, director or shareholder (except for deposit or loan agreements entered into in the ordinary course of business); (iv) material license, whether as licensor or licensee; (v) contract or commitment for the purchase of materials, supplies or other real or personal property in an amount in excess of $10,000 or for the performance of services over a

 

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period of more than thirty days and involving an amount in excess of $10,000; (vi) joint venture or partnership agreement or arrangement; (vii) material contract, arrangement or understanding with any present or former consultant, advisor, investment banker, broker, attorney or accountant; or (viii) contract, agreement or other commitment not made in the ordinary course of business.

Section 2.19.     Compliance with Americans with Disabilities Act. (a) To the best of Stone City's knowledge, Stone City and Stone City Bank and their respective properties (including those held by either of them in a fiduciary capacity) are in compliance with all applicable provisions of the Americans with Disabilities Act (the "ADA"), and (b) no action under the ADA against Stone City, Stone City Bank or any of its properties has been initiated nor, to the best of Stone City's knowledge, has been threatened or contemplated.

Section 2.20.      Statements True and Correct . To the best of the knowledge of Stone City, none of the information supplied or to be supplied by Stone City or Stone City Bank for inclusion in any documents to be filed with the FRB, the DFI, the FDIC, or any other regulatory authority in connection with the Merger will, at the respective times such documents are filed, be false or misleading with respect to any material fact or omit to state any material fact necessary in order to make the statements therein not misleading.

Section 2.21.     Stone City's Knowledge . With respect to representations and warranties herein that are made or qualified as being made "to the knowledge of Stone City" or words of similar import, it is understood and agreed that matters within the knowledge of the Shareholders, or the directors and the executive officers of Stone City and Stone City Bank, shall be considered to be within the knowledge of Stone City.

Article III.

 

REPRESENTATIONS AND WARRANTIES  

OF GERMAN AMERICAN

German American hereby makes the following representations and warranties to Stone City and the Shareholders:

Section 3.1.

Organization and Capital Stock .

(a)           German American is a corporation duly incorporated and validly existing under the IBCL and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted.

(b)           German American has authorized capital stock of (i) 20,000,000 shares of German American Common, no par value, $1 stated value, of which, as of October 1, 2005, 11,084,234 shares are issued and outstanding, and (ii) 500,000 shares of preferred stock, $10 par value per share, of which no shares are issued and outstanding, including 400,000 unissued shares that have been designated "Series A Preferred Shares" and that have been reserved for potential issuance upon exercise of preferred stock purchase rights (the "Rights"). All of the issued and outstanding shares of German American Common are duly and validly issued and outstanding, fully paid and non-assessable.

 

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(c)           The shares of German American Common that are to be issued to the Shareholders pursuant to the Merger have been duly authorized and, when issued in accordance with the terms of this Agreement, will be validly issued and outstanding, fully paid and non-assessable.

Section 3.2.        Authorization . The Board of Directors of German American has, by all appropriate action, approved this Agreement and the Merger and authorized the execution hereof on its behalf by its duly authorized officers and the performance by each such entity of its obligations hereunder. Nothing in the Articles of Incorporation or Bylaws of German American, as amended, or any other agreement, instrument, decree, proceeding, law or regulation (except as specifically referred to in or contemplated by this Agreement) by or to which it or any of its subsidiaries is bound or subject would prohibit German American from entering into and consummating this Agreement and the Merger on the terms and conditions herein contained. This Agreement has been duly and validly executed and delivered by German American and constitutes a legal, valid and binding obligation enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, and similar laws of general applicability relating to or affecting creditors' rights or by general equitable principles. No other corporate acts or proceedings are required by law to be taken by German American to authorize the execution, delivery and performance of this Agreement. Except for any requisite approvals of the FRB, FDIC and DFI, and German American's filing of a notice of sales with the SEC on Form D with respect to the issuance of German American Common pursuant to this Agreement, no notice to, filing with, authorization by, or consent or approval of, any federal or state regulatory authority is necessary for the execution and delivery of this Agreement or the consummation of the Merger by German American. German American is not, nor will be by reason of the consummation of the transactions contemplated herein, in material default under or in material violation of any provision of, nor will the consummation of the transactions contemplated herein afford any party a right to accelerate any indebtedness under, its articles of incorporation or bylaws, any material promissory note, indenture or other evidence of indebtedness or security therefor, or any material lease, contract, or other commitment or agreement to which it is a party or by which it or its property is bound.

