As filed with the Securities and Exchange Commission on December 20, 2001
Registration No. 333-73924
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------------------
FIRSTFED AMERICA BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 6035 04-3331237
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
ONE FIRSTFED PARK
Swansea, Massachusetts 02777
(508) 679-8181
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
Robert F. Stoico
Chairman, President and Chief Executive Officer
ONE FIRSTFED PARK
Swansea, Massachusetts 02777
(508) 679-8181
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
------------------------------------------------------
Copies to:
Lawrence M.F. Spaccasi, Esq. Eric R. Fischer, Esq.
Muldoon Murphy & Faucette LLP Goodwin Procter LLP
5101 Wisconsin Avenue, N.W. Exchange Place
Washington, D.C. 20016 Boston, Massachusetts 02109
(202) 362-0840 (617) 570-1000
------------------------------------------
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the effectiveness of this Registration
Statement and the satisfaction or waiver of all other conditions to the Merger
described in the Joint Proxy Statement-Prospectus.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
-------------------------------------------------
Calculation of Registration Fee
------------------------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities To Be To Be Price Offering Registration
Registered Registered(1) Per Share(2) Price (2) Fee (2)
------------------------------------------------------------------------------------------------------------------
Common Stock, par
value $0.01 per 2,390,882 N/A $31,329,693 $592(3)
share ("Common Stock")
----------------------------- ------------------- -------------------- ---------------------- --------------------
(1) Represents the estimated maximum number of shares of Common Stock issuable
by FIRSTFED AMERICA BANCORP, INC. ("FIRSTFED") upon the consummation of the
merger with People's Bancshares, Inc. and computed based on the estimated
maximum number of shares (3,508,366), including shares issuable upon the
exercise of outstanding stock options, that may be exchanged for the
securities being registered. Pursuant to Rule 416, this Registration
Statement also covers an indeterminate number of shares of common stock as
may become issuable as a result of stock splits, stock dividends or similar
transactions. This number also includes 394,691 additional shares of Common
Stock available to be issued to ensure tax-free treatment of the merger
transaction or in the event certain adjustments called for in the merger
agreement are required before the effective time of the merger.
(2) Pursuant to Rule 457(f)(1), the registration fee for the FIRSTFED common
stock is based on the market value of People's Bancshares, Inc. common
stock, par value $0.10 per share, on December 14, 2001 ($21.03). Pursuant
to Rule 457(f)(3), the cash portion of the merger consideration to be paid
by FIRSTFED in connection with the transaction has been deducted from the
value of the securities to be received by FIRSTFED in the transaction.
(3) On November 20, 2001, FIRSTFED paid a registration fee equal to $7,241 in
connection with the filing on November 21, 2001 of the Registration
Statement on Form S-4 (Registration No. 333-73924). The aggregate amount of
the registration fee equals $7,833.
----------------------------------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
FIRSTFED AMERICA LOGO PEOPLE'S BANCSHARES LOGO
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The boards of directors of FIRSTFED AMERICA BANCORP, INC. and People's
Bancshares, Inc. have agreed to a merger of our companies. In the merger, each
share of People's common stock will be converted into either $22.00 in cash or
1.2644 shares of FIRSTFED common stock (plus cash instead of any fractional
shares). The value of the FIRSTFED common stock will be evaluated during a
20-day measurement period shortly before the closing of the merger. If during
this period the average closing price of the FIRSTFED stock declines below
$13.92 (causing the value of 1.2644 shares of FIRSTFED stock to be less than
$17.60) and the market value of FIRSTFED common stock underperforms the "SNL
New England Thrift Index" by more than 15% between September 28, 2001 and the
end of the measurement period, People's has the right to terminate the merger.
FIRSTFED would have the right to cancel the termination by increasing the number
of shares of FIRSTFED stock it is to exchange to a specified level. If the
average closing price of FIRSTFED common stock during the measurement period
increases to $20.88 or more, the value of the shares of FIRSTFED common stock to
be exchanged for each share of People's common stock will be limited to $26.40.
FIRSTFED common stock is listed on the American Stock Exchange under the symbol
FAB. On December 17, 2001, the closing price of FIRSTFED common stock was
$17.00.
People's stockholders will be able to elect whether to receive cash
and/or FIRSTFED common stock for their shares of People's common stock.
Elections will be limited by the requirement that 45% of the shares of People's
common stock be exchanged for FIRSTFED common stock. Therefore, the allocation
of cash and FIRSTFED common stock that a People's stockholder will receive will
depend on the elections of other People's stockholders. The federal income tax
consequences of the merger to People's stockholders will depend on whether they
receive cash or stock in exchange for their shares of People's common stock. The
merger will be a tax-free transaction for FIRSTFED stockholders.
We cannot complete the merger unless we obtain the necessary government
approvals and unless the stockholders of both companies approve the merger
agreement. Each of us will hold a meeting of our stockholders to consider and
vote on this merger proposal. Whether or not you plan to attend your company's
meeting, please take the time to vote by completing and mailing the enclosed
proxy card to us. If you sign, date and mail your proxy card without indicating
how you want to vote, your proxy will be counted as a vote FOR the merger and
the transactions contemplated by the merger agreement. If you do not return your
proxy card, or if you do not instruct your broker how to vote any shares held
for you in "street name," the effect will be a vote against the merger.
The places, dates and times of the stockholders meetings are as
follows:
For FIRSTFED stockholders: For People's stockholders:
The Western Hotel Stoneforge Tavern & Publick House
One Exchange Street 90 Paramount Drive
Providence, Rhode Island Raynham, Massachusetts
February 4, 2002 February 4, 2002
2:00 p.m., local time 10:00 a.m., local time
This document contains a more complete description of the stockholders
meetings, the terms of the merger and the procedures for electing to receive
stock or cash. We urge you to review this entire document carefully. You may
also obtain information about FIRSTFED and People's from documents each company
has filed with the Securities and Exchange Commission. We enthusiastically
support the merger and recommend that you vote in favor of the merger.
Robert F. Stoico Richard S. Straczynski
Chairman, President and Chief President and Chief Executive Officer
Executive Officer People's Bancshares, Inc.
FIRSTFED AMERICA BANCORP, INC.
--------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under this
joint proxy statement - prospectus or determined if this joint proxy statement -
prospectus is accurate or adequate. Any representation to the contrary is a
criminal offense. The securities we are offering through this document are not
savings or deposit accounts or other obligations of any bank or non-bank
subsidiary of either of our companies, and they are not insured by the Federal
Deposit Insurance Corporation, the Savings Association Insurance Fund, the Bank
Insurance Fund or any other governmental agency.
--------------------------------------------------------------------------------
Joint Proxy Statement - Prospectus dated December 20, 2001
and first mailed to stockholders on or about December 28, 2001
This document incorporates important business and financial information
about FIRSTFED and People's from documents filed with the Securities and
Exchange Commission that have not been included in or delivered with this
document. You may read and copy these documents at the SEC's public reference
facilities. Please call the SEC at 1-800-SEC-0330 for information about these
facilities. This information is also available at the Internet site the SEC
maintains at http://www.sec.gov. Reports and other information relating to
FIRSTFED are also available at the offices of the American Stock Exchange.
Reports and other information relating to People's are also available at the
offices of the National Association of Securities Dealers. See "Where You Can
Find More Information" on page 108.
You also may request copies of these documents from FIRSTFED and
People's. FIRSTFED and People's will provide you with copies of these documents,
without charge, upon written or oral request to:
FIRSTFED AMERICA BANCORP, INC.
ONE FIRSTFED PARK
Swansea, Massachusetts 02777
Attention: Philip G. Campbell, Vice President, Director of Marketing
Telephone: (508) 235-1361
People's Bancshares, Inc.
545 Pleasant Street
New Bedford, Massachusetts 02740
Attention: Mary Ann Wilson, Assistant Vice President, Marketing Officer
Telephone: (508) 991-2601
In order to receive timely delivery of the documents in advance of our
special meetings of stockholders, you should make your requests no later than
January 28, 2002.
FIRSTFED AMERICA BANCORP, INC.
ONE FIRSTFED PARK
Swansea, Massachusetts 02777
(508) 235-1361
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
A special meeting of stockholders of FIRSTFED AMERICA BANCORP, INC.
will be held at The Western Hotel, One Exchange Street, Providence, Rhode Island
on February 4, 2002, at 2:00 p.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of October 1, 2001, by and
between FIRSTFED AMERICA BANCORP, INC. and People's Bancshares,
Inc., pursuant to which People's will merge with and into
FIRSTFED, all on and subject to the terms and conditions
contained therein; and
2. To transact any other business as may properly come before the
meeting or any adjournment or postponement.
Only stockholders of record at the close of business on December 17,
2001 will be entitled to notice of and to vote at the meeting and at any
adjournment or postponement.
By Order of the Board of Directors
Cecilia R. Viveiros
Corporate Secretary
Swansea, Massachusetts
December 28, 2001
FIRSTFED's board of directors unanimously recommends that you vote
"FOR" the proposal to approve and adopt the merger agreement. Whether or not you
plan to attend the meeting, please complete, sign, date and return the enclosed
proxy in the accompanying pre-addressed postage-paid envelope.
People's Bancshares, Inc.
545 Pleasant Street
New Bedford, Massachusetts 02740
(508) 991-2601
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Notice is hereby given that a special meeting of stockholders of
People's Bancshares, Inc. will be held at Stoneforge Tavern & Publick House, 90
Paramount Drive, Raynham, Massachusetts, at 10:00a.m., local time, on February
4, 2002, for the following purposes:
1. To consider and vote on a proposal to approve the Agreement and
Plan of Merger, dated as of October 1, 2001, by and between
FIRSTFED AMERICA BANCORP, INC., a Delaware corporation, and
People's Bancshares, Inc., a Massachusetts corporation. In the
merger, People's will merge with and into FIRSTFED, with FIRSTFED
being the surviving corporation, and each outstanding share of
People's common stock will be converted into the right to receive,
at the election of its holder, either (i) $22.00 in cash or (ii)
1.2644 shares of FIRSTFED common stock. The merger consideration
to be received by holders of People's common stock is subject to
adjustment under certain circumstances described in the joint
proxy statement - prospectus and in the merger agreement.
2. To transact such other business as may properly come before the
meeting and any adjournments or postponements thereof.
Pursuant to People's by-laws, the board of directors has fixed the
close of business on December 17, 2001 as the record date for the determination
of stockholders entitled to notice of and to vote at the special meeting and any
adjournments or postponements thereof.
We cannot complete the merger unless the merger agreement is adopted by
the affirmative vote of a majority of the shares of People's common stock
outstanding and entitled to vote at the special meeting. This joint proxy
statement - prospectus describes the proposed merger and the actions to be taken
in connection with the merger. Please give this information your careful
attention.
The People's board of directors recommends that stockholders vote "FOR"
the adoption of the merger agreement.
Please do not send any stock certificates at this time.
If People's stockholders approve the merger agreement at the special
meeting and the merger occurs, any stockholder (1) who files with People's
before the vote on the merger agreement written objection to the merger
agreement stating that he or she intends to demand payment for his or her shares
of People's common stock if the merger occurs and (2) whose shares of People's
common stock are not voted in favor of the merger agreement, has the right to
demand in writing from FIRSTFED, within 20 days after FIRSTFED mails a written
notice that the merger has occurred, payment for his or her shares and an
appraisal of the shares' value. FIRSTFED and any such stockholder will, in those
cases, have the rights and duties and will be required to follow the procedures
set forth in sections 88 to 98, inclusive, of Chapter 156B of the Massachusetts
Business Corporation Law, a copy of which is attached as Appendix E to this
joint proxy statement - prospectus.
By Order of the Board of Directors
Terrence A. Gomes
Clerk
New Bedford, Massachusetts
December 28, 2001
Table of Contents
QUESTIONS AND ANSWERS ABOUT THE MERGER ......................................... 1
Summary ........................................................................ 4
Comparative Per Share Data ..................................................... 16
Selected Historical Financial Information ...................................... 17
Selected Historical Financial Information for FIRSTFED ...................... 18
Selected Historical Financial Information for People's ...................... 20
Summary Selected Pro Forma Combined Data ....................................... 22
Market Price and Dividend Information .......................................... 24
Special Meeting of FIRSTFED Stockholders ....................................... 25
General ..................................................................... 25
Purpose of the Meeting ...................................................... 25
Record Date for Voting at the Meeting ....................................... 25
Quorum and Stockholder Vote Required ........................................ 25
Voting of Proxies ........................................................... 25
How to Revoke a Proxy ....................................................... 26
Solicitation of Proxies ..................................................... 26
Participants in First Federal Savings Bank's ESOP or 401(k) Plan ............ 27
Shares Held by FIRSTFED Officers and Directors and by People's .............. 27
Recommendation of FIRSTFED's Board of Directors ............................. 27
Special Meeting of People's Stockholders ....................................... 28
General ..................................................................... 28
Purpose of the Meeting ...................................................... 28
Record Date for Voting at the Meeting ....................................... 28
Quorum and Stockholder Vote Required ........................................ 28
Voting of Proxies ........................................................... 29
How to Revoke a Proxy ....................................................... 30
Solicitation of Proxies ..................................................... 30
Shares Held by People's Officers and Directors and by FIRSTFED .............. 30
Recommendation of People's Board of Directors ............................... 31
Ownership of FIRSTFED Common Stock ............................................. 32
Ownership of People's Common Stock ............................................. 36
The Merger ..................................................................... 38
About the Parties to the Merger ............................................. 38
Other Information ........................................................... 39
Form of the Merger .......................................................... 41
Conversion of People's Common Stock ......................................... 41
Cash or Stock Election ...................................................... 42
Election Procedures; Surrender of Stock Certificates ........................ 43
Treatment of People's Stock Options ......................................... 44
Tax Consequences for People's Stockholders .................................. 45
Background of the Merger .................................................... 47
Recommendation of the FIRSTFED Board; FIRSTFED's Reasons for the Merger ..... 54
Recommendation of the People's Board; People's Reasons for the Merger ....... 56
Opinion of FIRSTFED's Financial Advisor ..................................... 59
Opinion of People's Financial Advisor ....................................... 62
Dissenters' Rights .......................................................... 68
Interests of Our Directors and Officers in the Merger that Differ From Your
Interests .................................................................. 69
Regulatory Approvals Needed to Complete the Merger .......................... 70
Accounting Treatment of the Merger .......................................... 72
Resale of FIRSTFED Common Stock ............................................. 72
The Merger Agreement ........................................................... 73
Terms of the Merger ......................................................... 73
When Will the Merger be Completed ........................................... 73
Conditions to Completing the Merger ......................................... 73
Conduct of Business Before the Merger ....................................... 75
Covenants of People's and FIRSTFED in the Merger Agreement .................. 78
i
Representations and Warranties Made by FIRSTFED and People's in the
Merger Agreement ............................................................ 81
Terminating the Merger Agreement ............................................ 81
Stock Option Agreement ...................................................... 82
Expenses .................................................................... 85
Changing the Terms of the Merger Agreement .................................. 85
Management and Operations Following the Merger ................................. 86
Board of Directors .......................................................... 86
Management .................................................................. 86
Operations .................................................................. 86
Pro Forma Financial Information ................................................ 87
A Warning about Forward-looking Statements ..................................... 95
Description of FIRSTFED Common Stock ........................................... 96
General ..................................................................... 96
Common Stock ................................................................ 96
Preferred Stock ............................................................. 96
Comparison of Rights of Stockholders ........................................... 97
Authorized Stock ............................................................ 97
Voting Rights ............................................................... 97
Required Vote for Authorization of Certain Actions .......................... 98
Dividends ................................................................... 99
Appraisal Rights ............................................................ 99
Stockholders' Meetings ...................................................... 100
Action by Stockholders Without a Meeting .................................... 101
Board of Directors .......................................................... 102
Limitation of Personal Liability of Directors ............................... 103
Amendment of the Bylaws ..................................................... 103
Amendment of the Certificate of Incorporation/Articles of Organization ...... 104
Selected Provisions in the Certificate of Incorporation and Bylaws of
FIRSTFED .................................................................... 105
Business Combinations with Interested Stockholders .......................... 105
Limitation on Voting Rights ................................................. 106
Board of Directors .......................................................... 106
Special Meetings of Stockholders ............................................ 106
Advance Notice Provisions for Stockholder Nominations and Proposals ......... 107
Preferred Stock ............................................................. 107
Amendment of Certificate of Incorporation ................................... 107
Legal Matters .................................................................. 108
Experts ........................................................................ 108
Where You Can Find More Information ............................................ 108
Stockholder Proposals .......................................................... 110
FIRSTFED .................................................................... 110
People's .................................................................... 110
People's Management's Discussion and Analysis .................................. 111
People's Management's Discussion and Analysis of Financial Condition and
Results of Operations For the Three and Nine Months Ended September 30,
2001......................................................................... 111
Overview..................................................................... 111
Financial Condition.......................................................... 111
Results of Operations........................................................ 112
People's Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Years Ended December 31, 2000, 1999 and 1998 .. 117
Comparison of Financial Condition and Operating Results...................... 118
Results of Operations........................................................ 120
Quantitative and Qualitative Disclosures About Market Risk................... 125
Index to Financial Statements .................................................. F-1
APPENDIX A Agreement and Plan of Merger
APPENDIX B Stock Option Agreement
APPENDIX C Fairness Opinion of Keefe, Bruyette & Woods, Inc.
APPENDIX D Fairness Opinion of Fox-Pitt, Kelton Inc.
APPENDIX E Sections 85 through 98 of the Massachusetts Business Corporation
Law
ii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Why is People's merging with FIRSTFED?
Our companies are proposing to merge because we believe that the merger will
benefit our stockholders, customers and employees. We believe the merger will
create a stronger financial services company that will be better positioned to
compete in the financial services industry in Massachusetts through expanded
operations and market coverage. In addition, the value of the cash and FIRSTFED
common stock to be issued in the merger in exchange for the People's common
stock represents a premium over the market and book value of People's common
stock. To review the background and reasons for the merger in greater detail,
see pages 47 through 58.
What am I being asked to vote on and how does my board recommend that I vote?
You are being asked to vote FOR the adoption of the Agreement and Plan of Merger
dated as of October 1, 2001 providing for the merger of People's with and into
FIRSTFED. FIRSTFED's board of directors has determined that the proposed merger
is advisable and in the best interests of FIRSTFED's stockholders, has approved
the merger agreement and recommends that its stockholders vote for the adoption
of the merger agreement. People's board of directors has determined that the
proposed merger is advisable and in the best interests of People's stockholders,
has approved the merger agreement and, with the exception of Vincent Smyth who
takes no position on the matter, recommends that its stockholders vote FOR the
adoption of the merger agreement.
What vote is required to adopt the merger agreement?
The adoption of the merger agreement requires the affirmative vote of a majority
of the outstanding shares of FIRSTFED common stock and the affirmative vote of a
majority of the outstanding shares of People's common stock.
What will I receive in the merger?
Under the merger agreement, if you are a stockholder of People's, you will
receive either cash, FIRSTFED common stock, or a combination of cash and
FIRSTFED common stock, depending upon what you elect, in exchange for shares of
People's common stock you own. At your election, each share of People's common
stock you own will be exchanged for either: (1) $22.00 in cash, without interest
or (2) 1.2644 shares of FIRSTFED common stock. The amount of stock you receive
may be subject to the possible adjustments as described on page 41. You will be
able to elect to receive either cash, FIRSTFED common stock, or a combination of
both in exchange for your shares of People's common stock. Elections will be
limited by the requirement that 45% of the total number of outstanding shares of
People's common stock be exchanged for FIRSTFED common stock. Therefore, the
form of consideration you receive will depend in part on the elections of other
People's stockholders.
FIRSTFED will not issue fractional shares in the merger. Instead, you will
receive a cash payment, without interest, for the value of any fraction of a
share of FIRSTFED common stock that you would otherwise be entitled to receive.
If you are a stockholder of FIRSTFED, each of your shares of FIRSTFED common
stock will remain outstanding and unchanged in the merger; you do not need to
surrender your stock certificates or exchange them for new ones.
How do I elect to receive cash, stock or a combination of both for my People's
stock?
A green form for making an election will be sent to you separately. For your
election to be effective, your properly completed election form, along with your
People's stock certificates or an appropriate guarantee of delivery must be sent
to and received by Registrar and Transfer Company, the exchange agent, on or
before 5:00 p.m., Eastern time, on February 12, 2002. Do not send your election
form together with your proxy card. Instead, use the separate green envelope
specifically provided for the green election form and your stock certificates.
If you do not make a timely election you will be allocated FIRSTFED common stock
and/or cash depending on the elections made by other stockholders.
How do I exchange my People's stock certificates?
If you make an election, you must return your People's stock certificates or an
appropriate guarantee of delivery with your election form. Shortly after the
merger, the exchange agent will allocate cash and FIRSTFED common stock among
People's stockholders, consistent with their elections and the allocation and
proration procedures in the merger agreement. If you do not submit an election
form, you will receive instructions on where to surrender your People's stock
certificates from the exchange agent after the merger is completed. IN ANY
EVENT, YOU SHOULD NOT FORWARD YOUR PEOPLE'S STOCK CERTIFICATES WITH YOUR PROXY
CARD.
What do I do with my FIRSTFED stock certificates?
Nothing. Current holders of FIRSTFED stock will not have to exchange their
certificates as a result of the merger.
What will my dividends be after the merger?
You will receive any dividends that are declared and paid after the merger by
FIRSTFED's board of directors with respect to FIRSTFED common stock. FIRSTFED's
current quarterly dividend rate is $0.14 per share. FIRSTFED has paid quarterly
dividends on FIRSTFED common stock without interruption since 1998. All
dividends of FIRSTFED common stock are declared at the discretion of the
FIRSTFED board of directors.
May I sell the shares of FIRSTFED common stock that I will receive in the
merger?
Generally, yes. Shares of FIRSTFED common stock that you receive in the merger
will be freely transferable, unless you are an "affiliate" of People's under
applicable federal securities laws. Affiliates include directors and certain
executive officers and may include holders of 10% or more of People's common
stock. Generally, all shares of FIRSTFED common stock received by People's
affiliates (including shares they beneficially own through others) may not be
sold by them, except in compliance with the Securities Act of 1933, as amended.
For more detail regarding this subject, see page 72.
When is the merger expected to be completed?
We expect to complete the merger as soon as practicable after receiving FIRSTFED
and People's stockholder approvals as well as all required regulatory approvals.
We currently expect that all stockholder and regulatory approvals will be
received during the first calendar quarter of 2002.
2
What are the tax consequences of the merger to me?
If you exchange your People's shares solely for FIRSTFED common stock, you
should not recognize gain or loss except with respect to the cash you receive
instead of a fractional share. If you exchange your People's shares solely for
cash, you should recognize capital gain or loss on the exchange. If you exchange
your People's shares for a combination of FIRSTFED common stock and cash, you
should recognize capital gain, but not loss, on the exchange to the extent of
the lesser of cash received or gain realized in the exchange. THIS TAX TREATMENT
MAY NOT APPLY TO ALL PEOPLE'S STOCKHOLDERS. YOU SHOULD CONSULT YOUR OWN TAX
ADVISOR FOR A FULL UNDERSTANDING OF THE MERGER'S TAX CONSEQUENCES THAT ARE
PARTICULAR TO YOU.
If you are a FIRSTFED stockholder, you should not recognize gain or loss with
respect to your shares of FIRSTFED common stock solely as a result of the
merger.
What should I do now?
After you have read this document, please indicate on your proxy card how you
want to vote. Sign and mail the proxy card in the enclosed postage prepaid
envelope as soon as possible, so that your shares will be represented at the
special meeting. Instead of returning a proxy card, FIRSTFED stockholders may
vote their shares by telephone by calling a special toll-free telephone number.
Telephone voting instructions and the toll-free telephone number for FIRSTFED
stockholders are set forth on the enclosed proxy card.
If my shares are held in "street name" by my broker, will my broker
automatically vote my shares for me?
No. Your broker will not be able to vote your shares of FIRSTFED common stock or
People's common stock unless you provide instructions on how to vote. You should
instruct your broker how to vote your shares, following the directions your
broker provides. If you do not provide instructions to your broker, your shares
will not be voted, and this will have the effect of voting against adoption of
the merger agreement. Please check the voting form used by your broker to see if
it offers telephone or internet voting.
Who can help answer my questions?
If you want additional copies of this document, or if you want to ask any
questions about the merger, you should contact:
Philip G. Campbell or Mary Ann Wilson
Vice President, Director of Marketing Assistant Vice President,
FIRSTFED AMERICA BANCORP, INC. Marketing Officer
ONE FIRSTFED PARK People's Bancshares, Inc.
Swansea, Massachusetts 02777 545 Pleasant Street
Telephone:(508) 235-1361 New Bedford, Massachusetts
02740
Telephone:(508) 991-2601
3
SUMMARY
This brief summary highlights selected information from the joint proxy
statement - prospectus. This summary does not contain all of the information
that is important to you. You should carefully read this entire document and the
other documents that accompany this document or to which this document refers
you in order to fully understand the merger. See "Where You Can Find More
Information."
THE COMPANIES
FIRSTFED AMERICA BANCORP, INC. FIRSTFED is
the savings and loan holding ONE FIRSTFED
PARK company for First Federal Savings Bank
of Swansea, Massachusetts 02777 America, a
federally chartered (508) 679-8181 savings
association. First Federal operates 15
banking offices in the municipalities of
Swansea, Fall River, Attleboro, New
Bedford, Seekonk, Somerset and Taunton,
Massachusetts, and Pawtucket, Providence,
East Providence, Warwick and Cranston,
Rhode Island, and five loan origination
centers in Yarmouth, Auburn, Agawam and
Burlington, Massachusetts and East
Greenwich, Rhode Island. First Federal's
sixteenth banking office is scheduled to
open in Middletown, Rhode Island in January
2002. At September 30, 2001, FIRSTFED had
total assets of $1.7 billion, deposits of
$758.8 million and stockholders' equity of
$119.7 million.
People's Bancshares, Inc. People's is the bank holding company for
545 Pleasant Street People's Savings Bank of Brockton, a
New Bedford, Massachusetts 02740 Massachusetts savings bank. People's
(508) 991-2601 Savings Bank of Brockton operates 12
banking offices in southeastern
Massachusetts and 10 loan production
offices through its subsidiary People's
Mortgage Corporation in Massachusetts,
Connecticut, Maryland, Rhode Island and
Virginia. At September 30, 2001, People's
had total assets of $928.5 million,
deposits of $576.2 million, and
stockholders' equity of $38.0 million.
THE FIRSTFED SPECIAL STOCKHOLDERS' MEETING
General (page 25) FIRSTFED's special meeting will be held at
The Westin Hotel, One Exchange Street,
Providence, Rhode Island, on February 4, 2002
at 2:00 p.m., local time.
Purpose of the Meeting At the special meeting, FIRSTFED stockholders
(page 25) will be
4
asked to approve the merger agreement with
People's and to transact any other business
that may properly come before the meeting.
Record Date for Voting You can vote at the meeting of FIRSTFED
(page 25) stockholders if you owned FIRSTFED common
stock at the close of business on December
17, 2001. You will be able to cast one vote
for each share of FIRSTFED common stock you
owned at that time. As of December 17, 2001
there were 6,220,249 shares of FIRSTFED
common stock issued and outstanding.
Quorum and Stockholder Vote In order to approve the merger agreement, the
Required (page 25) holders of a majority of the outstanding
shares of FIRSTFED common stock entitled to
vote must vote in its favor. You can vote
your shares by attending the meeting and
voting in person or by completing and mailing
the enclosed proxy card.
THE PEOPLE'S SPECIAL STOCKHOLDERS' MEETING
General (page 28) People's special meeting will be held at
Stoneforge Tavern & Publick House, 90
Paramount Drive, Raynham, Massachusetts on
February 4, 2002 at 10:00 a.m., local time.
Purpose of the Meeting At the special meeting, People's stockholders
(page 28) will be asked to approve the merger agreement
with FIRSTFED and to transact any other
business that may properly come before the
meeting.
Record Date for Voting You can vote at the special meeting of
(page 28) People's stockholders if you owned People's
common stock at the close of business on
December 17, 2001. You will be able to cast
one vote for each share of People's common
stock you owned at that time. As of December
17, 2001 there were 3,258,250 shares of
People's common stock outstanding.
Quorum and Stockholder Vote In order to approve the merger agreement, the
Required (page 28) holders of a majority of the outstanding
shares of People's common stock entitled to
vote must vote in its favor. You can vote
your shares by attending the special meeting
and voting in person or by completing and
mailing the enclosed proxy card.
5
THE MERGER
We have attached the merger agreement to this document as Appendix A. We
encourage you to read the entire merger agreement. It is the legal document that
governs the merger.
Overview of the Transaction We propose a business combination in which
(page 38) People's will merge with FIRSTFED. FIRSTFED
will be the surviving corporation in the
merger. Immediately after the merger,
People's Savings Bank of Brockton will be
merged into First Federal, with First Federal
being the surviving institution.
Each Share of People's Common FIRSTFED stockholders. As a FIRSTFED
Stock Will Be Exchanged for stockholder, each of your shares of FIRSTFED
Either 1.2644 Shares of FIRSTFED common stock will remain outstanding and
Common Stock or $22.00 in Cash unchanged in the merger. You do not need to
(page 41) surrender your stock certificates or exchange
them for new ones.
