-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DOycCiddaQfdqmMifPwXnOlYhpEt6dSgxRKK/haJLp0pSe+nMtMmxM4EOCR/7PYx xU0TqrrVfsVLPfL02uvbTg== 0000743530-02-000071.txt : 20021112 0000743530-02-000071.hdr.sgml : 20021111 20021112170351 ACCESSION NUMBER: 0000743530-02-000071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QCR HOLDINGS INC CENTRAL INDEX KEY: 0000906465 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 421397595 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22208 FILM NUMBER: 02817816 BUSINESS ADDRESS: STREET 1: 3551 7TH STREET CITY: MOLINE STATE: IL ZIP: 61265 BUSINESS PHONE: 3097363580 MAIL ADDRESS: STREET 1: 3551 7TH STREET CITY: MOLINE STATE: IL ZIP: 61265 FORMER COMPANY: FORMER CONFORMED NAME: QUAD CITY HOLDINGS INC DATE OF NAME CHANGE: 19930805 10-Q 1 qccover.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ------------- to ------------------------ Commission file number 0-22208 QCR HOLDINGS, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 42-1397595 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer ID Number) of incorporation or organization) 3551 7th Street, Suite 204, Moline, Illinois 61265 -------------------------------------------------- (Address of principal executive offices) (309) 736-3580 ---------------------------------------------------- (Registrant's telephone number, including area code) Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of November 1, 2002, the Registrant had outstanding 2,753,687 shares of common stock, $1.00 par value per share. 1 QCR HOLDINGS, INC. AND SUBSIDIARIES INDEX Page Number Part I FINANCIAL INFORMATION Item 1 Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets, September 30, 2002 and June 30, 2002 3 Consolidated Statements of Income, For the Three Months Ended September 30, 2002 and 2001 4 Consolidated Statements of Cash Flows, For the Three Months Ended September 30, 2002 and 2001 5 Notes to Consolidated Financial Statements 6-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-16 Item 3 Quantitative and Qualitative Disclosures 17 About Market Risk Item 4 Controls and Procedures 17-18 Part II OTHER INFORMATION Item 1 Legal Proceedings 19 Item 2 Changes in Securities and Use of Proceeds 19 Item 3 Defaults Upon Senior Securities 19 Item 4 Submission of Matters to a Vote of Security Holders 19 Item 5 Other Information 19 Item 6 Exhibits and Reports on Form 8-K 19-20 Signatures 20-22 2 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, 2002 and June 30, 2002 September 30, June 30, 2002 2002 ------------------------------ ASSETS Cash and due from banks ........................................................ $ 34,948,741 $ 26,207,676 Federal funds sold ............................................................. 8,155,000 760,000 Certificates of deposit at financial institutions .............................. 6,678,213 7,272,213 Securities held to maturity, at amortized cost ................................. 425,386 425,440 Securities available for sale, at fair value ................................... 79,736,833 75,805,678 ------------------------------ 80,162,219 76,231,118 ------------------------------ Loans receivable held for sale ................................................. 24,777,612 8,498,345 Loans receivable held for investment ........................................... 405,445,450 382,095,469 Less: Allowance for estimated losses on loans .................................. (6,481,881) (6,111,454) ------------------------------ 423,741,181 384,482,360 ------------------------------ Premises and equipment, net .................................................... 9,152,192 9,206,761 Accrued interest receivable .................................................... 3,352,520 3,125,992 Other assets ................................................................... 2,648,678 11,542,375 ------------------------------ Total assets ........................................................... $ 568,838,744 $ 518,828,495 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing ......................................................... $ 73,658,528 $ 65,384,902 Interest-bearing ............................................................ 331,777,310 310,932,407 ------------------------------ Total deposits ............................................................ 405,435,838 376,317,309 ------------------------------ Short-term borrowings .......................................................... 41,896,638 34,628,709 Federal Home Loan Bank advances ................................................ 64,553,155 52,414,323 Other borrowings ............................................................... 5,000,000 5,000,000 Company obligated manditorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures ................... 12,000,000 12,000,000 Other liabilities .............................................................. 5,477,028 5,890,551 ------------------------------ Total liabilities ...................................................... 534,362,659 486,250,892 ------------------------------ STOCKHOLDERS' EQUITY Common stock, $1 par value; shares authorized 5,000,000; September 2002 - shares issued 2,809,818 and outstanding 2,749,672; June 2002 - 2,809,593 and 2,749,447 respectively ................. 2,809,818 2,809,593 Additional paid-in capital ..................................................... 16,686,067 16,684,605 Retained earnings .............................................................. 13,813,507 12,654,202 Accumulated other comprehensive income ......................................... 2,021,229 1,283,739 ------------------------------ 35,330,621 33,432,139 Less cost of 60,146 common shares acquired for the treasury .................... (854,536) (854,536) ------------------------------ Total stockholders' equity ............................................. 34,476,085 32,577,603 ------------------------------ Total liabilities and stockholders' equity ............................. $ 568,838,744 $ 518,828,495 ==============================
See Notes to Consolidated Financial Statements 3 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended September 30 2002 2001 ------------------------- Interest income: Interest and fees on loans .................................. $ 6,639,470 $ 5,789,552 Interest and dividends on securities: Taxable ............................................... 869,808 733,680 Nontaxable ............................................ 116,974 104,545 Interest on certificates of deposit at financial institutions 109,785 164,573 Interest on federal funds sold .............................. 30,393 78,392 Other interest .............................................. 109,227 79,302 ------------------------- Total interest income .................................. 7,875,657 6,950,044 ------------------------- Interest expense: Interest on deposits ....................................... 2,068,967 2,569,682 Interest on company obligated manditorily redeemable preferred securities ....................... 283,376 283,377 Interest on short-term borrowings .......................... 784,714 652,127 Interest on other borrowings ............................... 51,704 15,034 ------------------------- Total interest expense ................................. 3,188,761 3,520,220 ------------------------- Net interest income .................................... 4,686,896 3,429,824 Provision for loan losses ....................................... 636,800 408,490 ------------------------- Net interest income after provision for loan losses .... 4,050,096 3,021,334 ------------------------- Noninterest income: Merchant credit card fees, net of processing costs .......... 687,900 519,625 Trust department fees ....................................... 513,705 476,718 Deposit service fees ........................................ 284,206 237,752 Gains on sales of loans, net ................................ 713,052 461,762 Securities losses, net ...................................... 0 (670) Other ....................................................... 270,211 152,467 ------------------------- Total noninterest income ............................... 2,469,074 1,847,654 ------------------------- Noninterest expenses: Salaries and employee benefits .............................. 2,866,528 2,290,436 Professional and data processing fees ....................... 395,569 372,517 Advertising and marketing ................................... 139,727 112,464 Occupancy and equipment expense ............................. 702,400 529,523 Stationery and supplies ..................................... 117,000 105,289 Postage and telephone ....................................... 144,677 108,532 Other ....................................................... 405,505 407,025 ------------------------- Total noninterest expenses ............................. 4,771,406 3,925,786 ------------------------- Income before income taxes ............................. 1,747,764 943,202 Federal and state income taxes ................................... 588,459 294,965 ------------------------- Net income ............................................. $ 1,159,305 $ 648,237 ========================= Earnings per common share: Basic .................................................. $ 0.42 $ 0.26 Diluted ................................................ $ 0.41 $ 0.26 Weighted average common shares outstanding ............. 2,749,562 2,454,757 Weighted average common and common equivalent .......... 2,814,186 2,501,165 shares outstanding Comprehensive income ............................................. $ 1,896,795 $ 1,310,029
See Notes to Consolidated Financial Statements 4 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended September 30 2002 2001 --------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ....................................................... $ 1,159,305 $ 648,237 Adjustments to reconcile net income to net cash used in operating activities: Depreciation ................................................... 248,051 211,916 Provision for loan losses ...................................... 636,800 408,490 Amortization of offering costs on subordinated debentures ...... 7,376 7,376 Amortization of premiums on securities, net .................... 70,255 30,082 Securities losses, net ......................................... 0 670 Loans originated for sale ...................................... (58,957,339) (35,065,340) Proceeds on sales of loans ..................................... 43,391,124 33,337,336 Net gains on sales of loans .................................... (713,052) (461,762) Increase in accrued interest receivable ........................ (226,528) (345,304) Decrease (increase) in other assets ............................ 8,473,803 (295,497) (Decrease) increase in other liabilities ....................... (413,523) 520 --------------------------- Net cash used in operating activities ....................... $ (6,323,728) $(1,523,276) --------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in federal funds sold ............................... (7,395,000) (255,000) Net decrease in certificates of deposits at financial institutions 594,000 794,011 Purchase of securities available for sale ........................ (6,822,988) (6,307,160) Proceeds from calls and maturities of securities ................. 3,560,000 2,750,000 Proceeds from paydowns on securities ............................. 440,605 405,862 Proceeds from sales of securities available for sale ............. 0 101,285 Increase in cash value of life insurance contracts ............... (28,965) (25,791) Net loans originated and held for investment ..................... (23,616,354) (20,238,971) Purchase of premises and equipment, net .......................... (193,482) (493,858) --------------------------- Net cash used in investing activities ....................... $(33,462,184) $(23,269,622) --------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposit accounts ................................. 29,118,529 13,388,466 Net increase (decrease) in short-term borrowings ................. 7,267,929 (2,359,197) Proceeds from Federal Home Loan Bank advances .................... 14,700,000 4,000,000 Payments on Federal Home Loan Bank advances ...................... (2,561,168) (1,582,369) Net increase in other borrowings ................................. 0 5,000,000 Proceeds from issuance of common stock, net ...................... 1,687 4,988,622 --------------------------- Net cash provided by financing activities ................... $ 48,526,977 $23,435,522 --------------------------- Net increase (decrease) in cash and due from banks .......... 8,741,065 (1,357,376) Cash and due from banks, beginning ......................................... 26,207,676 20,217,219 --------------------------- Cash and due from banks, ending ............................................ $ 34,948,741 $18,859,843 =========================== Supplemental disclosure of cash flow information, cash payments for: Interest ......................................................... $ 3,526,352 $ 3,975,415 =========================== Income/franchise taxes ........................................... $ 755,925 $ 150,040 =========================== Supplemental schedule of noncash investing activities: Change in accumulated other comprehensive income, unrealized gains on securities available for sale, net ........... $ 737,490 $ 661,792 ===========================
See Notes to Consolidated Financial Statements 5 Part I Item 1 QCR HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include information or footnotes necessary for a fair presentation of financial position, results of operations and changes in financial condition in conformity with accounting principles generally accepted in the United States of America. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. Any differences appearing between numbers presented in financial statements and management's discussion and analysis are due to rounding. Results for the period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the six-month transition period ending December 31, 2002. Since the Company's formation in February 1993, its fiscal year end has been June 30th. On August 21, 2002, the Company's Board of Directors approved a change in the fiscal year end to December 31st. The Company will file a Form 10-K with the Securities and Exchange Commission for the transition period July 1, 2002 through December 31, 2002. NOTE 2 - PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of QCR Holdings, Inc. (the "Company"), a Delaware corporation, and its wholly owned subsidiaries, Quad City Bank and Trust Company ("Quad City Bank & Trust"), Cedar Rapids Bank and Trust Company ("Cedar Rapids Bank & Trust"), Quad City Bancard, Inc. ("Bancard"), Allied Merchant Services, Inc. ("Allied"), QCR Capital Trust I ("Capital Trust"), and Quad City Liquidation Corporation ("QCLC"). All significant intercompany accounts and transactions have been eliminated in consolidation. In addition to these six wholly owned subsidiaries, the Company has an aggregate investment of $241 thousand in four associated companies, Nobel Electronic Transfer, LLC, Nobel Real Estate Investors, LLC, Velie Plantation Holding Company, and Clarity Merchant Services, Inc. Effective November 1, 2001, the Company changed its name from Quad City Holdings, Inc. to QCR Holdings, Inc., and its Nasdaq SmallCap trading symbol to "QCRH". NOTE 3 - EARNINGS PER SHARE The following information was used in the computation of earnings per share on a basic and diluted basis. Three months ended September 30, ----------------------- 2002 2001 ----------------------- Net income, basic and diluted earnings ..................................... $1,159,305 $ 648,237 ======================= Weighted average common shares outstanding ......... 2,749,562 2,454,757 Weighted average common shares issuable upon exercise of stock options ........................ 64,624 46,408 ----------------------- Weighted average common and common equivalent shares outstanding .................................. 2,814,186 2,501,165 ======================= 6 NOTE 4 - BUSINESS SEGMENT INFORMATION Selected financial information on the Company's business segments is presented as follows for the three month periods ended September 30, 2002 and 2001, respectively. 2002 2001 ------------------------------ Revenue: Commercial banking .................... $ 8,972,373 $ 7,713,339 Merchant credit card processing ....... 731,098 566,072 Trust management ...................... 513,705 476,718 All other ............................. 127,555 41,569 ------------------------------ Total revenue .................... $ 10,344,731 $ 8,797,698 ============================== Net income (loss): Commercial banking .................... $ 1,123,693 $ 638,842 Merchant credit card processing ....... 208,024 93,456 Trust management ...................... 99,497 85,734 All other ............................. (271,909) (169,795) ------------------------------ Total net income ................. $ 1,159,305 $ 648,237 ============================== NOTE 5 - RECENT ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board has issued Statement 143, "Accounting for Asset Retirement Obligations" and Statement 144, " Accounting for the Impairment or Disposal of Long-Lived Assets". Statement 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Statement 144 supersedes FASB Statement 121 and the accounting and reporting provisions of APB Opinion No. 30. Statement 144 establishes a single accounting model for long-lived assets to be disposed of by sale at the lower of its carrying amount or its fair value less costs to sell and to cease depreciation/amortization. For the Company, the provisions of Statement 143 and 144 were effective July 1, 2002. Implementation of the Statements had no material impact on the Company's financial statements. The Financial Accounting Standards Board has issued Statement 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement rescinds FASB Statements No. 4 and 64, relative to debt extinguishments and provides that gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Opinion 30. Applying the provisions of Opinion 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. The Statement amends FASB Statement No. 13, "Accounting for Leases" to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Finally, the Statement rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers" and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of the Statement relative to accounting for leases were effective for transactions occurring after May 15, 2002. Implementation of these provisions of the Statement had no impact on the Company's consolidated financial statements. For the Company, the provisions of the Statement relative to accounting for debt extinguishment were effective July 1, 2002. Implementation of these provisions of the Statement had no material impact on the Company's consolidated financial statements. The Financial Accounting Standards Board has issued Statement 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability and Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The Statement provides that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. For the Company, the provisions of the Statement are effective for exit or disposal activities that are initiated after December 31, 2002. Implementation of the Statement is not expected to have a material impact on the Company's consolidated financial statements. 