Section 3.3.        Subsidiaries . Each of German American's subsidiaries is duly organized and validly existing under the laws of the jurisdiction of its incorporation and has the corporate power to own its respective properties and assets, to incur its respective liabilities and to carry on its respective business as now being conducted.

Section 3.4.      Financial Information . The consolidated balance sheet of German American and its subsidiaries as of December 31, 2003 and 2004 and related consolidated statements of income, changes in shareholders' equity and cash flows for the three years ended December 31, 2004, together with the notes thereto, included in German American's Annual Report on Form 10-K, as amended (the "10-K"), and the consolidated balance sheets of German American and its subsidiaries as of March 31, 2005 and June 30, 2005, and related consolidated statements of income and cash flows for the periods then ended, together with the notes thereto, included in German American's Quarterly Reports on Form 10-Q (together, the "German American Financial Statements"), have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as disclosed therein) and fairly

 

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present the consolidated financial position and the consolidated results of operations and cash flows of German American and its consolidated subsidiaries as of the dates and for the periods indicated.

Section 3.5.        Absence of Changes . Since December 31, 2004, there has not been any material adverse change in the consolidated financial condition or the consolidated results of operations or the business of German American and its subsidiaries, taken as a whole.

Section 3.6.        Reports . Since January 1, 2003 (or, in the case of subsidiaries of German American, the date of acquisition thereof by German American, if later), German American and each of its subsidiaries have duly and timely filed all reports, records, registrations, notices, statements and other documents or information (the "GAB Reports"), together with any amendments required to be made with respect thereto, required to be filed with (i) the SEC, (ii) the FRB, (iii) the FDIC, (iv) the DFI, (v) the IRS, (vi) any applicable state securities or banking authorities, and (vii) any other governmental authority with jurisdiction over German American or any of its subsidiaries. As of their respective dates, each of the GAB Reports, as amended, including the financial statements, exhibits and schedules thereto, were materially true, accurate, correct and complete, and were complied in all material respects with the relevant statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed.

Section 3.7.       Absence of Litigation. There is no material litigation, claim or other proceeding pending or, to the knowledge of German American, threatened, before any judicial, administrative or regulatory agency or tribunal against German American or any of its subsidiaries, or to which the property of German American or any of its subsidiaries is subject, which is required to be disclosed in SEC reports under Item 103 of Regulation S-K, and which has not been so disclosed.

Section 3.8.      Absence of Agreements with Banking Authorities . Neither German American nor any of its subsidiaries is subject to any order (other than orders applicable to bank holding companies or banks generally) or is a party to any agreement or memorandum of understanding with (or any resolution of its board of directors suggested by) any federal or state agency charged with the supervision or regulation of banks or bank holding companies, including without limitation the FDIC, the DFI, and the FRB, and German American has no knowledge that any of such regulatory bodies have any present intention to place German American or any of its subsidiaries under any such order, agreement, memorandum of understanding, board resolution or administrative action.

Section 3.9.        Compliance with Law . German American and its subsidiaries have all material licenses, franchises, permits and other governmental authorizations that are legally required to enable them to conduct their respective businesses as presently conducted and are in compliance in all material respects with all applicable laws and regulations.

Section 3.10.   Brokerage . There are no claims, agreements, arrangements, or understandings (written or otherwise) for brokerage commissions, finders' fees or similar compensation in connection with the Merger payable by German American and its subsidiaries.

 

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Section 3.11.     Statements True and Correct . To the best of the knowledge of German American, none of the information supplied or to be supplied by German American and its subsidiaries for inclusion in any documents to be filed with the FRB, the DFI, the FDIC, or any other regulatory authority in connection with the Merger will, at the respective times such documents are filed, be false or misleading with respect to any material fact or omit to state any material fact necessary in order to make the statements therein not misleading.

Section 3.12.    German American's Knowledge . With respect to representations and warranties herein that are made or qualified as being made "to the knowledge of German American" or words of similar import, it is understood and agreed that matters within the knowledge of the directors and the executive officers of German American shall be considered to be within the knowledge of German American.

Article IV.

 

COVENANTS OF STONE CITY

Section 4.1.

Conduct of Business .

(a)           From the date hereof until the earlier of the termination of this Agreement or