People's stockholders. As a People's
stockholder, upon the closing of the merger,
each of your shares of People's common stock
will automatically be converted into the
right to receive either 1.2644 shares of
FIRSTFED common stock or $22.00 in cash. You
may elect either of these options, and if you
desire you may elect to exchange some of your
People's common stock for cash and some of
your People's common stock for shares of
FIRSTFED common stock. The value of the
FIRSTFED common stock will be evaluated
during a 20-day measurement period shortly
before the closing of the merger. If during
this period (1) the average closing price of
the FIRSTFED stock declines below $13.92
(causing the value of 1.2644 shares of
FIRSTFED stock to be less than $17.60), and
---
(2) FIRSTFED's common stock underperforms the
"SNL New England Thrift Index" by more than
15% between September 28, 2001 and the end of
the measurement period, then People's has the
right to terminate the merger. FIRSTFED would
have the right to cancel the termination by
increasing the number of shares of FIRSTFED
stock it is to exchange such that (a) the
market value of that number of shares is
equal to $17.60 or, if less, (b) the value of
that number of shares would not have
underperformed the decline in the Index. If
the average closing price of FIRSTFED common
stock during the 20-day measurement period
increases to $20.88 or more, the number of
---------
shares of FIRSTFED stock to be exchanged will
be automatically decreased such that the
value of the shares of FIRSTFED common stock
to be exchanged
6
for each share of People's common stock is
equal to $26.40.
On December 17, 2001, FIRSTFED common stock
closed at $17.00 per share on the American
Stock Exchange. Additionally, the value of
the SNL New England Thrift Index was 727.0 at
September 28, 2001 and as of December 17,
2001 was 735.2. If this were the average
closing price of FIRSTFED common stock during
the measurement period, and if we were
comparing the performance of FIRSTFED common
stock to the performance of the Index as of
that date, People's right to terminate the
merger agreement would not have arisen.
The amount of cash and/or stock that you
receive may differ from the amounts that you
elect due to the allocation and proration
procedures in the merger agreement. The
merger agreement generally provides that 45%
of the People's common stock will be
converted into FIRSTFED common stock and 55%
of the People's common stock will be
converted into cash. Because the tax
consequences of receiving cash will differ
from the tax consequences of receiving stock,
you should carefully read the tax information
beginning on page 45.
Comparative Market Prices and FIRSTFED common stock is listed on the
Share Information (page 24) American Stock Exchange under the symbol
"FAB." People's common stock is quoted on the
Nasdaq National Market under the symbol
"PBKB."
The following table shows the closing price
per share of FIRSTFED common stock, the
closing price per share of People's common
stock and the equivalent per share price for
People's common stock giving effect to the
merger on (1) September 28, 2001, which was
the last business day preceding the public
announcement of the proposed merger and (2)
December 17, 2001, which is 8 trading days
before the mailing of this document. The
equivalent per share price of People's common
stock was computed by multiplying the price
of FIRSTFED common stock by the exchange
ratio that would be used if the average
closing price of FIRSTFED common stock during
the measurement period used to calculate the
7
exchange ratio were equal to the closing
price of FIRSTFED common stock on the date
indicated.
FIRSTFED People's Equivalent Price
Common Common Per Share of
Stock Stock People's Stock
-------- -------- ----------------
September 28, 2001.... $17.40 $13.73 $22.00
December 17, 2001..... $17.00 $21.05 $21.49
How to Elect to Receive Cash or A green form for making an election will be
Stock and Exchange Your People's sent to you separately. The election form
Stock Certificates allows you to elect to receive cash, stock,
(page 43) or a combination of cash and stock.
For your election to be effective your
properly completed green election form, along
with your People's stock certificates or an
appropriate guarantee of delivery must be
received by Registrar and Transfer Company on
or before 5:00 p.m., Eastern time, on
February 12, 2002. Registrar and Transfer
Company will act as exchange agent in the
merger and in that role will process the
exchange of People's stock certificates for
either cash or FIRSTFED common stock. Shortly
after the merger, the exchange agent will
allocate cash and stock among People's
stockholders, consistent with their elections
and the allocation and proration procedures
set forth in the merger agreement. If you do
not submit an election form, you will receive
instructions on where to surrender your
People's stock certificates from the exchange
agent after the merger is completed. IN ANY
EVENT, YOU SHOULD NOT FORWARD YOUR ELECTION
---
FORM OR YOUR PEOPLE'S STOCK CERTIFICATES WITH
YOUR PROXY CARD.
If you have a preference for receiving either
FIRSTFED stock or cash for your People's
stock, you should complete and return the
enclosed election form. If you do not make an
election you will be allocated FIRSTFED
common stock or cash depending on the
elections made by other stockholders. Please
remember, however, that even if you do make
an
8
election, you might not receive the amount of
cash and/or stock that you elect.
We are not recommending whether you should
elect to receive cash or stock in the merger.
You must make your own decision with respect
to your election.
Tax Consequences of the Merger FIRSTFED stockholders. As your shares of
(page 45) FIRSTFED common stock will remain unchanged,
the merger will not cause you to recognize
any gain or loss for U.S. federal income tax
purposes.
People's stockholders. Your federal income
tax treatment will depend primarily on
whether you exchange your People's common
stock solely for FIRSTFED common stock,
solely for cash or for a combination of
FIRSTFED stock and cash. If you exchange your
People's shares solely for FIRSTFED common
stock, you should not recognize gain or loss
except with respect to the cash you receive
instead of a fractional share. If you
exchange your People's shares solely for
cash, you should recognize capital gain or
loss on the exchange to the extent of the
lesser of cash received or gain realized in
the exchange. If you exchange your People's
shares for a combination of FIRSTFED common
stock and cash, you should recognize capital
gain, but not any loss, on the exchange. The
actual federal income tax consequences to you
of electing to receive cash or FIRSTFED
common stock or a combination of both will
not be ascertainable at the time you make
your election because we will not know at
that time if, or to what extent, the
allocation and proration procedures will
apply.
THIS TAX TREATMENT MAY NOT APPLY TO ALL
PEOPLE'S STOCKHOLDERS. DETERMINING THE ACTUAL
TAX CONSEQUENCES OF THE MERGER TO YOU CAN BE
COMPLICATED. YOU SHOULD CONSULT YOUR OWN TAX
ADVISOR FOR A FULL UNDERSTANDING OF THE
MERGER'S TAX CONSEQUENCES THAT ARE PARTICULAR
TO YOU.
9
We will not be obligated to complete the
merger unless we each receive a legal opinion
from our respective legal counsel, dated the
closing date, that the merger will be treated
as a transaction of a type that is generally
tax-free to FIRSTFED and People's for U.S.
federal income tax purposes. In that case,
the U.S. federal income tax treatment of the
merger will be as we have described it above.
This opinion, however, will not bind the
Internal Revenue Service, which could take a
different view.
We Recommend that Stockholders FIRSTFED stockholders. FIRSTFED's board of
Approve the Merger directors believes that the merger is fair to
(pages 54 and 56) you and in your best interests, and
unanimously recommends that you vote "FOR"
the proposal to approve the merger agreement.
For a discussion of the circumstances
surrounding the merger and the factors
considered by FIRSTFED's board of directors
in approving the merger agreement, see
page 54.
People's stockholders. People's board of
directors believes that the merger is fair to
you and in your best interests, and, with the
exception of Vincent Smyth who takes no
position on the matter, recommends that you
vote "FOR" the proposal to approve the merger
agreement.
For a discussion of the circumstances
surrounding the merger and the factors
considered by People's board of directors in
approving the merger agreement, see page 56.
Our Financial Advisors Believe FIRSTFED stockholders. Keefe, Bruyette &
the Merger Consideration Is Fair Woods, Inc. has delivered to FIRSTFED's board
to Stockholders of directors its opinion that, as of the date
(pages 59 and 62) of this document, the merger
consideration is fair to the holders of
FIRSTFED common stock from a financial point
of view. A copy of this opinion is provided
as Appendix C to this document. You should
read it completely to understand the
procedures followed, assumptions made,
matters considered, and qualifications and
limitations on the review made by Keefe
Bruyette in providing
10
this opinion. FIRSTFED has agreed to pay
Keefe Bruyette $364,000, plus its expenses up
to $7,500, for its services in connection
with the merger.
People's stockholders. Fox-Pitt, Kelton Inc.
has delivered to People's board of directors
its opinion that, as of the date of this
document, the merger consideration is fair to
the holders of People's common stock from a
financial point of view. A copy of this
opinion is provided as Appendix D to this
document. You should read it completely to
understand the procedures followed,
assumptions made, matters considered, and
qualifications and limitations on the review
made by Fox-Pitt, Kelton in providing this
opinion. People's has agreed to pay Fox-Pitt,
Kelton its expenses plus a fee equal to 1% of
the aggregate consideration paid to People's
stockholders for its services in connection
with the merger.
Only People's Stockholders Have FIRSTFED stockholders. FIRSTFED stockholders
Appraisal Rights in the Merger will not have appraisal rights as a result of
(page 68) the merger.
People's stockholders. Massachusetts law
provides you with dissenters' appraisal
rights in the merger. This means that if you
are not satisfied with the amount you are
receiving in the merger, you are legally
entitled to have the value of your shares
independently determined and to receive
payment in cash based on that valuation. To
exercise your dissenters' rights you must (1)
deliver an objection to the merger agreement
and assert your intent to demand payment for
your shares to People's at or before the
special meeting of People's stockholders (but
in any event before the vote is taken at the
special meeting); (2) not vote in favor of
the merger; and (3) deliver a written demand
to FIRSTFED for payment for your shares of
People's stock and for an appraisal of the
value of those shares. Notices to People's
should be addressed to People's Bancshares,
Inc. Attention: President and sent to
People's at 545 Pleasant Street, New Bedford,
Massachusetts
11
02740. Notices to FIRSTFED should be
addressed to FIRSTFED's Corporate Secretary
and sent to FIRSTFED at ONE FIRSTFED PARK,
Swansea, Massachusetts 02777. YOUR FAILURE TO
FOLLOW EXACTLY THE PROCEDURES SPECIFIED UNDER
MASSACHUSETTS LAW WILL RESULT IN THE LOSS OF
YOUR DISSENTERS' RIGHTS. If you exercise your
dissenters' rights, you could receive less or
more than the value of the merger
consideration. A copy of the dissenters'
rights provisions of Massachusetts law is
provided as Appendix E to this document.
Interests of People's Directors Some of People's directors and officers have
and Officers in the Merger That interests in the merger that are different
Differ From Your Interests from, or are in addition to, their interests
(page 69) as stockholders in our companies. The members
of our boards of directors knew about these
additional interests, and considered them,
when they approved the merger. These include:
. the payout of cash benefits under existing
employment agreements and arrangements as
a result of completion of the merger;
. the vesting of People's stock options as a
result of completion of the merger;
. provisions in the merger agreement
relating to indemnification of directors
and officers and insurance for directors
and officers of People's for events
occurring before the merger; and
. the appointment of one director of
People's to the board of directors of
FIRSTFED and First Federal.
Regulatory Approvals Needed to We cannot complete the merger unless it is
Complete the Merger first approved by the Office of Thrift
(page 70) Supervision and the Massachusetts Board of
Bank Incorporation. First Federal is also
required to provide the FDIC with a notice of
the potential acquisition of People's
Savings' subsidiaries. We will also need
either the approval of, or a waiver of the
requirement to obtain the approval of, the
Federal Reserve Board, and People's
12
must provide 60 days' prior written notice of
the bank merger to the Massachusetts
Commissioner of Banks and the Massachusetts
Depositors Insurance Fund. FIRSTFED has filed
the required applications with the Office of
Thrift Supervision and the Massachusetts
Board of Bank Incorporation and has filed a
waiver request with the Federal Reserve
Board, which waiver was received on November
21, 2001, and the requisite notice has been
furnished to the FDIC. People's has furnished
the requisite notice to the Massachusetts
Commissioner of Banks and the Massachusetts
Depositors Insurance Fund. As of the date of
this document, we have not received the
approval of the Office of Thrift Supervision
or the Massachusetts Board of Bank
Incorporation. While we do not know of any
reason why we would not be able to obtain
these approvals and the waiver in a timely
manner, we cannot be certain when or if we
will receive them.
Management and Operations After The present management of FIRSTFED will
the Merger (page 86) continue to manage the combined company. The
board of directors of FIRSTFED after the
merger will be composed of its current
members and one current director of People's.
13
THE MERGER AGREEMENT
Conditions to Completing the The completion of the merger depends on
Merger (page 73) a number of conditions being met. These
conditions include:
1. approval of the merger agreement by
both FIRSTFED's stockholders and
People's stockholders;
2. approval of the merger by regulatory
authorities (and such approvals may
not contain any conditions or
requirements that would adversely
impact FIRSTFED as described in this
document);
3. receipt of tax opinions that the
merger qualifies as a tax-free
reorganization;
4. the listing on the American Stock
Exchange of sufficient additional
shares of FIRSTFED common stock to
be exchanged for People's stock in
the merger and to be issued upon the
exercise of People's stock options
following the completion of the
merger;
5. a requirement that People's shall
not sustain a material adverse
effect on its business, financial
condition or results of operations
(as defined and qualified by the
merger agreement) at any time after
October 1, 2001; and
6. the aggregate fair market value of
People's trust preferred securities,
subordinated debt securities,
corporate debt securities and zero
coupon debt instruments shall not
have declined by more than 7% from
their aggregate value on August 31,
2001 when compared to their
aggregate value within 10 business
days before the merger is completed.
Where the law permits, we could decide
to complete the merger even though one
or more of these conditions has not been
met. We cannot be certain when or if the
conditions to the merger will be
satisfied or waived, or that the merger
will be completed.
14
Terminating the Merger Agreement We can agree at any time not to complete
(page 81) the merger, even if the stockholders of
both our companies have approved it.
Also, either of us can decide, without
the consent of the other, to terminate
the merger agreement if:
1. the stockholders of either company
do not approve the merger;
2. a required regulatory approval is
denied or a governmental authority
prevents consummation of the merger
transactions;
3. we do not complete the merger by
June 30, 2002 (unless the failure to
timely complete is due to a breach
of a representation, warranty or
covenant by the party seeking to
terminate);
4. the other party makes a
misrepresentation, breaches a
warranty or fails to satisfy or
fulfill a covenant and such event
would have a material adverse effect
on the party seeking to terminate
the merger agreement; or
5. the other party's board of directors
(1) does not publicly recommend in
this document that its stockholders
approve the merger agreement; (2)
withdraws its recommendation to its
stockholders to approve the merger
agreement; or (3) revises such
recommendation in any respect
materially adverse to the party
seeking to terminate the merger
agreement under this provision.
In addition, People's may terminate the
merger agreement if its board of
directors determines that it must accept
a superior proposal from a third party
in the exercise of its fiduciary duties.
If People's terminated the merger
agreement for this reason, it would be
required to pay FIRSTFED a $3 million
termination fee. People's may also
terminate the merger agreement if the
average closing price of FIRSTFED common
stock during the 20-day measurement
period shortly before the closing of the
merger is less than $13.92 and
---
FIRSTFED's common stock underperforms
the SNL New England Thrift Index by more
than 15% between September 28, 2001 and
the end of the measurement period.
However,
-------
15
FIRSTFED may cancel the termination by
electing to increase the exchange ratio
such that (a) the market value of the
number of shares to be exchanged is
equal to $17.60, or, if less, (b) the
value of that number of Shares would not
have underperformed the decline in the
SNL New England Thrift Index.
We May Amend the Terms of the We can agree to amend the merger
Merger and Waive Some Conditions agreement, and each of us can waive our
(page 85) right to require the other party to
adhere to the terms and conditions of
the merger agreement, where the law
allows. However, after our stockholders
approve the merger agreement, they must
approve any amendment or waiver that
reduces or changes the consideration to
be received by People's stockholders in
the merger.
Stock Option Agreement (page 82) People's, at the request of FIRSTFED,
entered into a stock option agreement
granting FIRSTFED an option to purchase
up to 647,197 shares of People's common
stock, or 19.9% of People's outstanding
common stock as of October 1, 2001
(subject to adjustment as provided in
the stock option agreement), at a price
of $22.00 per share. People's and
FIRSTFED entered into the stock option
agreement to increase the likelihood
that the merger would be completed. The
option agreement could discourage other
companies from trying or proposing to
combine with People's before we complete
the merger.
FIRSTFED cannot exercise its option
unless specified events occur that
threaten completion of the merger. We do
not know of any event that has occurred
as of the date of this document that
would permit FIRSTFED to exercise its
option. A copy of the option agreement
is included in this document as Appendix
B.
16
Comparative Per Share Data
The following table shows information about our income per common
share, dividends per share and book value per share, and similar information
reflecting the merger (which we refer to as "pro forma" information). In
presenting the comparative pro forma information for certain time periods, we
assumed that we had been merged throughout those periods.
The information listed as "pro forma equivalent" was obtained by
multiplying the pro forma amounts by an exchange ratio of 1.2644. We present
this information to reflect the fact that some People's stockholders will
receive shares of FIRSTFED common stock for each share of People's common stock
exchanged in the merger. We also anticipate that the combined company will
derive financial benefits from the merger that include reduced operating
expenses and the opportunity to earn more revenue. The pro forma information,
while helpful in illustrating the financial characteristics of the new company
under one set of assumptions, does not reflect these benefits and, accordingly,
does not attempt to predict or suggest future results. The pro forma information
also does not necessarily reflect what the historical results of the combined
company would have been had our companies been combined during these periods.
The information in the following table is based on, and should be read
together with, the historical financial information that we have presented in
this document and in our prior filings with the Securities and Exchange
Commission. FIRSTFED has incorporated its prior filings into this document by
reference. See "Where You Can Find More Information" on page 108.
At
September 30, 2001
------------------
Book value per share:
FIRSTFED historical......................... $20.62
People's historical......................... 11.69
Pro forma combined (1)...................... 20.09
People's pro forma equivalent (2)........... 25.41
Six
Months Ended Year Ended
September 30, March 31,
2001 2001
---- ----
Cash dividends declared per share (3):
FIRSTFED historical......................... $0.24 $0.37
People's historical......................... - 0.84
Pro forma (4)............................... 0.24 0.37
People's pro forma equivalent (2)........... 0.30 0.47
Diluted net income per share (3):
FIRSTFED historical......................... $1.01 $1.56
People's historical......................... 0.71 2.52
Pro forma combined.......................... 0.98 2.07
People's pro forma equivalent (2)........... 1.24 2.62
_________________
(1) The pro forma combined book value per share of FIRSTFED
common stock is based upon the historical total combined
common stockholders' equity for FIRSTFED and People's divided
by total pro forma common shares of the combined entities.
(2) The pro forma equivalent amounts are computed by multiplying
the pro forma combined amounts by a factor of 1.2644 to
reflect the exchange ratio in the merger.
(3) FIRSTFED's fiscal year ends March 31 and People's fiscal year
ends December 31. The historical financial data of People's
as presented for the six month and full fiscal year periods
are for the six months ended June 30, 2001 and the year ended
December 31, 2000, respectively.
(4) Pro forma dividends per share represent FIRSTFED's historical
dividends per share.
17
Selected Historical Financial Information
The following tables show summarized historical financial data for
FIRSTFED and People's. The information in the following tables is based on
historical financial information that FIRSTFED and People's have presented in
their prior filings with the Securities and Exchange Commission. You should read
this summary financial information together with FIRSTFED's and People's
historical financial information.
The audited financial statements of FIRSTFED are included in FIRSTFED's
2001 annual report to stockholders for the fiscal year ended March 31, 2001 and
the unaudited financial statements for FIRSTFED for the six months ended
September 30, 2001 and 2000 are included in FIRSTFED's Quarterly Report on Form
10-Q for the period ended September 30, 2001, both of which are incorporated
herein by reference. Prior to January 15, 1997, FIRSTFED had no significant
assets, liabilities or operations, and accordingly, the data prior to such time
represents the financial condition and results of operations of First Federal.
The audited financial statements of People's are included in this document
beginning on page F-10 and the unaudited financial statements of People's for
the nine months ended September 30, 2001 and 2000 are included in this document
beginning on page F-2.
Unaudited financial statements for FIRSTFED and People's for the six
and nine months ended September 30, 2001 and 2000 include normal, recurring
adjustments necessary to fairly present the data for those periods. The
unaudited data is not necessarily indicative of expected results of a full year
of operation.
18
Selected Historical Financial Information for FIRSTFED
At At March 31,
September 30, ---------------------------------------------------------------
2001 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Financial Condition Data:
Total assets .................................. $1,746,680 $1,671,065 $1,579,995 $1,393,237 $1,281,832 $ 979,736
Short-term investments ........................ 26,585 200 250 14,422 -- 39,410
Investment in trading securities .............. 587 815 587 94 -- --
Investment securities available for sale(1) ... 23,221 7,837 5,643 5,575 7,712 888
Mortgage-backed securities available 595,613 501,230 543,627 408,451 215,143 31,732
for sale ...................................
Investment securities held to maturity ........ -- -- -- 9,998 22,491 20,991
Mortgage-backed securities held
to maturity(1) ............................. 1,270 2,138 2,819 5,608 12,495 15,435
Mortgage loans held for sale .................. 29,441 39,103 3,417 52,334 84,867 23,331
Loans receivable, net(2) ...................... 925,707 977,174 888,760 766,687 848,552 796,355
Deposits ...................................... 758,814 707,416 664,682 674,870 708,488 723,976
FHLB advances and other borrowings ............ 832,885 814,764 779,662 585,981 403,865 111,062
Stockholders' equity .......................... 119,713 111,558 101,705 102,961 126,986 122,154
Six Months Ended
September 30, Year Ended March 31,
------------------- ------------------------------------------------------
2001 2000 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------- -------- ---------
(In thousands, except per share data)
Operating Data:
Interest and dividend income ................... $ 55,527 $ 56,176 $114,075 $ 93,821 $ 86,777 $ 76,890 $ 62,259
Interest expense ............................... 37,176 38,659 79,395 61,771 56,443 46,529 38,497
-------- -------- -------- -------- -------- -------- ---------
Net interest income before provision for loan
losses ....................................... 18,351 17,517 34,680 32,050 30,334 30,361 23,762
Provision for loan losses ...................... 600 600 1,200 1,200 1,200 2,350 3,750
-------- -------- -------- -------- -------- -------- ---------
Net interest income after provision
for loan losses ............................. 17,751 16,917 33,480 30,850 29,134 28,011 20,012
Total non-interest income ...................... 6,426 4,378 8,958 6,534 7,638 6,353 4,414
Total non-interest expense ..................... 14,635 14,645 29,053 25,509 25,333 22,259 27,305
-------- -------- -------- -------- -------- -------- ---------
Income (loss) before income tax expense
(benefit)(3) ................................ 9,542 6,650 13,385 11,875 11,439 12,105 (2,879)
Income tax expense (benefit) ................... 3,213 2,081 4,221 3,689 3,818 5,286 (449)
-------- -------- -------- -------- -------- -------- ---------
Net income (loss) before cumulative
effect of accounting change ................. 6,329 4,569 9,164 8,186 7,621 6,819 (2,430)
Cumulative effect of change in
accounting for derivative
instruments and hedging activities,
net of $237 tax benefit ..................... (461) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Net income (loss) .............................. $ 5,868 $ 4,569 $ 9,164 $ 8,186 $ 7,621 $ 6,819 ($2,430)
======== ======== ======== ======== ======== ======== =========
Per Share Data:
Basic earnings per share before
cumulative effect of accounting $ 1.10 $ 0.77 $ 1.57 $ 1.31 $ 1.09 $ 0.84 N/M
change ......................................
Cumulative effect of accounting
change ...................................... (0.08) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Basic earnings per share ....................... $ 1.02 $ 0.77 $ 1.57 $ 1.31 $ 1.09 $ 0.84 N/M
======== ======== ======== ======== ======== ======== =========
Diluted earnings per share before
cumulative effect of accounting
change ...................................... $ 1.09 $ 0.77 $ 1.56 $ 1.31 $ 1.09 $ 0.84 N/M
Cumulative effect of accounting
change........................... ........... (0.08) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Diluted earnings per share ..................... $ 1.01 $ 0.77 $ 1.56 $ 1.31 $ 1.09 $ 0.84 N/M
======== ======== ======== ======== ======== ======== =========
Dividends per share ............................ $ 0.24 $ 0.17 $ 0.37 $ 0.26 $ 0.15 -- --
19
Selected Historical Financial Information for FIRSTFED (continued)
At or For the Six
Months Ended
September 30, At or For the Year Ended March 31,
------------------ -----------------------------------------------
2001 2000 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------- -------- --------
Selected Consolidated Financial Ratios and
Other Data:(4)
Return (loss) on average assets (net income
divided by average assets)..................... 0.68% 0.56% 0.56% 0.56% 0.57% 0.63% (0.28%)
Return (loss) on average stockholders'
equity (net income divided by average equity).. 9.89% 8.83% 8.71% 7.79% 6.82% 5.40% (3.71%)
Average stockholders' equity to average assets.... 6.90% 6.33% 6.40% 7.20% 8.39% 11.60% 7.58%
Stockholders' equity to total assets at end
of period...................................... 6.85% 6.28% 6.68% 6.44% 7.39% 9.91% 12.47%
Average interest rate spread(5)................... 1.93% 2.00% 1.93% 2.06% 1.92% 2.22% 2.27%
Net interest margin(6)............................ 2.27% 2.28% 2.25% 2.36% 2.41% 2.93% 2.87%
Average interest-earning assets to average
interest-bearing liabilities................... 107.74% 106.03% 106.24% 106.03% 111.04% 115.87% 112.67%
Total non-interest expense to average assets...... 1.70% 1.79% 1.77% 1.75% 1.90% 2.04% 3.16%
Efficiency ratio(3)(7)............................ 59.07% 66.89% 66.58% 66.11% 66.71% 60.63% 96.91%
Ratio of dividends paid to net income............. 25.44% 24.49% 26.04% 22.09% 15.10% -- --
Asset Quality Ratios:
Non-performing loans as a percent of loans(8)(9).. 0.04% 0.08% 0.13% 0.15% 0.33% 0.35% 0.45%
Non-performing assets as a percent of total
assets(9)....................................... 0.03% 0.05% 0.09% 0.08% 0.21% 0.28% 0.44%
Allowance for loan losses as a percent of
loans(2)(8)..................................... 1.46% 1.27% 1.34% 1.36% 1.54% 1.27% 1.09%
Allowance for loan losses as a percent of
non-performing loans(2)(9)..................... 3,348% 1,669% 993% 937% 471% 359% 240%
Capital Ratios (Bank Only):
Tangible capital.................................. 6.27% 6.10% 6.27% 6.35% 7.03% 8.54% 10.34%
Core capital...................................... 6.27% 6.10% 6.27% 6.35% 7.03% 8.54% 10.34%
Risk-based capital................................ 13.32% 13.86% 13.58% 15.06% 16.18% 18.35% 20.24%
(1) Investment securities at September 30, 2001 and March 31, 2001, 2000, 1999,
1998, and 1997 do not include $40.4 million, $40.4 million, $30.9 million,
$28.7 million, $17.9 million, and $9.5 million of Federal Home Loan Bank of
Boston stock.
(2) The allowance for loan losses at September 30, 2001 and March 31, 2001,
2000, 1999, 1998 and 1997 was $13.7 million, $13.2 million, $12.3 million,
$12.0 million, $10.9 million, and $8.8 million, respectively.
(3) For the year ended March 31, 1997, non-interest expense includes $6.5
million for the establishment of the FIRSTFED Charitable Foundation and a
$2.9 million assessment to recapitalize the Savings Association Insurance
Fund of the FDIC.
(4) Asset Quality Ratios and Capital Ratios are end of period ratios. With the
exception of end of period ratios, all ratios are based on average balances
during the indicated periods and are annualized where appropriate.
(5) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) The efficiency ratio represents the ratio of non-interest expenses divided
by the sum of the net interest income and non-interest income.
(8) Loans include loans receivable, net, excluding the allowance for loan
losses.
(9) Non-performing assets consists of non-performing loans and real estate
owned. Non-performing loans consists of all loans 90 days or more past due
and other loans which have been identified by FIRSTFED as presenting
uncertainty with respect to the collectibility of interest or principal. It
is FIRSTFED's policy to cease accruing interest on all such loans.