7 The Financial Accounting Standards Board has issued Statement 147, "Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets." In addition, the Statement amends FASB Statement No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used. For the Company, the provisions of the Statement are effective October 1, 2002. Implementation is not expected to have a material impact on the Company's consolidated financial statements. NOTE 6 - SUBSEQUENT EVENTS On October 22, 2002, the Company announced Bancard's sale of its ISO-related merchant credit card operations to iPayment, Inc. for the price of $3.5 million. After contractual compensation and severance payments, transaction expenses, and income taxes, the transaction resulted in a gain of approximately $1.2 million, or $0.44 per share, which will be realized during the quarter ended December 31, 2002. Also included in the sale were all of the merchant credit card processing relationships owned by Allied. Bancard will continue to provide credit card processing for its local merchants and cardholders of the subsidiary banks and agent banks. It is anticipated that the Company's termination of ISO-related merchant credit card processing will reduce Bancard's future earnings. However, the Company believes that Bancard can be profitable with its narrowed business focus of continuing to provide credit card processing for its local merchants and agent banks and for cardholders of the Company's subsidiary banks. On October 23, 2002, the Company announced that the board of directors had declared the Company's first cash dividend of $0.05 per share payable on January 3, 2003, to stockholders of record on December 16, 2002. Going forward, it is the Company's intention to consider the payment of dividends on a semi-annual basis. The Company anticipates an ongoing need to retain much of its operating income to help provide the capital for continued growth, but believes that operating results have reached a level that can sustain dividends to stockholders as well. 8 Part I Item 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL QCR Holdings, Inc. (the "Company") is the parent company of Quad City Bank & Trust, Cedar Rapids Bank & Trust, and Quad City Bancard, Inc. Effective November 1, 2001, the Company changed its name to QCR Holdings, Inc. from Quad City Holdings, Inc. Quad City Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation. Quad City Bank & Trust commenced operations in January 1994 and provides full-service commercial and consumer banking, and trust and asset management services to the Quad City area and adjacent communities through its four offices that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation. The Company commenced operations in Cedar Rapids in June 2001 operating as a branch of Quad City Bank & Trust. The Cedar Rapids branch operation began functioning under the Cedar Rapids Bank & Trust charter in September 2001. Cedar Rapids Bank & Trust provides full-service commercial and consumer banking service to Cedar Rapids and adjacent communities through its office located in the GreatAmerica Building in downtown Cedar Rapids, Iowa. Quad City Bancard, Inc. ("Bancard") provides merchant credit card processing services. Bancard has contracted with independent sales organizations ("ISOs") that market credit card services to merchants throughout the country. In March 1999, Bancard formed its own subsidiary ISO, Allied Merchant Services, Inc. ("Allied"), for the purpose of generating additional credit card processing business. At September 30, 2002, approximately 26,300 merchants were processing transactions with Bancard. On October 22, 2002 the Company announced that Bancard completed the sale of its ISO-related merchant credit card operations. For more information with respect to the transaction, refer to Note 6. Since the Company's formation in February 1993, its fiscal year end has been June 30th. On August 21, 2002, the Company's Board of Directors approved a change in the fiscal year end to December 31st. The Company will file a Form 10-K with the Securities and Exchange Commission for the transition period July 1, 2002 through December 31, 2002. CRITICAL ACCOUNTING POLICY The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan losses. The Company's allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan portfolio, it will enhance its methodology accordingly. Management may report a materially different amount for the provision for loan losses in the statement of operations to change the allowance for loan losses if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Management's Discussion and Analysis which discusses the allowance for loan losses in the section entitled "Financial Condition". Although management believes the levels of the allowance as of both September 30, 2002 and June 30, 2002 were adequate to absorb losses inherent in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time. 9 FINANCIAL CONDITION Total assets of the Company increased by $50.0 million, or 10%, to $568.8 million at September 30, 2002 from $518.8 million at June 30, 2002. The growth resulted primarily from increases in the loan portfolio and cash and due from banks funded by deposits received from customers and by proceeds received from Federal Home Loan Bank advances and short-term borrowings. Cash and due from banks increased by $8.7 million, or 33%, to $34.9 million at September 30, 2002 from $26.2 million at June 30, 2002. The increase was primarily due to the receipt on the final day of the period of $9.1 million of funds from Visa/Mastercard for subsequent distribution to credit card merchants who processed transactions with Bancard. Cash and due from banks represented both cash maintained at its subsidiary banks, as well as funds that the Company and its banks had deposited in other banks in the form of demand deposits. Federal funds sold are inter-bank funds with daily liquidity. At September 30, 2002, the subsidiary banks had $8.2 million invested in such funds. This amount increased by $7.4 million from $760 thousand at June 30, 2002. This increase was the result of additional liquidity at Quad City Bank & Trust at September 30, 2002 when compared to June 30, 2002. Certificates of deposit at financial institutions decreased by $594 thousand, or 8%, to $6.7 million at September 30, 2002 from $7.3 million at June 30, 2002. During the quarter ended September 30, 2002, the certificate of deposit portfolio had six maturities totaling $594 thousand and no purchases. Securities increased by $4.0 million, or 5%, to $80.2 million at September 30, 2002 from $76.2 million at June 30, 2002. The increase was the result of a number of transactions in the securities portfolio. Paydowns of $441 thousand were received on mortgage-backed securities, and the amortization of premiums, net of the accretion of discounts, was $70 thousand. Maturities and calls of securities occurred in the amount of $3.5 million. These portfolio decreases were offset by the purchase of an additional $6.8 million of securities, classified as available for sale and a $1.2 million increase in the fair value of securities, classified as available for sale. Total loans receivable increased by $39.6 million, or 10%, to $430.2 million at September 30, 2002 from $390.6 million at June 30, 2002. The increase was the result of the origination or purchase of $138.2 million of commercial business, consumer and real estate loans, less loan charge-offs, net of recoveries, of $266 thousand, and loan repayments or sales of loans of $98.3 million. During the three months ended September 30, 2002, Quad City Bank & Trust contributed $104.5 million, or 76%, and Cedar Rapids Bank & Trust contributed $33.7 million, or 24%, of the Company's loan originations or purchases. Cedar Rapids Bank & Trust participated $4.8 million, or 14%, of their originations during the quarter to Quad City Bank & Trust. The mix of loan types within the Company's portfolio remained relatively unchanged from June 30, 2002, reflecting 76% commercial, 14% real estate and 10% consumer loans. The majority of residential real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with long term fixed rate loans. Loans originated for this purpose were classified as held for sale. The allowance for estimated losses on loans was $6.5 million at September 30, 2002 compared to $6.1 million at June 30, 2002, an increase of $370 thousand, or 6%. The adequacy of the allowance for estimated losses on loans was determined based on factors that included the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful credits, economic conditions, and other factors that, in management's judgement, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase in loans and a detailed analysis of the loan portfolio. The loan portfolio was reviewed and analyzed monthly utilizing the percentage allocation method. In addition, specific reviews were completed on all credits risk-rated less than "fair quality" and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance for estimated losses on loans was monitored by the loan review staff, and reported to management and the board of directors. Although management believes that the allowance for estimated losses on loans at September 30, 2002 was at a level adequate to absorb losses on existing loans, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions for loan losses in the future. 10 Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. Along with other financial institutions, management shares a concern for the outlook of the economy during the remainder of calendar 2002 and into 2003. A slowdown in economic activity beginning in 2001 severely impacted several major industries as well as the economy as a whole. Even though there are numerous indications of emerging strength, it is not certain that this strength is sustainable. In addition, consumer confidence may still be negatively impacted by the recent substantial decline in equity prices. These events could still adversely affect cash flows for both commercial and individual borrowers, as a result of which, the Company could experience increases in problem assets, delinquencies and losses on loans, and require further increases in the provision for loan losses. Net charge-offs for the three months ended September 30 were $266 thousand in 2002 and $27 thousand in 2001. One measure of the adequacy of the allowance for estimated losses on loans is the ratio of the allowance to the held for investment loan portfolio. The allowance for estimated losses on loans as a percentage of held for investment loans was 1.59% at both September 30, 2002 and June 30, 2002. At September 30, 2002, total nonperforming assets were $4.8 million compared to $2.3 million at June 30, 2002. The $2.5 million increase was the result of a $2.6 million increase in nonaccrual loans, partially offset by a decrease of $164 thousand in accruing loans past due 90 days or more. All of the Company's nonperforming assets are located in the loan portfolio at Quad City Bank & Trust. The loans in the Cedar Rapids Bank & Trust loan portfolio have been originated fairly recently, and none of the loans have been categorized as nonperforming assets. As the loan portfolio at Cedar Rapids Bank & Trust matures, it is likely that there will be nonperforming loans or charge-offs associated with the portfolio. Nonaccrual loans were $4.2 million at September 30, 2002 compared to $1.6 million at June 30, 2002, an increase of $2.6 million. The increase in nonaccrual loans was comprised of an increase in commercial loans of $2.6 million, slightly offset by decreases in real estate loans of $9 thousand and consumer loans of $18 thousand. The net increase in nonaccrual commercial loans was primarily due to the transfer to nonaccrual status of one commercial lending relationship at Quad City Bank & Trust with an aggregate outstanding balance of $2.4 million. Management is working closely with this customer in an attempt to remedy the situation. In general, nonaccrual loans consisted primarily of loans that were well collateralized and were not expected to result in material losses, and represented approximately one percent of the Company's held for investment loan portfolio at September 30, 2002. From June 30, 2002 to September 30, 2002, accruing loans past due 90 days or more decreased from $708 thousand to $544 thousand. The $164 thousand net decrease was due primarily to the transfer to nonaccrual status of a single loan at Quad City Bank & Trust with an outstanding balance of $133 thousand. Premises and equipment showed a decrease of $55 thousand, or less than 1%, to remain at $9.2 million at September 30, 2002, which was consistent with June 30, 2002. During the three-month period there were purchases of additional furniture, fixtures and equipment and leasehold improvements of $193 thousand entirely offset by depreciation expense of $248 thousand. Accrued interest receivable on loans, securities and interest-bearing cash accounts increased by $227 thousand, or 7%, to $3.3 million at September 30, 2002 from $3.1 million at June 30, 2002. The increase was primarily due to greater average outstanding balances in interest-bearing assets. Other assets decreased by $8.9 million, or 77%, to $2.6 million at September 30, 2002 from $11.5 million at June 30, 2002. The decrease was primarily due to the receipt on the final day of the period of $9.1 million of funds from Visa/Mastercard for subsequent distribution to credit card merchants who processed transactions with Bancard. Other assets included Federal Reserve Bank and Federal Home Loan Bank stock, the cash surrender value of life insurance contracts, prepaid Visa/Mastercard processing charges, accrued trust department fees, other miscellaneous receivables, and various prepaid expenses. Deposits increased by $29.1 million, or 8%, to $405.4 million at September 30, 2002 from $376.3 million at June 30, 2002. The increase resulted from a $16.5 million net increase in non-interest bearing, NOW, money market and savings accounts and a $12.6 million net increase in interest-bearing certificates of deposit. Management believes that much of the increase resulted from customers' reactions to the continued uncertainty in the equity markets. 11 Short-term borrowings increased $7.3 million, or 21%, from $34.6 million at June 30, 2002 to $41.9 million at September 30, 2002. The subsidiary banks offer short-term repurchase agreements to some of their major customers. Also, on occasion, the subsidiary banks purchase Federal funds for short-term funding needs from the Federal Reserve Bank, or from some of their correspondent banks. As of September 30, 2002 and June 30, 2002, short-term borrowings were comprised of $30.2 million and $29.1 million of customer repurchase agreements, respectively, along with Federal funds purchased of $11.7 million and $5.5 million, respectively. Federal Home Loan Bank advances increased by $12.1 million, or 23%, to $64.5 million at September 30, 2002 from $52.4 million at June 30, 2002. As a result of their memberships in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. FHLB advances are utilized for loan matching as a hedge against the possibility of rising interest rates, and when these advances provide a less costly or more readily available source of funds than customer deposits. Other borrowings were $5.0 million at both June 30, 2002, and September 30, 2002. In September 2001, the Company drew a $5.0 million advance on a line of credit at its primary correspondent bank as partial funding for the initial capitalization of Cedar Rapids Bank & Trust. In June 1999, the Company issued 1,200,000 shares of trust preferred securities through a newly formed subsidiary, QCR Capital Trust I. On the Company's balance sheet these securities are included with liabilities and are presented as "company obligated manditorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures", and were $12.0 million at both September 30, 2002 and June 30, 2002. Other liabilities were $5.5 million at September 30, 2002 down $414 thousand, or 7%, from $5.9 million at June 30, 2002. Other liabilities were comprised of unpaid amounts for various products and services, and accrued but unpaid interest on deposits. At September 30, 2002, the most significant component of other liabilities was $1.5 million of interest payable. Common stock at September 30, 2002 was $2.8 million, which was unchanged from June 30, 2002. A slight increase of $225 was the result of proceeds received from the exercise of stock options. Additional paid-in capital totaled $16.7 million at both September 30, 2002 and June 30, 2002. A slight increase of $1 thousand resulted primarily from proceeds received in excess of the $1.00 per share par value for the 225 shares of common stock issued as the result of the exercise of stock options. Retained earnings increased by $1,159,000, or 9%, to $13,813,000 at September 30, 2002 from $12,654,000 at June 30, 2002. The increase reflected net income for the three-month period. On October 23, 2002, the Company announced that the board of directors had declared a cash dividend of $0.05 per share, or approximately $138 thousand, payable on January 3, 2003, to stockholders of record on December 16, 2002. Unrealized gains on securities available for sale, net of related income taxes, totaled $2.0 million at September 30, 2002 as compared to $1.3 million at June 30, 2002. The increase in gains of $737 thousand was attributable to the increase during the period in fair value of the securities identified as available for sale. In April 2000, the Company announced that the board of directors approved a stock repurchase program enabling the Company to repurchase approximately 60,000 shares of its common stock. This stock repurchase program was completed in the fall of 2000 and at both September 30, 2002 and June 30, 2002 the Company held 60,146 shares at a total cost of $855 thousand. The weighted average cost of the shares was $14.21. 12 RESULTS OF OPERATIONS OVERVIEW Net income for the quarter ended September 30, 2002 was $1.2 million as compared to net income of $648 thousand for the same period in 2001, an increase of $511 thousand or 79%. Basic earnings per share for the quarter ended September 30, 2002 increased to $0.42 from $0.26 for the same quarter one year ago. For the quarter ended September 30, 2002, net interest income improved by 37% while noninterest income improved by 34%, for a combined improvement of $1.9 million when compared to the same period in 2001. Quad City Bank & Trust generated much of the improvement in the Company's net interest margin, as well as a large increase in the gains on sales of residential real estate loans during the period. Offsetting the improvements in revenue for the Company were increases in noninterest expense of $846 thousand and the provision for loan losses of $228 thousand. During the three-month period ended September 30, 2002, the climb in noninterest expense was primarily due to an increase in salaries and benefits expense of $576 thousand. After-tax losses at Cedar Rapids Bank & Trust were $172 thousand for the three months ended September 30, 2002, which were less than anticipated, and Cedar Rapids Bank and Trust's growth was more rapid than expected. Management remains confident that the decision to enter the Cedar Rapids market will provide significant long-term benefits to the Company. The Company's operating results are derived largely from net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on borrowings and customer deposits. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to the net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. The Company realized a 0.91% increase in the net interest spread improving from 2.92% at September 30, 2001 to 3.83% at September 30, 2002. The average yield on interest-earning assets decreased 1.07% for the quarter ended September 30, 2002 when compared to the same quarter ended September 30, 2001. At the same time, the average cost of interest-bearing liabilities declined 1.98%. The widening of the net interest spread created an improvement in the Company's net interest margin. For the three months ended September 30, 2002, the net interest margin was 3.75% compared to 3.64% for the same period in 2001. Management has aggressively managed the Company's cost of funds during the dramatic drop in short-term interest rates in 2001 and the continuation of a low interest rate environment through 2002, and continues to closely monitor and manage net interest margin. On November 6, 2002 the Federal Reserve announced that it had cut its short term rate by 50 basis points. THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 Interest income increased by $926 thousand to $7.9 million for the three-month period ended September 30, 2002 when compared to $6.9 million for the quarter ended September 30, 2001. The increase of 13% in interest income was attributable to greater average, outstanding balances in interest earning assets, principally with respect to loans receivable, partially offset by reduced interest rates. The Company's average yield on interest-earning assets decreased 1.07% for the three months ended September 30, 2002 when compared to the three months ended September 30, 2001. Interest expense decreased by $331 thousand from $3.5 million for the three-month period ended September 30, 2001 to $3.2 million for the three-month period ended September 30, 2002. The 9% decrease in interest expense was caused by significant reductions in interest rates, partially offset by greater average, outstanding balances in interest-bearing liabilities, principally with respect to customers' deposits in subsidiary banks, Federal Home Loan Bank advances and short-term borrowings. The Company's average cost of interest-bearing liabilities declined 1.98% for the three months ended September 30, 2002 when compared to the three months ended September 30, 2001. 13 At both September 30, 2002 and June 30, 2002, the Company had an allowance for estimated losses on loans of approximately 1.59% of held for investment loans. The provision for loan losses increased by $229 thousand from $408 thousand for the three-month period ended September 30, 2001 to $637 thousand for the three-month period ended September 30, 2002. During the quarter in calendar 2002, management made monthly provisions for loan losses based upon a number of factors, including principally the increase in loans and a detailed analysis of the loan portfolio. The $370 thousand net increase in the allowance for loan losses was attributed 99%, or $366 thousand, to growth in the loan portfolio, and 1%, or $4 thousand, to downgrades within the portfolio. For the three months ended September 30, 2002, commercial loan charge-offs totaled $244 thousand, which was primarily a single, fully reserved loan, and recoveries totaled less than $1 thousand. Consumer loan charge-offs and recoveries totaled $43 thousand and $20 thousand, respectively, during the quarter. Residential real estate loans had no charge-offs or recoveries for the three months ended September 30, 2002. Noninterest income of $2.4 million for the three-month period ended September 30, 2002 was a $621 thousand, or 34%, increase from $1.8 million for the three-month period ended September 30, 2001. Noninterest income during each of the quarters in comparison consisted primarily of income from the merchant credit card operation, the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. The quarter ended September 30, 2002, when compared to the same quarter in 2001, posted a $168 thousand increase in fees earned by the merchant credit card operations of Bancard. This 33% improvement in merchant credit card fees was the result of increased processing volumes from Bancard's ISO (Independent Sales Organization) relationships. Gains on the sale of residential real estate mortgage loans, net, increased $251 thousand from the quarter ended September 30, 2001 to the same quarter in fiscal 2002. The activity within this area of the subsidiary banks was stimulated by interest rates lower than those seen during the same period last year. Additional increases in noninterest income consisted of a $37 thousand increase in trust department fees, a $46 thousand increase in deposit service fees, and a $118 thousand increase in other noninterest income. Other noninterest income in each quarter consisted primarily of investment advisory and management fees, fees collected from correspondent banks, item processing fees, and income from associated companies. Merchant credit card fees, for the three months ended September 30, 2002, increased by 32% reflecting substantial growth in processing volumes. Bancard's dollar volume of transactions processed during the quarter ended September 30, 2002 was $466 million compared to $288 million for the same period in 2001 for an increase of $178 million or 62%. On October 22, 2002, the Company announced Bancard's sale of its ISO-related merchant credit card operations to iPayment, Inc.for the price of $3.5 million. After contractual compensation and severance payments, transaction expenses, and income taxes, the transaction resulted in a gain of approximately $1.2 million, or $0.44 per share, which will be realized during the quarter ended December 31, 2002. Also included in the sale were all of the merchant credit card processing relationships owned by Allied. Bancard will continue to provide credit card processing for its local merchants and cardholders of the subsidiary banks and agent banks. It is anticipated that the Company's termination of ISO-related merchant credit card processing will reduce Bancard's future earnings. However, the Company believes that Bancard can be profitable with its narrowed business focus of continuing to provide credit card processing for its local merchants and agent banks and for cardholders of the company's subsidiary banks. For the quarter ended September 30, 2002, trust department fees increased $37 thousand, or 8%, to $514 thousand from $477 thousand for the same quarter in 2001. The increase was primarily due to the continued development of existing trust relationships and the addition of new trust customers, partially offset by the reduced market values of securities held in trust accounts and the resulting impact in the realization of trust fees. Deposit service fees increased $46 thousand, or 20%, to $284 thousand from $238 thousand for the three-month periods ended September 30, 2002 and September 30, 2001, respectively. This increase was primarily a result of the growth in deposit accounts of $89.9 million, or 28%, since September 30, 2001. Service charges and NSF (non-sufficient funds) charges related to demand deposit accounts were the main components of deposit service fees. Gains on sales of loans, net, were $713 thousand for the three months ended September 30, 2002, which reflected an increase of 54%, or $251 thousand, from $462 thousand for the three months ended September 30, 2001. The increase resulted from larger numbers of home refinances and/or home purchases, and the subsequent sale of the majority of these loans into the secondary market. The decline in interest rates during the past twelve months stimulated the activity within this area of the subsidiary banks. 14 For the quarter ended September 30, 2002, other noninterest income increased $118 thousand, or 77%, to $270 thousand from $152 thousand for the same quarter in 2001. The increase was primarily due to a gain realized by Nobel Electronic Transfer, LLC, one of the four associated companies in which the Company holds an interest The primary components of noninterest expenses were mainly salaries and benefits, occupancy and equipment expenses, and professional and data processing fees, for both quarters. Noninterest expenses for the three months ended September 30, 2002 were $4.8 million as compared to $3.9 million for the same period in 2001, for an increase of $846 thousand or 22%. The following table sets forth the various categories of noninterest expenses for the three months ended September 30, 2002 and 2001. Noninterest Expenses Three months ended September 30, -------------------------------- 2002 2001 % change -------------------------------- Salaries and employee benefits .............. $2,866,528 $2,290,436 25.2% Professional and data processing fees ....... 395,569 372,517 6.2% Advertising and marketing ................... 139,727 112,464 24.2% Occupancy and equipment expense ............. 702,400 529,523 32.7% Stationery and supplies ..................... 117,000 105,289 11.1% Postage and telephone ....................... 144,677 108,532 33.3% Other ....................................... 405,505 407,025 (0.4)% -------------------------------- Total noninterest expenses .... $4,771,406 3,925,786 21.5% ================================ Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For the quarter ended September 30, 2002, total salaries and benefits increased to $2.9 million or $576 thousand over the previous year's quarter total of $2.3 million. The increase was primarily due to the addition of employees at the subsidiary banks, in combination with increased incentive compensation to real estate officers proportionate to the increased volumes of gains on sales of loans. Occupancy and equipment expense increased $173 thousand or 33% for the quarter. The increase was predominately due to the addition of Cedar Rapids Bank & Trust's permanent full service banking facility in September 2001and the resulting increased levels of rent, utilities, depreciation, maintenance, and other occupancy expenses. Postage and telephone increased $36 thousand from $109 thousand for the three months ended September 30, 2001 to $145 thousand for the same period in 2002. The increase was primarily due to the addition of Cedar Rapids Bank & Trust, which contributed $21 thousand of the growth. For the quarter ended September 30, 2002, advertising and marketing increased to $140 thousand, or $28 thousand over the previous year's quarter total of $112 thousand, with the addition of Cedar Rapids Bank & Trust accounting for $18 thousand of the increase. Professional and data processing fees increased from $373 thousand for the three months ended September 30, 2001 to $396 thousand for the same three-month period in 2002. The $23 thousand increase was predominately due to increases in data processing and auditing fees at the subsidiary banks, substantially offset by a decrease in legal fees resulting from the settlement of legal proceedings at Bancard in February 2002. The provision for income taxes was $588 thousand for the three-month period ended September 30, 2002 compared to $295 thousand for the three-month period ended September 30, 2001 for an increase of $293 thousand or 100%. The increase was the result of an increase in income before income taxes of $805 thousand or 85% for the 2002 quarter when compared to the 2001 quarter, in combination with an increase in the Company's effective tax rate. 15 LIQUIDITY Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The liquidity of the Company primarily depends upon cash flows from operating, investing, and financing activities. Net cash used in operating activities, consisting primarily of loan originations for subsequent sale in the secondary market, was $6.3 million for the three months ended September 30, 2002 compared to $1.5 million net cash used for the same period in 2001. Net cash used in investing activities, consisting principally of loan originations to be held for investment, was $33.5 million for the three months ended September 30, 2002 and $23.3 million for the three months ended September 30, 2001. Net cash provided by financing activities, consisting primarily of deposit growth, proceeds from Federal Home Loan Bank (FHLB) advances, and net proceeds from short-term borrowings for the three months ended September 30, 2002 was $48.5 million and for the same period in 2001 was $23.4 million. The Company has a variety of sources of short-term liquidity available to it, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. At September 30, 2002, the subsidiary banks had seven unused lines of credit totaling $38.0 million of which $4.0 million was secured and $34.0 million was unsecured. At June 30, 2002, the subsidiary banks had seven unused lines of credit totaling $36.0 million of which $4.0 million was secured and $32.0 million was unsecured. At both September 30, 2002 and June 30, 2002, the Company also had a secured line of credit for $10.0 million, of which $5.0 million had been used as partial funding for the capitalization of Cedar Rapids Bank & Trust. On October 23, 2002, the Company announced that the board of directors had declared the Company's first cash dividend of $0.05 per share payable on January 3, 2003, to stockholders of record on December 16, 2002. Going forward it is the Company's intention to consider the payment of dividends on a semi-annual basis. The Company anticipates an ongoing need to retain much of its operating income to help provide the capital for continued rapid growth, however believes that operating results have reached a level that can sustain dividends to stockholders as well. 16 Part I Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company realizes income principally from the spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings. Loan volumes and yields, as well as the volume of and rates on investments, deposits and borrowings, are affected by market interest rates. Additionally, because of the terms and conditions of many of the loan and deposit accounts, a change in interest rates could also affect the projected maturities in the loan portfolio and/or the deposit base, which could alter the Company's sensitivity to future changes in interest rates. Accordingly, management considers interest rate risk to be a significant market risk. Interest rate risk management focuses on maintaining consistent growth in net interest income within policy limits approved by the board of directors, while taking into consideration, among other factors, the Company's overall credit, operating income, operating cost, and capital profile. The subsidiary banks' ALM/Investment Committees, which includes senior management representatives and members of the board of directors, monitor and manage interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. One method used to quantify interest rate risk is the net portfolio value analysis. This analysis calculates the difference between the present value of liabilities and the present value of expected cash flows from assets and off-balance sheet contracts. The most recent net portfolio value analysis, as of June 30, 2002, projected that net portfolio value would decrease by approximately 7.73% if interest rates would rise 200 basis points over the next year. It projected an increase in net portfolio value of approximately 1.28% if interest rates would drop 200 basis points. Both simulations are within the board-established policy limits of a 10% decline in value. Part I Item 4 CONTROLS AND PROCEDURES Based upon an evaluation within the 90 days prior to the filing date of this report, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. There were no significant deficiencies or material weaknesses identified in the evaluation and therefore, no corrective actions were taken. SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following: o The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company's assets. 17 o The economic impact of the terrorist attacks that occurred on September 11th, as well as any future threats and attacks, and the response of the United States to any such threats and attacks. o The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters. o The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company's assets) and the policies of the Board of Governors of the Federal Reserve System. o The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector. o The inability of the Company to obtain new customers and to retain existing customers. o The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet. o Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. o The ability of the Company to develop and maintain secure and reliable electronic systems. o The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner. o Consumer spending and saving habits which may change in a manner that affects the Company's business adversely. o Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected. o The costs, effects and outcomes of existing or future litigation. o Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board. o The ability of the Company to manage the risks associated with the foregoing as well as anticipated. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. 18 Part II QCR HOLDINGS, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1 Legal Proceedings There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. Item 2 Changes in Securities and Use of Proceeds - None Item 3 Defaults Upon Senior Securities - None Item 4 Submission of Matters to a Vote of Security Holders - None The annual meeting of stockholders was held at The Lodge (formerly Jumer's Castle Lodge) located at 900 spruce Hills Drive, Bettendorf, Iowa on Wednesday, October 23, 2002 at 10:00 a.m. At the meeting, Article XII of the certificate of incorporation was amended to change the number of directors from three to nine to three to twelve. The certificate of incorporation was also amended to permit the board of directors to consider non-stockholder factors when considering a change in control proposal. At the meeting, stockholders approved the adoption of the QCR Holdings, Inc. Employee Stock Purchase Plan. Also at the meeting, Patrick S. Baird was elected and John K. Lawson and Ronald G. Peterson were re-elected to serve as Class III directors, with terms expiring in 2005. Continuing as Class I directors, with terms expiring in 2003, are Michael A. Bauer, James J. Brownson, and Henry Royer. Continuing as Class II directors, with terms expiring in 2004, are Larry J. Helling, Douglas M. Hultquist, and John W. Schricker. At the time of the annual meeting, there were 2,809,818 issued shares and 2,749,672 outstanding shares of common stock. Either in person or by proxy, there were 2,323,455 common shares represented at the meeting, constituting approximately 84% of the outstanding shares. The voting was as follows: Votes Votes Broker Votes For Against Abstained Non-votes --------------------------------------------- Amendment of Article XII ....... 2,212,189 86,085 25,181 0 Amendment regarding consideration of non-stockholder interests . 1,399,850 122,782 24,055 776,768 Approval of the QCR Holdings, Inc. Employee Stock Purchase Plan ....... 2,175,885 120,387 27,183 0 Votes Votes For Withheld ----------------------------- Patrick S. Baird ....................... 2,304,476 18,979 John K. Lawson ......................... 2,311,776 11,679 Ronald G. Peterson ..................... 2,304,776 18,679 Item 5 Other Information - None Item 6 Exhibits and Reports on Form 8-K (a) Exhibits 3(ii) Bylaws of QCR Holdings, Inc. dated August 21 , 2002. 3(iii) Certificate of Amendment of QCR Holdings, Inc. Certificate of Incorporation dated October 24, 2002. 10.1 First Amendment of Lease, dated October, 2001 between 3001 L.L.C., an Iowa limited liability company ("Landlord"), and Cedar Rapids Bank and Trust Company f.k.a. Quad City Bank and Trust Company ("Tenant"). 19 10.2 Purchase and Sale Agreement, dated October, 2002 between Quad City Bancard, Inc., a Delaware corporation, Allied Merchant Services, Inc., an Illinois corporation (collectively referred to as "Seller"), and iPayment, Inc., a Delaware corporation, and Quad City Acquisition Corp., a Delaware corporation, a wholly owned subsidiary of iPayment ("Purchaser"). 99.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (exhibit is being filed herewith). 99.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (exhibit is being filed herewith). 99.3 Shareholder letter dated November 2002 discussing earnings for the quarter ended September 30, 2002 and related financial information. (b) Reports on Form 8-K A report on Form 8-K was filed on August 5, 2002 under Item 5, which reported the Company's fourth quarter financial information in the form of a press release. A report on Form 8-K was filed on August 27, 2002 under Item 5, which issued information, in the form a press release, regarding the Company's decision to change its fiscal year end from June 30th to December 31st and its plans to file a From 10-K for the transition period July 1, 2002 to December 31, 2002. A report on Form 8-K was filed on October 22, 2002 under Item 5, which issued information, in the form a press release, announcing the sale of a portion of the Company's merchant credit card business to iPayment, Inc. and the resulting gain. A report on Form 8-K was filed on October 23, 2002 under Item 5, which reported the Company's declaration of a dividend payable January 3, 2003 and its earnings for the quarter ended September 30, 2002. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QCR HOLDINGS, INC. (Registrant) Date November 12, 2002 /s/ Michael A. Bauer ----------------- --------------------------------- Michael A. Bauer, Chairman Date November 12, 2002 /s/ Douglas M. Hultquist ----------------- --------------------------------- Douglas M. Hultquist, President Chief Executive Officer Date November 12, 2002 /s/ Todd A. Gipple ----------------- ------------------- Todd A. Gipple, Executive Vice President Chief Financial Officer 20 SECTION 302 CERTIFICATION I, Douglas M. Hultquist, Chief Executive Officer of the Company, certify that: 1. I have reviewed this quarterly report on Form 10-Q of QCR Holdings, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. There were no significant deficiencies or material weaknesses identified in the evaluation and therefore, no corrective actions were taken. Date: November 12, 2002 /s/ Douglas M. Hultquist - ------------------------------- Douglas M. Hultquist Chief Executive Officer 21 SECTION 302 CERTIFICATION I, Todd A. Gipple, Chief Financial Officer of the Company, certify that: 1. I have reviewed this quarterly report on Form 10-Q of QCR Holdings, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. There were no significant deficiencies or material weaknesses identified in the evaluation and therefore, no corrective actions were taken. Date: November 12, 2002 /s/ Todd A. Gipple - -------------------------- Todd A. Gipple Chief Financial Officer 22 EX-3 3 qcrbylaws.txt Amended October 24, 2001 Bylaws of QCR HOLDINGS, INC. A Delaware Corporation ARTICLE I Offices Section 1.1 The corporation shall maintain a registered office in the State of Delaware as required by law. The corporation may also have offices at other places, within or without the State of Delaware, as the business of the corporation may require. ARTICLE II Stockholders Section 2.1 ANNUAL MEETING. An annual meeting of the stockholders shall be held commencing in 1993 on the second Wednesday in October of each year, if not a legal holiday, and if a legal holiday, then on the next succeeding business day, or on such date as shall be determined by the board of directors, for the election of directors and for the transaction of such other business as may come before the meeting. Section 2.2 SPECIAL MEETINGS. Special meetings of the stockholders may be called by the chairman of the board, the president, the board of directors, or at the request in writing of stockholders owning a majority of the issued and outstanding voting stock of the corporation. Within ten days after the receipt of such a written request, the president or another officer designated by the president must send a notice of meeting in accordance with Section 2.5 hereof. Section 2.3 ACTION BY STOCKHOLDERS. (a) At any annual or special meeting of stockholders, only such new business shall be conducted, and only such proposals shall be acted upon, as shall have been brought before the meeting by, or at the direction of, the board of directors, or by any stockholder entitled to vote at such meeting, provided, however, that such stockholder has complied with the procedures set forth in this Section 2.3. (b) For a proposal to be properly brought before a special or annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation as set forth in this Section 2.3. To be timely, a stockholder's notice must be delivered, mailed or telegraphed to the principal executive offices of the corporation not less than 30 days nor more than 75 days prior to the date of the originally scheduled meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that, if less than 40 days' notice of the date of the scheduled meeting is given or made by the corporation, notice by the stockholder, to be timely, must be so delivered, mailed or telegraphed to the corporation not later than the close of business on the 10th day following the day on which notice of the date of the scheduled meeting was first mailed to stockholders. Such stockholder's notice shall set forth as to each matter the stockholder proposes to bring before the meeting: (i) a brief description of the proposal desired to be brought before the meeting and the reasons for conducting such business at the meeting; (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business; (iii) the number of shares of the corporation's common stock beneficially owned by such stockholder on the date of such stockholder's notice; and (iv) any financial or other interest of such stockholder in the proposal. (c) The board of directors may reject any stockholder proposal not timely made in accordance with this Section 2.3. If the board of directors determines that the information provided in a stockholder's notice does not satisfy the informational requirements hereof, the secretary of the corporation shall promptly notify such stockholder of the deficiency in the notice. The stockholder shall then have an opportunity to cure the deficiency by providing additional information to the secretary within such period of time, not to exceed 10 days from the date such deficiency notice is given to the stockholder, as the board of directors shall determine. If the deficiency is not cured within such period, or if the board of directors determines that the additional information provided by the stockholder, together with the information previously provided, does not satisfy the requirements of this Section 2.3, then the board of directors may reject such stockholder's proposal. The secretary of the corporation shall notify a stockholder in writing whether his or her proposal has been made in accordance with the time and information requirements hereof. 