20
Selected Historical Financial Information for People's
At At December 31,
September 30, --------------------------------------------------------------
2001 2000 1999 1998 1997 1996
------------ ---------- ---------- ---------- ---------- ----------
(In thousands)
Selected Consolidated Balance
Sheet Data:
Total assets..................... $ 928,492 $1,003,435 $1,071,176 $944,640 $762,910 $496,133
Securities....................... 253,412 488,128 572,565 378,382 289,889 184,195
Restricted equity securities..... 19,869 19,869 21,701 19,841 14,824 8,322
Loans, net....................... 334,803 393,451 413,215 423,778 382,407 246,195
Deposits......................... 576,220 624,561 561,614 470,887 355,083 336,238
Borrowed funds................... 282,441 330,610 447,950 416,900 356,550 123,920
Subordinated debentures.......... 23,800 23,800 13,800 13,800 13,800 --
Stockholders' equity............. 38,007 17,757 40,864 34,667 30,136 31,064
Nine Months Ended
September 30, Year Ended December 31,
------------------- -----------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
--------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
Selected Consolidated Operating Data:
Interest and dividend income .......... $ 51,056 $ 61,016 $ 81,302 $ 73,346 $ 61,792 $ 44,500 $ 33,761
Interest expense ...................... 32,340 39,111 52,707 45,545 39,241 26,185 18,595
-------- -------- -------- -------- -------- -------- --------
Net interest income ................... 18,716 21,905 28,595 27,801 22,551 18,315 15,166
Provision (credit) for loan losses .... -- -- -- (850) 600 100 75
-------- -------- -------- -------- -------- -------- --------
Net interest income, after
provision (credit) for loan losses.. 18,716 21,905 28,595 28,651 21,951 18,215 15,091
Other income .......................... 8,995 7,487 8,811 9,042 9,457 6,197 4,031
Operating expenses .................... 22,541 18,883 25,075 23,718 19,238 16,347 13,678
======== -------- -------- -------- -------- -------- --------
Income before income taxes and
cumulative effect of accounting
change 5,170 10,509 12,331 13,975 12,170 8,065 5,444
========
Provision for income taxes ............ 1,976 3,411 4,064 4,609 4,370 2,934 1,885
======== -------- -------- -------- -------- -------- --------
Income before cumulative effect of
accounting change .................. 3,194 7,098 8,267 9,366 7,800 5,131 3,559
Cumulative effect of accounting
change for organization costs, net of
tax ................................... -- -- -- -- (186) -- --
======== -------- -------- -------- -------- -------- --------
Net income ............................ $ 3,194 $ 7,098 $ 8,267 $ 9,366 $ 7,614 $ 5,131 $ 3,559
======== ======== ======== ======== ======== ======== ========
Per Share Data:
Diluted earnings per share ............ $ 0.98 $ 2.16 $ 2.52 $ 2.77 $ 2.25 $ 1.47 $ 1.09
======== ======== ======== ======== ======== ======== ========
Basic earnings per share .............. $ 0.98 $ 2.19 $ 2.55 $ 2.81 $ 2.30 $ 1.49 $ 1.11
======== ======== ======== ======== ======== ======== ========
Dividends per share ................... 0 0.63 0.84 0.81 0.58 0.42 0.27
========
21
Selected Historical Financial Information for People's
(continued)
At or For the
Nine Months
Ended September
30, At or For the Year Ended December 31,
------------------- --------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------- -------- --------
Selected Consolidated Financial Ratios
and Other Data:
Return on average assets (net income divided
by average assets) ........................... 0.45% 0.88% 0.77% 0.93% 0.89% 0.83% 0.74%
Return on average equity (net income divided
by average equity) ........................... 13.83 22.97 19.78 24.82 23.33 16.65 13.03
Average equity to average assets ................ 3.27 3.84 3.91 3.74 3.82 5.01 5.70
Weighted average interest rate spread
(difference between yield on interest-
earning assets and average cost of interest-
bearing liabilities for the period) .......... 2.44 2.60 2.52 2.62 2.49 2.78 2.92
Allowance for loan losses to non-performing
loans ........................................ 428.84 1,033.33 1,121.18 814.31 320.76 110.20 122.08
Efficiency ratio (1) ............................ 69.96 59.74 58.68 60.32 57.67 63.39 68.10
Efficiency ratio of People's excluding
mortgage banking subsidiary (1) ............... 73.99 44.64 46.68 48.32 53.20 58.55 60.84
Net interest margin (net interest income as a
percentage of average interest-earning assets
for the period ................................ 2.71 2.83 2.77 2.85 2.74 3.12 3.34
Dividend payout ratio ........................... -- 29.17 33.33 29.24 25.78 28.57 24.77
Non-interest expenses to average assets ......... 3.17 2.35 2.35 2.35 2.25 2.66 2.86
Average interest-earning assets to average
interest-bearing liabilities ................. 105.78 104.28 104.78 104.88 105.20 107.64 110.15
Asset Quality Ratios:
Allowance for loan losses to total loans at
end of period (2) ............................ 0.93 0.94 0.95 0.93 0.99 1.04 1.71
Net charge-offs (recoveries) to average
outstanding loans during the period (2) ...... 0.02 (0.01) (0.02) (0.02) 0.01 0.17 0.34
Ratio of non-performing assets to total assets. 0.60 0.04 0.04 0.05 0.16 0.51 0.78
Capital Ratios:
Average equity to average assets ................ 3.27 3.84 3.91 3.74 3.82 5.01 5.70
________________________
(1) Equals non-interest expense (excluding provisions for loan losses, OREO
expenses, and non-recurring expenses), divided by the sum of net interest
income plus non-interest income, excluding gains and losses on the sale of
securities and loans and interest expense on subordinated debentures.
(2) All loan data includes portfolios and loans held for sale.
22
Summary Selected Pro Forma Combined Data
The following table shows selected financial information on a pro forma
combined basis giving effect to the merger as if the merger had become effective
at the end of the periods presented, in the case of balance sheet information,
and at the beginning of each period presented, in the case of income statement
information. The pro forma information reflects the purchase method of
accounting.
We anticipate that the merger will provide the combined company with
financial benefits that include reduced operating expenses and the opportunity
to earn more revenue. The pro forma information, while helpful in illustrating
the financial characteristics of the new company under one set of assumptions,
does not reflect these benefits and, accordingly, does not attempt to predict or
suggest future results. It also does not necessarily reflect what the historical
results of the new company would have been had our companies been combined
during these periods.
FIRSTFED's fiscal year ends March 31 and People's fiscal year ends December
31. The financial data of People's as presented for the six month and full
fiscal year periods are for the six months ended June 30, 2001 and the year
ended December 31, 2000, respectively.
You should read this summary pro forma information in conjunction with the
information under "Pro Forma Financial Information" beginning on page 87.
Six Months
Ended Year Ended
September 30, March 31,
2001 2001
------------ ------------
(In thousands, except per share data)
Pro forma combined income statement data:
Interest income ................................................................... $ 90,306 $193,630
Interest expense .................................................................. 59,069 130,224
Net interest income ............................................................... 31,237 63,406
Provision for loan losses ......................................................... 600 1,200
Net interest income after provision for loan losses ............................... 30,637 62,206
Non-interest income ............................................................... 11,806 17,769
Non-interest expense .............................................................. 30,192 56,483
Net income before cumulative effect of accounting change .......................... 7,968 15,963
Cumulative effect of accounting change ............................................ (461) --
Net income ........................................................................ 7,507 15,963
Pro forma per share data:
Basic earnings per share before cumulative effect of accounting change ............ $ 1.05 $ 2.07
Cumulative effect of accounting change ............................................ (0.06) --
-------- --------
Basic earnings per share .......................................................... $ 0.99 $ 2.07
======== ========
Diluted earnings per share before cumulative effect of accounting change .......... $ 1.04 $ 2.07
Cumulative effect of accounting change ............................................ (0.06) --
-------- --------
Diluted earnings per share ........................................................ $ 0.98 $ 2.07
======== ========
23
September 30,
2001
-------------
(In thousands)
Pro forma combined balance sheet data:
Total assets............................................... $2,691,297
Investment and mortgage-backed securities.................. 874,103
Loans receivable, net...................................... 1,264,060
Deposits................................................... 1,335,034
FHLB advances and other borrowings......................... 1,159,126
Total stockholders' equity................................. 153,845
Following the merger, the declaration of dividends will be at the
discretion of FIRSTFED's board of directors and will be determined after
consideration of various factors, including earnings, cash requirements, the
financial condition of FIRSTFED, applicable state law and government regulations
and other factors deemed relevant by FIRSTFED's board of directors. The merger
agreement prohibits the payment of dividends on People's common stock pending
consummation of the merger. See "The Merger Agreement--Conduct of Business
Before the Merger."
24
Market Price and Dividend Information
FIRSTFED common stock is listed on the American Stock Exchange under
the symbol FAB. People's common stock is quoted on the Nasdaq National Market
under the symbol PBKB.
The following table lists the high and low prices per share for
FIRSTFED common stock and People's common stock and the cash dividends declared
by FIRSTFED and People's for the periods indicated.
FIRSTFED Common Stock People's Common Stock
-------------------------------- ----------------------------------
High Low Dividends High Low Dividends
-------- ------- --------- -------- -------- ---------
FIRSTFED's Fiscal 2000
Quarter ended June 30, 1999.............. $14.125 $12.250 $0.05 $21.500 $ 18.375 $0.20
Quarter ended September 30, 1999......... 14.750 12.563 0.07 21.125 17.500 0.21
Quarter ended December 31, 1999.......... 13.500 11.625 0.07 20.000 17.375 0.21
Quarter ended March 31, 2000............. 11.625 10.375 0.07 18.625 13.813 0.21
FIRSTFED's Fiscal 2001
Quarter ended June 30, 2000.............. 11.625 10.625 0.07 21.375 15.250 0.21
Quarter ended September 30, 2000......... 15.500 11.625 0.10 17.750 14.500 0.21
Quarter ended December 31, 2000.......... 16.000 13.375 0.10 17.000 13.500 0.21
Quarter ended March 31, 2001............. 16.750 14.950 0.10 17.250 13.500 0.00
FIRSTFED's Fiscal 2002
Quarter ended June 30, 2001.............. 18.200 15.000 0.10 16.875 14.110 0.00
Quarter ended September 30, 2001......... 20.050 16.500 0.14 16.050 12.700 0.00
Quarter ending December 31, 2001
(through December 17, 2001)........... 17.750 15.500 0.14 21.500 19.260 0.00
You should obtain current market quotations for FIRSTFED common stock,
as the market price of FIRSTFED common stock will fluctuate between the date of
this document and the date on which the merger is completed, and thereafter. You
can get these quotations from a newspaper, on the Internet or by calling your
broker.
As of December 17, 2001, there were approximately 1,247 holders of
record of FIRSTFED common stock. As of December 17, 2001, there were
approximately 508 holders of record of People's common stock. These numbers do
not reflect the number of persons or entities who may hold their stock in
nominee or "street name" through brokerage firms.
25
Special Meeting of FIRSTFED Stockholders
General
This joint proxy statement - prospectus is furnished in connection with
the solicitation of proxies by the board of directors of FIRSTFED AMERICA
BANCORP, INC. for use at the special meeting of stockholders of FIRSTFED to be
held at The Western Hotel, One Exchange Street, Providence, Rhode Island, at
2:00 p.m., local time, on February 4, 2002 and any adjournments or postponements
thereof, for the purposes set forth in this joint proxy statement - prospectus.
Purpose of the Meeting
At the special meeting, stockholders of FIRSTFED will be asked to
consider and vote upon the merger agreement and the transactions contemplated by
that agreement, including the merger, and on any other matters properly
submitted to a vote at the special meeting.
Record Date for Voting at the Meeting
The board of directors has fixed the close of business on December 17,
2001 as the record date for the determination of stockholders entitled to notice
of and to vote at the special meeting and any adjournments or postponements
thereof. Only holders of FIRSTFED common stock at that time will be entitled to
notice of and to vote at the special meeting and any adjournments or
postponements thereof. As of the record date, there were 6,220,249 shares of
FIRSTFED common stock issued and outstanding, and each such share is entitled to
one vote at the special meeting. As provided in FIRSTFED's certificate of
incorporation, record holders of FIRSTFED's common stock who beneficially own,
either directly or indirectly, in excess of 10% of FIRSTFED's outstanding shares
are not entitled to any vote in respect of the shares held in excess of the 10%
limit.
Quorum and Stockholder Vote Required
The presence, in person or by proxy, of holders of at least a majority
of the total number of outstanding shares of common stock is necessary to
constitute a quorum for transaction of business at the special meeting.
Abstentions and "broker non-votes" will be counted as present for determining
the presence or absence of a quorum for the transaction of business at the
special meeting. A "broker non-vote" is a proxy from a broker or other nominee
indicating that such person has not received instructions from the beneficial
owner or other person entitled to vote the shares on a particular matter with
respect to which the broker or other nominee does not have discretionary voting
power. Your broker cannot vote your shares of FIRSTFED common stock without
specific instructions from you.
Provided a quorum is present, the affirmative vote of the holders of a
majority of the outstanding common stock of FIRSTFED is necessary to adopt the
merger agreement. Thus, abstentions and broker non-votes will have the same
effect as a vote against adoption of the merger agreement.
Voting of Proxies
Shares represented by proxy will be voted at the special meeting as
specified in the proxy.
Proxies Without Voting Instructions. Proxies that are properly signed
and dated but which do not contain voting instructions will be voted for
approval of the merger agreement.
26
Abstentions. FIRSTFED will count a properly executed proxy marked
"ABSTAIN" for purposes of determining whether there is a quorum, but the shares
represented by that proxy will not be voted at the special meeting. Because the
affirmative vote of a majority of the outstanding shares of FIRSTFED common
stock is required for approval of the merger agreement, if you mark your proxy
"ABSTAIN" it will have the same effect as a vote against approval of the merger
agreement.
Broker Non-Votes. If your shares are held by your broker, your broker
will vote your shares for you only if you provide instructions with respect to
your shares. You should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares. Your broker cannot vote your
shares of FIRSTFED common stock without specific instructions from you. Because
the affirmative vote of a majority of the votes cast is required to approve the
merger agreement, if you do not instruct your broker how to vote it will have
the same effect as a vote against approval of the merger agreement.
Other Matters. If you sign the proxy card, you grant authority to the
holders of the proxy to vote in their discretion on any other matters that may
properly come before the special meeting or any adjournments or postponements of
the special meeting. FIRSTFED's management does not currently know of any other
matters to be brought before the special meeting. As to other matters, if any,
that may properly come before the special meeting, unless otherwise provided in
FIRSTFED's certificate of incorporation, bylaws or by statute, the matter will
be approved if a majority of the votes cast are in favor of the matter.
The special meeting may be adjourned or postponed, including by the
presiding officer, for the purpose of, among other things, soliciting additional
proxies. No proxy voted against the proposal to adopt the merger agreement will
be voted in favor of any proposal to adjourn or postpone the special meeting
that is submitted to FIRSTFED's stockholders for a vote for the purpose of
soliciting additional votes.
How to Vote Shares Held Through Brokers. If you hold FIRSTFED common
stock in the name of a broker or other custodian and wish to vote those shares
in person at the special meeting, you must obtain from the nominee holding the
FIRSTFED common stock a properly executed "legal proxy" identifying you as a
FIRSTFED stockholder, authorizing you to act on behalf of the nominee at the
special meeting and identifying the number of shares with respect to which the
authorization is granted. Your broker or bank may allow you to deliver your
voting instructions via the telephone or the Internet. Please see the
instruction form that accompanies this document.
How to Revoke a Proxy
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Secretary of FIRSTFED
in writing before your common stock has been voted at the special meeting,
deliver proxy instructions with a later date, or attend the meeting and vote
your shares in person. Attendance at the special meeting will not in itself
constitute revocation of your proxy.
Solicitation of Proxies
This solicitation of proxies for use at the special meeting is being
made by the board of directors of FIRSTFED. The cost of soliciting proxies will
be borne by FIRSTFED. In addition to solicitation services to be provided by
Georgeson Shareholder Communications, Inc. described below, proxies may be
solicited, in person or by telephone, by officers and other employees of
FIRSTFED, who will receive no compensation for their services other than their
normal salaries. Brokerage houses, nominees, fiduciaries, and other custodians
are requested to forward soliciting material to the beneficial owners of shares
held of record by them and will be reimbursed for their expenses in doing so.
27
FIRSTFED has retained Georgeson Shareholder Communications at a fee
estimated not to exceed $5,000, plus reimbursement of reasonable out-of-pocket
expenses, to assist in the solicitation of proxies.
Participants in First Federal Savings Bank's ESOP or 401(k) Plan
If you participate in the First Federal Saving Bank of America Employee
Stock Ownership Plan and Trust or if you hold shares through First Federal's
401(k) Plan, you will be receiving voting instructions under separate cover.
Through those voting instructions you will be able to direct the trustees for
the plans as to the manner in which shares of FIRSTFED common stock allocated to
your plan accounts are to be voted. Unallocated shares of common stock held by
the ESOP and allocated shares for which no voting instructions are received will
be voted by the ESOP trustees in the same proportion as shares for which the
trustees have received voting instructions, subject to the exercise of their
fiduciary duties.
Shares Held by FIRSTFED Officers and Directors and by People's
As of December 17, 2001, directors and executive officers of FIRSTFED,
and persons closely associated with them, beneficially owned 464,942 shares of
FIRSTFED common stock, not including shares that may be acquired upon the
exercise of stock options. This equals 7.1% of the outstanding shares of
FIRSTFED common stock. As of the same date, People's and its subsidiaries and
its directors and executive officers do not beneficially own any shares of
FIRSTFED common stock.
Recommendation of FIRSTFED's Board of Directors
The FIRSTFED board of directors has approved the merger agreement and
the transactions contemplated by that agreement. The FIRSTFED board of directors
believes that the merger agreement is in the best interests of FIRSTFED and its
stockholders and unanimously recommends that the FIRSTFED stockholders vote
"FOR" approval of the merger agreement. See "The Merger--Recommendation of the
FIRSTFED Board; FIRSTFED's Reasons for the Merger."
28
Special Meeting of People's Stockholders
General
This joint proxy statement - prospectus is furnished in connection with
the solicitation of proxies by the board of directors of People's Bancshares,
Inc. for use at the special meeting of stockholders of People's to be held at
Stoneforge Tavern & Publick House, 90 Paramount Drive, Raynham, Massachusetts,
at 10:00 a.m., local time, on February 4, 2002 and any adjournments or
postponements thereof, for the purposes set forth in this joint proxy statement
- prospectus.
Purpose of the Meeting
At the special meeting, stockholders of People's will be asked to
consider and vote upon the merger agreement and the transactions contemplated by
that agreement, including the merger, and any other matters that may be properly
submitted to a vote at the special meeting.
Record Date for Voting at the Meeting
This joint proxy statement - prospectus is first being mailed to
stockholders of People's on or about December 28, 2001, in connection with the
solicitation of proxies for the special meeting. The board of directors has
fixed the close of business on December 17, 2001 as the record date for the
determination of stockholders entitled to notice of and to vote at the special
meeting and any adjournments or postponements thereof. Only holders of People's
common stock at that time will be entitled to notice of and to vote at the
special meeting and any adjournments or postponements thereof. As of the record
date, there were 3,258,250 shares of common stock issued and outstanding, and
each such share is entitled to one vote at the special meeting.
Quorum and Stockholder Vote Required
The presence, in person or by proxy, of holders of at least a majority
of the total number of outstanding shares of common stock is necessary to
constitute a quorum for transaction of business at the special meeting.
Abstentions and "broker non-votes" will be counted as present for determining
the presence or absence of a quorum for the transaction of business at the
special meeting. A "broker non-vote" is a proxy from a broker or other nominee
indicating that such person has not received instructions from the beneficial
owner or other person entitled to vote the shares on a particular matter with
respect to which the broker or other nominee does not have discretionary voting
power.
Provided a quorum is present, the affirmative vote of the holders of a
majority of the outstanding common stock of People's is necessary to adopt the
merger agreement. Thus, abstentions and broker non-votes will have the same
effect as a vote against adoption of the merger agreement.
Directors of People's holding an aggregate of 232,571 shares of common
stock, or 7.15% of the outstanding common stock of People's, have delivered
voting agreements to FIRSTFED in which they have agreed to vote all of the
shares owned by them on the record date in favor of the merger.
29
Voting of Proxies
Shares represented by proxy will be voted at the special meeting as
specified in the proxy.
Proxies Without Voting Instructions. Proxies that are properly signed and
dated but which do not contain voting instructions will be voted for approval of
the merger agreement.
Abstentions. People's will count a properly executed proxy marked "ABSTAIN"
for purposes of determining whether there is a quorum, but the shares
represented by that proxy will not be voted at the special meeting. Because the
affirmative vote of a majority of the outstanding shares of People's common
stock is required for approval of the merger agreement, if you mark your proxy
"ABSTAIN" it will have the same effect as a vote against approval of the merger
agreement.
Broker Non-Votes. If your shares are held by your broker, your broker will
vote your shares for you only if you provide instructions with respect to your
shares. You should follow the directions provided by your broker regarding how
to instruct your broker to vote your shares. Your broker cannot vote your shares
of People's common stock without specific instructions from you. Because the
affirmative vote of a majority of the votes cast is required to approve the
merger agreement, if you do not instruct your broker how to vote it will have
the same effect as a vote against approval of the merger agreement.
Other Matters. If you sign the proxy card, you grant authority to the
holders of the proxy to vote in their discretion on any other matters that may
properly come before the special meeting or any adjournments or postponements of
the special meeting. People's management does not presently know of any other
matters to be brought before the special meeting. As to other matters, if any,
that may properly come before the special meeting, unless otherwise provided in
People's articles of organization or by-laws or by statute, the matter will be
approved if a majority of the votes cast are in favor of the matter.
The special meeting may be adjourned or postponed, including by the
presiding officer, for the purpose of, among other things, soliciting additional
proxies. No proxy voted against any of the proposals will be voted in favor of
any proposal to adjourn or postpone the special meeting that is submitted to the
People's stockholders for a vote for the purpose of soliciting additional votes.
The enclosed proxy card is different from the green election form that you
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can use to elect to receive cash, stock, or a combination of cash and stock in
------------------------------------------------------------------------------
the merger, which will be sent to you separately. Do not return your proxy card
-------------------------------------------------------------------------------
with the green election form and your stock certificates. For more information
---------------------------------------------------------
about the election form, see "The Merger - Election Procedures; Surrender of
Stock Certificates."
How to Vote Shares Held Through Brokers. If you hold People's common stock
in the name of a broker or other custodian and wish to vote those shares in
person at the special meeting, you must obtain from the nominee holding the
People's common stock in the nominee's name a properly executed "legal proxy"
identifying you as a People's stockholder, authorizing you to act on behalf of
the nominee at the special meeting and identifying the number of shares with
respect to which the authorization is granted.
Any People's stockholder has the right to dissent from approval of the
merger agreement and, subject to compliance with certain requirements and
procedures set forth in Sections 85 to 98, inclusive,
30
of the Massachusetts Business Corporation Law ("MBCL"), to receive payment of
the "fair value," as defined in the MBCL, of his or her shares of People's
common stock. See "The Merger - Dissenters' Rights."
BECAUSE APPROVAL OF THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF
THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF PEOPLE'S COMMON
STOCK ENTITLED TO VOTE AT THE SPECIAL MEETING, ABSTENTIONS AND BROKER NON-VOTES
WILL HAVE THE SAME EFFECT AS VOTES AGAINST APPROVAL OF THE MERGER AGREEMENT.
ACCORDINGLY, THE PEOPLE'S BOARD OF DIRECTORS URGES STOCKHOLDERS TO COMPLETE,
DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED,
POSTAGE-PAID ENVELOPE.
How to Revoke a Proxy
The accompanying form of proxy is for your use at the special meeting if
you are unable or do not wish to attend in person. You may revoke your proxy at
any time before it is exercised by submitting to the President of People's a
written notice of revocation or a properly executed proxy having a later date or
by attending the special meeting and voting in person. Written notices of
revocation and other communications with respect to the revocation of People's
proxies should be addressed to People's Bancshares, Inc., 545 Pleasant Street,
New Bedford, Massachusetts 02740, Attention: President. All shares represented
by valid proxies received pursuant to this solicitation, and not revoked before
they are exercised, will be voted in the manner specified in the proxy.
Solicitation of Proxies
This solicitation of proxies for use at the special meeting is being made
by the board of directors of People's. The cost of soliciting proxies will be
borne by People's. In addition to solicitation services to be provided by
Georgeson Shareholder Communications, Inc. as described below, proxies may be
solicited, in person or by telephone, by officers and other employees of
People's, who will receive no compensation for their services other than their
normal salaries. Brokerage houses, nominees, fiduciaries, and other custodians
are requested to forward soliciting material to the beneficial owners of shares
held of record by them and will be reimbursed for their expenses in doing so.
People's has retained Georgeson Shareholder Communications, Inc. at a base
fee estimated not to exceed $5,000, plus reimbursement of reasonable
out-of-pocket expenses, to assist in the solicitation of proxies. People's has
also agreed to indemnify Georgeson Shareholder Communications against certain
liabilities and expenses, including liabilities under the federal securities
laws.
Shares Held by People's Officers and Directors and by FIRSTFED
As of the record date, directors and executive officers of People's owned
approximately 586,894 shares of People's common stock, not including shares of
stock that may be acquired upon the exercise of stock options, entitling them to
exercise approximately 18.01% of the voting power of the People's common stock
entitled to vote at the special meeting. Twelve of the 13 directors of People's
have entered into voting agreements with FIRSTFED to vote all of the shares of
People's common stock owned by them on the record date in favor of the proposal
to approve the merger agreement.
As of December 17, 2001, directors and executive officers of FIRSTFED, and
persons closely associated with them, beneficially owned 12,000 shares of
People's common stock, entitling them to exercise approximately 0.37% of the
voting power of the People's common stock entitled to vote at the special
meeting.
31
Recommendation of People's Board of Directors
The People's board of directors has approved the merger agreement and the
transactions contemplated by that agreement. The People's board of directors
believes that the merger agreement is in the best interests of People's and its
stockholders and, with the exception of Vincent Smyth who takes no position on
the matter, recommends that the People's stockholders vote "FOR" approval of the
merger agreement. See "The Merger--Recommendation of the People's Board;
People's Reasons for the Merger."
32
Ownership of FIRSTFED Common Stock
The following table provides information as of December 17, 2001 with
respect to persons known to FIRSTFED to be the beneficial owners of more than 5%
of FIRSTFED's outstanding common stock. A person may be considered to
beneficially own any shares of common stock over which he or she has, directly
or indirectly, sole or shared voting or investing power.
Percent of
Number of Common Stock
Name and Address Shares Owned Outstanding
---------------- ------------ ------------
First Federal Savings Bank of America 653,715(1) 10.51%
Employee Stock Ownership Plan and Trust
ONE FIRSTFED PARK
Swansea, Massachusetts 02777
The FIRSTFED Charitable Foundation 601,972(2) 9.68%
ONE FIRST PARK
Swansea, Massachusetts 02777
Jeffrey L. Gendell 582,200(3) 9.36%
Tontine Management, L.L.C.
Tontine Financial Partners, L.P.
Tontine Overseas Associates, L.L.C.
Tontine Partners, L.P.
Tontine Associates, L.L.C.
200 Park Avenue, Suite 3900
New York, New York 10166
Robert F. Stoico 400,195(4) 6.25%
c/o FIRSTFED AMERICA BANCORP, INC.
ONE FIRSTFED PARK
Swansea, Massachusetts 02777
Brandes Investment Partners, L.P. 392,149(5) 6.30%
Brandes Investment Partners, Inc.
Brandes Holdings, L.P.
Charles H. Brandes
Glenn R. Carlson
Jeffrey A. Busby
11988 El Camino Real
Suite 500
San Diego, California 92130
Wellington Management Company, LLP 319,400(6) 5.13%
75 State Street
Boston, Massachusetts 02109
___________________________
(1) Under the terms of the ESOP, the ESOP trustee will vote shares allocated to
participants' accounts in the manner directed by the participants. The ESOP
trustee, subject to its fiduciary responsibilities, will vote unallocated
shares and allocated shares for which no timely voting instructions are
received in the same proportion as shares for which the trustee has
received proper voting instructions from participants. As of December 17,
2001, 343,958 shares have been allocated to participants' accounts and
309,787 shares remain unallocated under the ESOP.
(2) The Foundation was established and funded in connection with First
Federal's conversion to stock form on January 15, 1997. As mandated by the
Office of Thrift Supervision, the terms of the gift instrument require that
all shares of common stock
33
held by the Foundation must be voted in the same ratio as all other shares
of FIRSTFED common stock on all proposals considered by stockholders of
FIRSTFED.
(3) Based on information disclosed by the group of reporting persons set forth
in a Schedule 13G filed with the Securities and Exchange Commission ("SEC")
and most recently amended on February 14, 2001, the following entities may
be deemed to be the beneficial owners of the amount of common stock
indicated after their names: Jeffrey L. Gendell, 582,200 shares; Tontine
Management, L.L.C. 489,700 shares; Tontine Financial Partners, L.P.,
414,700 shares; Tontine Overseas Associates, L.L.C., 90,000 shares; Tontine
Partners, L.P., 65,000 shares; and Tontine Associates, L.L.C., 10,000
shares.
(4) Includes 174,144 shares subject to options granted under the FIRSTFED
AMERICA BANCORP, INC. 1997 Stock-Based Incentive Plan, which are currently
exercisable or will become exercisable within 60 days, and 13,061 shares
subject to options granted under the FIRSTFED 1998 Stock Option Plan (the
"1998 Stock Option Plan"), which will become exercisable within 60 days.
(5) Based on information disclosed by the group of reporting persons set forth
herein in a Schedule 13G filed with the SEC and most recently amended on
February 14, 2001 and a Form 13F filed on February 14, 2001.
(6) Based on information disclosed in a Schedule 13G filed with the SEC and
most recently amended on February 13, 2001.
34
The following table provides information as of December 17,2001 about the
shares of common stock of FIRSTFED that may be considered to be beneficially
owned by each director of FIRSTFED, by those executive officers of FIRSTFED
whose salary and bonus during the 2001 fiscal year exceeded $100,000, and by all
directors and executive officers of FIRSTFED as a group. Unless otherwise
indicated, each of the named individuals has sole voting power and sole
investment power with respect to the shares shown.