1 (d) This Section 2.3 shall not prevent the consideration and approval or disapproval at a special or annual meeting of reports of officers, directors and committees of the board of directors, but in connection therewith no new business shall be acted upon at any such meeting unless stated, filed and received as herein provided. Section 2.4 PLACE OF MEETING. The board of directors may designate any place, either within or without the State of Delaware, as the place of meeting for any annual meeting or for any special meeting called by the board of directors. If no designation is made or if a special meeting is called otherwise than by the board of directors, the place of meeting shall be the principal place of business of the corporation. Section 2.5 NOTICE OF MEETING. Written notice stating the place, date and hour of the meeting, the place where the stockholder list may be examined prior to the meeting, if different from the place of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given in person or by mail or telegram not less than ten nor more than sixty days before the date of the meeting, or in the case of a merger or consolidation of the corporation requiring stockholder approval or a sale, lease or exchange of all or substantially all of the corporation's property and assets, not less than twenty nor more than sixty days before the date of meeting, by or at the direction of the chairman of the board, the president, any vice president, the secretary or the officer or persons calling the meeting, to each stockholder of record entitled to vote at such meeting. If mailed, notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at his or her address as it appears on the records of the corporation. If notice is given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. If notice is given by overnight delivery service, such notice will be deemed delivered on the next business day after the date of delivery to a nationally recognized overnight delivery service. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, unless the adjournment is for more than thirty days, or unless, after adjournment, a new record date is fixed for the adjourned meeting, in either of which cases notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Notice need not be given to any stockholder who submits a written waiver of notice signed by such stockholder either before or after any meeting. Attendance by a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting need be specified in any waiver of notice of such meeting. Section 2.6 NOMINATIONS OF DIRECTORS. (a) Nominations, other than those made by, or at the direction of, a majority of the board of directors or a committee thereof shall be made only if timely written notice of such nomination or nominations has been given to the secretary of the corporation. To be timely, such notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 30 days nor more than 75 days prior to the meeting irrespective of any deferrals, postponements or adjournments thereof to a later date; provided, however, that in the event that less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of meeting was mailed or such public disclosure was made, whichever first occurs. Each such notice to the secretary shall set forth: (i) the name and address of record of the stockholder who intends to make the nomination; (ii) a representation that the stockholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) the name, age, business and residence addresses, and principal occupation or employment of each nominee; (iv) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (v) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, as then in effect; and (vi) the consent of each nominee to serve as a director of the corporation if so elected. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. 2 (b) A majority of the board of directors may reject any nomination by a stockholder not timely made or otherwise not in accordance with the terms of this Section 2.6. If a majority of the board of directors reasonably determines that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section 2.6 in any material respect, the secretary of the corporation shall promptly notify such stockholder of the deficiency in writing. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the secretary within such period of time, not to exceed 10 days from the date such deficiency notice is given to the stockholder, as a majority of the board of directors shall reasonably determine. If the deficiency is not cured within such period, or if a majority of the board of directors reasonably determines that the additional information provided by the stockholder, together with the information previously provided, does not satisfy the requirements of this Section 2.6 in any material respect, then a majority of the board of directors may reject such stockholder's nomination. The secretary of the corporation shall notify a stockholder in writing whether his or her nomination has been made in accordance with the time and information requirements of this Section 2.6. Section 2.7 FIXING OF RECORD DATE. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the board of directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. Section 2.8 VOTING LISTS. The officer or agent who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and number of shares registered in his or her name, which list, for a period of ten days prior to such meeting, shall be kept on file either at a place within the city where the meeting is to be held and which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held, and shall be open to the examination of any stockholder, for any purpose germane to the meeting, at any time during ordinary business hours. Such list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.9 STOCK LEDGER. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders. Section 2.10 QUORUM. A majority of the outstanding shares of voting stock of the corporation, represented in person or by proxy, shall constitute a quorum at any meeting of stockholders; provided, however, that if less than a majority of the outstanding shares of voting stock are represented at said meeting, a majority of the shares of voting stock so represented may adjourn the meeting. If a quorum is present, the affirmative vote of a majority of the shares of voting stock represented at the meeting shall be the act of the stockholders in all matters other than the election of directors, who shall be elected by a plurality of the votes of the shares present in person or by proxy and entitled to vote on the election of directors, unless the vote of a greater number or voting by classes is required by the General Corporation Law of the State of Delaware, the certificate of incorporation or these bylaws. At any adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the original meeting. Withdrawal of stockholders from any meeting shall not cause failure of a duly constituted quorum at that meeting. 3 Section 2.11 PROXIES. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Every proxy must be signed by the stockholder or his or her attorney-in-fact. A duly executed proxy shall be irrevocable if it states that it is irrevocable, and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. Section 2.12 VOTING OF STOCK. Subject to the provisions of the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote for each share of the voting stock held by such stockholder. Section 2.13 VOTING OF STOCK BY CERTAIN HOLDERS. (a) Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the corporation he or she has expressly empowered the pledgee to vote thereon, in which case only the pledgee or his or her proxy may represent such stock and vote thereon. Shares of its own stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the corporation, shall neither be entitled to vote nor counted for quorum purposes, but shares of its stock held, directly or indirectly, by the corporation in a fiduciary capacity may be voted by it and counted for quorum purposes. (b) Subject always to the specific directions of the board of directors, any share or shares of stock issued by any other corporation and owned or controlled by the corporation may be voted at any stockholders' meeting of such other corporation by the chairman of the board or the president, if he or she be present, or in his or her absence by any vice president. Whenever, in the judgment of the chairman of the board or the president, or in his or her absence, any vice president, it is desirable for the corporation to execute a proxy or give a stockholders' consent in respect to any share or shares of stock issued by any other corporation and owned by the corporation, such proxy or consent shall be executed in the name of the corporation by the chairman of the board or the president and shall be attested by the secretary without necessity of any authorization by the board of directors. Any person or persons designated in the manner above stated as the proxy or proxies of the corporation shall have full right, power and authority to vote the share or shares of stock issued by such other corporation and owned by the corporation the same as such share or shares might be voted by the corporation. Section 2.14 VOTING BY BALLOT. Voting in any election of directors may, if permitted by the certificate of incorporation, be by voice vote, and voting on any other questions shall be by voice vote unless, in each case, the presiding officer shall order or any stockholder shall demand that voting be by ballot. Section 2.15 INSPECTORS. The board of directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, or upon the request of any stockholder shall, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his or her ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes or ballots, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes or ballots, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question or matter determined by the inspector or inspectors and execute a certificate of any fact found by the inspector or inspectors. ARTICLE III Directors Section 3.1 GENERAL POWERS. The business of the corporation shall be managed by or under the direction of its board of directors, except as otherwise provided in the certificate of incorporation. 4 Section 3.2 NUMBER AND QUALIFICATIONS. (a) The number of directors of the corporation shall be not less than three nor more than nine or such other number as may be determined from time to time as provided in the certificate of incorporation. (b) Directors need not be stockholders of the corporation, citizens of the United States or residents of the State of Delaware. (c) The directors of the corporation shall be divided into three classes, Class I, Class II and Class III, as nearly equal in number as the then total number of directors constituting the entire board permits with the term of office of one class expiring each year. At the annual meeting of stockholders in 1993, directors of Class I shall be elected to hold office for a term expiring at the 1994 annual meeting, directors of Class II shall be elected to hold office for a term expiring at the 1995 annual meeting and directors of Class III shall be elected to hold office for a term expiring at the 1996 annual meeting. Any vacancies in the board of directors for any reason, and any directorships resulting from any increase in the number of directors, may be filled by the board of directors, acting by a majority of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their successors shall be elected and qualified. If the number of directors is changed, any increase or decrease in the number of directors shall be apportioned among the classes so as to maintain all classes as equal in number as possible. At each annual meeting of stockholders, the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting. (d) Notwithstanding any other provisions of the certificate of incorporation of the corporation or these bylaws (and notwithstanding the fact that some lesser percentage may be specified by law, the certificate of incorporation or these bylaws of the corporation), any director or the entire board of directors of the corporation may be removed at any time, but only for cause and only by the affirmative vote of the holders of not less than 75% of the outstanding shares of stock of the corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at an annual meeting of stockholders or at a meeting of the stockholders called for that purpose. Section 3.3 ELECTION AND VACANCIES. Each class of directors to be elected shall be elected at the annual meeting of the stockholders of the corporation and shall hold office until their successors are elected and qualified- or until their earlier death, resignation or removal. Any director may resign at any time upon written notice to the corporation. Thereafter, directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders at which directors of such class are to be elected and until their successors are elected and qualified or until their earlier death, resignation or removal. In the interim between annual meetings of stockholders or of special meetings of stockholders called for the election of directors and/or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any vacancies in the board of directors, including vacancies resulting from the removal of directors, may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining director. Section 3.4 REGULAR MEETINGS. A regular meeting of the board of directors shall be held without other notice than this bylaw, immediately after, and at the same place as, the annual meeting of stockholders. The board of directors may provide, by resolution, the time and place, either within or without the State of Delaware, for the holding of additional regular meetings without other notice than such resolution. Section 3.5 SPECIAL MEETINGS. Special meetings of the board of directors may be called by or at the request of the president or any director. The person or persons calling such special meeting of the board of directors shall fix a place, either within or without the State of Delaware, as the place for holding any special meeting of the board of directors. 5 Section 3.6 NOTICE. Notice of any special meeting of the board of directors stating the time and place of such meeting shall be given by delivery of notice not less than forty eight hours prior to the time of such proposed meeting by: (a) written notice delivered personally or by mail, recognized overnight delivery service, telegraph or telecopy to each director at his or her business or residence address or telecopy number or at any other address or telecopy number provided by a director to the corporation; or (b) oral notice given in person or provided to such director by telephone wherever he or she may be located. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, on a business day before 5:00 p.m. local time, so addressed, with postage thereon prepaid. If notice is given by overnight delivery service, such notice will be deemed delivered on the next business day after the date of delivery to a nationally recognized overnight delivery service. If notice is given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. If notice is given by telecopy, such notice shall be deemed to be delivered when sent to the telecopy number provided to the corporation by any director and receipt is confirmed by telephone with such director, or any adult family member, employee or agent of such director. Written notice delivered personally and oral notice given in person or by telephone shall be deemed delivered when so delivered or given to such director. Notice need not be given to any director who submits a written waiver of notice signed by him or her either before or after any meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of such meeting. Section 3.7 QUORUM. A majority of the number of directors fixed by or determined in accordance with these bylaws shall constitute a quorum for the transaction of business at any meeting of the board of directors, provided, however, that if less than a majority of such number of directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. A majority of the number of directors serving on a committee of the board shall constitute a quorum for the transaction of business at any meeting of the committee. Interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of any committee thereof. Section 3.8 MANNER OF ACTING. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors or of a committee of the board, as the case may be. Section 3.9 ACTION WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all the members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Section 3.10 COMPENSATION. The board of directors shall have authority to establish reasonable compensation of all directors for services to the corporation as directors, officers or otherwise. Section 3.11 LIABILITY FOR UNLAWFUL PAYMENT OF DIVIDEND. In case of any willful or negligent violation of the provisions of sections 160 or 173 of the Delaware General Corporation Law regarding the payment of dividends, any director who may have been absent when the same was done, or who may have dissented from the act or resolution by which the same was done, may exonerate himself or herself from such liability by causing his or her dissent to be entered on the books containing the minutes of the proceedings of the directors at the time the same was done, or immediately after he or she has notice of the same. Section 3.12 TELEPHONE MEETINGS. Members of the board of directors, or of any committee thereof, may participate in a meeting of the board or committee, as the case may be, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at the meeting. Section 3.13 COMMITTEES. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, to the extent permitted under the Delaware General Corporation Law. 6 ARTICLE IV OFFICERS Section 4.1 NUMBER. The officers of the corporation shall be a chairman of the board, a president, a secretary and a treasurer, each of whom shall be elected by the board of directors. Such other officers, including one or more vice presidents, assistant officers and acting officers as may be deemed necessary may be elected or appointed by the board of directors. Any two or more offices may be held by the same person. Section 4.2 ELECTION AND TERM OF OFFICE. The officers of the corporation to be elected by the board of directors shall be elected annually by the board of directors at the first meeting of the board of directors held after each annual meeting of the stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Vacancies may be filled or new offices created and filled at any meeting of the board of directors. Each officer shall hold office until his or her successor shall have been duly elected and qualified or until his or her death or until he or she shall resign or shall have been removed in the manner hereinafter provided. Election or appointment of an officer or agent shall not of itself create contract rights. Section 4.3 REMOVAL. Any officer or agent elected or appointed by the board of directors may be removed by the board of directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 4.4 VACANCIES. A vacancy in any office because of death, removal, resignation or otherwise, may be filled by the board of directors. Section 4.5 THE CHAIRMAN OF THE BOARD. The chairman of the board shall preside at all meetings of the stockholders and of the board of directors and exercise such other powers and perform such duties as the board of directors shall lawfully authorize. Section 4.6 THE PRESIDENT. The president shall be the chief executive officer of the corporation and, subject only to the board of directors, shall have general authority over, and general management and control of, the property, business and affairs of the corporation. In the absence of the chairman of the board, the president shall preside at all meetings of the stockholders and of the board of directors. The president shall have authority to vote all shares of stock of any other corporation standing in the name of the corporation, at any meeting of the stockholders of such other corporation or by written consent of the stockholders of such other corporation, and may, on behalf of the corporation, waive any notice of the calling of any such meeting, and may give a written proxy in the name of the corporation to vote any or all shares of stock of such other corporation owned by the corporation at any such meeting. The president shall perform such other duties as may be prescribed by the board of directors from time to time. Section 4.7 THE VICE PRESIDENTS. Each of the vice presidents, if any, shall report to the president or such other officer as may be determined by the board of directors. Each vice president shall have such duties and responsibilities as from time to time may be assigned to him or her by the president or the board of directors. Section 4.8 THE TREASURER. The treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the corporation, receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Article V of these bylaws; (b) in general, perform all the duties incident to the office of the treasurer and such other duties as may from time to time be assigned to him or her by the president or the board of directors. In the absence of the treasurer, or in the event of his or her incapacity or refusal to act, or at the direction of the treasurer, any assistant treasurer may perform the duties of the treasurer. 7 Section 4.9 THE SECRETARY. The secretary shall: (a) record all the proceedings of the meetings of the stockholders and board of directors in one or more books kept for that purpose; (b) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all certificates for shares of stock prior to the issuance thereof and to all documents, the execution of which on behalf of the corporation under its seal is duly authorized in accordance with the provisions of these bylaws; (d) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder; (e) have general charge of the stock transfer books of the corporation; and (f) in general, perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him or her by the president or the board of directors. In the absence of the secretary, or in the event of his or her incapacity or refusal to act, or at the direction of the secretary, any assistant secretary may perform the duties of secretary. ARTICLE V Written Instruments, Loans, Checks and Deposits Section 5.1 WRITTEN INSTRUMENTS. Subject always to the specific directions of the board of directors, all deeds and mortgages made by the corporation and all other written contracts and agreements to which the corporation shall be a party shall be executed in its name by the president or any vice president or other officer so authorized by the board of directors. Section 5.2 LOANS. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors. Such authority may be general or confined to specific instances. Section 5.3 CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the board of directors. Section 5.4 DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the board of directors may select. ARTICLE VI Certificates for Shares of Capital Stock and Their Transfer Section 6.1 CERTIFICATES FOR SHARES OF CAPITAL STOCK. Certificates representing shares of stock of the corporation shall be in such form as may be determined by the board of directors. Such certificates shall be signed by the president or any vice president and the secretary or an assistant secretary. If any such certificate is manually countersigned by a transfer agent other than the corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. All certificates for shares of stock shall be consecutively numbered or otherwise identified. The name of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the books of the corporation. All certificates surrendered to the corporation for transfer shall be cancelled and no new certificates shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate a new certificate may be issued therefor upon such terms and indemnity to the corporation as the board of directors may prescribe. 8 Section 6.2 TRANSFER OF SHARES OF STOCK. Transfers of shares of stock of the corporation shall be made on the books of the corporation by the holder of record thereof or by his or her legal representative, who shall furnish proper evidence of authority to transfer, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation, and on surrender for cancellation of the certificate for such shares. The -person in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation. Section 6.3 TRANSFER AGENTS AND REGISTRARS. The board of directors may appoint one or more transfer agents or assistant transfer agents and one or more registrars of transfers, and may require all certificates for shares of stock of the corporation to bear the signature of a transfer agent or assistant transfer agent and a registrar of transfers. The board of directors may at any time terminate the appointment of any transfer agent or any assistant transfer agent or any registrar of transfers. ARTICLE VII Indemnification Section 7.1 DIRECTORS AND OFFICERS. (a) The corporation shall indemnify any person who was or is a party or is threatened to be made party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. (b) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper. (c) To the extent that any person referred to in paragraphs (a) and (b) of this Section 7.1 has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to therein or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. (d) Any indemnification under paragraphs (a) and (b) of this Section 7.1 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he or she has met the applicable standard of conduct set forth in paragraphs (a) and (b) of this Section 7.1. Such determination shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (ii) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. 9 (e) Expenses (including attorneys' fees) incurred in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation as provided in this Section 7.1. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. (f) The indemnification and advancement of expenses provided by or granted pursuant to this Section 7.1 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. (g) The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify-him or her against such liability under the provisions of this Section 7.1. (h) For purposes of this Section 7.1, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Section 7.1. (i) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 7.1 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (j) Unless otherwise determined by the board of directors, references in this section to "the corporation" shall not include in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued. Section 7.2 EMPLOYEES AND AGENTS. The board of directors may, by resolution, extend the indemnification provisions of the foregoing Section 7.1 to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he or she is or was an employee or agent of the corporation, or is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise. ARTICLE VIII Fiscal Year Section 8.1 The fiscal year of the corporation shall end on December 31 of each year or on such other date as the board of directors may from time to time determine by resolution. 10 ARTICLE IX Dividends Section 9.1 The board of directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares of stock in the manner and upon the terms and conditions provided by law and its certificate of incorporation. ARTICLE X Seal Section 10.1 The corporation shall have a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Delaware." ARTICLE XI Waiver of Notice Section 11.1 Whenever any notice whatsoever is required to be given under any provision of these bylaws or of the certificate of incorporation or of the General Corporation Law of the State of Delaware, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transactions of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders or directors or any committee need be specified in any written waiver of notice. ARTICLE XII Amendments Section 12.1 These bylaws may not be altered, amended, changed or repealed unless such alteration, amendment, change or repeal shall have received: (a) the affirmative vote of not less than 80% of the number of directors as may be fixed from time to time, in the manner prescribed in the certificate of incorporation, by the board of directors of the corporation, or the written consent of all of such directors; or (b) the affirmative vote of the holders of shares having at least 75% of the voting power of all outstanding capital stock of the corporation entitled to vote thereon. 11 EX-3 4 qcrexhbt3iii.txt State of Delaware Secretary of State Division of Corporations Filed 09:00 AM 10/24/02 020658533 - 2324794 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF QCR HOLDINGS, INC. QCR Holdings, Inc. (hereinafter called the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, as amended, does hereby certify that: 1. The name of the Corporation is: QCR Holdings, Inc. 2. The first sentence of Article XII of the Certificate of Incorporation of the Corporation is hereby amended to read in its entirety as follows: The number of directors constituting the entire board of directors shall not be less than three nor more than twelve as fixed from time to time by resolution of not less than 80% of the number of directors which immediately prior to such proposed change had been fixed, in the manner prescribed herein, by the board of directors of the corporation, provided, however, that the number of directors shall not be reduced as to shorten the term of any director at the time in office, and provided further, that the number of directors constituting the entire board of directors shall be nine until otherwise fixed as described immediately above. 3. The following provision is hereby added to the Certificate of Incorporation of the Corporation as a new Article XVI to read in its entirety as follows: ARTICLE XVI NON-STOCKHOLDER INTERESTS In connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its stockholders when evaluating a proposal by another person or persons to make a tender or exchange offer for any equity security of the Corporation or any subsidiary, to merge or consolidate with the Corporation or any subsidiary or to purchase or otherwise acquire all or substantially all of the assets of the Corporation or any subsidiary, the board of directors of the Corporation may consider all of the following factors and any other factors which it deems relevant: (A) the adequacy of the amount to be paid in connection with any such transaction; (B) the social and economic effects of the transaction on the Corporation and its subsidiaries and the other elements of the communities in which the Corporation or its subsidiaries operate or are located; (C) the business and financial condition and earnings prospects of the acquiring person or persons, including, but not limited to, debt service and other existing or likely financial obligations of the acquiring person or persons, and the possible effect of such conditions upon the Corporation and its subsidiaries and the other elements of the communities in which the Corporation and its subsidiaries operate or are located; (D) the competence, experience, and integrity of the acquiring person or persons and its or their management; and (E) any antitrust or other legal or regulatory issues which may be raised by any such transaction." 4. The amendment to the Certificate of Incorporation herein certified has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. Dated as of the 23rd day of October, 2002. QCR HOLDINGS, INC. By: /s/ Douglas M. Hultquist ------------------------------- Douglas M. Hultquist, President 1 EX-10 5 qcrfirstamendlease.txt FIRST AMENDMENT OF LEASE This First Amendment of Lease, dated as of October _____, 2001 ("First Amendment"), between 3001 L.L.C., an Iowa limited liability company ("Landlord") and Cedar Rapids Bank & Trust Company f.k.a. Quad City Bank & Trust Company ("Tenant"). WITNESSETH, that: WHEREAS, Landlord and Tenant have entered into a Lease dated May 11, 2001, (Lease), whereby Landlord has leased to Tenant certain Premises located in the Building addressed as 625 First Street SE, in the City of Cedar Rapids, Iowa, consisting of the Premises, as such Premises are defined in the Lease; and WHEREAS, Landlord and Tenant desire and intend hereby to amend the Lease as specifically hereinafter set forth and provided; NOW, THEREFORE, in consideration of the Premises and covenants contained herein, Landlord and Tenant hereby agree that 1. The Commencement Date is September 28, 2001. The Term shall expire September 30, 2006, unless earlier terminated or extended pursuant to the Terms of the Lease. Certificate of Substantial Completion attached hereto as Exhibit A. 2. The Tenant is officially recognized as a state chartered bank as stated on letter dated September 21, 2001 attached hereto as Exhibit B. 3. Landlord and Tenant hereby agree that the Premises contains 8,203 square feet of Rentable Area as shown on crosshatched on the floor plans attached hereto as Exhibit C. Tenant's Proportionate Share of Operating Costs shall be 5.83%. 4. Operating Costs to commence September 28, 2001. 5. Tenant agrees to pay to Landlord for the partial month from September 28, 2001, through September 30, 2001, a Base Rent of EIGHT HUNDRED FIFTY FIVE AND NO/100 Dollars ($855.00); for the period from October 1, 2001, through September 30, 2006, a Monthly Base Rent of EIGHT THOUSAND FIVE HUNDRED FORTY FIVE AND NO/100 Dollars ($8,545.00). 6. Pursuant to the Terms of Section 35 of the Lease, Tenant's employees shall pay individually directly to Operator rent for Spaces in lot adjacent to Building. 7. Landlord shall pay $205,075.00 towards Leashold Improvements as outlined in Section 7, Item H. 8. Broker Commission per Section 26 is $24,609.00, with Skogman Realty receiving $18,456.75 and Ruhl Realtors receiving $6,152.25. EXCEPT as expressly amended or supplemented herein, the Lease shall remain and continue in full force and effect in all respects. IN WITNESS WHEREOF, this First Lease Amendment is hereby executed as of the date first above written. LANDLORD: TENANT: 3001 L.L.C. CEDAR RAPIDS BANK & TRUST By: Ryan Properties, Inc. COMPANY f.k.a. QUAD CITY Its: Manager BANK & TRUST COMPANY By: /s/ Marc Gullickson By: /s/ John A. Rodriguez -------------------------------- ------------------------------- Marc Gullickson John A. Rodriguez Its: Vice President Its: Senior Vice President Date: Date: 1 EX-10 6 qcrpurchasesaleagree.txt PURCHASE AND SALE AGREEMENT This PURCHASE AND SALE AGREEMENT (this "Agreement"), dated October __, 2002, is entered into between QUAD CITY BANCARD, INC., a Delaware corporation ("Bancard"), ALLIED MERCHANT SERVICES, INC., an Illinois corporation ("AMS") (Bancard and AMS sometimes collectively referred to herein as the "Seller"), iPAYMENT, INC., a Delaware corporation ("iPayment"), and QUAD CITY ACQUISITION CORP., a Delaware corporation, a wholly owned subsidiary of iPayment ("Purchaser"). W I T N E S S E T H: ------------------- WHEREAS, Bancard has entered into certain merchant services agreements with the Merchants (as further defined herein), in the forms which are attached hereto as Exhibit A, (the "Merchant Agreements") regarding credit card processing services; WHEREAS, Bancard has entered into certain Merchant Agreements with merchants that were solicited by AMS (as listed on Exhibit B hereto) (the "AMS Merchants"); WHEREAS, Bancard has entered into certain merchant solicitation agreements with the independent sales organizations and agents (as listed on Exhibit C attached hereto) (the "ISO Groups") and has certain rights to merchant agreements with merchants solicited by the ISO Groups (as listed on Exhibit D hereto) (the "ISO Merchants"); WHEREAS, Bancard has entered into agreements with Online Data Corporation ("ODC") and with Cardsync, Inc. ("Cardsync") to provide certain merchant processing services to each of them for certain merchants (as listed on Exhibit E) (the "ODC/CardSync Merchants") whereby Bank has certain rights to such ODC/CardSync Merchants. ODC and Cardsync are both wholly owned subsidiaries of iPayment. For purposes of this Agreement, the "AMS Merchants, the ISO Merchants and the ODC/CardSync Merchants are hereinafter collectively referred to as the "Merchants"; WHEREAS, Bancard (and AMS, via Bancard) has entered into certain agreements with third party vendors, (as listed on Exhibit F attached hereto), (all of which are collectively referred to as the "Vendor Agreements") pursuant to which such entities agreed to provide certain services, including processing services to the Merchants. For purposes of this Agreement, the rights of AMS and Bancard to the Merchants, the rights of AMS and Bancard to the Merchant Agreements, the rights of AMS and Bancard to the Vendor Agreements and all related and ancillary documents are hereinafter collectively referred to herein as the "Seller Portfolio"; WHEREAS, Seller desires to sell to Purchaser and Purchaser desires to purchase from Seller the Seller Portfolio and all rights associated therewith, whether owned by the Bancard or AMS, together with certain other assets described in Schedule 1.01 hereto; NOW, THEREFORE, IN CONSIDERATION of the promises and of the mutual representations, warranties and covenants which are made and to be performed by the respective parties, it is agreed as follows: ARTICLE I PURCHASE AND SALE OF SELLER PORTFOLIO 1.01. Purchase and Sale of Seller Portfolio. Subject to the terms and conditions of this Agreement, and subject to Seller's receipt of the purchase price set forth in Section 1.05(a), on the "Closing Date" (as defined in Section 1.08 hereof), Seller shall sell, assign and deliver good and marketable title ("Transfer") to Purchaser, and Purchaser shall purchase, acquire, accept and assume from Seller, all of Seller's rights and interest in and to the Seller Portfolio, including all contracts, contract rights, customer lists, merchant accounts, agent agreements, independent sales organization agreements, computer printouts, papers and other documents in the possession of Seller relating to the Seller Portfolio, and also certain AMS office furnishings and equipment, as are further set forth in Schedule 1.01 attached hereto. The Seller Portfolio together with the other assets referenced in Schedule 1.01 are collectively referred to as the "Assets." Seller Transfers such Assets to Purchaser free and clear of all liens, liabilities and encumbrances except for any liabilities specifically assumed by the Purchaser herein. Furthermore, Seller transfers its right, title and interest in and to the Merchant Reserves (as defined herein). 1 Anything herein to the contrary notwithstanding, Seller and AMS reserve to themselves, and do not sell or assign to Purchaser as part of the Seller Portfolio or the Assets, the following: (1) all rights (and any associated liabilities) of AMS to lease residuals on point of sale, equipment leases made before the Effective Date between Lease Finance Group (a division of Newcourt Financial USA, Inc.), as Lessor, and Merchants which are a part of the AMS portion of the Seller Portfolio, as Lessees; and (2) Eighty percent (80%) of the annual fees for 2002 which, in accordance with the past annual fee billing practices of AMS and Seller, the parties hereto agree shall be assessed as a charge processed under the Interim Processing Agreement (attached as Exhibit 5.03) in December, 2002 to the Merchants which are a part of the AMS portion of the Seller Portfolio. Seller and AMS will retain such 80% of those fees as they are collected, any other terms or provisions of the Interim Processing Agreement notwithstanding. 