Number of Shares
Number of That May be Percent of
Shares Owned Acquired Common Stock
(Excluding Within 60 Days by Outstanding
Name Options) Exercising Options (1)
---- -------------- -------------------- --------------
Robert F. Stoico 212,990(2) 187,205(3) 6.25%
John S. Holden, Jr. 16,049(4) 22,465(5) *
Richard W. Cederberg 18,449(6) 22,465(7) *
Gilbert C. Oliveira 42,449(8) 22,465(9) 1.04%
Paul A. Raymond, DDS 16,019(10) 22,465(11) *
Thomas A. Rodgers, Jr. 53,449(12) 22,465(13) 1.22%
Anthony L. Sylvia 21,449(14) 22,465(15) *
Edward A. Hjerpe, III 42,564(16) 66,175(17) 1.72%
Frederick R. Sullivan 34,578(18) 37,441(19) 1.15%
Kevin J. McGillicuddy 33,366(20) 37,441(21) 1.13%
All directors and executive officers
as a group (10 persons).............. 464,942 489,173 14.22%
_____________________
0* Does not exceed 1.0% of FIRSTFED's voting securities.
(1) For purposes of calculating the percentage of the outstanding shares of
common stock at December 17, 2001 for each listed person, the number of
shares of common stock includes the shares that may be acquired by such
person within 60 days of December 17, 2001 through the exercise of stock
options.
(2) Includes 87,072 shares awarded to Mr. Stoico under the FIRSTFED AMERICA
BANCORP, INC. 1997 Stock Based Incentive Plan (the "Incentive Plan"). Such
awards commenced vesting at a rate of 20% per year beginning August 5,
1998, but would vest immediately upon death, disability, retirement or a
change in control. Each participant currently has voting power as to the
shares awarded under the Incentive Plan.
(3) Excludes 43,536 shares and 52,243 shares subject to unexercisable options
granted to Mr. Stoico under the Incentive Plan and FIRSTFED's 1998 Stock
Option Plan, respectively. Shares subject to options granted under the
Incentive Plan and the 1998 Stock Option Plan vest at a rate of 20% per
year commencing on August 5, 1998 and July 18, 2001, respectively, but
would vest immediately upon death, disability, retirement or a change in
control.
(4) Includes 10,449 shares awarded to Mr. Holden under the Incentive Plan. Such
awards commenced vesting at a rate of 20% per year beginning August 5,
1998, but would vest immediately upon death, disability, retirement or a
change in control.
(5) Excludes 5,224 shares subject to unexercisable options granted to Mr.
Holden under the Incentive Plan and 6,269 shares subject to options granted
under the 1998 Stock Option Plan. Shares subject to options granted under
the Incentive Plan and the 1998 Stock Option Plan vest at a rate of 20% per
year commencing on August 5, 1998 and July 18, 2001, respectively, but
would vest immediately upon death, disability, retirement or a change in
control. Includes 200 shares held by Mr. Holden's spouse and 200 shares
held by Mr. Holden's son.
(6) Includes 10,449 shares awarded to Mr. Cederberg under the Incentive Plan.
Such awards commenced vesting at a rate of 20% per year beginning August 5,
1998, but would vest immediately upon death, disability, retirement or a
change in control. Includes 4,000 shares held by Mr. Cederberg's spouse.
(7) Excludes 5,224 shares subject to unexercisable options granted to Mr.
Cederberg under the Incentive Plan and 6,269 shares subject to options
granted under the 1998 Stock Option Plan. Shares subject to options granted
under the Incentive Plan and the 1998 Stock Option Plan vest at a rate of
20% per year commencing on August 5, 1998 and July 18, 2001, respectively,
but would vest immediately upon death, disability, retirement or a change
in control.
(8) Includes 10,449 shares awarded to Mr. Oliveira under the Incentive Plan.
Such awards commenced vesting at a rate of 20% per year beginning August 5,
1998, but would vest immediately upon death, disability, retirement or a
change in control.
(9) Excludes 5,224 shares subject to unexercisable options granted to Mr.
Oliveira under the Incentive Plan and 6,269 shares subject to options
granted under the 1998 Stock Option Plan. Shares subject to options granted
under the Incentive Plan
35
and the 1998 Stock Option Plan vest at a rate of 20% per year commencing on
August 5, 1998 and July 18, 2001, respectively, but would vest immediately
upon death, disability, retirement or a change in control.
(10) Includes 10,449 shares awarded to Dr. Raymond under the Incentive Plan.
Such awards commenced vesting at a rate of 20% per year beginning August 5,
1998, but would vest immediately upon death, disability, retirement or a
change in control. Includes 470 shares held by Dr. Raymond's spouse's IRA.
(11) Excludes 5,224 shares subject to unexercisable options granted to Dr.
Raymond under the Incentive Plan and 6,269 shares subject to options
granted under the 1998 Stock Option Plan. Shares subject to options granted
under the Incentive Plan and the 1998 Stock Option Plan vest at a rate of
20% per year commencing on August 5, 1998 and July 18, 2001, respectively,
but would vest immediately upon death, disability, retirement or a change
in control.
(12) Includes 10,449 shares awarded to Mr. Rodgers under the Incentive Plan.
Such awards commenced vesting at a rate of 20% per year beginning August 5,
1998, but would vest immediately upon death, disability, retirement or a
change in control.
(13) Excludes 5,224 shares subject to unexercisable options granted to Mr.
Rodgers under the Incentive Plan and 6,269 shares subject to options
granted under the 1998 Stock Option Plan. Shares subject to options granted
under the Incentive Plan and the 1998 Stock Option Plan vest at a rate of
20% per year commencing on August 5, 1998 and July 18, 2001, respectively,
but would vest immediately upon death, disability, retirement or a change
in control.
(14) Includes 10,449 shares awarded to Mr. Sylvia under the Incentive Plan. Such
awards commenced vesting at a rate of 20% per year beginning August 5,
1998, but would vest immediately upon death, disability, retirement or a
change in control.
(15) Excludes 5,224 shares subject to unexercisable options granted to Mr.
Sylvia under the Incentive Plan and 6,269 shares subject to options granted
under the 1998 Stock Option Plan. Shares subject to options granted under
the Incentive Plan and the 1998 Stock Option Plan vest at a rate of 20% per
year commencing on August 5, 1998 and July 18, 2001, respectively, but
would vest immediately upon death, disability, retirement or a change in
control.
(16) Includes 17,414 shares awarded to Mr. Hjerpe under the Incentive Plan,
which commenced vesting at a rate of 20% per year beginning August 5, 1998,
and 8,707 additional shares awarded under the Incentive Plan, which
commenced vesting at a rate of 20% per year beginning June 29, 1999. All
such shares would vest immediately upon death, disability, retirement or a
change in control.
(17) Excludes 26,122 shares and 20,896 shares subject to unexercisable options
granted to Mr. Hjerpe under the Incentive Plan and the 1998 Stock Option
Plan, respectively. Shares subject to options granted under the Incentive
Plan and the 1998 Stock Option Plan vest at a rate of 20% per year
commencing on August 5, 1998 and July 18, 2001, respectively, but would
vest immediately upon death, disability, retirement or a change in control.
(18) Includes 17,414 shares awarded to Mr. Sullivan under the Incentive Plan,
which commenced vesting at a rate of 20% per year beginning August 5, 1998,
but would vest immediately upon death, disability, retirement or a change
in control. Each participant currently has voting power as to the shares
awarded.
(19) Excludes 8,707 shares and 10,448 shares subject to unexercisable options
granted to Mr. Sullivan under the Incentive Plan and the 1998 Stock Option
Plan, respectively. Shares subject to options granted under the Incentive
Plan and the 1998 Stock Option Plan vest at a rate of 20% per year
commencing on August 5, 1998 and July 18, 2001, respectively, but would
vest immediately upon death, disability, retirement or a change in control.
(20) Includes 17,414 shares awarded to Mr. McGuillicuddy under the Incentive
Plan, which commenced vesting at a rate of 20% per year beginning August 5,
1998, but would vest immediately upon death, disability, retirement or a
change in control.
(21) Excludes 8,707 shares and 10,448 shares subject to unexercisable options
granted to Mr. McGuillicuddy under the Incentive Plan and the 1998 Stock
Option Plan, respectively. Shares subject to options granted under the
Incentive Plan and the 1998 Stock Option Plan vest at a rate of 20% per
year commencing on August 5, 1998 and July 18, 2001, respectively, but
would vest immediately upon death, disability, retirement or a change in
control.
36
Ownership of People's Common Stock
The following table provides information as of December 17, 2001 with
respect to persons known to People's to be the beneficial owners of more than 5%
of People's outstanding common stock. A person may be considered to beneficially
own any shares of common stock over which he or she has, directly or indirectly,
sole or shared voting or investing power.
Number of Percent of
Shares Common Stock
Name and Address Owned Outstanding
------------------ ----------- --------------
Vincent A. Smyth 309,515(1) 9.53%
143 Main Street
Huntington, NY 11743
Jeffrey L. Gendell 181,298(2) 5.60%
237 Park Avenue, 9th Floor
New York, NY 10017
Dimensional Fund Advisors Inc. 165,869(3) 5.12%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
__________________________
(1) Includes 309,515 shares owned by Mr. Smyth jointly with his wife. Based
solely on information contained in the Schedule 13D filed with the SEC on
April 26, 2001 by Mr. Smyth.
(2) Based solely upon information contained in the Quarterly Report on Form 13F
filed with the SEC on September 9, 2001 by Jeffrey L. Gendell.
(3) Based solely upon information contained in the Schedule 13G filed with the
SEC on February 6, 2001 by Dimensional Fund Advisors Inc.
37
The following table provides information as of December 17, 2001 about
the shares of People's common stock that may be considered to be owned by each
director, by those executive officers of People's whose salary and bonus
exceeded $100,000 in fiscal 2001, and by all directors and executive officers of
People's as a group. Unless otherwise indicated, each of the named individuals
has sole voting power and sole investment power with respect to the shares
shown.
Number of Shares Percent of
Number of That May Be Common
Shares Owned Acquired Stock
(Excluding Within 60 Days By Outstanding
Name Options) Exercise Options (9)
---- -------------- ------------------ --------------
Frederick W. Adami III 9,016 3,484 *
Donna L. Boulanger 0 15,300 *
B. Benjamin Cavallo 163,562(1) 6,916 5.21%
John R. Eaton 8,480(2) 10,000 *
William Foster, Jr. 1,500 1,000 *
Thomas Gillen 1,000 1,000 *
Terrence A. Gomes 100 6,916 *
James K. Hunt 10,000 0 *
Dr. Loring C. Johnson 1,874 10,000 *
John J. Kiernan 7,254(3) 25,000 *
Richard D. Matthews 28,068(4) 2,000 *
Scott W. Ramsay 1,500(5) 4,000 *
Davis H. Scudder 8,309(6) 10,000 *
Stanley D. Siskind 9,201 5,400 *
Vincent A. Smyth 309,515(7) 1,000 9.53%
Richard S. Straczynski 27,515(8) 57,000 2.55%
All directors and executive officers
as a group (16 persons) 586,894 158,016 21.80%
----------
* Does not exceed 1.0% of the People's voting securities.
(1) Includes 79,733 shares owned by members of Mr. Cavallo's immediate family,
24,709 shares owned jointly by Mr. Cavallo and members of his immediate
family and 59,130 shares held by partnerships in which Mr. Cavallo is a
partner.
(2) Includes 6,277 shares owned by Mr. Eaton jointly with his wife.
(3) Includes 2,000 shares owned by Mr. Kiernan jointly with his wife. Also
includes approximately 5,254 shares that may be deemed beneficially owned
by Mr. Kiernan through his interest in the Bank's 401(k) plan, which
invests in People's common stock.
(4) Includes 4,871 shares owned by Mr. Matthews jointly with his wife.
(5) Includes 1,000 shares owned by Mr. Ramsay jointly with his wife.
(6) Includes 340 shares owned by members of Mr. Scudder's immediate family,
2,555 shares owned by Scudder Bros. Fuel Company, Inc., of which Mr.
Scudder is a principal, and 1,200 shares owned by Campello Salvage, of
which Mr. Scudder is a partner.
(7) Includes 309,515 shares owned by Mr. Smyth jointly with his wife. Based
solely upon information contained in the Schedule 13D filed with the SEC on
April 26, 2001 by Mr. Smyth.
(8) Includes 2,662 shares that may be deemed beneficially owned by Mr.
Straczynski through his interest in the Bank's 401(k) plan, which invests
in People's common stock.
(9) For purposes of calculating the percentage of the outstanding shares of
common stock at December 17, 2001 for each listed person or entity, the
number of shares of common stock includes shares that may be acquired by
such person or entity within 60 days of December 17, 2001 through the
exercise of stock options.
38
The Merger
The following discussion of the merger is qualified by reference to the
merger agreement, which is attached to this joint proxy statement - prospectus
as Appendix A. You should read the entire merger agreement carefully. It is the
legal document that governs the merger.
About the Parties to the Merger
FIRSTFED AMERICA BANCORP, INC. FIRSTFED is the savings and loan holding
company for First Federal Savings Bank of America. As a savings and loan holding
company, FIRSTFED is subject to regulation by the Office of Thrift Supervision
(the "OTS"). Since its formation, FIRSTFED's principal activity has been to
direct and coordinate the business of First Federal.
First Federal is a federally chartered savings bank located in Swansea,
Massachusetts. First Federal is regulated by the OTS and its deposits are
insured by the Federal Deposit Insurance Corporation up to applicable limits.
First Federal currently operates 15 banking offices in Swansea, Fall River,
Attleboro, New Bedford, Seekonk, Somerset, and Taunton, Massachusetts and
Pawtucket, Providence, East Providence, Warwick, and Cranston, Rhode Island and
its five loan origination centers located in Yarmouth, Auburn, Agawam and
Burlington, Massachusetts, and East Greenwich, Rhode Island. First Federal's
sixteenth banking office is scheduled to open in Middletown, Rhode Island in
January 2002.
FIRSTFED's principal business has been and continues to be attracting
retail and business deposits in the areas surrounding its banking offices and
investing those deposits, together with funds generated from operations and
borrowings, primarily in residential, commercial, and consumer loans and
mortgage-backed securities. Through its 15 banking offices and five loan
origination centers, FIRSTFED originates loans for investment and loans for sale
in the secondary market, generally retaining the servicing rights to loans sold.
Loan sales are made from loans designated as being held for sale or originated
for sale during the period. FIRSTFED's revenues are derived principally from
interest on its loan portfolios and interest and dividends on its investment and
mortgage-backed securities and loan servicing income. FIRSTFED's primary sources
of funds are deposits, principal and interest payments on loans and
mortgage-backed securities, proceeds from the sale of loans, Federal Home Loan
Bank of Boston advances and other borrowings.
FIRSTFED owns FIRSTFED INSURANCE AGENCY, LLC, which has over 4,000
customers and offers a comprehensive insurance product line including auto,
home, life, accident and health insurance to consumers and businesses. FIRSTFED
TRUST COMPANY, N.A. provides investment and fiduciary services in the Rhode
Island and southeastern Massachusetts marketplace. The trust company is a joint
venture with certain members of the Metcalf and Danforth families of Rhode
Island. In addition to their 35% ownership interest, the families are also
significant clients of the trust company.
For financial statements of FIRSTFED and a discussion of FIRSTFED's
recent results of operations, see FIRSTFED's 2001 annual report to stockholders
and Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, both
of which are incorporated by reference into this document.
People's Bancshares, Inc. People's Bancshares, Inc. is a bank holding
company whose principal subsidiary is People's Savings Bank of Brockton, a
Massachusetts savings bank. People's is headquartered in New Bedford,
Massachusetts. Although People's is a legal entity separate from People's
Savings Bank, People's itself is not engaged in any business activities.
People's also owns all of the common securities of People's Bancshares Capital
Trust and People's Bancshares Capital Trust II,
39
both Delaware business trusts. People's Bancshares Capital Trust issued $13.8
million of trust preferred securities to the public on June 26, 1997 and used
the proceeds to purchase subordinated debentures from People's. People's
Bancshares Capital Trust II issued $10.0 million of trust preferred securities
on July 26, 2000 and used the proceeds to purchase subordinated debentures from
People's. The net proceeds of these offerings were primarily used to increase
People's Tier 1 capital.
People's Savings was chartered as a Massachusetts mutual savings bank
on February 6, 1895. On October 30, 1986, People's Savings converted to a
Massachusetts-chartered savings bank in stock form. People's Savings is engaged
principally in the business of attracting deposits from individuals, businesses
and governmental entities, and investing those funds in residential and
commercial mortgages, consumer, commercial and construction loans and investment
securities, which currently consist primarily of mortgage-backed securities and
trust preferred securities. People's Savings originates loans for investment
with the exception of residential mortgage loans. People's Savings and its
mortgage banking subsidiary, People's Mortgage Corporation, originate 1- to 4-
family residential loans primarily for sale in the secondary market, generally
with the sale of the servicing rights of such loans. People's Savings operates
12 branch offices in southeastern Massachusetts. People's Mortgage has 10
offices located in Massachusetts, Connecticut, Maryland, Rhode Island and
Virginia.
People's Savings' revenues are derived principally from interest on
loans, interest and dividends on investment securities, customer fees, and gains
on residential mortgage loan sales. People's Savings' primary sources of funds
are customer deposits, amortization and repayment of loan and investment
securities principal, interest and dividends on loans and investment securities,
maturity or sale of investment securities, collateralized borrowings and
proceeds from the sale of loans. People's Savings offers a variety of deposit
accounts, including NOW accounts, regular savings accounts, money market
accounts, fixed rate certificates of deposits and various retirement accounts.
Other than People's Mortgage, which originates loans, People's Savings
has four subsidiaries that are currently inactive but primarily engaged in the
management and sale of foreclosed real estate.
Other Information
People's and People's Savings. On June 27, 2000, People's Savings
entered into a Memorandum of Understanding ("M.O.U.") with the Massachusetts
Commissioner of Banks and the Federal Deposit Insurance Corporation (the
"FDIC"), pursuant to which People's Savings has agreed, among other matters, to
develop plans to reduce over time the level of its investment in trust preferred
securities to less than 100% of its Tier 1 leverage capital. In addition,
People's Savings has agreed to achieve and maintain a Tier 1 leverage capital
ratio of not less than 6.5% of total assets. At September 30, 2001, People's
Savings' Tier 1 leverage capital ratio was 7.57%. Additional provisions of the
M.O.U. required People's Savings to assess its management and staffing needs,
develop revised strategic and capital plans, improve the quality of the
investment portfolio and investment administration, improve liquidity and the
management thereof, develop a plan for reducing interest rate risk exposure and
address other operational issues. All required plans have been submitted to
regulators and it is FIRSTFED's understanding that People's Savings is in
compliance with the terms of the M.O.U.
On December 5, 2000, People's Bancshares entered into an agreement with
the Federal Reserve Bank of Boston (the "FRB") pursuant to which People's has
agreed, among other matters, to obtain written approval from the FRB and the
Director of the Division of Banking Supervision and Regulation of the FRB prior
to declaring or paying any dividends or making any distributions of interest,
principal, or other sums on its subordinated debentures (the "FRB Agreement").
People's is also required to
40
maintain a minimum consolidated Tier 1 leverage capital ratio of not less than
5%. At September 30, 2001, People's consolidated Tier 1 leverage capital ratio
was 6.94%. The FRB Agreement also requires People's to receive written approval
from the FRB to increase borrowings or renew any existing debt. It is FIRSTFED's
understanding that People's is in compliance with the terms of the FRB
Agreement.
On October 16, 2001, as required under the merger agreement for
transactions other than in the ordinary course of business, FIRSTFED consented
to a program allowing People's Savings to accelerate the sale of trust preferred
securities in excess of its $7 million quarterly commitment to bank regulators.
The program, which was also approved by People's Executive Committee,
contemplated the sale of up to $70 million of trust preferred securities and the
remaining $21 million of zero coupon bonds held by People's Savings at September
30, 2001. Realized losses from this program are currently projected to be
approximately $6 million to $7 million and will reduce concentrations of trust
preferred securities from $111 million at September 30, 2001 to between $40 and
$60 million, or less than 100% of People's Savings' resulting Tier 1 leverage
capital. Upon completion of the program, assuming the realization of up to $7
million in losses, People's resulting consolidated Tier 1 leverage capital ratio
is projected to be approximately 6.3% and its Tier 1 leverage capital ratio of
People's Savings is projected to be approximately 7.1%, thereby maintaining Tier
1 leverage ratios well in excess of levels required under the various regulatory
agreements.
Through December 17, 2001, the $21 million of zero coupon agency bonds
held at People's Savings had been sold along with approximately $51 million of
trust preferred securities at an aggregate loss of $5 million. The total
concentration in trust preferred securities has been reduced to $57 million, or
an estimated 84% of Tier 1 leverage capital.
OTS policy limits a federal savings bank's investment in trust
preferred securities to 15% of total capital (the "regulatory limit") unless OTS
approval is received for a higher level. Upon the consummation of the merger of
First Federal and People's Savings, First Federal's holdings of trust preferred
securities are expected to constitute approximately 36% of total capital.
Consequently, OTS approval to hold the additional amount will be necessary. To
the extent the OTS does not authorize the holding of the trust preferred
securities in excess of the regulatory limit, expedited divestiture by FIRSTFED
may be necessary which may result in losses on such sales.
FIRSTFED and First Federal. According to projections, First Federal's
Tier 1 capital ratio upon consummation of the merger will be 4.88%, which would
change its classification for regulatory purposes from "well capitalized" to
"adequately capitalized." Although an "adequately capitalized" classification
means that First Federal complies with all applicable minimum regulatory capital
requirements, reclassification as "adequately capitalized" would have certain
adverse consequences such as increased FDIC insurance premiums and a prohibition
on accepting brokered deposit as without prior FDIC approval. Under the current
FDIC regulations, institutions which qualify as well capitalized are assessed
0.17 basis points per $100 of deposits, depending on the risk of the institution
as compared to 3 to 24 basis points for "adequately capitalized"
institutions.
FIRSTFED has obtained a commitment from a third party for an unsecured
loan of approximately $10 million. The loan is expected to close prior to the
consummation of the merger. Proceeds from this loan may be used for general
corporate purposes including the payment of such funds to First Federal as a
capital contribution, thereby raising First Federal's level of Tier 1 capital.
The funding of the loan or any other form of capital raising is not a condition
to the consummation of the merger under the terms of the merger agreement.
41
For financial statements of People's and a discussion of People's
recent results of operations, see the information beginning on page F-1.
Form of the Merger
Our boards of directors each have approved a merger agreement that
provides for the merger of People's with and into FIRSTFED. FIRSTFED will
survive the merger. Upon completion of the merger, each share of People's common
stock will be converted into the right to receive, at the election of the
holder, either $22.00 in cash or 1.2644 shares of FIRSTFED common stock, subject
to the possible adjustments described below in "--Conversion of People's Common
Stock." The common stock of FIRSTFED will continue to trade on the American
Stock Exchange under the symbol "FAB" after completion of the merger.
Conversion of People's Common Stock
When the merger becomes effective, each share of People's common stock
issued and outstanding immediately prior to the completion of the merger will
automatically be converted into the right to receive, at the holder's election,
either (1) $22.00 in cash without interest or (2) 1.2644 shares of FIRSTFED
common stock with cash being paid instead of fractional shares. A People's
stockholder's receipt of either cash and/or stock, however, is subject to the
allocation and proration procedures as well as other provisions in the merger
agreement. See "--Cash or Stock Election."
The value of the FIRSTFED common stock will be evaluated during the 20
consecutive trading days ending on the date that we receive the last of the
required regulatory and stockholder approvals. If during that period, (1) the
average closing price of the FIRSTFED common stock is less than $13.92, and (2)
---
FIRSTFED common stock underperforms the "SNL New England Thrift Index" by more
than 15% between September 28, 2001 and the end of the measurement period, then
People's will have the right to terminate the merger. However, if People's
terminates the merger, FIRSTFED will have the right to cancel the termination by
increasing the number of shares of FIRSTFED stock it is to exchange for shares
of People's common stock to the lesser of:
--- ------
. the product of $13.92 and 1.2644 divided by the average
closing price of FIRSTFED common stock during the measurement
period; or
. the product of the "index ratio" and 1.2644 divided by the
"aquiror ratio." The "index ratio" is the value of the SNL New
England Thrift Index on the last day of the measurement
period, divided by the value of the index after the close of
business on September 28, 2001, minus 0.15. The "acquiror
ratio" is the average closing price of FIRSTFED common stock
during the measurement period, divided by $17.40.
If the average closing price of FIRSTFED common stock during the 20-day
measurement period equals $20.88 or more, the value of the shares of FIRSTFED
common stock to be exchanged for each share of People's common stock will be
limited to $26.40.
As of December 17, 2001, the average closing price of FIRSTFED common
stock over the prior 20-day trading period was $17.20. Additionally, the SNL New
England Thrift Index increased 1.13% while the market value of FIRSTFED stock
decreased 1.16% between September 28, 2001 and December 17, 2001. We can give
you no assurance as to what the market price of FIRSTFED commonstock will be if
and when the merger is completed, and People's stockholders are advised to
obtain current
42
market quotations for FIRSTFED common stock and People's common stock. In
addition, because the tax consequences of receiving cash will differ from the
tax consequences of receiving FIRSTFED common stock, you should carefully read
the information included below under "-- Tax Consequences for People's
Stockholders."
Cash or Stock Election
Under the terms of the merger agreement, People's stockholders may elect
to convert their shares into cash, FIRSTFED common stock, or a combination of
FIRSTFED common stock and cash. All elections of People's stockholders are
further subject to the allocation and proration procedures described in the
merger agreement. These procedures provide that the number of shares of People's
common stock to be converted into FIRSTFED common stock in the merger must be
45% of the total number of shares of People's common stock issued and
outstanding on the date of the merger. We are not making any recommendation as
to whether People's stockholders should elect to receive cash or FIRSTFED common
stock in the merger. Each holder of People's common stock must make his or her
own decision with respect to such election.
It is unlikely that elections will be made in the exact proportions
provided for in the merger agreement. As a result, the merger agreement
describes procedures to be followed if People's stockholders in the aggregate
elect to receive more or less of the FIRSTFED common stock than FIRSTFED has
agreed to issue. These procedures are summarized below.
. If Stock Is Oversubscribed: If People's stockholders elect to
receive more FIRSTFED common stock than FIRSTFED has agreed to
issue in the merger, then all People's stockholders who have
elected to receive cash or who have made no election will receive
cash for their People's shares and all stockholders who elected to
receive FIRSTFED common stock will receive a pro rata portion of
the available FIRSTFED shares plus cash for those shares not
converted into FIRSTFED common stock.
. If Stock Is Undersubscribed: If People's stockholders elect to
receive fewer shares of FIRSTFED common stock than FIRSTFED has
agreed to issue in the merger, then all People's stockholders who
have elected to receive FIRSTFED common stock will receive
FIRSTFED common stock and those stockholders who have elected cash
or have made no election will be treated in the following manner:
. If the number of shares held by People's stockholders who
have made no election is sufficient to make up the shortfall
in the number of FIRSTFED shares that FIRSTFED is required
to issue, then all People's stockholders who elected cash
will receive cash, and those stockholders who made no
election will receive both cash and FIRSTFED common stock in
whatever proportion is necessary to make up the shortfall.
. If the number of shares held by People's stockholders who
have made no election is insufficient to make up the
shortfall, then all People's stockholders who made no
election will receive FIRSTFED common stock and those
People's stockholders who elected to receive cash will
receive cash and FIRSTFED common stock in whatever
proportion is necessary to make up the shortfall.
Notwithstanding these rules, in order that the tax opinions described
under "--Tax Consequences for People's Stockholders" can be rendered, it may be
necessary for FIRSTFED to reduce the number of
43
shares of People's common stock that will be converted into the right to receive
cash and correspondingly increase the number of shares of People's common stock
that will be converted into FIRSTFED common stock. If this adjustment is
necessary, stockholders who elect to receive cash or a mixture of cash and stock
may be required on a pro rata basis to receive a greater amount of FIRSTFED
common stock than they have elected.
NO GUARANTEE CAN BE MADE THAT YOU WILL RECEIVE THE AMOUNTS OF CASH
AND/OR STOCK YOU ELECT. AS A RESULT OF THE ALLOCATION PROCEDURES AND OTHER
LIMITATIONS OUTLINED IN THIS DOCUMENT AND IN THE MERGER AGREEMENT, YOU MAY
RECEIVE FIRSTFED COMMON STOCK AND/OR CASH IN AMOUNTS THAT VARY FROM THE AMOUNTS
YOU ELECT TO RECEIVE.
Election Procedures; Surrender of Stock Certificates
A green form for making an election of the consideration you wish to
receive in the merger will be sent to you separately. The election form allows
you to elect to receive cash, stock, or a combination of cash and stock, or make
no election with respect to the merger consideration you wish to receive. FOR
YOUR ELECTION TO BE EFFECTIVE, YOUR PROPERLY COMPLETED ELECTION FORM, ALONG WITH
YOUR PEOPLE'S STOCK CERTIFICATES OR AN APPROPRIATE GUARANTEE OF DELIVERY, MUST
BE RECEIVED BY REGISTRAR AND TRANSFER COMPANY ON OR BEFORE 5:00 P.M., EASTERN
TIME, ON February 12, 2002. Registrar and Transfer Company will act as exchange
agent in the merger and in that role will process the exchange of People's stock
certificates for cash and/or FIRSTFED common stock. Shortly after the merger,
the exchange agent will allocate cash and stock among People's stockholders,
consistent with their elections and the allocation and proration procedures. If
you do not submit an election form, you will receive instructions from the
exchange agent on where to surrender your People's stock certificates after the
merger is completed. In any event, you should not forward your People's stock
certificates with your proxy cards.