1.02. Assumption of Liabilities. Except for the liabilities specifically assumed hereby and further described below, Purchaser will not assume any debts, liabilities, obligations, expenses, taxes, contracts or commitments of Seller or AMS of any kind, character or description, whether accrued, absolute, contingent or otherwise. Purchaser and iPayment hereby assume the following described liabilities and agree to indemnify Seller and AMS and their successors, assigns, parent companies (including Quad City Bank & Trust Company ("Bank") and QCR Holdings, Inc.), affiliates, officers, directors, agents, attorneys and insurers against and hold them harmless from any and all damages, claims, causes of action, Liabilities, losses, obligations or expenses relating to the following described matters: (a) With regard to the AMS Merchants, Purchaser will assume all Liabilities associated therewith that relate to transactions which occurred on or after January 1, 2002; (b) With regard to the ISO Merchants and the ODC/CardSync Merchants, Purchaser will assume all Liabilities whatsoever associated therewith, whether occurring on, before or after the Effective Date; (c) For purposes of this Section 1.02(a) and 1.02(b), "Liabilities" shall mean Unfulfilled Chargebacks (as hereinafter defined), credit vouchers and penalties, assessments, MasterCard/Visa fines and other adjustments relating to Merchants and all other expenses and losses resulting therefrom; (d) Subject to the Interim Processing Agreement, all contractual obligations accruing after the Effective Date of Bancard, Bank or AMS owing to the AMS Merchants, the ISO Merchants and the ODC/CardSync Merchants pursuant to the Merchant Agreements; (e) All contractual obligations relating to the period after the Effective Date of Bancard, Bank or AMS owing to the AMS sales offices and agents, owing to the ISO Groups or owing to ODC or CardSync; provided, however, Purchaser and iPayment shall be obligated to perform all residual purchase obligations owing to the AMS sales offices, regardless of when accrued, to the extent those rights are triggered by this transaction or are exercised after the Effective Date; and (f) Those additional liabilities of Bancard, Bank or AMS listed on Schedule 1.02 attached hereto and herein incorporated by this reference. 1.03 Merchant Chargeback. (a) Subsequent to the Closing, all merchant chargebacks and penalties pertaining to Merchants' transactions will be processed in the ordinary course of business, and debited from the operating accounts of the affected Merchants, consistent with the applicable Merchant Agreements, regardless of the location of the operating accounts. To the extent that the funds within such operating accounts are insufficient to pay any chargebacks and/or penalties and assessments imposed by Visa USA, Inc. or Mastercard International, Inc., (collectively, "Unfulfilled Chargebacks"), such Unfulfilled Chargebacks will be processed utilizing funds set aside in the reserve accounts set forth in Section 1.03(b), subject to the provisions thereof, and then shall be allocated pursuant to Section 1.02 above. 2 (b) Seller has in its possession certain Merchants' reserves set aside for Unfulfilled Chargebacks. The merchant reserve accounts, as of the Closing, are as set forth in Schedule 1.03 attached hereto ("Merchant Reserves"). The accounts in which the Merchant Reserves are deposited will be maintained at Seller until the termination of the Interim Processing Agreement executed concurrently herewith and until the existing BINs and ICAs have been transferred to a new Visa/MasterCard Member Bank in order that Seller and Bank will not have continuing liability for Unfulfilled Chargebacks related to or arising from the Seller Portfolio or Bancard's and Bank's continued services under the Interim Processing Agreement (other than Unfulfilled Chargebacks arising from AMS's pre-January 1, 2002 transactions), at which time any remaining Merchant Reserves will be transferred to another financial institution, which is a member in good standing of the national credit card associations, at the Purchaser's direction ("Purchaser's Bank"). (c) Purchaser and iPayment hereby agree to accept the assignment from Seller and AMS of the Merchant Reserves, to become the holder of the Merchant Reserves and to assume and perform all obligations of Seller or AMS arising from, related to, or regarding the Merchant Reserves including, but not limited to, all obligations owing to the merchants who have deposited such reserves and all obligations arising under law, including, but not limited to, escheat obligations. Purchaser and iPayment, hereby agree to indemnify, defend, and hold Seller and AMS, and their officers, directors, parent companies and affiliates (collectively the "Indemnified Parties") harmless from any and all losses, liabilities, claims, causes of action, and damages now existing or hereafter arising to which the Indemnified Parties may become subject or which Indemnified Parties may suffer or incur arising from, related to, or regarding the Merchant Reserve including, but not limited to, any claims of merchants, and any claims arising under law, including, but not limited to, escheat obligations. (d) As to Unfulfilled Chargebacks which are allocated to Purchaser and iPayment pursuant to Section 1.02 above and cannot be satisfied from the applicable Merchant Reserves, then Bancard, while it is processing pursuant to the Interim Processing Agreement, may collect such Unfulfilled Chargebacks in the following order of right: (i) setting off against the next month settlement of residuals to Purchaser or iPayment; (ii) repayment immediately on Purchaser's demand from Purchaser or iPayment; (iii)repayment immediately on Purchaser's demand from Greg Daily, as guarantor (provided that demand shall not be made on Greg Daily sooner than five (5) days after demand is made on Purchaser and iPayment under Section 1.03(d)(ii); and (iv) Bancard may proceed with all applicable remedies pursuant to the Uniform Commercial Code against its security interest in the Seller Portfolio. (e) Purchaser and iPayment hereby grant to Bancard and Bank a security interest in the Seller Portfolio, which lien shall be a first and prior lien and security interest in such Seller Portfolio, to secure and to assure payment to Bancard and Bank of all obligations owing to Bancard or Bank pursuant to the terms of this Purchase and Sale Agreement. Purchaser and iPayment shall deliver to Bancard and Bank all UCC financing statements or other documents reasonably requested by Bancard and Bank to evidence and perfect the security interest granted hereunder. At such time as the Interim Processing Agreement is terminated, including transfer of the applicable BIN to a new sponsor bank other than Bank /Bancard, and all sums owing to Bancard and Bank hereunder have been paid in full, this security interest in favor of Bancard and Bank in the Seller Portfolio shall terminate and be of no further force or effect. Bancard/Bank shall undertake good faith efforts to terminate all UCC filings upon termination of the security interest. 1.04 Prorations. After the Closing Date, Purchaser and Seller shall prorate as of the Closing Date any amounts which become due and payable after the Closing Date with respect to the Assets. 3 1.05 Purchase Price. The purchase price for the Seller Portfolio shall be a total of Three Million, Five Hundred Thousand Dollars ($3,500,000.00), in cash, due and payable at Closing. An additional sum of Seven Thousand Eight Hundred Dollars & 00/100 ($7,800.00) shall be paid to AMS from Purchaser in cash at closing for the AMS furnishings and equipment described in Schedule 1.01.The foregoing purchase price for the Seller Portfolio is allocated by the Parties entirely to the purchase of the contracts, contract rights, customer lists, merchant accounts, agent agreements, independent sales organization agreements, computer printouts, papers and other documents relating to the Seller Portfolio, and as consideration for the non-solicitation provision as follows: (a) One Million Dollars shall be allocated towards the AMS Merchants and the assets associated therewith. (b) Two Million Five Hundred Thousand Dollars shall be allocated towards the ISO Merchants and the ODC/CardSync Merchants and the assets associated therewith. 1.06. Instruments of Conveyance and Transfer, Etc. Seller is delivering to Purchaser herewith such assignments and other good and sufficient instruments of conveyance and transfer, in form and substance reasonably satisfactory to Purchaser, as is necessary to complete the Transfer and be effective to vest in Purchaser all of Seller's rights and interest in the Assets free of all liens or encumbrances or other claims of third parties other than those disclosed in Schedule 1.06, and simultaneously with such delivery, is taking such steps as may be necessary to put Purchaser in operating control of the Seller Portfolio. Purchaser is delivering to Seller such acknowledgments or assumption agreements herewith as may be required to assume the obligation to perform service under the Bank Agreements and Merchant Agreements subsequent to the Effective Date. The consummation of the Closing shall be deemed to constitute Seller's acknowledgment of satisfaction as to such acknowledgments and assumptions. The documents delivered pursuant to this section shall be dated as of the Closing Date. 1.07. Further Assurances. From time to time after the Closing, without further consideration, either party hereto will execute and deliver such other reasonable instruments of conveyance, assignment, transfer and delivery and take such other action as the other party reasonably may request in order more effectively to transfer, convey, assign and deliver to Purchaser, and to place Purchaser in control of, the Assets, or to more effectively cause Purchaser or iPayment to assume and perform the obligations assumed by Purchaser and iPayment pursuant to Section 1.02 hereof. 1.08. Closing Date. The purchase and sale of the Seller Portfolio pursuant to this Agreement (the "Closing") shall take place on October __, 2002, at the office of Seller. The date of Closing is referred to in this Agreement as the "Closing Date." Irrespective of the actual time of Closing, for all economic purposes, including without limitation the allocation of chargebacks liability, and revenue relating to the Assets, the Closing will be deemed to have taken place and shall be effective as of October 1, 2002 ("Effective Date"); provided, however, that all representations, warranties and covenants (to the extent any covenants are to be performed after Closing) shall be measured and determined as of the Closing Date. 1.09 Retained Liabilities. Purchaser is not assuming and will not perform any liabilities or obligations of Seller or AMS not specifically described in Section 1.02 herein, whether fixed or contingent, known or unknown, disclosed or undisclosed, recorded or unrecorded and whether relating to the Assets or other facts or circumstances. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER AND AMS Seller, as to the Seller Portfolio and AMS as to those portion of the Seller Portfolio pertaining to AMS, hereby represents and warrants to Purchaser as follows: 2.01. Corporate Organization; Etc. Seller is a Delaware corporation and AMS is an Illinois corporation, both duly organized, validly existing and in good standing and having full corporate power and authority to carry on the business as it is now being conducted and to own the properties and assets it now owns, including the Seller Portfolio. 4 2.02. Authorization. Seller and AMS have full corporate power and authority to enter into this Agreement and carry out the transactions contemplated hereby. The Boards of Directors of Seller and AMS have duly authorized the execution and delivery by Seller and AMS of this Agreement, the performance by Seller and AMS of their obligations hereunder and the consummation of the transactions contemplated hereby. 2.03. No Violation. Except as disclosed on Schedule 2.03, neither the execution and delivery of this Agreement, nor the performance by Seller or AMS of its obligations hereunder nor the consummation of the transactions contemplated hereby will (a) violate any provision of the Articles of Incorporation or Bylaws of Seller or AMS; (b) would require the consent of any other party which has not been obtained prior to Closing, constitute a breach of, or result in the creation or imposition of any lien upon the Seller Portfolio under, any agreement or commitment to which Seller or AMS is a party or by which Seller or AMS is bound; (c) violate any statute or law or any judgment, decree, order, regulation or rule of any court or governmental authority to which Seller or AMS is subject or (d) whether with or without notice, the lapse of time or both, will not conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which Seller or AMS is a party or by which it is bound or create any lien, security interest, charge, encumbrance or restriction on any of the Assets. No other corporate proceedings on the part of Seller or AMS are necessary to authorize the execution and delivery of this Agreement or the completion by Seller or AMS of the transactions contemplated hereby. 2.04. Consents and Approvals of Governmental Authorities. No consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority is required to be made or obtained by Seller or AMS in connection with the execution, delivery and performance of this Agreement by Seller or AMS. 2.05. No Undisclosed Liabilities. Neither Bancard nor AMS have knowledge of material liabilities or obligations that adversely impact the portion of the Seller Portfolio relating to the AMS merchants, except as disclosed to Purchaser and iPayment in Schedule 2.05. Bancard does not have knowledge of material liabilities or obligations that adversely impact the portion of the Seller Portfolio relating to the ISO merchants, except as disclosed to Purchaser and iPayment in Schedule 2.05. 2.06. Litigation. Other than the litigation disclosed in Schedule 2.06, there is no known action, proceeding or investigation pending or threatened against Seller, or any properties or rights of Seller or AMS, before any court, arbitrator or administrative or governmental body that would involve the Seller Portfolio in any manner. 2.07. Seller Portfolio. The list of the accounts contained in the Seller Portfolio is attached hereto as Exhibits B, D and E, which sets forth (a) the name of the individual Merchant, (b) the September, 2002 sales, and (c) the current year-to-date sales discount rate is accurate and complete in all material respects to the best knowledge of Seller. The Seller's most recent Nobel/ISO settlement reports (August, 2002) regarding the Seller Portfolio are attached hereto as Schedule 2.07, and are accurate and complete in all material respects to the best knowledge of Seller Seller has no reason to believe any of the Bank Agreements are unenforceable. Finally, to the best knowledge of Seller, Seller is not subject to any material agreements involving Merchants or the Seller Portfolio which are not being assigned to Purchaser pursuant to this Agreement. The knowledge of Seller in this Agreement refers to the knowledge of John W. Schricker, President of Seller and William J. Brockway, Vice President of Seller. The knowledge of AMS in this Agreement refers to the knowledge of Gerald Grecco, President of AMS, and William J. Brockway. With respect to the information referenced in items (c), (d) and (e) above, the information is not presently included in Schedule 2.07, but will be provided by Seller as soon as commercially practicable after the Closing Date. 2.08. Licenses, Permits and Authorizations. To the knowledge of Seller and AMS, they have all approvals, authorizations, consents, licenses, franchises, orders and other permits of all governmental or regulatory agencies, whether federal, state, local or foreign, the absence of which would impair the Seller Portfolio. 2.09. Intentionally Deleted 5 2.10 Compliance with Law. To the knowledge of Seller and AMS, they are in compliance, in all respects, with all applicable statutes, regulations, judgments, injunctions, decrees, orders, ordinances and other laws (collectively, "Laws") of the United States of America, all state and local governments and other governmental authorities, and agencies and courts of any of the foregoing, to which Seller is subject, and they have not received any notice to the effect that, or otherwise been advised by counsel that, they have materially violated or are not in compliance in all material respects with any of such Laws, and, to the knowledge of Seller and AMS, there are no investigations with respect thereto, nor past or current business conduct or practices of Seller or AMS similar to the conduct or practices of other businesses that to the knowledge of Seller or AMS have been the subject of investigations, proceedings, claims, actions, suits, demands or notices with respect thereto or have resulted in any liability arising out of or related to such conduct or practices. 2.11 Ownership and Portability of Merchant Accounts. With respect to all of the Merchant Accounts (except for (i) iPayment's, ODC's and CardSync's pre-existing rights and obligations regarding the ODC/CardSync Merchants, (ii) those rights disclosed in Schedule 2.11 which are retained by the ISO Groups as to the ISO Merchants, and (iii) the residuals retained by, and the related payout rights of, the AMS Sales Centers and Agents as described in Schedule 2.11), (a) Bancard or AMS owns such Merchant Accounts free and clear of all liens, claims, charges, encumbrances, mortgages, pledges, security interests and other interests, (b) such Merchant Accounts, to the knowledge of Bancard and AMS, are processed under unique BINs and ICAs, and (c) Purchaser will have the right at any time and from time to time after the Closing Date, to direct Seller and third-party processors to, and such third-party processors are obligatedto, (i) assign the Merchant Agreements relating to the Merchants so identified, including all Merchant files and records (paper and fiche), related merchant reserve and hold accounts, BINs, ICAs and databases relating thereto, to one or more other Member Banks and/or third-party processors designated by Seller and (ii) effect the deconversion of such Merchant Accounts. Subject to the rights of the ISO Groups, ODC and CardSync, such third-party processors are obligated to transfer the merchant files, merchant agreements, related documents and other items described herein after receipt of Seller's request for such assignment and deconversion and such assignment and deconversion of the Merchant Accounts shall be at no cost or expense to Purchaser or iPayment other than the reasonable cost of copying, shipping, supplies, programming and the like and any related reasonable transfer, association or registration fees. Bancard agrees to use reasonable efforts following Closing to obtain the consents of the ISO Groups to this transaction and to iPayment's assumption of the Bank's obligations under the merchant solicitation agreements with the respective ISO Groups; provided, however, if Bancard is unable to obtain such consents, there shall be no penalty or other adverse consequences to Bancard from Purchaser or iPayment. "BINs" shall mean a unique Bank Identification Number assigned by VISA and licensed to a Member Bank for its use in entering or receiving transactions into (or from) VISA's settlement authorization systems and participating in the VISA card program. An "ICA" is the corresponding number assigned by MasterCard for the same purpose. "Member Bank" means a member of VISA and/or MasterCard which is authorized by such association(s) to enter or receive transactions into (or from) such association(s) settlement and authorization systems, and to participate in such association(s) charge card program. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER: AND PAYMENT Purchaser and iPayment hereby represent and warrant to Seller as follows: 3.01. Corporate Organization; Etc. Purchaser and iPayment are at the date hereof, and will be on the Closing Date, corporations duly organized, validly existing and in good standing under the laws of the State of Delaware, are solvent, and have corporate power and authority to carry on their business as now being conducted. 3.02. Authorization, Etc. Purchaser and iPayment have full corporate power and authority to enter into this Agreement and carry out the transactions contemplated hereby. 6 3.03. No Violation. Neither the execution and delivery of this Agreement, nor the performance by Purchaser or iPayment of their obligations hereunder nor the consummation of the transactions contemplated hereby will (a) violate any provision of the Charters or Bylaws of Purchaser or iPayment; (b) would require the consent of any other party which has not been obtained prior to Closing; or (c) violate any statute or law or any judgment, decree, order, regulation or rule of any court or governmental authority to which Purchaser or iPayment is subject. 