If you have a preference for receiving either FIRSTFED stock and/or
cash for your People's stock, you should complete and return the enclosed
election form. If you do not make an election, you will be allocated FIRSTFED
common stock and/or cash depending on the elections made by other stockholders.
We are not recommending whether you should elect to receive cash, stock
or a combination of cash and stock in the merger. You must make your own
decision with respect to your election. Generally, the merger will be a tax-free
transaction for People's stockholders to the extent they receive FIRSTFED common
stock. See "--Tax Consequences for People's Stockholders."
If certificates for People's common stock are not immediately available
or time will not permit the election form and other required documents to reach
the exchange agent prior to the election deadline, People's shares may be
properly exchanged, and an election will be effective, if:
. such exchanges are made by or through a member firm of a
registered national securities exchange or of the National
Association of Securities Dealers, Inc., or by a commercial
bank or trust company having an office, branch or agency in
the United States;
. the exchange agent receives, prior to the election deadline,
a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided with this joint
proxy statement - prospectus (delivered by hand, mail,
telegram, telex or facsimile transmission); and
44
. the exchange agent receives, within three business days
after the election deadline, the certificates for all
exchanged People's shares, or confirmation of the delivery
of all such certificates into the exchange agent's account
with the Depository Trust Company in accordance with the
proper procedures for such transfer, together with a
properly completed and duly executed election form and any
other documents required by the election form.
People's stockholders who do not submit a properly completed election
form or revoke their election form prior to the election deadline will have
their shares of People's common stock designated as non-election shares.
People's stock certificates represented by elections that have been revoked will
be promptly returned without charge to the People's stockholder submitting the
election form upon written request. After the completion of the merger, the
exchange agent will allocate cash and FIRSTFED common stock among the
stockholders of People's common stock according to the allocation procedures
outlined above.
After the completion of the merger, the exchange agent will mail to
People's stockholders who do not submit election forms a letter of transmittal,
together with instructions for the exchange of their People's common stock
certificates for the merger consideration. Until you surrender your People's
stock certificates for exchange after completion of the merger, you will not be
paid dividends or other distributions declared after the merger with respect to
any FIRSTFED common stock into which your People's shares have been converted.
When you surrender your People's stock certificates, FIRSTFED will pay any
unpaid dividends or other distributions, without interest. After the completion
of the merger, there will be no further transfers of People's common stock.
People's stock certificates presented for transfer after the completion of the
merger will be canceled and exchanged for the merger consideration.
If your People's stock certificates have been lost, stolen or
destroyed, you will have to prove your ownership of these certificates and that
they were lost, stolen or destroyed before you receive any consideration for
your shares. Upon request, Registrar and Transfer Company will send you
instructions and appropriate forms for this purpose.
Holders of FIRSTFED common stock will not be required to exchange
certificates representing their shares of FIRSTFED common stock or otherwise
take any action as a result of the completion of the merger. THERE IS NO NEED
FOR FIRSTFED STOCKHOLDERS TO SUBMIT THEIR FIRSTFED COMMON STOCK CERTIFICATES TO
FIRSTFED, REGISTRAR AND TRANSFER COMPANY OR ANY OTHER PERSON IN CONNECTION WITH
THE MERGER.
Treatment of People's Stock Options
At the effective time of the merger, each option to purchase shares of
People's common stock outstanding and unexercised immediately prior to the
effective time will become an option to purchase FIRSTFED common stock and will
continue to be governed by the terms of the applicable People's stock option
plan and the stock option agreement evidencing the option. However, from and
after the effective time, each stock option granted and outstanding under
People's stock option plans may be exercised solely for shares of FIRSTFED
common stock. The number of shares of FIRSTFED common stock issuable upon
exercise of each former People's stock option will be equal to the number of
shares of People's common stock subject to the option immediately prior to the
merger multiplied by the exchange ratio. The exercise price per share of
FIRSTFED common stock issuable upon exercise of each former
45
People's stock option will be equal to the exercise price per share of People's
common stock subject to the option immediately prior to the merger divided by
the exchange ratio, rounded to the nearest cent. Each stock option which is an
"incentive stock option" will be adjusted as required by the Internal Revenue
Code in order to continue as an incentive stock option for federal income tax
purposes. FIRSTFED will take all corporate action necessary to reserve a
sufficient additional number of shares of FIRSTFED common stock for future
issuance in satisfaction of its obligations with respect to these options.
Tax Consequences for People's Stockholders
The following is a discussion of the material federal income tax
consequences of the merger to holders of People's common stock. The discussion
is based upon the Internal Revenue Code, Treasury regulations, IRS rulings, and
judicial and administrative decisions in effect as of the date of this joint
proxy statement - prospectus. This discussion assumes that the People's common
stock is a capital asset in the hands of the People's stockholders (generally,
held for investment). In addition, this discussion does not address all of the
tax consequences that may be relevant to you in light of your particular
circumstances or to People's stockholders subject to special rules, such as
foreign persons, financial institutions, tax-exempt organizations, dealers in
securities or foreign currencies or insurance companies. The opinions of counsel
referred to in this section will be based on facts existing at the completion of
the merger. In rendering their opinions, counsel will require and rely upon
representations contained in certificates of officers of FIRSTFED, People's and
others.
It is a condition to the obligation of FIRSTFED and People's to
complete the merger that FIRSTFED receive an opinion of Muldoon Murphy &
Faucette LLP and that People's receive an opinion of Goodwin Procter LLP, each
dated as of the completion of the merger, that the merger will be treated as a
reorganization within the meaning of the Internal Revenue Code. If either of us
waives the requirement of receiving a tax opinion and there is a material change
in tax consequences to FIRSTFED stockholders or People's stockholders, you will
be notified and given the opportunity to confirm or change your vote. If the
merger is treated as a reorganization, neither FIRSTFED nor People's will
recognize any gain or loss as a result of the merger.
The tax opinions to be delivered to us in connection with the merger
are not binding on the Internal Revenue Service or the courts, and we do not
intend to request a ruling from the Internal Revenue Service with respect to the
merger.
The federal income tax consequences of the merger to People's
stockholders will depend primarily on whether the stockholder exchanges his or
her People's common stock for solely FIRSTFED common stock (except for cash
received instead of a fractional share of FIRSTFED common stock), solely cash or
a combination of FIRSTFED common stock and cash. Regardless of whether a
People's stockholder elects to receive FIRSTFED common stock, cash, or a mixture
of stock and cash, the federal income tax consequences will depend on the actual
merger consideration received.
THE TAX CONSEQUENCES OF THE MERGER TO YOU MAY VARY DEPENDING UPON YOUR
PARTICULAR CIRCUMSTANCES. THEREFORE, YOU SHOULD CONSULT YOUR TAX ADVISOR TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO YOU, INCLUDING THOSE
RELATING TO STATE AND/OR LOCAL TAXES.
Receipt of FIRSTFED Common Stock in Exchange for People's Common Stock.
No gain or loss will be recognized by a People's stockholder who receives solely
shares of FIRSTFED common stock (except for cash received in lieu of fractional
shares, as discussed below) in exchange for all of his or her shares of People's
common stock. The tax basis of the shares of FIRSTFED common stock received by a
People's stockholder in such exchange will be equal (except for the basis
attributable
46
to any fractional shares of FIRSTFED common stock, as discussed below) to the
basis of the People's common stock surrendered in exchange for the FIRSTFED
common stock. The holding period of the FIRSTFED common stock received will
include the holding period of shares of People's common stock surrendered in
exchange for the FIRSTFED common stock, provided that such shares were held as
capital assets of the People's stockholder at the effective time of the merger.
Receipt of Cash in Exchange for People's Common Stock. A People's
stockholder who receives solely cash in exchange for all of his or her shares of
People's common stock (and is not treated as constructively owning FIRSTFED
common stock after the merger under the circumstances referred to below under
"--Possible Dividend Treatment") will recognize gain or loss for federal income
tax purposes equal to the difference between the cash received and such
stockholder's tax basis in the People's common stock surrendered in exchange for
the cash. Such gain or loss will be a capital gain or loss, provided that such
shares were held as capital assets of the People's stockholder at the effective
time of the merger. Such gain or loss will be long-term capital gain or loss if
the People's stockholder's holding period is more than one year. The Internal
Revenue Code contains limitations on the extent to which a taxpayer may deduct
capital losses from ordinary income.
Receipt of FIRSTFED Common Stock and Cash in Exchange for People's
Common Stock. A People's stockholder who receives a combination of FIRSTFED
common stock and cash in exchange for his or her People's common stock will not
be permitted to recognize any loss for federal income tax purposes. Such a
stockholder will recognize gain, if any, equal to the lesser of (1) the amount
of cash received or (2) the amount of gain "realized" in the transaction. The
amount of gain a People's stockholder "realizes" will equal the amount by which
(a) the cash plus the fair market value at the effective time of the merger of
the FIRSTFED common stock received exceeds (b) the stockholder's basis in the
People's common stock to be surrendered in the exchange for the cash and
FIRSTFED common stock. Any recognized gain could be taxed as a capital gain or a
dividend, as described below. The tax basis of the shares of FIRSTFED common
stock received by such People's stockholder will be the same as the basis of the
shares of People's common stock surrendered in exchange for the shares of
FIRSTFED common stock reduced by the amount of cash received and increased by
the amount of gain recognized in the exchange (whether characterized as capital
gain or a dividend). The holding period for shares of FIRSTFED common stock
received by such People's stockholder will include such stockholder's holding
period for the People's common stock surrendered in exchange for the FIRSTFED
common stock, provided that such shares were held as capital assets of the
stockholder at the effective time of the merger.
A People's stockholder's federal income tax consequences will also
depend on whether his or her shares of People's common stock were purchased at
different times at different prices. If they were, the People's stockholder
could realize gain with respect to some of the shares of People's common stock
and loss with respect to other shares. Such People's stockholder would have to
recognize such gain to the extent such stockholder receives cash with respect to
those shares in which the stockholder's adjusted tax basis is less than the
amount of cash plus the fair market value at the effective time of the merger of
the FIRSTFED common stock received, but could not recognize loss with respect to
those shares in which the People's stockholder's adjusted tax basis is greater
than the amount of cash plus the fair market value at the effective time of the
merger of the FIRSTFED common stock received. Any disallowed loss would be
included in the adjusted basis of the FIRSTFED common stock. Such a People's
stockholder is urged to consult his or her own tax advisor respecting the tax
consequences of the merger to that stockholder.
Possible Dividend Treatment. In certain circumstances, a People's
stockholder who receives solely cash or a combination of cash and FIRSTFED
common stock in the merger may receive ordinary income, rather than capital
gain, treatment on all or a portion of the gain recognized by that stockholder
if the receipt of cash "has the effect of the distribution of a dividend." The
determination of whether a cash
47
payment has such effect is based on a comparison of the People's stockholder's
proportionate interest in FIRSTFED after the merger with the proportionate
interest the stockholder would have had if the stockholder had received solely
FIRSTFED common stock in the merger. For purposes of this comparison, the
People's stockholder may be deemed to constructively own shares of FIRSTFED
common stock held by certain members of the stockholder's family, certain
entities in which the stockholder has an ownership or beneficial interest,
certain of the stockholder's beneficial owners (if the stockholder is an entity)
and certain stock options may be aggregated with the stockholder's shares of
FIRSTFED common stock. The amount of the cash payment that may be treated as a
dividend is limited to the stockholder's ratable share of the accumulated
earnings and profits of People's at the effective time of the merger. Any gain
that is not treated as a dividend will be taxed as a capital gain, provided that
the stockholder's shares were held as capital assets at the effective time of
the merger. Because the determination of whether a cash payment will be treated
as having the effect of a dividend depends primarily upon the facts and
circumstances of each People's stockholder, People's stockholders are urged to
consult their own tax advisors regarding the tax treatment of any cash received
in the merger.
Cash in Lieu of Fractional Shares. A People's stockholder who holds
People's common stock as a capital asset and who receives in the merger, in
exchange for such stock, solely FIRSTFED common stock and cash in lieu of a
fractional share interest in FIRSTFED common stock will be treated as having
received such cash in full payment for such fractional share of stock and as
capital gain or loss, notwithstanding the dividend rules discussed above.
Background of the Merger
As part of its continuing efforts to improve People's community banking
franchise and enhance stockholder value, People's management and board of
directors have regularly considered various strategic alternatives, including
continuing as an independent institution, growing internally, acquiring
branches, community banks, or mortgage-related businesses and entering into a
strategic merger with another institution.
In September 1999, a group of People's stockholders including Vincent
Smyth, Thomas Gillen and William Foster (the "Smyth Group") requested that
People's retain an independent investment banker to review strategic
alternatives to maximize shareholder value including a possible sale of
People's. The People's board of directors authorized senior management to engage
in discussions with the Smyth Group, which took place at several meetings during
late 1999 and early 2000. The People's board considered the Smyth Group's
requests during 1999 and early 2000. At certain of People's board meetings,
representatives of Sandler O'Neill & Associates, L.P., People's financial
advisor at the time, advised the board regarding then-current market and
economic conditions, recent industry transactions and the likelihood that
People's would be able to consummate a transaction with an acquiror. During this
time it was the consensus of the board that a sale of People's would then not be
in the best interest of People's stockholders, given the economic environment
for community banks and a lack of credible acquirors with the capacity to
consummate a transaction with People's.
During the spring of 2000, the Smyth Group announced and carried out a
proxy contest, with its stated goal of having its three director nominees
elected to the board to encourage the board to retain an investment banking firm
to review strategic alternatives for People's. At the June 2000 annual meeting
of stockholders, management's nominees defeated the Smyth Group's nominees.
On June 27, 2000, People's Savings entered into the M.O.U. with the
FDIC and the Massachusetts Commissioner of Banks, pursuant to which People's
Savings agreed, among other matters, to develop plans to reduce over time the
level of its investment in trust preferred securities and to achieve and
maintain a minimum specified Tier 1 leverage capital ratio.
48
At its board meetings in June and July 2000, the FIRSTFED board of
directors discussed FIRSTFED's possible interest in a business combination with
People's.
In October and November 2000, Vincent Smyth again requested that People's
retain an independent investment banker to pursue a sale of People's and
indicated that he intended to carry out another proxy contest at the 2001 annual
meeting.
In early October 2000, Frederick Adami, III, chairman of the board of
People's, spoke by telephone with the chief executive officer of another
company, Company A, concerning the possibility of a strategic transaction and to
schedule a meeting at a neutral site during November 2000.
On November 15, 2000, Mr. Straczynski met with Robert Stoico, the chief
executive officer of FIRSTFED, in Swansea to discuss various matters. During the
conversation, Mr. Stoico indicated that if People's were to become interested
in being sold, FIRSTFED desired to be part of the discussions. No specific
discussions regarding a strategic transaction were held at this time.
On November 27, 2000, People's held a meeting with representatives of
Company A in Boston. Attendees at the meeting were the chief executive officer
and the chief financial officer of Company A and Messrs. Straczynski and Hunt,
along with director Benjamin Cavallo, representing People's. The meeting
included a historical review of Company A and its assembly strategy, including
an interest in southeastern Massachusetts. People's agreed to provide
nonconfidential information to Company A for the purposes of updating Company
A's financial models.
At a November 28, 2000 meeting of the People's board of directors,
representatives of Fox-Pitt, Kelton made a presentation regarding strategic
alternatives, and the board considered and discussed whether People's
stockholders would be best served by continuing to operate People's or by a sale
of People's.
On December 5, 2000, People's entered into the FRB Agreement with the
Federal Reserve Bank of Boston in which People's agreed, among other matters, to
obtain written approval prior to declaring or paying any dividends on its
capital stock or making any distributions of interest, principal, or other sums
on its subordinated debentures. People's is also required to maintain a minimum
specified consolidated Tier 1 leverage capital ratio.
Consistent with the FDIC memorandum of understanding and the agreement with
the Federal Reserve Bank, People's board of directors and management formulated
and submitted to regulators plans to improve and maintain the financial
soundness of People's and People's Savings, and People's began restructuring its
consolidated balance sheet to reduce interest rate risk while improving
liquidity and balance sheet fundamentals.
On January 23, 2001, Company A entered into a confidentiality agreement
with People's. During February and March 2001, People's provided information to
Company A regarding its business and operations.
On February 3, 2001, People's retained Fox-Pitt, Kelton to provide
financial advisory and investment banking services.
On March 26, 2001, Company A informed People's that it had decided not to
pursue a transaction with People's at that time, citing concerns over the
economy and other initiatives taking priority at Company A.
49
Throughout March and early April 2001, People's was in discussions with the
Smyth Group regarding a threatened proxy contest. On April 12, 2001, the Smyth
group formally notified People's that it intended to mount another proxy
contest, with the goal of having its three nominees elected to the board. On
April 19, 2001, People's entered into an agreement with the Smyth Group in which
the Smyth Group executed confidentiality agreements and terminated the proxy
contest and People's agreed to increase the size of its board of directors from
10 to 13 members and, subject to the receipt of regulatory approvals, appoint
Messrs. Smyth, Gillen and Foster to the boards of People's and People's Savings.
FDIC approval was received in June 2001, and the Smyth Group designees were
appointed to the board of directors of People's Savings at that time. Federal
Reserve Board approval was received in August 2001 and the Smyth Group designees
were appointed to the board of directors of People's at that time. At the time
of his election as a director of People's, Mr. Gillen was also appointed to the
Merger and Acquisition Committee (the "M&A committee"). Between May and August
2001, Mr. Gillen attended meetings of the M&A committee by invitation.
At the April 24, 2001 meeting of the People's board of directors, with
Messrs. Smyth, Gillen and Foster present by invitation, representatives of
Fox-Pitt, Kelton made a presentation that included an analysis of People's core
earnings and recent financial performance. At the meeting it was the consensus
of the board that, given People's recent operating results and its prospects,
including restrictions imposed by regulatory agreements, as well as the general
environment for community banks, a sale of People's should be considered. The
board authorized Fox-Pitt, Kelton to assume a leadership role in the process and
directed Fox-Pitt, Kelton to check with Company A whether it had renewed
interest in a transaction. The board reactivated its M&A committee, consisting
of Messrs. Matthews, Ramsay and Siskind, to act as liaison between Fox-Pitt,
Kelton and the full board of directors in any matters involving possible
strategic transactions with other companies.
On April 27, 2001, Company A requested further information from People's,
which was provided.
At the May 10, 2001 meeting of the M&A committee, at which Messrs. Smyth,
Gillen and Cavallo were present by invitation, representatives of Fox-Pitt,
Kelton made a presentation regarding potential acquirors of People's. The board
authorized Fox-Pitt, Kelton to prepare an information memorandum for potential
acquirors and entered into a new engagement letter with Fox-Pitt, Kelton.
Between May and September 2001, Fox-Pitt, Kelton received inquiries from or held
preliminary discussions with approximately 15 potential acquirors.
On May 11, 2001, Messrs. Gillen and Cavallo and a representative of
Fox-Pitt, Kelton met with an executive officer of Company A to further discuss
the possibility of a strategic transaction. Between May 11 and May 27, People's
sent additional information to Company A.
At the May 29, 2001 meeting of the People's board of directors, Mr. Gillen
reported on the meeting with Company A. Mr. Straczynski reported that his
understanding from Fox-Pitt, Kelton was that a transaction with People's was not
currently a priority at Company A, but might be revisited later in the year or
early in 2002. Management was asked to direct Fox-Pitt, Kelton to review earlier
inquiries and prioritize those companies with the greatest interest and the
greatest ability to complete a transaction with People's.
On June 1, 2001, a representative of Fox-Pitt, Kelton contacted Mr. Stoico
to discuss the possibility of a business combination between FIRSTFED and
People's. Mr. Stoico advised Fox-Pitt, Kelton that FIRSTFED would be interested
in discussing such a transaction. After internal discussions regarding
FIRSTFED's interest in People's and an internal analysis of the potential terms
of a possible
50
transaction, FIRSTFED delivered a general non-binding written indication of
interest to Fox-Pitt, Kelton on June 7, 2001.
At the June 8, 2001 meeting of the People's M & A committee, Fox-Pitt,
Kelton made a presentation to the board regarding its review of earlier
inquiries. Fox-Pitt, Kelton reported that Company B had the highest level of
interest at this time and had sufficient capacity to pursue a transaction. The
board directed Fox-Pitt, Kelton to organize a meeting between People's and
Company B.
On June 12, 2001, Mr. Straczynski, Mr. Hunt and a representative of
Fox-Pitt, Kelton met with senior management of Company B for preliminary
discussions and an exchange of public information. Discussions and exchange of
public information continued and a follow-up meeting was held on June 15, 2001.
At the meeting, the parties reviewed pro forma information prepared by Company B
and discussed various accounting issues and the potential benefits and costs of
a possible merger between Company B and People's.
At the June 19, 2001 telephonic M&A committee meeting, at which Mr. Gillen
and representatives of Fox-Pitt, Kelton were present by invitation, Mr. Hunt
reported on the June 12 meeting with Company B. It was the decision of the
committee that, based on Company B's clear interest and apparent ability to
consummate a transaction, People's engage in exclusive discussions with Company
B regarding a possible merger.
On June 21, 2001, Company B entered into a confidentiality agreement with
People's.
At the June 26, 2001 meeting of the People's board of directors, Mr. Hunt
updated the board regarding the discussions with Company B. Based on the
progress made, it was the consensus of the board that discussions with Company B
should continue.
In late June 2001, Fox-Pitt, Kelton requested that FIRSTFED furnish
People's with additional information regarding its interest in pursuing a
business combination with People's. FIRSTFED conveyed additional information to
Fox-Pitt, Kelton during a telephonic conference call on July 3, 2001.
At the July 12, 2001 telephonic M&A committee meeting, representatives of
Fox-Pitt, Kelton reported on the status of prospective acquirors. Also at this
meeting, Mr. Hunt made a presentation to the committee regarding the financial
impact of a merger on People's using various assumptions and pricing models. The
committee determined that Mr. Hunt should meet with Company B to re-assess its
interest and to discuss the assumptions and pricing of a possible merger.
On July 17, 2001, Mr. Hunt met with the chief financial officer of Company
B and a representative of Fox-Pitt, Kelton to discuss various transaction
considerations and pricing alternatives.
On July 20, 2001, Messrs. Straczynski and Hunt met with senior management
of Company B and Fox-Pitt, Kelton to discuss a possible merger. Company B
indicated it was concerned about valuations and that it was not prepared to
proceed on an exclusive basis, but that it would be interested in receiving an
information memorandum if one were distributed. Accordingly, exclusive
discussions with Company B were terminated.
On July 24, 2001, People's M&A committee directed Fox-Pitt, Kelton to
initiate direct contact with additional possible acquirors to determine their
levels of interest. People's and Fox-Pitt, Kelton began to update the
confidential information memorandum containing information regarding the
business and operations of People's.
51
Between July 25, 2001 and August 1, 2001, Fox-Pitt, Kelton contacted eleven
companies to determine their interest in pursuing a strategic transaction with
People's. Nine of the eleven (including FIRSTFED, Company A and Company B, which
had requested to remain in the process) entered into confidentiality agreements
and eight (excluding Company A) received copies of the confidential information
memorandum.
After August 1, 2001, Fox-Pitt, Kelton received initial indications of
interest from FIRSTFED, Company B and three additional companies, Company C,
Company D and Company E. Three other companies withdrew from the process.
On August 9, 2001, Messrs. Straczynski, Hunt and McKinlay, along with a
representative of Fox-Pitt, Kelton, met with senior management of Company C.
Following several discussions between members of senior management and
Keefe, Bruyette & Woods, Inc. ("KBW") regarding a potential transaction with
People's and a presentation by KBW regarding such transaction on August 8, 2001,
FIRSTFED formally retained KBW to serve as FIRSTFED's financial advisor on
August 14, 2001.
On August 16, 2001, Messrs. Straczynski, Hunt and McKinlay met with
representatives of Company D.
At the August 20, 2001 telephonic M&A committee meeting, the committee
discussed the preliminary indications received from FIRSTFED and Company E.
At a meeting held on August 23, 2001, the FIRSTFED board of directors
authorized senior management, with the assistance of FIRSTFED's financial and
legal advisors, to continue to pursue a transaction with People's consistent
with the proposed terms discussed by the board.
On August 24, 2001, Messrs. Straczynski, Hunt and McKinlay met with
representatives of FIRSTFED for further discussions regarding valuation and
related matters.
From mid- to late August 2001, several prospective acquirors conducted due
diligence in People's off-site data room.
On August 30, 2001, Messrs. Straczynski, Hunt and McKinlay, along with a
representative of Fox-Pitt, Kelton, had a follow-up meeting with management of
Company D.
On August 31, 2001, representatives of People's held a meeting with
representatives of Company E.
On September 4, 2001, Fox-Pitt, Kelton reported to People's on feedback
from prospective acquirors. FIRSTFED indicated that it was eager to proceed and
requested details on process and timing as well as the opportunity to conduct
further due diligence. Company C indicated that it did not intend to provide a
final indication of interest because restructuring and other one-time expenses
would make a transaction with People's uneconomical for Company C. Company D
cited concerns over People's investment securities and mortgage company, but
indicated that it was working to prepare a final indication of interest. Company
E indicated that it expected to provide an initial indication of interest by
September 5.
52
FIRSTFED submitted a more specific non-binding indication of interest to
Fox-Pitt, Kelton on September 7, 2001. The letter outlined the material terms by
which FIRSTFED's board of directors had agreed it would consider an acquisition
of People's.
At the September 14, 2001 telephonic M&A committee meeting, Fox-Pitt,
Kelton reported that final indications of interest had been received from
FIRSTFED and Company D and that an initial indication of interest had been
received from Company E. It was reported that FIRSTFED confirmed its indication
of $22.00 per share in the form of 50% stock and 50% cash. Company D and Company
E had submitted indications below FIRSTFED's offer price and imposed additional
conditions on the structure of a possible transaction with People's, including
in the case of Company E the exclusion of People's mortgage company from the
transaction.
It was the consensus of the committee that Fox-Pitt, Kelton should discuss
with FIRSTFED, among other things, the possibility of an all-cash deal, board
representation and downside stock-price protection, and should continue
discussions with Company D.
On September 14, 2001, Fox-Pitt, Kelton relayed the M&A committee's
reactions to Mr. Stoico of FIRSTFED, who said he would respond by September 17.
On September 17, 2001, in a telephone call between senior management of
FIRSTFED, FIRSTFED's financial advisor and Fox-Pitt, Kelton, FIRSTFED indicated
that it could not pay all cash, but would consider a mix of stock and cash
consideration, with possibly as much as 60% cash. FIRSTFED also indicated that
it would be willing to grant one, but not more than one, board seat to a
People's designee.
In a second telephone call on September 17, 2001, FIRSTFED indicated that
it would pay $22.00 per share, with 55% of the consideration to be in cash and
45% in FIRSTFED stock, with a fixed exchange ratio and a 20% collar, with the
addition of an index trigger on the downside.
At the September 21, 2001 telephonic M&A committee meeting, Fox-Pitt,
Kelton updated the committee on FIRSTFED's proposal, and Mr. Smyth indicated
that he would, in his capacity as a director, vote in favor of FIRSTFED's
proposal.
On September 21, 2001, Fox-Pitt, Kelton, at the direction of the M&A
committee, terminated discussions with Company D and Company E because of
pricing issues, structural complexities and uncertainty presented by their
indications of interest.
On September 24, 2001, FIRSTFED sent a revised indication letter to
People's confirming the transaction outlined in the September 17 telephone call.
At the September 25, 2001 meeting of the People's board of directors,
representatives of Goodwin Procter made a presentation to the board regarding
its duties to stockholders in connection with a possible sale of the company;
Mr. Gillen, on behalf of the M&A committee, reported to the board on the status
of discussions with FIRSTFED; and Mr. Gillen, Mr. Hunt and a representative of
Goodwin Procter reviewed for the board the activities undertaken by Fox-Pitt,
Kelton in reviewing strategic alternatives on behalf of People's, including
inquiries of and discussions with numerous potential acquirors. The board then
authorized management to continue discussions with FIRSTFED.
At a meeting of the FIRSTFED board of directors held on September 25, 2001,
representatives of KBW provided the board with a detailed financial analysis of
the proposed transaction and the negotiations that had occurred to date.
Representatives of Muldoon Murphy & Faucette LLP made a detailed presentation
53
regarding the terms of the merger and the transactions contemplated thereby, the
board's fiduciary duties in the context of a merger, and potential regulatory
issues involved with the transaction.
During the week of September 23, 2001, People's and FIRSTFED management and
their respective financial and legal advisors facilitated the exchange of
business, financial, accounting, tax and legal due diligence and participated in
discussions with each other on various issues relating to the proposed
transaction. On September 26, 2001, FIRSTFED's legal counsel forwarded a draft
of the merger agreement to People's, Goodwin Procter and Fox-Pitt, Kelton. From
then until September 30, 2001, the parties negotiated and exchanged numerous
drafts of the merger agreement, the stock option agreement and the voting
agreements to be entered into by each of the members of the People's board (with
the exception of Vincent Smyth) pursuant to which such members would agree to
vote their shares of People's common stock in favor of the transaction.
On September 30, 2001, People's board of directors met to discuss the final
terms of the merger with FIRSTFED. At this meeting, Mr. Hunt, together with
representatives of Goodwin Procter, updated the board on the status of the
negotiations and the material terms that had been resolved, subject to approval
by the People's board. Goodwin Procter reviewed for the board the terms of the
merger agreement and the terms of the stock option agreement, as well as the
voting agreements to be entered into by each member of the People's board (with
the exception of Vincent Smyth). Fox-Pitt, Kelton made a presentation to the
People's board of a financial analysis of the proposed merger. In addition,
Fox-Pitt, Kelton delivered an oral opinion concerning the fairness, from a
financial point of view, of the consideration set forth in the merger agreement
to People's common stockholders, which was later confirmed in writing. The
People's board of directors considered the terms of the merger agreement, the
stock option agreement and the voting agreements, the potential advantages and
risks associated with the merger, and the analysis and opinion of Fox-Pitt,
Kelton. Following discussion, the People's board of directors unanimously
determined that the merger was advisable and in the best interests of People's
stockholders. Accordingly, the People's board of directors approved the merger
agreement and (with the exception of Vincent Smyth, who took no position on the
matter) recommended that stockholders vote their shares in favor of approving
the merger agreement and the merger, and authorized management to enter into the
merger agreement, the stock option agreement and other related agreements.
On September 30, 2001, the FIRSTFED board of directors met to discuss the
final terms of the proposed merger agreement. At this meeting, members of senior
management together with a representative of KBW and Muldoon Murphy & Faucette
LLP updated the board on the status of the merger negotiations. The terms of the
merger agreement and the proposed transactions were discussed in detail
including the remaining unresolved issues. The KBW representative provided the
board with an updated financial analysis of the proposed merger and related
transactions and delivered an opinion to the board concerning the fairness, from
a financial point of view, of the consideration set forth in the merger
agreement to FIRSTFED's stockholders. The board considered all of the foregoing
and, following a detailed discussion, unanimously determinated that the merger
was in the best interests of FIRSTFED and its stockholders. Accordingly, the
board of directors approved the merger agreement and authorized and instructed
Mr. Stoico to execute a definitive merger agreement on behalf of FIRSTFED.
The negotiations and preparation of final definitive versions of the merger
agreement and related agreements continued through the evening of September 30,
2001 and the merger agreement was signed on the morning of October 1, 2001.
People's and FIRSTFED then issued a joint press release publicly announcing the
merger.
54
Recommendation of the FIRSTFED Board; FIRSTFED's Reasons for the Merger
FIRSTFED's board of directors has unanimously approved the merger
agreement and recommends that FIRSTFED stockholders vote "FOR" the approval of
the merger agreement.
FIRSTFED's board of directors has determined that the merger and the
merger agreement are fair to, and in the best interests of, FIRSTFED and its
stockholders. In reaching this determination, the FIRSTFED board consulted with
legal counsel as to its legal duties and the terms of the merger agreement and
with its financial advisors with respect to the financial aspects and fairness
of the transaction from a financial point of view. In arriving at its
determination, the FIRSTFED board also considered a number of factors, including
the following:
. Due Diligence Review. Information concerning the businesses,
earnings, operations, financial condition and prospects of
People's and FIRSTFED, both individually and as combined. The
FIRSTFED board took into account the results of FIRSTFED's due
diligence review of People's.
. KBW Opinion. The opinion rendered by KBW, as financial advisor to
FIRSTFED, that the merger consideration is fair, from a financial
standpoint, to FIRSTFED stockholders (see "--Opinion of
FIRSTFED's Financial Advisor").
. Complementary Markets. The complementary nature of the businesses
and market areas of FIRSTFED and People's.
. Tax Consequences. The terms of the merger agreement and the
structure of the merger, including the fact that the merger
agreement provides a maximum number of shares of FIRSTFED common
stock to be issued in the merger and that the merger is intended
to qualify as a transaction of a type that is generally tax-free
for U.S. federal income tax purposes and as a purchase for
accounting purposes.
. Greater Resources. The size of the combined company, which would
permit FIRSTFED to pursue other acquisitions.
. Continuity of Management. The fact that FIRSTFED's management
team immediately before the merger will remain intact following
the merger, and that FIRSTFED's board of directors will be
increased to accommodate the addition of one current member of
the People's board of directors.
. Stock Prices. The historical trading prices for FIRSTFED and
People's common stock.
. Cost Savings. The opportunities for decreasing operating expenses
for the combined company.
. Current Environment. The current and prospective economic,
competitive and regulatory environment facing FIRSTFED, People's
and the financial services industry.
. Greater Liquidity. Although still not widely traded, the market
for FIRSTFED common stock, after the merger, is expected to be
substantially broader than the current market for FIRSTFED common
stock.
55
. Termination Rights. The merger agreement provides People's with a
right to terminate the transaction in the event that the market
value of FIRSTFED common stock declines by both (1) more than 20%
and (2) more than 15% below an index of comparable saving
institutions between September 28, 2001 and the end of a specific
measurement period, all subject to FIRSTFED's right to increase
the consideration to be paid to People's stockholders receiving
common stock consideration in the merger.
. Limit on Market Value of Exchange Ratio. The exchange ratio will
be automatically reduced if the market value of FIRSTFED's common
stock increases by 20% or more.
. Stock Option Agreement. The terms of the merger agreement and the
stock option agreement, including the possibility that certain of
such terms might discourage other parties that might have an
interest in proposing a business combination with People's at a
price that would be attractive to People's.
. Termination Fee. The termination fee to which FIRSTFED would be
entitled under certain circumstances.
. More Competitive. The board of directors' assessment that
FIRSTFED would be better able to serve the convenience and needs
of its customers and communities by becoming a larger institution
better suited for competing against regional financial
institutions in its market area.
. Accretive to Earnings. That the merger is expected to be
accretive to earnings in the first year after the merger and the
belief that the business and financial advantages contemplated in
connection with the merger will likely be achieved within a
reasonable time frame.
. Likelihood of Consummation. That People's had thoroughly reviewed
its strategic planning options and the likelihood that the
proposed merger would receive the required approvals, and the
anticipated impact of the foregoing on the successful
consummation of the transaction.
. M.O.U. and FRB Agreement. The existence of the M.O.U. and the FRB
Agreement.
. People's Savings' CRA Rating. The "Satisfactory" Community
Reinvestment Act rating at the most recent examination of
People's Savings.
The discussion of the information and factors considered by the
FIRSTFED board is not intended to be exhaustive, but includes all material
factors considered by the FIRSTFED board. In reaching its determination to
approve and recommend the merger, the FIRSTFED board did not assign any specific
or relative weights to any of the foregoing factors, and individual directors
may have weighed factors differently.
Recommendation of the People's Board; People's Reasons for the Merger
The People's board of directors believes that the merger is fair to,
and in the best interests of, People's and its stockholders. Accordingly, the
People's board of directors has unanimously approved the merger agreement and,
with the exception of director Vincent Smyth, who takes no position on this
matter, recommends that stockholders vote "FOR" the approval and adoption of the
merger agreement and the transactions contemplated by that agreement, including
the merger.
56
In reaching its decision to approve the merger agreement and the
transactions contemplated by that agreement, including the merger, the People's
board of directors consulted with People's senior management, as well as with
People's financial and legal advisors, at numerous meetings and considered a
broad range of factors, including the following:
. Due Diligence Review. The People's board of directors'
familiarity with, and the results of People's due diligence
review of, FIRSTFED and of FIRSTFED's business, operations,
financial condition, earnings and prospects.
. Business of People's. The People's board of directors'
familiarity with People's business, operations, financial
condition, earnings and properties.
. State of Banking Industry Environment. The People's board of
directors' knowledge and analysis of the current banking industry
environment, which is characterized by continuing consolidation
in Massachusetts and increased nationwide, statewide and local
competition.
. Current Economic Environment. The People's board of directors'
awareness of a recent downturn in economic conditions nationwide,
as well as in People's and FIRSTFED's principal market,
southeastern Massachusetts.
. Trends in Technology. The People's board of directors' awareness
of evolving trends in technology and the need to spend a
substantial portion of a financial institution's after-tax income
to remain competitive with other banking institutions in
southeastern Massachusetts.
. Strategic Options. The review conducted by the People's board of
directors of the strategic options available to People's and the
assessment of the People's board of directors that none of those
options presented superior opportunities or were likely to create
greater value for People's stockholders than the prospects
presented by the proposed merger with FIRSTFED.
. Merger Consideration. The financial terms of the merger,
including the fact that 55% of the merger consideration to be
paid by FIRSTFED would be paid in cash, and that the
consideration proposed to be paid by FIRSTFED in connection with
the merger represented a substantial premium over then prevailing
market prices of People's common stock.
. Risk of Market Fluctuation of FIRSTFED Stock. The fact that,
since 55% of the merger consideration would be paid by FIRSTFED
in cash, the risk to People's stockholders of material market
fluctuations with respect to the merger consideration is
substantially reduced.
. Broader Liquidity. The fact that, although still not widely
traded, the market for FIRSTFED common stock after the merger is
expected to be substantially broader than the current market for
FIRSTFED common stock.
. FIRSTFED Liquidity. The People's board of directors' concern that
the common stock of FIRSTFED has a thinner trading market than
the trading market in the common stocks of many larger bank
holding companies.
. Termination Rights. The fact that the financial terms of the
merger agreement provide People's with a right to terminate the
transaction in the event that the market value of FIRSTFED common
stock declines by both (1) more than 20% and (2) more than 15%
below an index of comparable saving institutions between
September 28, 2001 and the end of a specific measurement period,
57
all subject to FIRSTFED's right to increase the consideration to
be paid to People's stockholders receiving common stock
consideration in the merger.
. Fox-Pitt, Kelton Opinion. The opinion of Fox-Pitt, Kelton to the
People's board of directors that, on September 30, 2001, the
merger consideration was fair, from a financial point of view, to
the holders of common stock of People's.
. FIRSTFED CRA Rating. The "Satisfactory" Community Reinvestment
Act rating at the most recent examination of FIRSTFED's
subsidiary savings association.
. Impact of Being Part of a Larger Institution. The People's board
of directors' belief that the merger represents an opportunity to
leverage People's infrastructure, financial products and services
over a larger consumer and corporate customer base through a
larger combined People's and FIRSTFED branch network and a more
prominent market position.
. Integration of Mortgage Business. The People's board of
directors' belief that the integration of People's residential
mortgage business with the residential mortgage business of
FIRSTFED should result in increased profitability derived from
economies of scale and back-office cost savings.
. Terms of Merger Agreement. The terms of the merger agreement and
the option agreement, including the possibility (reduced by the
extensive "market check" conducted by People's and Fox-Pitt,
Kelton) that certain of such terms might discourage other parties
that might have an interest in proposing a business combination
with People's at a price that would be attractive to People's.
. Convenience and Needs of Customers/Communities. The People's
board of directors' assessment that People's would better serve
the convenience and needs of its customers and the communities
that it serves through affiliation with a financial institution
that, with People's, could create a substantially larger,
broader-based banking institution.
. Business and Financial Advantages. The People's board of
directors' belief that the business and financial advantages
contemplated in connection with the merger were likely to be
achieved within a reasonable time frame.
. Likelihood of Regulatory Approval. The likelihood of the merger
being approved by the appropriate bank regulatory agencies.
. Likelihood of FIRSTFED Stockholder Approval. The likelihood of
the merger being approved by the common stockholders of FIRSTFED.
. Likelihood of People's Stockholder Approval. The likelihood of
the merger being approved by the common stockholders of People's.
. Effect on People's Constituencies. The effect of the merger on
People's constituencies other than its stockholders, including
its borrowers, depositors and other customers, as well as the
employees and the communities served by People's.
58
. Thorough Search for Strategic Partners. The People's board of
directors' assessment that the search for strategic partners for
People's conducted by Fox-Pitt, Kelton had been extremely
thorough.
. Resolution of Regulatory Issues. The People's board of directors'
belief that consummation of the proposed merger with FIRSTFED
would satisfactorily resolve the remaining regulatory issues
under the M.O.U. and the FRB Agreement.
. Eliminate Possibility of Proxy Contest. The People's board of
directors' belief that consummation of the proposed merger with
FIRSTFED would eliminate the possibility of a proxy contest with
respect to the election of directors at People's 2002 annual
meeting of stockholders.
The foregoing discussion of the information and factors considered by
the People's board of directors is not intended to be exhaustive, but includes
all material factors, both positive and negative, considered by the People's
board of directors. In reaching its determination to approve and recommend the
merger, the People's board of directors did not assign any relative or specific
weights to these factors, and individual directors may have given different
weights to various factors. In the opinion of the People's board of directors,
however, the positive factors outweighed the negative factors. All of the 13
members of the People's board of directors attended the September 30, 2001 board
meeting at which the merger agreement was approved. Moreover, all thirteen
members of the People's board of directors voted in favor of the merger
agreement and the transactions contemplated by that agreement. All 13 directors
(other than director Vincent Smyth, who took no position on the matter) also
voted to recommend to the stockholders of People's that the stockholders vote in
favor of the merger agreement and the transactions contemplated by that
agreement at the Special Meeting of People's Stockholders at which they will
consider and vote upon the merger agreement.
Opinion of FIRSTFED's Financial Advisor
On August 14, 2001, KBW was retained by FIRSTFED to provide investment
banking and advisory services to FIRSTFED in connection with the acquisition of
People's, and to provide its opinion as to the fairness of the transaction to
stockholders of FIRSTFED from a financial point of view. KBW, as part of its
investment banking business, is regularly engaged in the evaluation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, and distributions of listed and unlisted securities.
KBW is familiar with the market for common stocks of publicly traded banks and
thrifts and bank and thrift holding companies. The FIRSTFED board of directors
selected KBW on the basis of the firm's reputation and its experience and
expertise in transactions similar to the merger.
Pursuant to its engagement, KBW was asked to render an opinion as to
the fairness, from a financial point of view, of the merger consideration to
stockholders of FIRSTFED. KBW delivered its opinion to the FIRSTFED board of
directors that, as of October 1, 2001, the merger consideration is fair, from a
financial point of view, to the stockholders of FIRSTFED. KBW has also delivered
to the FIRSTFED board of directors a written opinion dated the date of this
joint proxy statement - prospectus which is substantially identical to the
October 1, 2001 opinion. No limitations were imposed by the FIRSTFED board of
directors upon KBW with respect to the investigations made or procedures
followed by it in rendering its opinion. KBW has consented to the inclusion
herein of the summary of its opinion to the FIRSTFED board of directors and to
the reference to December 20, 2001 opinion attached hereto as Appendix C.
59
The full text of the opinion of KBW, which is attached as Appendix C to
this joint proxy statement - prospectus, sets forth certain assumptions made,
matters considered and limitations on the review undertaken by KBW, and should
be read in its entirety. The summary of the opinion of KBW set forth in this
joint proxy statement - prospectus is qualified in its entirety by reference to
the opinion.
In rendering its opinion, KBW reviewed:
. the merger agreement by and between FIRSTFED and People's dated
October 1, 2001;
. FIRSTFED's annual report to stockholders, proxy statement
and Form 10-K for the years ended March 31, 2000 and 2001;
. FIRSTFED's quarterly reports on Form 10-Q for the quarters ended
June 30, 2001; and
. other information KBW deemed relevant.
In addition, KBW reviewed:
. the annual report and Form 10-K of People's for the years ended
December 31, 1999 and 2000;
. the proxy statement for People's 2000 and 2001 annual meeting of
Stockholders;
. People's quarterly reports on Form 10-Q for the quarters ended
March 31 and June 30, 2001; and
. other information KBW deemed relevant and certain other
information deemed relevant.
KBW also:
. discussed with senior management and the boards of directors of
FIRSTFED and its wholly-owned subsidiary, First Federal, the
current position and prospective outlook for FIRSTFED to enhance
future stockholder value;
. discussed with senior management of FIRSTFED its operations,
financial performance and future plans and prospects;
. considered historical quotations, levels of activity and prices
of recorded transactions in FIRSTFED's common stock;
. discussed with senior management of People's and its wholly-owned
subsidiary, People's Savings, the current position and
prospective outlook for People's;
. discussed with senior management of People's its operations,
financial performance and future plans and prospects;
. considered historical quotations, levels of activity and prices
of recorded transactions in People's common stock;
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. reviewed financial and stock market data of other thrifts in a
comparable asset range to FIRSTFED and People's;
. reviewed certain recent business combinations of strategic
alliance transactions which KBW deemed comparable in whole or in
part; and
. performed other analyses which KBW considered appropriate.
In rendering its opinion, KBW assumed and relied upon the accuracy and
completeness of the financial information provided to it by FIRSTFED and
People's. In its review, with the consent of the FIRSTFED board of directors,
KBW did not undertake any independent verification of the information provided
to it, nor did it make any independent appraisal or evaluation of the assets or
liabilities, and potential or contingent liabilities of FIRSTFED or People's.
KBW presented the following analyses:
Regional Group Analysis. KBW reviewed the financial performance of
FIRSTFED based on various financial measures of asset size, earnings
performance, tangible equity/assets, market pricing ratios, and dividend-related
ratios to publicly-traded thrift institutions in Massachusetts (23 in the group)
as well as all publicly traded thrift institutions. This analysis showed among
other things that FIRSTFED compared as follows:
Tangible Price to
Assets Equity/ ---------------------------------
($M) Assets ROAE Qtr EPS Book TangBook
FIRSTFED 1,747 6.44% 9.02% 8.02x 85.6% 86.5%
MA Median 801.9 8.44% 9.89% 11.98x 110.5% 123.5%
National Median 359.8 9.13% 6.97% 13.3x 97.4% 100.7%
Analysis of Selected Mergers / Strategic Alliance Transactions.
In rendering its opinion, KBW analyzed the consideration offered to
stockholders of People's in relation to certain comparable merger and
acquisition transactions of pending thrift deals, comparing merger consideration
relative to tangible book value, last 12 months earnings and premium to core
deposits. Pending and completed thrift deals consist of thrift acquisitions with
deal values between $50 and $100 million, target equity to assets ratios less
than 8% and target return on average equity greater than 13%.
The information in the following table summarizes the comparable group
results analyzed by KBW with respect to the merger. The summary does not purport
to be a complete description of the analysis performed by KBW and should not be
construed independently of the other information considered by KBW in rendering
its opinion. Selecting portions of KBW's analysis or isolating certain aspects
of the comparable transactions without considering all analysis and factors
could create an incomplete or potentially misleading view of the evaluation
process.
61
Price to Core Deposit
-------------------------
Tang. Book(1) EPS(2) Premium
(%) (x) (%)
People's: 225% 10.0x 9.8%
Median of Pending Deals: 195.7% 18.8x 10.7%
Median of Completed Deals: 172.3% 13.8x 14.5%
_________________
(1) People's tangible book value of $9.80 as of June 30, 2001
(2) People's earnings per share of $1.10 for the six months ended June 30,
2001 (annualized).
Based on the above information, KBW concluded that the above analysis
of the transaction with a deal price of $22.00 per share is fair from a
financial point of view to the stockholders of FIRSTFED.
No company or transaction used in any of the above analyses, as a
comparison is identical to FIRSTFED, People's or the contemplated transaction.
Accordingly, an analysis of the results of the foregoing is not formulaic;
rather, it involves complex considerations and judgments concerning differences
in financial, market and operating characteristics of the companies and other
factors that could affect the public trading value of the companies to which
they are being compared.
Based on the above information KBW concluded that the merger
consideration was fair to the stockholders of FIRSTFED from a financial point of
view relative to comparable transactions. Further, the fairness analysis
considered (1) the relative market performance of the thrift stocks in general
over the past year; (2) the relative historical returns on equity of FIRSTFED
and People's; and (3) the expected performance of each company given additional
considerations such as the business plan, asset mix, net interest margin, net
interest spread and asset quality. The summary does not purport to be a complete
description of the analysis performed by KBW and should not be construed
independently of the other information considered by KBW in rendering its
opinion. Selecting portions of KBW's analysis or isolating certain aspects of
the comparable transactions without considering all analysis and factors, could
create an incomplete or potentially misleading view of the evaluation process.
In preparing its analysis, KBW made numerous assumptions with respect
to industry performance, business and economic conditions and other matters,
many of which are beyond the control of KBW and FIRSTFED. The analyses performed
by KBW are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses and
do not purport to be appraisals or reflect the prices at which a business may be
sold.
KBW will receive a fee of $364,000 for services rendered in connection
with advising and issuing a fairness opinion regarding the merger. As of the
date of the joint proxy statement - prospectus, KBW has received $50,000 of such
fee, the remainder of the fee is due upon closing of the merger. In addition,
FIRSTFED has agreed to reimburse KBW for out of pocket expenses up to $7,500.
Opinion of People's Financial Advisor
Fox-Pitt, Kelton has acted as financial advisor to People's in
connection with the merger. As part of its engagement, Fox-Pitt, Kelton
delivered its oral opinion to the People's board of directors at that board's
September 30, 2001 meeting that, as of that date, and based upon and subject to
various considerations set forth in its opinion, the merger consideration to be
received in the merger by People's stockholders for each share of People's
common stock was fair, from a financial point of view, to those stockholders.
Fox-Pitt, Kelton subsequently confirmed its opinion in writing.
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FOX-PITT, KELTON'S WRITTEN OPINION AS DELIVERED TO PEOPLE'S BOARD OF
DIRECTORS, DATED SEPTEMBER 30, 2001, SETS FORTH, AMONG OTHER THINGS, THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND REVIEW UNDERTAKEN BY FOX-PITT,
KELTON. FOX-PITT, KELTON HAS ALSO DELIVERED TO PEOPLE'S BOARD OF DIRECTORS
A WRITTEN OPINION DATED THE DATE OF THIS JOINT PROXY STATEMENT - PROSPECTUS
WHICH IS SUBSTANTIALLY IDENTICAL TO THE SEPTEMBER 30, 2001 OPINION AND
WHICH IS ATTACHED AS APPENDIX D TO THIS DOCUMENT AND IS INCORPORATED INTO
THIS DOCUMENT BY REFERENCE. PEOPLE'S STOCKHOLDERS ARE URGED TO CAREFULLY
READ THE DECEMBER 20, 2001 OPINION IN ITS ENTIRETY. THE SUMMARY OF
FOX-PITT, KELTON'S OPINION AS DELIVERED TO PEOPLE'S BOARD OF DIRECTORS, SET
FORTH IN THIS DOCUMENT, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF THE OPINION.
In arriving at its opinion, Fox-Pitt, Kelton, among other things:
. reviewed and analyzed publicly available financial statements for
People's and FIRSTFED and financial information made available to
it by People's and FIRSTFED's management;
. analyzed internal financial statements, including financial
projections and other financial and operating data prepared by
People's management;
. discussed with People's management, its past, current and future
operations, financial condition and prospects;
. discussed with FIRSTFED's management, its past, current and
future operations, financial condition and prospects;
. reviewed the stock price performance and trading activity of
People's common stock and FIRSTFED's common stock;
. compared the financial performance and condition of People's and
FIRSTFED with similar information for selected companies whose
securities are publicly traded;
. reviewed the financial terms of selected recent business
combinations which it deemed comparable in whole or in part;
. reviewed and discussed with the management of People's and
FIRSTFED the strategic objectives of the merger and other
benefits of the merger;
. reviewed the merger agreement; and
. performed those other studies and analyses and considered those
other factors as it deemed appropriate.
In arriving at its opinion, Fox-Pitt, Kelton assumed and relied upon,
without independent verification, the accuracy and completeness of all of the
financial and other information reviewed by it for the purposes of providing its
opinion, and did not assume any responsibility for independent verification of
that information. Fox-Pitt, Kelton did not assume any responsibility for the
independent valuation and appraisal of any of People's or FIRSTFED's assets and
liabilities. With respect to financial projections, Fox-Pitt, Kelton assumed
that they were reasonably prepared by People's management on a basis reflecting
the best currently available estimates and judgments of People's future
financial performance. Fox-Pitt, Kelton expresses no view as to those
projections or the assumptions on which they were based. Fox-Pitt, Kelton
assumed that the merger will be consummated on the terms set forth in the merger
agreement without material waiver or modification. Fox-Pitt, Kelton's opinion
was necessarily based upon financial, economic, market and other conditions as
they existed on September 28, 2001.
63
The projections furnished to Fox-Pitt, Kelton were prepared by People's
management. People's does not publicly disclose internal management projections
of the type provided to Fox-Pitt, Kelton in connection with Fox-Pitt, Kelton's
analysis of the merger, and those projections were not prepared with a view
toward public disclosure. Those projections were based on numerous variables and
assumptions that are inherently uncertain and may be beyond the control of
management, including, without limitation, factors related to general economic
and competitive conditions. Accordingly, actual results could vary significantly
from those set forth in those projections.
Set forth below is a brief summary of the material financial analyses
performed by Fox-Pitt, Kelton in connection with its opinion and reviewed with
People's board of directors on September 30, 2001.
Selected Public Company Analyses
--------------------------------
Fox-Pitt, Kelton compared selected financial information and commonly used
valuation measurements for People's to corresponding information and
measurements for a group of 11 publicly traded thrifts headquartered in New
England with assets between $500 million and $1.5 billion. In this document, we
refer to these thrifts as the Selected Companies. The Selected Companies were:
Abington Bancorp, Inc. Connecticut Banchares, Inc.
BostonFed Bancorp, Inc. Medford Bancorp, Inc.
Brookline Bancorp, Inc. Berkshire Hills Bancorp, Inc.
Port Financial Corp. MASSBANK Corp.
Woronoco Bancorp, Inc. Bancorp Connecticut, Inc.
NewMil Bancorp, Inc.
Fox-Pitt, Kelton analyzed the relative performance and value of People's by
comparing selected publicly available financial data of People's with the
Selected Companies, including multiples of:
. market price to book value as of the latest available financial data,
. market price to tangible book value as of the latest available
financial data, and
. market price as a multiple of last 12 months earnings.
To calculate the trading multiples, Fox-Pitt, Kelton used, for the Selected
Companies, publicly available historical financial information and earnings
estimates as reported by SNL Datasource. This analysis yielded multiples for the
Selected Companies, as follows:
. market price to book value multiple of 1.14x,
. market price to tangible book value multiple of 1.25x, and
. market price as a multiple of last 12 months earnings of 11.84x.
Based on these multiples for the Selected Companies, an assumed change of
control premium and other customary valuation methodologies utilized by
Fox-Pitt, Kelton, Fox-Pitt, Kelton developed relevant value ranges for each of
the methodologies described above. In developing these value ranges, and based
on its experience with thrifts, Fox-Pitt, Kelton adjusted People's balance sheet
and income statement information by reducing the amount of investment securities
held by People's and the amount
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of People's indebtedness to more closely resemble the balance sheet and income
statement information of a typical thrift such as one of the Selected Companies.
Based on this information, Fox-Pitt, Kelton estimated that the implied value for
People's in the merger based on this analysis was approximately between $11.26
and $17.39 per share of People's common stock.
None of the Selected Companies are identical to People's. Accordingly,
Fox-Pitt, Kelton believes the analysis of publicly traded comparable companies
is not simply mathematical in nature. Rather, this analysis involves complex
considerations and qualitative judgments, reflected in Fox-Pitt, Kelton's
opinion, concerning differences in financial and operating characteristics of
the Selected Companies and other factors that could affect the public trading
value of the Selected Companies.
Selected Transactions Analysis
------------------------------
Fox-Pitt, Kelton reviewed the financial terms, to the extent publicly
available, of 12 pending or completed merger and acquisition transactions
announced since January 1, 2001, involving thrifts with assets between $500
million and $5.0 billion. In this document, we refer to these transactions as
the Selected Transactions.
The Selected Transactions reviewed were:
Date Target Acquiror
09/10/01 Community Savings Bankshares BankAtlantic Bancorp, Inc.
09/04/01 Ambanc Holding Co. Hudson River Bancorp
07/19/01 American Bank of Connecticut American Financial Holdings
07/16/01 SouthBanc Shares, Inc. National Commerce Financial Corp.
06/15/01 Ledger Capital Corp Anchor BanCorp Wisconsin
06/11/01 Andover Bancorp, Inc. Banknorth Group, Inc.
06/11/01 MetroWest Bank Banknorth Group, Inc.
06/04/01 Bank Plus Corp. FBOP Corp.
05/04/01 CENIT Bancorp, Inc. SouthTrust Corp.
03/27/01 Richmond County Financial Corp. New York Community Bancorp, Inc.
02/08/01 First Federal of East Hartford Connecticut Bancshares, Inc.
01/23/01 Alliance Bancorp Charter One Financial
Fox-Pitt, Kelton calculated for each of the Selected Transactions, the
ratio of price paid to last 12 months earnings per share, book value per share,
tangible book value per share, the premium over tangible book value to core
deposits and five trading day market premium. This analysis yielded the
following medians for the Selected Transactions:
. Price to earnings multiple of 15.57x;
. Price to book value ratio of 1.51x;
. Price to tangible book value ratio of 1.51x;
. Tangible book value premium to core deposit ratio of 9.94%; and
. Premium to seller common stock price of 27.50%.