3.04. Litigation. There is no known action, proceeding or investigation pending or, to the best knowledge and belief of Purchaser or iPayment, threatened against Purchaser or iPayment, or any properties or rights of Purchaser or iPayment, before any court, arbitrator or administrative or governmental body, which questions or challenges the validity of this Agreement or any action taken or to be taken by Purchaser or iPayment pursuant to this Agreement or in connection with the transactions contemplated by this Agreement. ARTICLE IV CERTAIN COVENANTS AND AGREEMENTS 4.01. Seller's and AMS's Non-Solicitation Covenant. During the period of three (3) years following the Closing Date, Seller and its successors in interest, assigns and affiliates, shall not (i) other than mass market campaigns not specifically directed toward any Merchant, directly solicit any Merchant for purposes of providing credit card authorization and related services to any of the Merchants, wherever located, or (ii) intentionally or knowingly interfere with, disrupt or attempt to disrupt any past, present or prospective business relationship, contractual, between Purchaser and any Merchant, client, supplier, consultant, agent or employee of Purchaser; provided, however, nothing herein shall prevent Seller or its successors, assigns and affiliates from contracting with any such Merchant, client, supplier, consultant, agent or employee in a manner that does not interfere with, disrupt or attempt to disrupt any contractual relationship between such person and Purchaser or from accepting any unsolicited business relationships of any kind with any such person. Notwithstanding the foregoing neither Seller nor its successors, assigns or affiliates shall be prohibited from: (a) contracting with any Merchant that terminated service with Purchaser at least six months prior to entering into a contract with Seller, so long as Seller was not in breach of this covenant with respect to such Merchant prior to entering into such contract; (b) mass marketing campaigns not specifically directed toward any Merchant and done without violation of Section 4.02 by any of Seller or any successor, assign or affiliate of Seller shall not be deemed a violation of this Section 4.01; (c) agent banks now or hereafter affiliated with Quad City Bank & Trust Company in the ordinary course of business signing up and processing through Seller any Merchant in those agent banks' respective bank trade areas; and (d) Seller in the ordinary course of its business signing up and processing any Merchant in the bank trade areas of Quad City Bank & Trust Company and Cedar Rapids Bank & Trust Company. 4.02. Confidentiality. Unless otherwise required by law, Seller agrees that during the period of five (5) years following the Closing Date, it will not voluntarily at any time, directly or indirectly, communicate, furnish, divulge or disclose to any individual, firm, association, partnership or corporation except to its accountants, attorneys, regulators, or to persons or entities who are conducting due diligence for purposes of selling the Seller Portfolio to Purchaser or its parent/holding company, subject, however, to a confidentiality agreement, , any knowledge or information with respect to any matters concerning or relating to the Merchants or the Seller Portfolio, including but not limited to, copies or originals of any information supplied to Purchaser. 4.03. Right to Injunctive Relief. Seller agrees and acknowledges that the violation of the foregoing covenants set forth in Sections 4.01 and 4.02 would cause irreparable injury to Purchaser and that the remedy at law for any violation or threatened violation would be inadequate and that Purchaser, provided that Purchaser shall be in compliance with this Agreement, shall be entitled to temporary and permanent injunctive relief or other equitable relief without the necessity of proving actual damages. 7 4.04. Notice of Merchant Conversion. If Seller discovers that it has accepted the application for credit card authorization services from a Merchant, except as permitted in Section 4.01 above, for a three year period from the date hereof, it shall promptly notify Purchaser. Purchaser agrees that in the event that Seller takes processing applications from any of the Merchants, except as permitted in Section 4.01 above, Purchaser shall, prior to taking the actions permitted in Section 4.03 above, give written notice to the Seller and Seller shall then have 30 days in which to assign such processing application to Purchaser or to cancel the processing agreement between Seller and such Merchant. If the Seller fails to take such action within the 30 day period, Purchaser shall then be entitled to pursue any remedies against Seller, including without limitation, the remedies provided in Section 4.03. 4.05 Merchant Reserves. At the time that Seller ceases to process the Seller Portfolio for Purchaser pursuant to the Interim Processing Agreement, and subject to the existing BIN's and ICA's being transferred to a new Visa/MasterCard Member Bank in order that Seller and Bank will not have continuing liability for Unfulfilled Chargebacks related to or arising from the Seller Portfolio or Bancard's and Bank's continued services under the Interim Processing Agreement (other than Unfulfilled Chargebacks arising from AMS's pre-January 1, 2002 transactions), then Seller shall transfer the Merchant Reserves to a financial institution of Purchaser's choosing at closing as set forth in Section 1.03 hereof. 4.06 Litigation Support. In the event and for so long as Purchaser actively is contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing Date involving Seller, Seller will cooperate with Purchaser and hisPurchaser's counsel in the contest or defense, make available their personnel, and provide such testimony and access to their books and records as shall be necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending party. 4.07 Public Statements. Purchaser and Seller shall consult with each other and will mutually agree on any press releases or public announcements pertaining to this Agreement or the transactions contemplated hereby and will not issue any such press releases or make any such public announcements prior to such consultation and agreement, except as may be required by applicable securities or other laws, in which case the party proposing to issue such press release or make such public announcement will use its best efforts to consult in good faith with the other party before issuing any such press releases or making any such public announcements. 4.08 Reasonable Best Efforts, Cooperation. Subject to the terms and conditions of this Agreement, each of Seller and Purchaser agrees to use its respective reasonable best efforts in good faith to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or desirable, or advisable under applicable laws, so as to permit consummation of the transactions contemplated by this Agreement as promptly as practicable and otherwise to enable consummation of the transactions contemplated hereby and shall cooperate fully with the other party hereto to that end. ARTICLE V DELIVERY OF DOCUMENTS AT OR PRIOR TO CLOSING 5.01. Delivery of Documents by Seller and AMS. At or prior to the Closing, Seller and AMS shall deliver to Purchaser, unless waived by Purchaser, the following documents and instruments: (a) all consents from government agencies and third parties necessary to complete the Transfer and otherwise to consummate the transactions contemplated hereby; (b) such bills of sale, endorsements, assignments, and other good and sufficient instruments of conveyance and assignment, reasonably satisfactory in form and substance to Purchaser and its counsel, as shall be necessary to vest all of Seller's and AMS's rights and interest in, and title to, the Seller Portfolio in Purchaser and otherwise to consummate the transactions contemplated hereby; 8 (c) the most recent VISA/MASTERCARD Settlement Report and copies of such other documents and computer printouts requested by Purchaser related to the Seller Portfolio. Seller may delete all information not related to the Seller Portfolio. At the time that Seller ceases to process the Seller Portfolio for Purchaser pursuant to the Interim Processing Agreement, and subject to the existing BIN's and ICA's being transferred to a new Visa/MasterCard Member Bank in order that Seller and Bank will not have continuing liability for Unfulfilled Chargebacks related to or arising from the Seller Portfolio or Bancard's and Bank's continued services under the Interim Processing Agreement (other than Unfulfilled Chargebacks arising from AMS's pre-January 1, 2002 transctions), then Seller shall deliver to Purchaser originals of all documents that relate to the Seller Portfolio; (d) written instruments whereby the creditors, if any listed on Schedule 5.01(d) hereto, if any, have effectively released and discharged the security interests referred to in said schedule; (e) Bancard agrees to use reasonable efforts following Closing to obtain the consents of the ISO Groups to this transaction and to iPayment's assumption of the Bank's obligations under the merchant solicitation agreements with the respective ISO Groups; provided, however, if Bancard is unable to obtain such consents, there shall be no penalty or other adverse consequences to Bancard from iPayment or Purchaser; and (f) such other documents or instruments as Purchaser may reasonably request. 5.02. Delivery of Documents by Purchaser. At or prior to the Closing, Purchaser shall deliver to Seller and AMS, the following documents and instruments: (a) the purchase price set forth in Section 1.05 hereof payable as allocated in said Section 1.05; and (b) the Purchaser's Receipt. 5.03 Concurrent Agreement. At or prior to the Closing, Purchaser and Seller shall enter into an Interim Processing Agreement in the form attached hereto as Exhibit 5.03. ARTICLE VI MISCELLANEOUS PROVISIONS 6.01. No Brokerage. Each party hereto represents and warrants to the other party hereto that it has not incurred any obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other like payment in connection with this Agreement or the transactions contemplated hereby, and each party agrees to indemnify and hold the other party harmless against and in respect of any such obligation or liability based in any way on agreements, arrangements or understandings claimed to have been made by such party with any third party. 6.02. Survival. Unless otherwise noted herein, each party hereto covenants and agrees that its representations, warranties, covenants and agreements contained in this Agreement and in any instrument of sale, assignment, conveyance and transfer executed and delivered pursuant to this Agreement, shall survive the Closing Date. 6.03. Amendments. Purchaser and Seller may amend, modify or supplement this Agreement only by an instrument in writing signed on behalf of Purchaser and Seller. 6.04. Waivers. Either party to this Agreement may, by written notice to the other, (a) extend the time for the performance of any of the obligations or other actions of the other party; (b) waive any inaccuracies in the representations or warranties of the other party contained in this Agreement or in any document delivered pursuant to this Agreement; (c) waive compliance with any of the covenants of the other party contained in this Agreement; and (d) waive or modify performance of any of the obligations of the other partyThe waiver by either party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 6.05. Expenses. Whether or not the transactions contemplated by this Agreement are consummated, each of the parties hereto shall pay its own fees and expenses incident to the negotiation, preparation, execution and performance of this Agreement including counsel and accountant's fees. 9 6.06. Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been given if mailed, certified mail, return receipt requested, with postage prepaid: (a) If to Bancard or to AMS, to: Quad City Bancard, Inc. Attn: John W. Shricher 3551 - 7 Street Moline, IL 61265 With copy to: QCR Holdings, Inc. Attn: Douglas Hultquist 3551 - 7th Street Moline, IL 61265 With copy to: Terry M. Giebelstein LANE & WATERMAN 220 N Main Street, Suite 600 Davenport, IA 52801 (b) If to Purchaser, to: QuadCity Acquisition Corp. c/o iPayment, Inc. Attn: Afshin Yazdian, General Counsel 30 Burton Hills, Suite 520 Nashville, Tennessee 37215 With a copy to: Howard Herndon, Esq. Waller Lansden Dortch & Davis, A Professional Limited Liability Company 511 Union Street, Suite 2100 Nashville, Tennessee 37219-1760 or to such other person or address as either party shall furnish the other party in writing. 6.07. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned without the prior written consent of the other party. 6.08. Governing Law. THE PROVISIONS OF THIS AGREEMENT AND THE LEGAL RELATIONS BETWEEN THE PARTIES ARISING THEREFROM SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS. 6.09 Venue. Any and all disputes between the parties which may arise pursuant to this Agreement shall be heard and determined before an appropriate federal or state court located in the State of Illinois; notwithstanding the foregoing, the parties agree to bring the action in Illinois federal courts, rather than Illinois state courts, if there is jurisdiction in the federal courts. The parties hereto acknowledge that such courts have the jurisdiction to interpret and enforce the provisions of this Agreement, and the parties waive any and all objections that they may have as to jurisdiction, venue or conflict of law issues in any of the above courts. 6.10. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Further, this Agreement may be executed by facsimile signatures, which shall be deemed binding on the parties with the same force and effect as original signatures. 6.11. Schedules and Headings. Information set forth in the Schedules hereto is deemed to have been disclosed for all purposes of this Agreement. 10 6.12. Entire Agreement. This Agreement, including the Schedules, the Interim Processing Agreement referred to in Section 5.03 and other documents referred to herein which form a part hereof, embody the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties, covenants or undertakings, other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 6.13 Severability. In the event any portion of this Agreement may be determined by any Court of competent jurisdiction to be unenforceable, the balance of the Agreement shall be severed therefrom and shall continue in full force and effect unless a failure of consideration would thereby result. 6.14. Attorneys Fees. Notwithstanding anything in Section 6.05, should a dispute, including but not limited to any litigation or arbitration be commenced (including any proceedings in a bankruptcy court) between the parties hereto or their representatives concerning any provision of this Agreement, or the rights and duties of any person or entity hereunder, the party or parties prevailing shall be entitled to attorneys' fees, expenses of counsel and court costs incurred by reason of such action. ARTICLE VII INDEMNIFICATION 7.01 Indemnification by Bancard and AMS. Bancard and AMS, as Indemnifying Party, shall indemnify, save and hold harmless each of Purchaser and iPayment and their affiliates, successors and permitted assigns, and each officer, director, employee or agent thereof, their respective controlling persons, and their respective estates, successors, and assigns (collectively, the "iPayment Indemnified Parties" and each an "Indemnified Party"), harmless against and from any liability, demands, claims, actions or causes of action, assessments, losses, fines, penalties, costs, damages and expenses, including reasonable attorneys' fees, disbursements and expenses (collectively, "Damages"), sustained or incurred by any of the iPayment Indemnified Parties after the Closing Date as a result of, arising out of or by virtue of any misrepresentation, breach of any warranty or representation, or non-fulfillment of any agreement or covenant that was to be fulfilled prior to the Closing Date, in each case on the part of Bancard or AMS, whether contained in this Agreement or any Exhibit or Schedule hereto or thereto or any written statement or certificate furnished or to be furnished to Purchaser or iPayment pursuant hereto or in any closing document or ancillary document executed and delivered in connection with, or contemplated by, this Agreement executed and delivered by Bancard or AMS to iPayment or Purchaser in connection herewith. Such indemnification shall include without limitation the following: (a) the untruth, inaccuracy or breach of any representation or warranty made by Bancard or AMS in this Agreement or any ancillary document executed and delivered in connection with, or contemplated by, this Agreement; (b) the nonfulfillment or breach of any covenant, agreement or obligation of Bancard or AMS contained in this Agreement or any ancillary document executed and delivered in connection with, or contemplated by, this Agreement; (c) any claim or demand by any person asserting any interest in the Assets or any other claim in respect to the transactions contemplated by this Agreement, except for: (i) iPayment's, ODC's and CardSync's pre-existing rights and obligations regarding the ODC/Cardsync Merchants; (ii) the rights disclosed in Schedule 2.11 which are retained by the ISO Groups as to the ISO Merchants; and (iii) the residuals retained by, and the related payout rights of, the AMS Sales Centers and Agents as disclosed in Schedule 2.11; (d) any failure of Seller to satisfy or comply with the requirements of any applicable bulk sales or similar law; (e) all Unfulfilled Chargebacks, liabilities and expenses relating to transactions of the AMS Merchants occurring prior to January 1, 2002; (f) any liability of Seller arising out of the operation of the Assets prior to the Closing which is imposed upon Purchaser or iPayment, except to the extent such liability is an Assumed Liability; 11 (g) any liability of the Bancard or AMS for unpaid taxes with respect to any tax year or portion thereof ending on or before the Closing Date (or for any tax year beginning before and ending after the Closing Date to the extent allocable to the portion of such period beginning before and ending on the Closing Date); and (h) any liability arising out of Seller's inability to obtain consents from the ISO Groups as further described in Sections 2.11 and 5.01(e), except for iPayment or Purchaser's claims related to loss of the ISO Merchants or revenue therefrom. 7.02 Indemnification by Purchaser and iPayment. Purchaser and iPayment, as Indemnifying Party, shall indemnify, save and hold harmless each of Bancard, Bank and AMS and their affiliates, successors and permitted assigns, and each officer, director, employee or agent thereof, their respective controlling persons, and their respective estates, successors, and assigns (collectively, the "Bancard Indemnified Parties" and each an "Indemnified Party"), harmless against and from any liability, demands, claims, actions or causes of action, assessments, losses, fines, penalties, costs, damages and expenses, including reasonable attorneys' fees, disbursements and expenses (collectively, "Damages"), sustained or incurred by any of the Bancard Indemnified Parties after the Closing Date as a result of, arising out of or by virtue of any misrepresentation, breach of any warranty or representation, or non-fulfillment of any agreement or covenant that was to be fulfilled after the Closing Date, in each case on the part of iPayment or Purchaser, whether contained in this Agreement or any Exhibit or Schedule hereto or thereto or any written statement or certificate furnished or to be furnished to Bancard, Bank or AMS pursuant hereto or in any closing document or ancillary document executed and delivered in connection with, or contemplated by, this Agreement executed and delivered by iPayment or Purchaser to Bancard, Bank or AMS in connection herewith. Such indemnification shall include without limitation the following: (a) the untruth, inaccuracy or breach of any representation or warranty made by iPayment or Purchaser in this Agreement or any ancillary document executed and delivered in connection with, or contemplated by, this Agreement; (b) the nonfulfillment or breach of any covenant, agreement or obligation of iPayment or Purchaser contained in this Agreement or any ancillary document (including the Interim Processing Agreement) executed and delivered in connection with, or contemplated by, this Agreement; (c) all Unfulfilled Chargebacks, liabilities and expenses relating to transactions of the AMS Merchants occurring on or after January 1, 2002; (d) all Unfulfilled Chargebacks, liabilities and expenses relating to transactions of the ISO Merchants and the ODC/CardSync Merchants, whether occurring on, before or after the Effective Date; (e) any liability which was assumed by iPayment and Purchaser pursuant to Section 1.02 of this Agreement; and (f) any liability of iPayment or Purchaser arising out of the operation of the Assets after the Effective Date. 7.03 Procedure for Indemnification - Non Third Party Claims. Whenever any claim shall arise for indemnification hereunder not involving a Proceeding (as hereinafter defined), the Indemnified Party shall notify the Indemnifying Party promptly after such Indemnified Party has actual knowledge of the facts constituting the basis for such claim. The notice to the Indemnifying Party shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. 