65
Based on the multiples for the Selected Transactions, and other customary
valuation methodologies utilized by Fox-Pitt, Kelton, Fox-Pitt, Kelton estimated
that the implied value for People's in the merger based on this analysis was
approximately between $11.32 and $19.99 per share. In developing this value
range, Fox-Pitt, Kelton adjusted People's balance sheet and income statement
information by reducing the amount of investment securities held by People's and
the amount of People's indebtedness to more closely resemble the balance sheet
and income statement information of a typical thrift such as one of the Selected
Companies.
Because the reasons for, and circumstances surrounding, each of the
precedent transactions analyzed were so diverse, and due to the inherent
differences between People's operations and financial condition and those of the
companies involved in these Selected Transactions, Fox-Pitt, Kelton believes
that a comparable transaction analysis is not simply mathematical in nature.
Rather, this analysis involves complex considerations and qualitative judgments,
reflected in Fox-Pitt, Kelton's opinion, concerning differences between the
characteristics of these prior transactions and the merger that could affect the
value of the these companies and businesses and People's.
Review of Takeover Premia
-------------------------
Fox-Pitt, Kelton also reviewed the premia paid in the Selected
Transactions. The takeover premia were calculated based on the closing price per
share of the target company's common stock on the five trading days immediately
preceding the announcement of the applicable transaction. For non-cash
transactions, Fox-Pitt, Kelton defined deal value per share as the closing price
per share of the acquiring company's common stock on the first trading day
immediately preceding the announcement multiplied by the stated exchange ratio.
The median premium for the Selected Transactions was 27.5% The merger
consideration represents a premium of 60.2% over the closing price per share of
$13.73 for People's common stock on September 28, 2001, the trading day
immediately prior to the announcement of the merger.
Stock Trading History
---------------------
Fox-Pitt, Kelton also reviewed the premia represented by the merger
consideration relative to the closing prices of People's common stock over
various periods during the 12 month period ending September 28, 2001. The
following table summarizes the results of this analysis.
Price People's Price Per Share Premium
Current Price $13.73 60.2%
Thirty-day average $14.71 49.6%
Ninety-day average $14.92 47.5%
52-week high $17.38 26.6%
52-week low $13.25 66.0%
Dividend Discount Analysis
--------------------------
Fox-Pitt, Kelton performed an analysis to calculate a range of present
values per share of People's common stock assuming People's continued to operate
as a stand-alone entity. The range was determined by adding (1) the present
value of the estimated future dividend stream that People's could generate over
the period beginning December 31, 2001 and ending on December 31, 2006, and (2)
the present value of the terminal value of People's common stock on December 31,
2006. To determine a
66
projected dividend stream, Fox-Pitt, Kelton assumed (1) a restructuring of
People's balance sheet between 2001 and 2006; (2) a gradual return to a more
typical level of profitability between 2001 and 2006; and (3) a dividend payout
ratio of 30% each year from 2002 through 2006.
The terminal values are based upon a range of price-to-earnings and
price-to-book value multiples consistent with the range of price-to-earnings and
price-to-book value multiples at which similarly-sized public thrift
institutions located in New England trade (12x to 13x last 12 month earnings per
share and 1.10x to 1.30x book value per share) and a range of discount rates
appropriate for similar thrift institutions (12% to 16%). Applying these
multiples, discount rates and assumptions, Fox-Pitt, Kelton determined that the
fully diluted value per share of People's common stock ranged from approximately
$17.44 to $22.72 based on the price-to-earnings multiple assumptions and $11.45
to $15.79 based on the price-to-book value multiple assumptions.
In arriving at its opinion, Fox-Pitt, Kelton performed a variety of
financial analyses, the material portions of which are summarized above. The
summary set forth above does not purport to be a complete description of the
analyses performed by Fox-Pitt, Kelton or of Fox-Pitt, Kelton's presentation to
People's board of directors. The preparation of a fairness opinion is a complex
analytical process involving various determinations as to the most appropriate
and relevant methods of financial analyses and the application of those methods
to the particular circumstances and, therefore, the opinion is not necessarily
susceptible to partial analysis or summary description. In arriving at its
opinion, Fox-Pitt, Kelton did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly,
Fox-Pitt, Kelton believes that its analyses must be considered as a whole and
that selecting portions of its analyses and the factors considered by it,
without considering all of the analyses and factors, could create an incomplete
view of the process underlying its analyses set forth in its opinion.
Fox-Pitt, Kelton's opinion does not imply any conclusion as to the likely
trading range for FIRSTFED's common stock after the date of its opinion or when
issued to People's stockholders in the merger. In performing its analyses,
Fox-Pitt, Kelton made numerous assumptions with respect to industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of People's and FIRSTFED. Any estimates
contained in those analyses are not necessarily indicative of actual past or
future results or values, which may be significantly more or less than those
estimates. Actual values will depend upon several factors, including changes in
interest rates, market conditions, general economic conditions and other factors
that generally influence the price of securities.
The terms of the merger were determined through negotiations between
People's and FIRSTFED and were approved by People's board of directors. Although
Fox-Pitt, Kelton provided advice to People's during the course of these
negotiations, the decision to enter into the merger agreement was solely that of
People's board of directors. As described above, the opinion and presentation of
Fox-Pitt, Kelton to People's board of directors were only one of a number of
factors taken into consideration by People's board of directors in making its
determination to approve the merger agreement and the merger. Fox-Pitt, Kelton's
opinion does not address the merits of the underlying decision by People's to
enter into the merger agreement or to consummate the transactions contemplated
by the merger agreement, and does not constitute a recommendation to any
stockholder as to how that stockholder should vote.
Fox-Pitt, Kelton is an internationally recognized investment banking firm.
Fox-Pitt, Kelton regularly engages in evaluation of bank, thrift and bank
holding company securities in connection with acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for various other purposes. In the ordinary
course of its business, Fox-Pitt,
67
Kelton may effect transactions, for its own account or for the account of
customers, and hold at any time a long or short position in securities of
People's or FIRSTFED.
People's selected Fox-Pitt, Kelton as its financial advisor in connection
with the merger based on Fox-Pitt, Kelton's qualifications, expertise,
reputation and experience in mergers and acquisitions. People's retained
Fox-Pitt, Kelton as its financial advisor pursuant to an engagement agreement,
dated May 10, 2001. Under the engagement agreement, People's paid Fox-Pitt,
Kelton a financial advisory fee of $250,000 in connection with Fox-Pitt,
Kelton's rendering of its opinion. People's has also agreed to pay Fox-Pitt,
Kelton, a transaction fee of 1.0% of the aggregate consideration paid or payable
by FIRSTFED upon consummation of the merger, subject to a minimum transaction
fee of $650,000. The $250,000 fee paid in connection with Fox-Pitt, Kelton's
rendering of its opinion is fully creditable against this transaction fee.
Regardless of whether the merger is consummated, People's has agreed to
reimburse Fox-Pitt, Kelton for fees and disbursements of Fox-Pitt, Kelton's
counsel and for Fox-Pitt, Kelton's travel and other out-of-pocket expenses
incurred in connection with the merger. People's has also agreed to indemnify
Fox-Pitt, Kelton and certain related persons to the full extent lawful against
various liabilities, including liabilities under the federal securities laws,
arising out of its engagement or the merger.
Dissenters' Rights
Under the MBCL, a holder of People's common stock who does not vote in
favor of the merger and who follows the procedures prescribed under
Massachusetts law may require FIRSTFED, as the surviving corporation in the
merger, to pay the fair value of his or her shares as determined in an appraisal
proceeding brought in accordance with Sections 85 through 98 of the MBCL. The
text of Sections 85 through 98 is set forth in full in Appendix E. In order to
exercise those statutory appraisal rights, a stockholder must comply with the
statutory provisions, and each stockholder who may desire to exercise those
rights should carefully review and adhere to those provisions.
Under Massachusetts statutory law, procedures relating to dissenters'
rights are stated to be the exclusive remedy available to a stockholder
objecting to the merger except for objections made on the grounds that the
merger will be or is illegal or fraudulent as to that stockholder. However,
under Massachusetts case law, dissenting stockholders may not be limited to the
statutory remedy of judicial appraisal where violations of fiduciary duty are
found.
Any person having a beneficial interest in shares of People's common stock
that are held of record in the name of another person, such as a broker or
nominee, must act promptly to cause the record holder to follow the procedures
prescribed under the MBCL and in a timely manner to perfect that beneficial
owner's appraisal rights, if any.
A dissenting stockholder of People's who desires to pursue the appraisal
rights available must file a written objection to the merger with People's
before the taking of the stockholders' vote on the merger, stating the intention
of the stockholder to demand payment for shares owned by the stockholder if the
merger is approved and consummated, refrain from voting shares owned by the
stockholder in favor of the merger, and within 20 days of the date of mailing of
a notice by FIRSTFED to objecting stockholders that the merger has become
effective, make written demand to FIRSTFED, as the surviving corporation, for
payment for the stockholder's shares.
The initial written objection of a dissenting stockholder of People's
should be delivered to People's Bancshares, Inc., 545 Pleasant Street, New
Bedford, Massachusetts 02740, Attention: President. The written demand which
must be made after the effective time should be delivered to FIRSTFED AMERICA
68
BANCORP, INC. at ONE FIRSTFED PARK, Swansea, Massachusetts 02777, Attention:
Investor Relations. It is recommended that the objection and the demand be sent
by registered or certified mail, return receipt requested.
A dissenting stockholder who files the required written objection with
People's prior to the stockholder vote need not vote against the merger, but a
vote in favor of the merger will constitute a waiver of the stockholder's
statutory appraisal rights. A vote against the merger does not, alone,
constitute a written objection. Pursuant to the applicable statutory provisions,
FIRSTFED will send a notice that the merger has become effective to each
objecting stockholder of People's within 10 days after the date on which the
merger becomes effective.
The value of the People's common stock will be determined in connection
with the statutory appraisal procedure. If, during the period of 30 days after
the expiration of the period during which the foregoing demand for payment may
be made, FIRSTFED and the dissenting stockholder fail to agree on an appraisal
value, either of them may file a bill in equity in the Superior Court of Bristol
County, Massachusetts, asking that the court determine the appraisal value. The
bill in equity must be filed within four months after the date of expiration of
the 30-day period. After a hearing, the court is to enter a decree determining
the fair value of the People's common stock and is to order FIRSTFED to make
payment of the value, with interest, if any, to the stockholders entitled to the
payment, upon transfer by them to FIRSTFED of the certificate(s) representing
the People's common stock held by those stockholders.
For appraisal proceeding purposes, value is determined as of the date
before the approval of the merger by stockholders, excluding any element of
value arising from the expectation or accomplishment of the merger.
Interests of Our Directors and Officers in the Merger that Differ From Your
Interests
Some members of People's management and board of directors may have
interests in the merger that are in addition to or different from the interests
of People's stockholders. Our boards of directors were aware of these interests
and considered them in approving the merger agreement.
Effects of the Merger on Existing People's Employment and Change in Control
Agreements. The merger will affect employment arrangements that People's,
People's Savings and/or People's Mortgage Company have with various officers
under existing employment and change in control agreements. Change in control
agreements with Richard Straczynski and Donna Boulanger, People's President and
Chief Executive Officer and Senior Vice President/Senior Lending Officer,
respectively, and one other People's employee provide for severance payments to
the executive if his or her employment is terminated following a change in
control of People's. These payments will equal three times the average of the
executive's five preceding taxable years' annual compensation. Mr. Straczynski
also has a non-competition agreement with People's Savings that will pay him an
additional two times his base salary if he is terminated. Two other employees'
change in control agreements provide the employee with a severance payment equal
to one times the employee's average annual compensation for the five preceding
taxable years. If any payment under these agreements would constitute an "excess
parachute payment" under Section 280G of the Internal Revenue Code, such payment
will be reduced to the maximum amount deductible by the employer under Section
280G.
Employment agreements with James Hunt, Executive Vice President/Finance and
Administration and Chief Financial Officer and one other employee, provide for
severance payments to the officer if his employment is terminated following a
change in control of People's. These payments will equal two years' base salary
at the rate in effect upon the change in control plus two times the bonus earned
during the year preceding termination. If any payment would constitute an
"excess parachute payment" under Section 280G
69
of the Internal Revenue Code, such payment will be reduced to the maximum amount
deductible by the employer under Section 280G. Mr. Hunt and the other employee
will also be provided with 24 months of welfare benefit continuation.
Employment agreements with John J. Kiernan, President of People's Savings'
mortgage subsidiary, People's Mortgage Company, and one other mortgage company
employee provide that Mr. Kiernan and the other employee will each receive a
severance payment equal to their total compensation for the 36 months preceding
the merger if their employment is terminated within three years of the merger.
Employment agreements with two other mortgage company employees provide the
employees with a severance payment equal to their aggregate total compensation
for the 24 months preceding the merger if their respective employments are
terminated within two years of the merger. Another employee's employment
agreement with the mortgage company provides that he will receive $3.3 million
(such amount to be reduced by payments previously made to him under his
incentive bonus schedule) if his employment is terminated within two years of
the merger. If any payment would constitute an "excess parachute payment" under
Section 280G of the Internal Revenue Code, such payment will be reduced to the
maximum amount deductible by the employer under Section 280G.
The merger will constitute a change in control for purposes of all of the
foregoing agreements. Assuming that the merger is completed in the first quarter
of 2002 and all individuals with employment and change in control agreements are
terminated, the aggregate payments due under all of the agreements described in
this section would be approximately $8.7 million. Of this amount, it is
currently expected that up to $3.0 million will be payable upon consummation of
the merger and the balance of $5.7 million will be payable if certain employees'
employment is terminated within certain periods of time following the merger.
First Federal is currently evaluating the extent to which officers of People's
Savings may be offered positions with First Federal after the merger.
Protection of People's Directors and Officers Against Claims. FIRSTFED has
agreed to indemnify and hold harmless each present and former director and
officer of People's for a period of six years from liability and expenses
arising out of matters existing or occurring at or before the consummation of
the merger to the fullest extent allowed under Massachusetts law as in effect at
the time of closing. FIRSTFED has also agreed that People's shall obtain an
extended reporting period endorsement under People's directors' and officers'
liability insurance policy for the benefit of People's officers and directors,
which provides such officers and directors with continued insurance coverage
under such policy for six years following consummation of the merger, subject to
a limit on the amount of the annual premium.
Vesting of People's Stock Options. Under the terms of People's 1996 stock
option plan, all unvested stock options will become vested upon completion of
the merger. The directors and executive officers of People's currently hold
20,000 unvested stock options.
Appointment of People's Director to the FIRSTFED and First Federal Boards
of Directors. FIRSTFED will appoint B. Benjamin Cavallo, a member of People's
board of directors, to the FIRSTFED and First Federal boards of directors upon
completion of the merger. Mr. Cavallo will be paid the same fees payable to
FIRSTFED's non-employee directors based upon meeting attendance and other
factors.
Regulatory Approvals Needed to Complete the Merger
Office of Thrift Supervision. Completion of the merger is subject to prior
approval of the OTS. In reviewing applications for transactions of this type,
the OTS must consider, among other factors, the financial and managerial
resources and future prospects of the existing and resulting institutions, and
the convenience and needs of the communities to be served. In addition, the OTS
may not
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approve a transaction if it will result in a monopoly or otherwise be
anticompetitive. FIRSTFED filed an application with the OTS on November 15,
2001.
Under the Community Reinvestment Act of 1977, the OTS must take into
account the record of performance of First Federal and People's Savings in
meeting the credit needs of the entire community, including low- and
moderate-income neighborhoods, served by each institution. As part of the review
process, bank regulatory agencies frequently receive comments and protests from
community groups and others. First Federal and People's Savings each received a
"Satisfactory" rating during their last federal Community Reinvestment Act
examinations.
As part of the application, FIRSTFED has requested from the OTS the
authority to hold the trust preferred securities it obtains from People's in
connection with the merger in excess of the regulatory limits for a period of up
to two years as permitted by regulation. No assurances can be made that the OTS
will grant such permission or will allow FIRSTFED to hold such securities in
excess of the regulatory limit for the entire two year period.
In addition, a period of 15 to 30 days must expire following approval by
the OTS, within which period the United States Department of Justice may file
objections to the merger under the federal antitrust laws. While we believe that
the likelihood of objection by the Department of Justice is remote in this case,
there can be no assurance that the Department of Justice will not initiate
proceedings to block the merger.
Massachusetts Board of Bank Incorporation. Completion of the merger is also
subject to the approval of the Massachusetts Board of Bank Incorporation
("BBI"). The BBI may approve the petition based upon a finding whether or not
competition among banking institutions will be unreasonably affected and whether
public convenience and advantage will be promoted. In making such determination,
the BBI will consider, but not be limited to, a showing of net new benefits,
including initial capital investments, job creation plans, consumer and business
services and commitments to maintain and open branch offices within a bank's
delineated local community. The BBI will require a public hearing and comment
period as well as notice from the Massachusetts Housing Partnership Fund (the
"Fund") that satisfactory arrangements have been made by FIRSTFED to make
certain assets available for call by the Fund. FIRSTFED filed an application
with the BBI on November 14, 2001, and a public hearing has been scheduled for
January 9, 2002.
Commissioner of Banks of the Commonwealth of Massachusetts; Massachusetts
Depositors Insurance Fund. People's must provide 60 days' prior written notice
of the merger of First Federal and People's Savings Bank to the Massachusetts
Commissioner of Banks and the Massachusetts Depositors Insurance Fund. People's
provided written notice to the Commissioner of Banks and the Depositors
Insurance Fund on November 15, 2001.
Federal Reserve Board. Consummation of the merger will require FIRSTFED to
receive either the prior approval of the Federal Reserve Board or the waiver of
such approval requirement, in each case as provided under the Bank Holding
Company Act of 1956, as amended. We requested a waiver of the approval
requirements of the Federal Reserve Board on November 15, 2001, which was
granted on November 21, 2001.
FDIC. First Federal is also required to provide the FDIC with a notice of
the potential acquisition by First Federal of People's Savings' subsidiaries.
First Federal furnished the FDIC with such notice on November 15, 2001.
The merger cannot proceed in the absence of the requisite regulatory
approvals. See "The Merger Agreement--Conditions to Completing the Merger" and
"--Terminating the Merger Agreement." There can be no assurance that the
requisite regulatory approvals will be obtained, and if obtained, there can be
no assurance as to the date of any approval. There can also be no assurance that
any regulatory approvals will
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not contain a condition or requirement that causes the approvals to fail to
satisfy the condition set forth in the merger agreement and described under "The
Merger Agreement--Conditions to Completing the Merger."
We are not aware of any other regulatory approvals that are required for
completion of the merger, except as described above. Should any other approvals
be required, we currently contemplate that we would seek those approvals. There
can be no assurance that any other approvals, if required, will be obtained.
The approval of any application merely implies the satisfaction of
regulatory criteria for approval, which does not include review of the merger
from the standpoint of the adequacy of the cash consideration or the exchange
ratio for converting People's common stock to FIRSTFED common stock.
Furthermore, regulatory approvals do not constitute an endorsement or
recommendation of the merger.
Accounting Treatment of the Merger
In accordance with the recently issued Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142,
"Accounting for Goodwill and Other Intangible Assets," FIRSTFED will use the
purchase method of accounting for the merger, as well as the new accounting
standards for goodwill and other intangible assets. Under these methods of
accounting, the assets and liabilities of People's will be recorded on
FIRSTFED's consolidated balance sheet at their estimated fair values at the
effective date of the merger. The amount by which the purchase price exceeds the
fair value of the net tangible and identifiable intangible assets acquired by
FIRSTFED through the merger will be recorded as goodwill. Goodwill will not be
amortized, but will instead be subject to assessment for impairment, and
identifiable intangible assets will be amortized over their estimated useful
lives. FIRSTFED currently expects that, based on preliminary accounting
estimates, the merger would result in the recording of goodwill of approximately
$44.2 million and other intangible assets of approximately $12.0 million.
Resale of FIRSTFED Common Stock
The shares of FIRSTFED common stock to be issued to stockholders of
People's in the merger have been registered under the Securities Act of 1933.
Shares of FIRSTFED common stock issued in the merger may be traded freely and
without restriction by those stockholders not deemed to be "affiliates" of
People's, as that term is defined in the rules under the Securities Act.
FIRSTFED common stock received by those stockholders of People's who are deemed
to be "affiliates" of People's at the time the merger is submitted for vote of
the stockholders of People's may be resold without registration under the
Securities Act only to the extent provided for by Rule 145 promulgated under the
Securities Act, which permits limited sales under certain circumstances, or
pursuant to another exemption from registration. An affiliate of People's is an
individual or entity that controls, is controlled by or is under common control
with, People's, and may include the executive officers and directors of
People's, as well as certain principal stockholders of People's. The same
restrictions apply to certain relatives or the spouses of those persons and any
trusts, estates, corporations or other entities in which those persons have a
10% or greater beneficial interest.
Pursuant to the terms of the merger agreement People's has caused each
person who may be deemed an affiliate of People's for purposes of Rule 145 under
the Securities Act to deliver to FIRSTFED a written agreement intended to ensure
compliance with the Securities Act.
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The Merger Agreement
The following describes material provisions of the merger agreement.
This description does not purport to be complete and is qualified by reference
to the merger agreement, which is attached as Appendix A and is incorporated by
reference into this joint proxy statement - prospectus.
Terms of the Merger
The merger agreement provides for a business combination in which
People's will merge with and into FIRSTFED. FIRSTFED will be the surviving
corporation in the merger.
As a result of the merger, except as noted below, each outstanding
share of People's common stock will be converted into the right to receive, at
the election of the holder, either 1.2644 shares of FIRSTFED common stock or
$22.00 in cash. See "The Merger-Conversion of People's Common Stock." FIRSTFED
will not issue fractions of shares of FIRSTFED common stock, but instead will
pay each holder of People's common stock who would otherwise be entitled to a
fraction of a share of FIRSTFED common stock an amount in cash determined by
multiplying that fraction by the average closing price of FIRSTFED common stock
over a measurement period prior to the completion of the merger. If there is a
change in the number or classification of shares of FIRSTFED outstanding as a
result of a stock split, stock dividend, reclassification, recapitalization, or
other similar transaction, the exchange ratio will be equitably adjusted. Shares
of People's common stock held directly or indirectly by FIRSTFED will be
canceled and retired upon completion of the merger, and no payment will be made
for them. Canceled shares will not include shares held by either People's or
FIRSTFED in a fiduciary capacity or in satisfaction of a debt previously
contracted. Holders of shares for which dissenters' rights have been exercised
will be entitled only to the rights granted by Massachusetts law.
When Will the Merger be Completed
The closing of the merger will take place on a date we agree upon that
is no later than seven days following the date on which the last waiting period
under the required regulatory approvals expires and all of the conditions to the
merger contained in the merger agreement are satisfied or waived, unless we
agree to a later date. See "--Conditions to Completing the Merger." On the
closing date, FIRSTFED will file a certificate of merger with the Delaware
Secretary of State and articles of merger or consolidation with the
Massachusetts Secretary of State merging People's into FIRSTFED. The merger will
become effective at the time stated in the certificate of merger.
We expect to complete the merger in the first calendar quarter of 2002.
However, we cannot guarantee when or if the required regulatory approvals will
be obtained. See "The Merger--Regulatory Approvals Needed to Complete the
Merger." Furthermore, either company may terminate the merger agreement if,
among other reasons, the merger has not been completed on or before June 30,
2002, unless failure to complete the merger by that time is due to a
misrepresentation, breach of warranty or failure to fulfill a covenant by the
party seeking to terminate the agreement. See "--Terminating the Merger
Agreement."
Conditions to Completing the Merger
Our obligations to consummate the merger are conditioned on the
following:
. approval of the merger agreement by our stockholders;
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. receipt of all required regulatory approvals, consents or
waivers; provided that no such approval, consent or waiver
contains any condition or requirement that: (1) FIRSTFED raise a
material amount of additional capital; (2) restricts materially
FIRSTFED's operations or growth; or (3) requires FIRSTFED to
dispose of securities to be acquired from People's in amounts
materially in excess of the required dispositions at the time the
merger agreement was executed, so as to adversely impact the
economic or business benefits of the merger to FIRSTFED to the
point where, had FIRSTFED known of the condition or requirement,
it would not have entered into the merger agreement;
. the expiration of all statutory waiting periods;
. no party to the merger being subject to any legal order that
prohibits consummating any part of the transaction, no
governmental entity having instituted any proceeding for the
purpose of blocking the transaction, and the absence of any
statute, rule or regulation that prohibits completion of any part
of the transaction;
. the registration statement of which this joint proxy statement -
prospectus forms a part being declared effective by the
Securities and Exchange Commission, the absence of any pending or
threatened proceeding by the Securities and Exchange Commission
to suspend the effectiveness of the registration statement and
the receipt of all required state "blue sky" approvals;
. receipt by us of all consents and approvals (other than those
required from government agencies) from third parties required to
complete the merger, unless failure to obtain those consents or
approvals would not have a material adverse effect on FIRSTFED
after completion of the merger;
. receipt by each of us of opinions from our respective legal
counsel to the effect that the merger will be treated for federal
income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
. the listing on the American Stock Exchange of sufficient
additional shares of FIRSTFED common stock to be exchanged for
People's common stock (and to be acquired through the exercise of
People's converted stock options) following the consummation of
the merger;
. the other party having performed in all material respects its
obligations under the merger agreement, the other party's
representations and warranties being true and correct as of the
date of the merger agreement and as of the closing date (provided
that this condition will be satisfied so long as any inaccuracy
does not and is not reasonably likely to have a material adverse
effect on the other party), and receipt of a certificate signed
by the other party's chief executive officer and chief financial
officer to that effect;
. receipt of certificates from appropriate authorities as to the
corporate existence of the other party and other documents and
certificates to evidence fulfillment of the conditions to the
merger as each party may reasonably require; and
. the other party having taken all necessary corporate action to
undertake the transactions contemplated by the merger agreement.
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The obligation of FIRSTFED to complete the merger is also conditioned
on:
. there having been no event or occurrence that had or can be
reasonably expected to have a material adverse effect on
People's; and
. there not having been, as of a date within 10 business days of
the merger, a reduction of more than 7% of the fair market value
of the trust preferred securities, subordinated debt securities,
corporate debt securities and zero coupon debt instruments
(including the proceeds from the sale of such securities) held by
People's and its subsidiaries as of August 31, 2001.
The obligation of People's to complete the merger is also conditioned
on FIRSTFED having deposited the cash portion of the merger consideration with
the exchange agent.
We cannot guarantee whether all of the conditions to the merger will be
satisfied or waived by the party permitted to do so. If the merger is not
completed on or before June 30, 2002, either party may terminate the merger
agreement by a vote of a majority of its board of directors.
Conduct of Business Before the Merger
We have each agreed that, until the completion of the merger, each of
us will use our best efforts to:
. conduct our business in the regular, ordinary and usual course
consistent with past practice; and
. maintain and preserve intact our business organization,
properties, leases, employees and advantageous business
relationships and retain the services of our officers and key
employees.
Further, except as otherwise provided in the merger agreement, until
the completion of the merger, each of us have agreed that, unless permitted to
by the other party, neither of us nor our subsidiaries will:
. take any action that is intended or expected to result in any of
its representations or warranties under the merger agreement
being or becoming untrue in any material respect or in the
conditions to the merger not being satisfied or in a violation of
a provision of the merger agreement (expect as required by law);
. knowingly take any action that would prevent or impede the merger
from qualifying as a reorganization under 368(a) of the IRC; and
. agree to take, commit to take or adopt any resolutions in support
of any of the foregoing actions.
Notwithstanding the foregoing, nothing in the merger agreement prevents
or prohibits FIRSTFED from entering into an agreement to acquire a third party
so long as such action would not reasonably be expected to delay or make the
consummation of the merger less likely.