7.04 Procedure for Indemnification - Third Party Claims. (a) Promptly following the receipt by any Indemnified Party of written notice of a demand, claim, action, assessment or proceeding made or brought by a third party, including a governmental agency (a "Third Party Claim") for which such person seeks indemnification, the Indemnified Party receiving such notice of the Third Party Claim shall promptly notify the Indemnifying Party, of its existence, setting forth the facts and circumstances of which such Indemnified Party has received notice, but the failure to notify the Indemnifying Party will not relieve the Indemnifying Party of any liability that it may have to the Indemnified Party, except to the extent that the Indemnifying Party demonstrates that the defense of such action is prejudiced by the Indemnified Party's failure to give such notice. 12 (b) The Indemnified Party shall tender the defense of a Third Party Claim to the Indemnifying Party. If the Indemnifying Party accepts responsibility for the defense of a Third Party Claim, then the Indemnifying Party shall have the exclusive right to contest, defend and litigate the Third Party Claim and shall have the exclusive right, in its discretion exercised in good faith and upon the advice of counsel, to settle any such matter, either before or after the initiation of litigation, at such time and upon such terms as it deems fair and reasonable, provided that at least ten days prior to any such settlement, it shall give written notice of its intention to settle to the Indemnified Party. The Indemnified Party shall have the right to be represented by counsel at its own expense in any defense conducted by the Indemnifying Party (but the Indemnifying Party will control the defense of the Third Party Claim (if it has elected to do so)). (c) If, in accordance with the foregoing provisions of this Article, an Indemnified Party shall be entitled to indemnification against a Third Party Claim, and if the Indemnifying Party shall fail to accept the defense of a Third Party Claim that has been tendered in accordance with this Section, the Indemnified Party shall have the right, without prejudice to its right of indemnification hereunder, in its discretion exercised in good faith and upon the advice of counsel, to contest, defend and litigate such Third Party Claim, and may settle such Third Party Claim, either before or after the initiation of litigation, at such time and upon such terms as the Indemnified Party deems fair and reasonable, provided at least ten days prior to any such settlement, written notice of its intention to settle is given to the Indemnifying Party. If, pursuant to this Section, the Indemnified Party so defends or settles a Third Party Claim for which it is entitled to indemnification hereunder, as hereinabove provided, the Indemnified Party shall be reimbursed or otherwise indemnified by the Indemnifying Party for the reasonable attorneys' fees and other expenses of defending the Third Party Claim that are incurred from time to time, immediately following the earlier of (i) the agreement of the Indemnified Party and the Indemnifying Party that the Indemnifying Party is liable for such Damages pursuant to this Article VII and (ii) the entry of a final judgment of a court of competent jurisdiction determining that any Damages exist and that the Indemnifying Party is liable for such Damages pursuant to this Article VII. No failure by the Indemnifying Party to acknowledge in writing its indemnification obligations under this Article VII shall relieve it of such obligations to the extent they exist. (d) Notwithstanding the foregoing, in connection with any settlement negotiated by the Indemnifying Party, no Indemnified Party shall be required to (i) enter into any settlement (A) that does not include the delivery by the claimant or plaintiff to the Indemnified Party of a release from all liability in respect of such claim or litigation, or (B) if the Indemnified Party shall, in writing to the Indemnifying Party within the ten day period prior to such proposed settlement, disapprove of such settlement proposal (which settlement proposal will not be unreasonably disapproved) and desire to have the Indemnifying Party tender the defense of such matter back to the Indemnified Party, or (ii) consent to the entry of any judgment that does not include a full dismissal of the litigation or proceeding against the Indemnified Party with prejudice; provided, however, that should the Indemnified Party disapprove of a settlement proposal pursuant to clause (B) above, the Indemnified Party shall thereafter have all of the responsibility for defending, contesting and settling such Third Party Claim but shall not be entitled to indemnification by the Indemnifying Party to the extent that, upon final resolution of such Third Party Claim, the Indemnifying Party's liability to the Indemnified Party but for this proviso exceeds what the Indemnifying Party's liability to the Indemnified Party would have been if the Indemnifying Party were permitted to settle such Third Party Claim in the absence of the Indemnified Party exercising its right under clause (B) above. 13 (e) Notwithstanding the foregoing, if an Indemnified Party determines in good faith that there is a reasonable probability that a Third Party Claim may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the Indemnified Party may, by notice to the Indemnifying Party, assume the exclusive right to defend, compromise or settle the Third Party Claim without the Indemnifying Party's consent (which may not be unreasonably withheld.) If the Indemnifying Party does not assume the defense of any claim or litigation, any Indemnified Party may defend against such claim or litigation in such manner as it may deem appropriate, including, but not limited to, settling such claim or litigation, after giving notice of the same to the Indemnifying Party, on such terms as the Indemnified Party may deem appropriate. The Indemnifying Party will promptly reimburse the Indemnified Party in accordance with the provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. BANCARD QUAD CITY BANCARD, INC., a Delaware corporation By: ________________________________ Title: ________________________________ AMS ALLIED MERCHANT SERVICES, INC., an Illinois corporation By: ________________________________ Title: ________________________________ PURCHASER QUADCITY ACQUISITION CORP. a Delaware Corporation By: ________________________________ Title: ________________________________ iPAYMENT iPAYMENT, INC., a Delaware Corporation By: ________________________________ Title ________________________________ 14 PERSONAL GUARANTY The undersigned, Greg Daily, being a principal in Purchaser and iPayment, hereby assumes and personally guarantees, unconditionally and without requirement of prior notice, demand, presentation or action against Purchaser or iPayment, all agreements, obligations and undertakings of Purchaser and/or iPayment owing under or pursuant to the foregoing Purchase and Sale Agreement. Dated this ____day of October, 2002. ----------------------------------------- Greg Daily 15 EXHIBIT A MERCHANT SOLICITATION AGREEMENTS Various merchant application and agreement forms have been supplied to iPayment/Purchaser, including: (1) Trinity Payment Systems; (2) Clarity Merchant Services, LLC; (3) Rich Ryan; (4) Student Advantage; (5) Real Time Processing; (6) Allied Merchant Services, LLC (7) Card/Sync Processing, Inc.; and (8) Online Data Corp. 16 EXHIBIT B AMS MERCHANTS List previously provided on CD Rom to Purchaser/iPayment. 17 EXHIBIT C ISO GROUPS (1) Trinity Payment Systems (written Merchant Broker Agreement previously provided to Purchaser/iPayment); (2) Clarity Merchant Services (no written agreement) (this entity is owned by Bancard); (3) Rich Ryan (no written agreement); (4) Student Advantage (written Merchant Broker Agreement previously provided to Purchaser/iPayment); and (5) Real Time Processing (written Merchant Broker Agreement previously provided to Purchaser/iPayment). 18 EXHIBIT D ISO MERCHANT LIST List previously provided on CD Rom to Purchaser/iPayment. 19 EXHIBIT E ODC/CARDSYNC MERCHANTS List previously provided on CD Rom to Purchaser/iPayment. 20 EXHIBIT F VENDOR AGREEMENTS (1) Nobel Electronic Transfer, LLC (written agreement provided to Purchaser/iPayment). 21 SCHEDULE 1.01 LIST OF ASSETS See attached depreciation schedule regarding AMS furnishings and equipment. 22 SCHEDULE 1.02 ADDITIONAL LIABILITIES BEING ASSUMED BY PURCHASER/iPAYMENT 1. AMS Lease Agreement with Hammond Development Corporation for lease of real estate in Hammond, Indiana (copy previously provided to Purchaser/iPayment). (Requires monthly payment of $____________ and contract expires on ________________.) 2. AMS copy machine lease with McShane's Business Products & Solutions/US Bancorp Office Equipment Finance Services (copy previously provided to Purchaser/iPayment). (Requires monthly payment of $____________ and contract expires on ________________.) 23 SCHEDULE 1.03 RESERVES Attached hereto. (1) Merchants with Diverted Balances (closed less than 1year as of 10/8/02) (List previously provided to Purchaser/iPayment.) Transactions, including releases of reserves or changes to reserves, have occurred in the ordinary course of business since 10/8/02. (2) Merchants with Diverted Balances (closed longer than 1 year as of 10/8/02). (List previously provided to Purchaser/iPayment.) Transactions, including releases of reserves or changes to reserves, have occurred in the ordinary course of business since 10/8/02. 24 SCHEDULE 1.06 LIENS - - No lien or encumbrances. - - The ISO Groups have certain claims to the ISO Merchants, all as set forth in the merchant solicitation agreements with the respective ISO Group members, as further described in Schedule 2.11 hereto. 25 SCHEDULE 2.03 REQUIRED CONSENTS (1) Claims of ISO Group members to the respective ISO Merchants, as further described in Schedules 1.06 and 2.11 hereof. (2) Hammond, Indiana lease of AMS. (3) AMS copy machine lease. 26 SCHEDULE 2.05 NO UNDISCLOSED LIABILITIES AMS Merchants - In the ordinary course of business, there are chargeoffs related to the AMS portfolio. In September, 2002, chargeoffs were approximately $20,000. Prior months chargeoffs have been reported to Purchaser/iPayment for January through August, 2002, as part of the monthly settlement reports provided to Purchaser/iPayment. ISO Merchants - In the ordinary course of business, there are chargeoffs related to the ISO Group portfolios. Prior months chargeoffs have been reported to the Purchaser/iPayment for January through August, 2002, as part of the monthly settlement reports provided to Purchaser/iPayment. 27 SCHEDULE 2.06 EXISTING LITIGATION 1. Ticketsupfront Litigation - Ticketsupfront, a CardSync merchant, is generating large chargebacks and resulting losses. Litigation for declaratory judgment has been commenced in the Marion County Superior Court (Indiana) entitled Joel Cohen vs. Quad City Bank & Trust Company, (Cause No. 49D040209MI001591). Bank has tendered defense and indemnification regarding the lawsuit to CardSync. 2. The Boardroom - The Boardroom, a CardSync merchant, has been shut down an alleged prostitution establishment. Bank/Bancard have been subpoenaed for information and testimony and have been investigated by Florida authorities for alleged interference with an ongoing criminal investigation arising from Bancard's report to CardSync and CardSync's report to the merchant of the receipt of a criminal investigatory subpoena. 3. One Cent Authorization - Several ODC Merchants, both approved and unapproved, ran approximately one million one cent authorizations through Vital as part of a possible credit card fraud scheme. Possible MasterCard/Visa fines and penalties may result which will be the obligation of ODC. 28 SCHEDULE 2.07 The Seller Portfolio information has been previously provided to Purchaser/iPayment in CD Rom format. The August, 2002 Nobel/ISO Settlement reports have also been previously provided to Purchaser/iPayment, and additional copies thereof are attached hereto. 29 SCHEDULE 2.11 DISCLOSURES REGARDING OWNERSHIP AND PORTABILITY ISO Groups Rights to ISO Merchants Pursuant to Section 10(B) of Merchant Broker Agreements with Student Advantage, Inc. and Trinity Payment Services, those ISO's retain 100% ownership in their Merchants. Also, Section 11 of such Merchant Broker Agreement restricts assignment by either party. In this case, since Bancard is selling substantially all of its assets, the assignment is allowed, so long as Purchaser/iPayment assumes the obligations and the other requirements of Section 11 are met. There is no written agreement with Rich Ryan, but Ryan and Bancard understand and previously orally agreed, that Ryan has the same rights to Merchants as Student Advantage, Inc. and Trinity Payment Services. Real Time Processing, Inc.'s Merchant Broker Agreement with Bancard expired in October, 2002 and ODC has previously purchased Real Time's portfolio. Hence, we believe ODC controls Real Time's Merchants. AMS Sales Centers and Agents AMS has entered into various Sales Center Agreements and Sale Representative Agreements, copies of which have previously been provided to Purchaser/iPayment. A list of the outstanding Sales Center and Sales Representative Agreements is attached hereto. The Sale Centers and Representatives retain residuals as provided in those various agreements. Also, the Sale Centers have the right to require AMS to purchase in a lump sum the Sales Center's residuals in the AMS Merchants pursuant to formula set forth in Exhibit C of the Sales Center Agreements. Purchaser/iPayment are assuming the obligations regarding residuals and lump sum payouts to the AMS Sales Centers and AMS Sales Representatives. 30 SCHEDULE 5.01(d) LIST OF CREDITORS None; there are no security interests held by creditors. 31 EXHIBIT 5.03 INTERIM PROCESSING AGREEMENT Copy attached. 32 EX-99 7 qcr906hultquist.txt Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of QCR Holdings, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, Douglas M. Hultquist, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Douglas M. Hultquist - ----------------------------- Douglas M. Hultquist Chief Executive Officer November 12, 2002 1 EX-99 8 qcr906gipple.txt Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of QCR Holdings, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, Todd A. Gipple, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Todd A. Gipple - ------------------------------- Todd A. Gipple Chief Financial Officer November 12, 2002 1 EX-99 9 qcrstockltr.txt Exhibit 99.3 November 2002 To Our Stockholders It was great to see so many of you at our recent stockholders' meeting. As those of you who were able to attend the meeting or read our recent press releases are aware, we have had significant news to report recently. We are pleased to announce strong earnings for the quarter ended September 30, 2002 that were slightly less than $1.2 million, or basic earnings per share of $.42, as compared to $648 thousand or $.26 per share for the year earlier quarter. The Company recognized a significant increase in net interest income of $1.3 million for this quarter over the same period in 2001. Gains on sales of residential real estate loans were also a significant contributor to our earnings results for the quarter as the Company realized an increase in these gains of $251 thousand over the previous year. In addition, the Company experienced tremendous growth this quarter of more than $50 million, to end the quarter at $568.8 million in total assets. At our stockholders' meeting, we announced that the Board of Directors declared the Company's first cash dividend to stockholders. The dividend of $.05 per share will be payable on January 3, 2003 to stockholders of record on December 16, 2002. It is the Company's intention to consider the payment of dividends on a semi-annual basis. While we anticipate an ongoing need to retain much of the Company's operating income to help provide the capital for continued growth, we believe that operating results have reached a level where we can sustain dividends to our stockholders as well. On October 22, we announced the sale of the Independent Sales Organization (ISO) related merchant credit card operations of our subsidiary, Quad City Bancard, Inc. (Bancard), to iPayment, Inc. in a transaction that resulted in a gain of approximately $1.2 million or $.44 per share. Historically, Bancard's largest source of revenue has been derived from providing merchant credit card processing to merchants of ISOs. iPayment had recently acquired two large ISOs that provided nearly 75% of Bancard's ISO processing volume. In addition to negotiating the compensation we were to receive for the transfer of this processing volume, we decided to sell the processing rights of our remaining ISO business, as well as the merchant credit card processing relationships owned by Bancard's ISO subsidiary, Allied Merchant Services, Inc. This gain will be reported in our December 2002 quarterly results. Bancard will continue to provide merchant processing services for Quad City and Cedar Rapids area merchants and to approximately 80 agent banks. We will also continue to provide cardholder services to customers of Quad City Bank & Trust and Cedar Rapids Bank & Trust, as well as the agent banks. John Schricker, President of Bancard, plans to semi-retire prior to the end of 2002 and will provide consulting assistance to Bancard, while Executive Vice President Bill Brockway will leave in November to form his own ISO. On behalf of our entire organization, we wish to thank John, Bill, and their staff for their efforts in making Bancard a financial success. Cedar Rapids Bank & Trust (CRBT) continues to make outstanding progress toward profitability as it reached its first anniversary as a charter in September 2002. The new bank's after-tax operating losses were $172 thousand for the quarter, which continue to run slightly better than anticipated, while asset growth continues to exceed expectations. CRBT continues to be a significant contributor to the Company's growth in assets, loans, and deposits since our opening in September of 2001. We have experienced rapid growth in CRBT's first twelve months of operations, reaching total assets of $78.2 million, net loans of $62.6 million, and deposits of $51.8 million, as of September 30, 2002. The Company's total assets increased 10% to $568.8 million at September 30, 2002 from $518.8 million at June 30, 2002. During the same period, net loans increased by $39.2 million or 10% to $423.7 million from $384.5 million at June 30, 2002. Non-performing assets increased to $4.8 million at September 30, 2002 from $2.3 million at June 30, 2002 and $3.2 million at September 30, 2001. At September 30, 2002 non-performing assets were 1.10% of gross loans in comparison to 1.04% of gross loans at September 30, 2001. Total deposits increased 8% to $405.4 million at September 30, 2002 from $376.3 million at June 30, 2002. Stockholders' equity rose to $34.5 million at September 30, 2002 as compared to $32.6 million at June 30, 2002. 1 The increase in non-performing assets from June 30, 2002 to September 30, 2002 was primarily due to one commercial lending relationship at Quad City Bank & Trust. The bank is working closely with this customer in an attempt to remedy the situation. Like many other financial institutions, some of our customers are experiencing difficulty in this lagging economy, which could lead to increased loan loss reserves. Given the continued soft economy, management is closely monitoring and providing reserves for the Company's loan portfolio. Since our formation in February 1993, our fiscal year end has been June 30. On August 21, 2002, our Board of Directors approved a change in the fiscal year end to December 31. We will file a Form 10-K with the Securities and Exchange Commission for the transition period July 1, 2002 through December 31, 2002. The economic picture is cloudy at best. Economists are mixed in their advice for the economy and the Federal Reserve. While rates were already at their lowest point in 40 years, Fed officials recently cut rates further, moving preemptively against further economic weakness. It would appear that the economy is not the only source of weakness. The tensions with Iraq and concerns regarding corporate governance may not be so easily addressed by monetary policy. Many of you have read of the Sarbanes-Oxley Act of 2002. The stated goals of the Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors. We have studied the Act closely and recently our Board of Directors formed an Executive Committee (comprised solely of outside, independent directors), which met to review the Act and its impact on the Company. We feel strongly that the underlying principals of the act are consistent with our corporate philosophy, which we have adhered to since our inception almost a decade ago. We continue to have a positive outlook about our business. Our stock price has held fairly constant this past quarter amid the major stock market slump and, despite extreme market volatility, bank stocks have performed relatively well. Thanks to our customers, stockholders, and employees for your continued confidence. 2 -----END PRIVACY-ENHANCED MESSAGE-----