People's has also agreed that neither it nor its subsidiaries will,
unless permitted by FIRSTFED:
Indebtedness
. incur any indebtedness or become responsible for the obligations
of any individual, corporation or entity, other than the creation
of deposit liabilities, borrowings from the Federal Home Loan
Bank that mature within one year, sales of certificates of
deposit that mature within two years
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and entering into repurchase agreements; provided, however, that
in no event will such indebtedness or other similar arrangements
with an individual, corporation or other entity exceed an
aggregate of $5,000,000;
. prepay any such indebtedness so as to cause itself to incur a
prepayment penalty thereunder;
Capital Stock
. adjust, split, combine or reclassify its capital stock;
. pay any cash or stock dividends or make any other distribution on
its capital stock (provided that People's Savings may pay
dividends to People's subject to regulatory approval);
. grant any stock appreciation rights or limited rights under any
of its benefit plans or grant any third party a right to acquire
any of its shares of capital stock;
. issue any securities convertible or exercisable for any shares of
its capital stock;
. issue any shares of its capital stock other than shares issued
upon the exercise of outstanding stock options, or pursuant to
the stock option agreement that People's entered into in
connection with the merger agreement;
Dispositions
. dispose of any of its material assets or cancel or release any
indebtedness, other than in the ordinary course of business or
pursuant to commitments existing as of the date of the merger
agreement;
Investments
. make any equity investment other than pursuant to commitments
existing as of the date of the merger agreement;
Contracts
. enter into, renew, amend or terminate any contract or agreement,
or make any change in any of its leases or contracts, other than
with respect to those involving the payment of less than $25,000
per year, other than those specifically permitted by the merger
agreement;
Loans
. make, renew, increase, extend or purchase any loans, advances,
credit enhancements or extensions, other than existing loan
commitments and those in conformity with lending policies in
effect as of the date of the merger agreement in amounts not to
exceed an aggregate of $1,000,000 with respect to any one
borrower;
. make or increase any loan or extension of credit or commit to
make or increase any such loan or extension of credit to any
director or executive officer of People's or People's Savings
Bank, except for loans or extensions of credit on terms made
available to the general public and other than renewals of
existing loans or commitments to loan;
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Employees
. increase the compensation or fringe benefits of any of its
employees or directors, except in the ordinary course of business
consistent with past practice;
. pay any pension or retirement allowance or contribution not
required by any existing plan or agreement to any employees or
directors;
. become a party to, amend or commit to any benefit plan or
employment agreement;
. voluntarily accelerate the vesting or the lapsing of any
restrictions with respect to any stock options or other
stock-based compensation;
. elect any new executive officer or director;
. hire any employee with an annual total compensation in excess of
$50,000;
Settling Claims
. settle any claim against it for more than $25,000 or impose or
agree to material restrictions on its operations;
Governing Documents
. amend its articles of organization or by-laws;
Sale of Securities
. other than sales of trust preferred securities and other
investment securities in accordance with arrangements or
understandings with the FDIC and the Massachusetts Commissioner
of Banks, restructure or materially change its investment
securities portfolio or its interest rate risk position, through
purchases, sales or otherwise, or the manner in which the
portfolio is classified or reported;
Investment in Debt Securities
. make any investment in any debt security, including
mortgage-backed and mortgage-related securities, other than U.S.
government and U.S. government agency securities with final
maturities not greater than one year;
Capital Expenditures
. make any capital expenditures in excess of $25,000 individually
and $100,000 in the aggregate other than pursuant to binding
commitments and other than expenditures necessary to maintain
existing assets in good repair or to make payment of necessary
taxes;
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Branches
. establish or commit to establish any new branch or other office
or file an application to relocate or terminate the operation of
an existing banking office;
Accounting
. change its method of accounting, except as required by changes in
generally accepted accounting principles or regulatory
guidelines;
Transactions Not in the Ordinary Course of Business
. engage in any transaction that is not in the usual and ordinary
course of business and consistent with past practices; or
Other Agreements
. agree to take or make any commitment to take any of the actions
listed above.
Covenants of People's and FIRSTFED in the Merger Agreement
Agreement Not to Solicit Other Proposals. People's has agreed not to
initiate, solicitor encourage any inquiries or the making of any proposal or
offer, or engage in any negotiations concerning or provide any confidential
information or data to, or have discussions with any person relating to an
acquisition proposal with a third party. An acquisition proposal includes the
following:
. any merger, consolidation, share exchange, business combination,
or other similar transaction involving People's or People's
Savings;
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 25% or more of the consolidated assets of People's
and its subsidiaries; and
. any tender offer or exchange offer for 25% or more of the
outstanding shares of People's capital stock.
Despite the agreement of People's not to solicit other acquisition
proposals, the board of directors of People's may generally negotiate or have
discussions with, or provide information to, a third party who makes an
unsolicited, written, bona fide acquisition proposal, provided that the People's
board of directors:
. after consultation with and receipt of advice from outside legal
counsel, in good faith deems such action to be necessary for the
proper discharge of its duties to People's stockholders under
applicable law; and
. after consultation with its financial advisor, determines in good
faith that the transaction presented by such unsolicited
acquisition proposal, taking into account all legal, financial
and regulatory aspects of the proposal, the person making the
proposal and the prospects and interests of People's and its
stockholders, is a more favorable transaction (a "superior
proposal") than the transaction contemplated by the FIRSTFED
merger agreement.
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If People's receives a proposal or information request from a third
party or enters into negotiations with a third party regarding a superior
proposal, People's must notify FIRSTFED and provide FIRSTFED with information
about the third party and its proposal.
Employee Matters. Each person who is an employee of People's and its
subsidiaries as of the closing of the merger (whose employment is not
specifically terminated upon the closing) will become an employee of FIRSTFED or
one of its subsidiaries. Each such People's Savings continuing employee will be
eligible to participate in FIRSTFED's pension and 401(k) plans with credit for
prior service with People's Savings for purposes of eligibility and vesting (but
not for purposes of benefit accrual under the pension plan) and FIRSTFED will
evaluate the eligibility of all other continuing employees for purposes of
providing benefits comparable to those available to People's Savings' continuing
employees. FIRSTFED will make available employer provided health and other
employee welfare benefit plans to each continuing employee on the same basis
that it provides such coverage to FIRSTFED employees. FIRSTFED will cause its
health and dental plans to provide full credit under such plans for any
deductibles, co-payments and out-of-pocket expenses incurred by the continuing
employees and their covered dependents during the portion of the calendar year
prior to the closing of the merger. Former employees of People's Savings will be
treated as new employees for purposes of FIRSTFED's employee stock ownership
plan. FIRSTFED will evaluate the eligibility of all other continuing employees
for purposes of participation in the FIRSTFED employee stock ownership plan. To
the extent permitted by the appropriate government regulators, FIRSTFED has also
agreed to honor all vested benefits or other vested amounts earned or accrued
under People's employee benefit plans, contracts and arrangements. FIRSTFED
intends to amend its defined benefit P.L. pension plan to provide benefit
accruals at a rate equal to the rate currently in effect under the People's
pension plan for all employees hired by FIRSTFED on or after January 1, 2002,
including employees of People's Savings and People's Mortgage Corporation, who
become employed by FIRSTFED and otherwise satisfy the eligibility requirements
of the pension plan. People's has consented to such amendment.
Indemnification of People's Officers and Directors. FIRSTFED has agreed
to indemnify and hold harmless each present and former director and officer of
People's for a period of six years from liability and expenses arising out of
matters existing or occurring at or before the consummation of the merger to the
fullest extent allowed under Massachusetts law as in effect at the time of
closing. FIRSTFED has also agreed that People's shall obtain an extended
reporting period endorsement under People's directors' and officers' liability
insurance policy for the benefit of People's directors and officers which
provides such officers and directors with continued insurance coverage under
such policy for six years following consummation of the merger, subject to a cap
on the amount of the annual premium equal to 125% of People's current annual
premium.
Certain Other Covenants. The merger agreement also contains other
agreements relating to our conduct before consummation of the merger, including
the following:
. After all requisite approvals necessary to consummate the merger
are obtained, People's Savings will modify and change its loan,
litigation, real estate valuation and investment and
asset/liability management policies and practices so as to be
more consistent with those of First Federal.
. People's will give FIRSTFED reasonable access during normal
business hours to People's property, books, records and personnel
and furnish all information FIRSTFED may reasonably request.
. People's will permit a FIRSTFED representative to attend meetings
of the Investment Committee of the board of directors of People's
Savings.
. People's will meet with FIRSTFED on a regular basis to discuss
and plan for the conversion of People's data processing and
related electronic information systems.
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. People's will use its reasonable best efforts to submit all
necessary applications, notices, and other filings with any
governmental entity, the approval of which is required to
complete the merger and related transactions.
. People's will use its reasonable best efforts to obtain all third
party consents necessary to consummate the merger.
. People's will take any necessary action to exempt FIRSTFED and
this transaction from any anti-takeover provisions contained in
People's articles of organization or by-laws or federal or state
law.
. People's will use all reasonable efforts to take all actions
necessary to consummate the merger and the transactions
contemplated by the merger agreement.
. People's and FIRSTFED will consult with each other regarding any
public statements about the merger and any filings with any
governmental entity or with any national securities exchange or
market.
. People's and FIRSTFED will take all actions necessary to convene
meetings of our respective stockholders to vote on the merger
agreement. Their boards of directors will each recommend at their
respective stockholder meetings that the stockholders vote to
approve the merger and will each use their reasonable best
efforts to solicit stockholder approval, unless they determine
that their actions would not comply with their fiduciary
obligations to their stockholders.
. Prior to completion of the merger, FIRSTFED will notify the
American Stock Exchange of the additional shares of FIRSTFED
common stock that FIRSTFED will issue in exchange for shares of
People's common stock.
. People's will use its reasonable best efforts to cause each
person who is an affiliate of it under Rule 145 of the Securities
Act to deliver to FIRSTFED a letter to the effect that such
person will comply with Rule 145.
. People's and FIRSTFED will notify each other of any material
contract defaults and any events that would reasonably be likely
to result in a material adverse effect on the other. They also
will notify each other of any communication from a third party
regarding the need to obtain that party's consent that may be
required in connection with the merger.
. People's and FIRSTFED will take appropriate board action to
exempt People's directors and officers from short-swing profit
liability that could arise under the federal securities laws in
connection with the transactions being completed by the merger
agreement.
Representations and Warranties Made by FIRSTFED and People's in the Merger
Agreement
We have made certain customary representations and warranties to each
other in the merger agreement relating to our businesses. For information on
these representations and warranties, please refer to the merger agreement
attached as Appendix A. The representations and warranties must be true in all
material respects through the completion of the merger except to the extent
qualified by the merger agreement, and there can be no inaccuracy to the
representations and warranties that could, individually or in the aggregate,
have or reasonably be likely to have a material adverse effect on either party.
See "--Conditions to Completing the Merger."
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Terminating the Merger Agreement
The merger agreement may be terminated at any time prior to the
completion of the merger, either before or after approval of the merger
agreement by our stockholders, as follows:
. with the mutual consent of FIRSTFED and People's;
. by either party, if the stockholders of either company fail to
approve the merger agreement (provided that the party seeking to
terminate has complied with its obligations under the merger
agreement with respect to its stockholder meeting);
. by either party, if a required regulatory approval, consent or
waiver is denied or any governmental entity prohibits the
consummation of the merger or the transactions contemplated by
the merger agreement;
. by either party, if the merger is not consummated by June 30,
2002, unless failure to complete the merger by that time is due
to a misrepresentation, breach of a warranty or failure to
fulfill a covenant by the party seeking to terminate the
agreement;
. by either party, if the other party makes a misrepresentation,
breaches a warranty or fails to fulfill a covenant that cannot be
cured within a specified time and that would have a material
adverse effect on the other party;
. by either party, if the board of directors of the other party
does not recommend approval of the merger in the joint proxy
statement - prospectus or withdraws or revises its recommendation
in a manner adverse to the other party; or
. by People's, if its board of directors determines that it must
accept a superior proposal from a third party in the exercise of
its duties to stockholders under applicable laws; provided that
in such case, People's must furnish FIRSTFED with an opportunity
to modify the terms of this merger that would enable People's and
FIRSTFED to consummate the merger.
In addition, People's may terminate the merger agreement if during the
20 consecutive trading days ending on the date that we receive approval from the
OTS or People's stockholder approval, whichever is later (the "measurement
date"), (1) the average closing price of the FIRSTFED common stock during such
period is less than $13.92 and (2) FIRSTFED's common stock has underperformed
---
the "SNL New England Thrift Index" by more than 15% during the period beginning
on September 28, 2001 and ending on the measurement date. This right to
terminate lasts for three business days starting on the measurement date. If
People's elects to terminate the merger, FIRSTFED will have the right to cancel
the termination by increasing the number of shares of FIRSTFED stock it is to
exchange for shares of People's common stock such that (a) the value of that
number of shares is equal to $17.60, or, if less, (b) the value of that number
of shares would not have underperformed the decline in the Index. FIRSTFED will
have three business days after receiving notice of termination from People's to
exercise its right to increase the exchange ratio. Whether People's would
exercise its right to terminate the merger agreement and whether FIRSTFED would
exercise its right to increase the exchange ratio will depend on the facts and
circumstances as they exist at the time.
People's will pay FIRSTFED a termination fee of $3 million if People's
terminates the merger agreement because People's board of directors authorizes
People's to enter into an agreement with a third party (other than FIRSTFED or
its subsidiaries) with respect to a superior proposal. People's will also have
to pay FIRSTFED a termination fee of $3 million if People's stockholders fail to
approve the merger
81
agreement at People's stockholders meeting and within 24 months of the
termination without FIRSTFED's consent: (1) People's (or any of its
subsidiaries) enters into an agreement with a third party with respect to an
acquisition proposal, or (2) People's board of directors recommends that
People's stockholders approve or accept an acquisition proposal from a third
party. The termination fee paid by People's to FIRSTFED, together with any
profit FIRSTFED may realize from the stock option agreement, cannot exceed $3
million.
Stock Option Agreement
General. Immediately after the execution of the merger agreement,
People's entered into a stock option agreement pursuant to which it granted
FIRSTFED an irrevocable option to purchase from People's up to 647,197 shares of
People's common stock or a lesser or greater amount of shares that is 19.9% of
the outstanding People's common stock at the time the option is exercised,
subject to certain adjustments. The exercise price of the option is $22.00 per
share, subject to certain adjustments.
Effect of the Stock Option Agreement. The option agreement was entered
into in order to increase the likelihood that the merger will be completed in
accordance with its terms. The option agreement may have the effect of
discouraging persons who might be interested in acquiring all of or a
significant interest in People's, even if such persons were prepared to pay a
higher price per share for People's common stock than the value per share
contemplated by the merger agreement. The acquisition by a third party of
People's or a significant interest in People's or a significant portion of its
consolidated assets, or an agreement to do so, could cause the option to become
exercisable and significantly increase the cost to a potential acquiror. Such
increased costs might discourage a potential acquiror from considering or
proposing an acquisition or might result in a potential acquiror proposing to
pay a lower per share price to acquire People's than it might otherwise have
proposed to pay.
Exercise. The option will become exercisable, in whole or in part and
subject to regulatory approval, only if both an "initial triggering event" and a
"subsequent triggering event" occur prior to an "exercise termination event."
For purposes of the option agreement:
(1) an "initial triggering event" will occur if one of the following
events occurs:
(a) People's or any of its subsidiaries, without FIRSTFED's
prior written consent, enters into an agreement to engage in
an acquisition transaction with any person other than
FIRSTFED or a FIRSTFED subsidiary, or People's board of
directors recommends that stockholders of People's approve
or accept an acquisition transaction;
(b) People's, without FIRSTFED's prior written consent,
authorizes, recommends, proposes or publicly announces its
intention to authorize, recommend or propose an acquisition
transaction with any person other than FIRSTFED or a
FIRSTFED subsidiary, or People's board of directors publicly
withdraws or modifies, or publicly announces its intention
to withdraw or modify, in any manner adverse to FIRSTFED,
its recommendation that its stockholders approve the merger
agreement;
(c) a third party acquires beneficial ownership, or the right to
acquire beneficial ownership, of 15% or more of the
outstanding shares of People's common stock;
82
(d) a third party makes a bona fide proposal to People's or its
stockholders by public announcement or written communication
that is or becomes the subject of public disclosure to
engage in an acquisition transaction;
(e) People's breaches any covenant or obligation in the merger
agreement after a proposal is made by a third party to
People's or its stockholders to engage in an acquisition
transaction, and following that breach FIRSTFED would be
entitled to terminate the merger agreement if People's
failed to cure such breach before the date of FIRSTFED's
written notice to People's informing People's of FIRSTFED's
intention to exercise the option; or
(f) any person, other than FIRSTFED or any subsidiary of
FIRSTFED, other than in connection with a transaction to
which FIRSTFED has given its prior written consent, files an
application or notice with the Federal Reserve Board, the
OTS or some other U.S. federal or state bank regulatory
authority, for approval to engage in an acquisition
transaction.
(2) As used above in (1), the term "acquisition transaction" means:
(a) a merger or consolidation, or any similar transaction with
People's or any of its significant subsidiaries;
(b) a purchase, lease or other acquisition or assumption of all
or substantially all of the assets or deposits of People's
or any of its significant subsidiaries;
(c) a purchase or other acquisition of securities representing
15% or more of the voting power of People's; or
(d) any substantially similar transaction.
(3) A "subsequent triggering event" will occur if either of the
following occurs:
(a) any person acquires beneficial ownership of 25% or more of
the then outstanding shares of People's common stock; or
(b) the initial triggering event described above in clause
(1)(a) occurs, except that the percentage referred to in
clause (2)(c) of the definition of "acquisition transaction"
set forth above is 25%.
(4) An "exercise termination event" means the earliest of:
(a) the effective time of the merger;
(b) termination of the merger agreement in accordance with its
terms if the termination occurs prior to the occurrence of
an initial triggering event, except in the case of the
termination of the merger agreement by FIRSTFED as a result
of a material breach by People's of any of its
representations, warranties, covenants or agreements; or
(c) the date that is 12 months after the termination of the
merger agreement.
83
As of the date of this joint proxy statement - prospectus, to our
knowledge, no initial triggering event or subsequent triggering event has
occurred.
Repurchase and Surrender. The stock option agreement permits FIRSTFED
to require that People's repurchase the option or any shares issued under the
option for a specified option repurchase price for a period of 90 days after the
occurrence of either of the following (each a "repurchase event"): (1) the
completion by People's of a merger, consolidation or similar transaction or any
sale of substantially all of its assets, or (2) the acquisition by any third
party of beneficial ownership of 50% or more of the outstanding common stock.
At any time following a repurchase event and prior to an exercise
termination event, FIRSTFED may, if it has not exercised its right to require
People's to repurchase the option, surrender the option and any option shares it
may then own to People's in exchange for a payment - the "surrender price."
The "surrender price" is equal to:
. $3,000,000, plus
. if applicable, the aggregate purchase price previously paid by
FIRSTFED with respect to any option shares, minus
. if applicable, the sum of the excess of (1) the net cash amounts,
if any, received by FIRSTFED pursuant to the arm's-length sale of
People's option shares to an unaffiliated party, over (2) the
aggregate purchase price previously paid by FIRSTFED with respect
to those option shares, and the net cash amounts, if any,
received by FIRSTFED pursuant to an arm's-length sale of a
portion of the option to an unaffiliated party.
Profit Limitation. The stock option agreement provides that the
aggregate profit that FIRSTFED may realize from the option, together with any
termination fee People's must pay to FIRSTFED under the merger agreement, is
$3,000,000.
Adjustment. The stock option agreement provides for adjustment to the
number of shares and the exercise price of the option upon the occurrence of
certain changes to the capital structure of People's or certain other events or
transactions.
Regulatory Matters. Some rights and obligations of FIRSTFED and
People's under the stock option agreement are subject to receipt of required
regulatory approvals. FIRSTFED must obtain the approval of the Federal Reserve
Board to acquire more than 5% of the outstanding shares of People's common
stock.
Expenses
Each of us will pay our own costs and expenses incurred in connection
with the merger, except that we will share equally the expense of filing,
printing and mailing this joint proxy statement - prospectus.
84
Changing the Terms of the Merger Agreement
Before the completion of the merger, we may agree to waive, amend or
modify any provision of the merger agreement. However, after the vote by our
stockholders, we can make no amendment or modification that would reduce the
amount or alter the kind of consideration to be received by People's
stockholders under the terms of the merger.
85
Management and Operations Following the Merger
Board of Directors
After completion of the merger, the board of directors of FIRSTFED will
consist of (1) Robert F. Stoico, Richard W. Cederberg, John S. Holden, Jr.,
Gilbert C. Oliveira, Paul A. Raymond, DDS, Thomas A. Rodgers, Jr. and Anthony L.
Sylvia, all of whom are current directors of FIRSTFED, and (2) B. Benjamin
Cavallo, who is a current director of People's and People's Savings. Mr. Stoico
will continue to be Chairman of the board. Mr. Cavallo will also join the board
of directors of First Federal.
Mr. Cavallo has been a director of People's since 1995. He has been an
insurance broker since 1959 and is a partner in Cavallo & Signoriello Insurance
Agency, Inc., Mansfield, Massachusetts. Mr. Cavallo is 73 years old.
Information regarding the current directors and executive officers of
FIRSTFED, executive compensation and relationships and related transactions is
incorporated by reference or set forth in FIRSTFED's Annual Report on Form 10-K
for the year ended March 31, 2001, which is incorporated in this document by
reference. Stockholders desiring copies of this document and other documents may
contact FIRSTFED at its address or telephone number indicated under "Where You
Can Find More Information."
Management
The executive officers of FIRSTFED and First Federal will not change as
a result of the merger.
Operations
While there can be no assurance as to the achievement of business and
financial goals, FIRSTFED currently expects to achieve cost savings equal to
20-25% of People's current annualized expenses by the end of 2002 through the
elimination of redundant senior management and back-office staffing, the
consolidation of two People's offices into First Federal offices, projected
decreases in deposit insurance costs and other operating efficiencies (such as
the elimination of duplicative data processing services). FIRSTFED expects to
achieve most of these savings in the first year following the merger. See "A
Warning About Forward-looking Statements."
86
Pro Forma Financial Information
The following unaudited pro forma consolidated condensed combined
balance sheet as of September 30, 2001 and the unaudited pro forma consolidated
condensed combined statements of operations for the six months ended September
30, 2001 and the year ended March 31, 2001 give effect to the pending merger,
accounted for as a purchase. FIRSTFED's fiscal year ends March 31 and People's
fiscal year ends December 31. The historical Consolidated Statements of
Operations of People's as presented in the unaudited pro forma condensed
combined statements of operations for the six months and full fiscal year
periods are for the six months ended June 30, 2001 and the year ended December
31, 2000, respectively.
The unaudited pro forma consolidated condensed combined financial
information is based on the historical consolidated financial statements of
FIRSTFED and People's under the assumptions and adjustments set forth in the
accompanying notes. The unaudited pro forma consolidated condensed combined
balance sheet gives effect to the merger as if the merger had been consummated
at the end of the period presented. The unaudited pro forma consolidated
condensed combined income statements give effect to the merger as if the merger
had been consummated on April 1, 2000. The unaudited pro forma consolidated
condensed combined financial statements do not give effect to the anticipated
cost savings in connection with the merger.
You should read the unaudited pro forma consolidated condensed combined
financial statements in conjunction with the historical consolidated financial
statements of FIRSTFED and People's, including the respective notes to those
statements. The pro forma information is not necessarily indicative of the
combined financial position or the results of operations in the future or of the
combined financial position or the results of operations which would have been
realized had the merger been consummated during the periods or as of the dates
for which the pro forma information is presented.
Pro forma per share amounts for the combined company are based on a
1.2644 exchange ratio.
87
FIRSTFED AMERICA BANCORP, INC. and People's Bancshares, Inc.
Unaudited Pro Forma Consolidated Condensed Combined Balance Sheet
as of September 30, 2001
(In thousands)
Historical Pro Forma Pro Forma
-------------------------
FIRSTFED People's Adjustments Combined
---------- -------- ------------- ----------
ASSETS:
Cash and cash equivalents...................... $ 49,477 $185,759 $ (2,075)(B) $ 190,148
(39,353)(B)
(3,660)(C)
Mortgage loans held for sale................... 29,441 100,726 130,167
Investment in trading securities............... 587 -- 587
Investment securities available for sale....... 23,221 136,412 159,633
Mortgage-backed securities..................... 596,883 117,000 713,883
Stock in Federal Home Loan Bank of Boston
and other restricted equity securities...... 40,369 19,869 60,238
Loans receivable, net.......................... 925,707 334,803 3,550(D) 1,264,060
Accrued interest receivable.................... 8,532 6,246 14,778
Office properties and equipment, net........... 22,769 16,751 39,520
Goodwill and other intangible assets........... 1,110 1,277 (1,277)(C) 57,306
11,520 (D)
520 (D)
44,156 (D)
Other assets................................... 48,584 9,649 1,244 (C) 60,977
1,500 (D)
---------- -------- -------- ----------
Total assets................................... $1,746,680 $928,492 $ 16,125 $2,691,297
========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits....................................... $ 758,814 $576,220 $1,335,034
FHLB advances and other borrowings............. 832,885 306,241 $ 20,000 (D) 1,159,126
Advance payments by borrowers for taxes
and insurance............................... 4,443 1,225 5,668
Accrued interest payable....................... 4,758 2,531 7,289
Other liabilities.............................. 26,067 4,268 30,335
---------- -------- -------- ----------
Total liabilities.............................. 1,626,967 890,485 20,000 2,537,452
---------- -------- -------- ----------
Common stock................................... 87 373 19 (B) 106
(373)(C)
Additional paid-in capital..................... 85,729 24,113 32,178 (B) 119,842
1,935 (B)
(24,113)(C)
Retained earnings.............................. 74,423 33,359 (33,359)(C) 74,423
Unallocated ESOP shares........................ (3,098) -- (3,098)
Unearned Stock Incentive Plan shares........... (1,559) -- (1,559)
Treasury stock................................. (40,672) (8,364) 8,364 (C) (40,672)
Accumulated other comprehensive income......... 4,803 (11,474) 11,474 (C) 4,803
---------- -------- -------- ----------
Total stockholders' equity..................... 119,713 38,007 (3,875) 153,845
---------- -------- -------- ----------
Total liabilities and stockholders' equity..... $1,746,680 $928,492 $ 16,125 $2,691,297
========== ======== ======== ==========
See Notes to the Unaudited Pro Forma Consolidated Condensed Combined Financial
Statements.
88
FIRSTFED AMERICA BANCORP, INC. and People's Bancshares, Inc.
Unaudited Pro Forma Consolidated Condensed Combined Statement of Operations
For the Six Months Ended September 30, 2001
(Dollars in thousands, except share data)
Historical Pro Forma Pro Forma
------------------------
FIRSTFED People's Adjustments Combined
---------- ---------- ----------- ----------
Interest and dividend income:
Loans ................................................... $ 36,928 $ 19,210 $ (310)(E) $ 55,828
Investment and mortgaged-backed securities .............. 18,599 16,443 (564)(E) 34,478
---------- ---------- -------- ----------
Total interest and dividend income .................... 55,527 35,653 (874) 90,306
---------- ---------- -------- ----------
Interest expense:
Deposits ................................................ 13,345 12,105 25,450
Borrowed funds .......................................... 23,831 10,727 (939)(E) 33,619
---------- ---------- -------- ----------
Total interest expense ................................ 37,176 22,832 (939) 59,069
---------- ---------- -------- ----------
Net interest income after loan loss provision ......... 18,351 12,821 65 31,237
Provision for loan loss .................................... 600 - - 600
---------- ---------- -------- ----------
Net interest income after loan loss provision ......... 17,751 12,821 65 30,637
Non-interest income:
Service charges on deposit accounts ..................... 933 703 1,636
Loan servicing income ................................... 398 - 398
Earnings on Bank-Owned Life Insurance ................... 905 - 905
Gain on sale of mortgage loans, net ..................... 1,461 6,505 7,966
Gain (loss) on sale of securities available
for sale ............................................. 1,003 (2,003) (1,000)
Other income ............................................ 1,726 175 1,901
---------- ---------- -------- ----------
Total non-interest income ............................ 6,426 5,380 - 11,806
---------- ---------- -------- ----------
Non-interest expense:
Compensation and benefits ............................... 9,125 7,956 17,081
Office occupancy and equipment .......................... 2,163 1,884 4,047
Data processing ......................................... 999 853 1,852
Amortization of goodwill and other
intangible assets .................................... 46 35 1,073 (E) 1,154
Other expense ........................................... 2,302 3,756 6,058
---------- ---------- -------- ----------
Total non-interest expense ............................ 14,635 14,484 1,073 30,192
---------- ---------- -------- ----------
Income before income tax expense ...................... 9,542 3,717 (1,008) 12,251
Income tax expense ......................................... 3,213 1,413 (343)(E) 4,283
---------- ---------- -------- ----------
Net income before cumulative effect of
accounting change .................................. 6,329 2,304 (665) 7,968
Cumulative effect of change in accounting for
derivative instruments and hedging activities,
net of $237 tax benefit ................................. (461) - - (461)
---------- ---------- -------- ----------
Net income ............................................ $ 5,868 $ 2,304 $ (665) $ 7,507
========== ========== ======== ==========
Basic earnings per share before cumulative effect
of accounting change .................................... $ 1.10 $ 0.71 $ 1.05
Cumulative effect of accounting change ..................... (0.08) - (0.06)
---------- ---------- ----------
Basic earnings per share ................................... $ 1.02 $ 0.71 $ 0.99
========== ========== ==========
Diluted earnings per share before cumulative
effect of accounting change ............................. $ 1.09 $ 0.71 $ 1.04
Cumulative effect of accounting change ..................... (0.08) - (0.06)
---------- ---------- ----------
Diluted earnings per share ................................. $ 1.01 $ 0.71 $ 0.98
========== ========== ==========
Weighted average shares outstanding - basic ................ 5,739,936 3,244,000 7,590,401
========== ========== ==========
Weighted average shares outstanding - diluted .............. 5,803,159 3,272,000 7,653,624
========== ========== ==========
See Notes to the Unaudited Pro Forma Consolidated Condensed Combined Financial
Statements.
89
FIRSTFED AMERICA BANCORP, INC. and People's Bancshares, Inc.
Unaudited Pro Forma Consolidated Condensed Combined Statement of Operations
For the Year Ended March 31, 2001
(Dollars, in thousands, except share data)
Historical Pro Forma Pro Forma
------------------------
FIRSTFED People's Adjustments Combined
---------- ----------- ----------- ---------
Interest and dividend income:
Loans............................................. $ 77,116 $ 35,798 $ (620)(E) $ 112,294
Investment and mortgaged-backed securities........ 36,959 45,504 (1,127)(E) 81,336
---------- ---------- ------- ----------
Total interest and dividend income.............. 114,075 81,302 (1,747) 193,630
---------- ---------- ------- ----------
Interest expense:
Deposits.......................................... 26,252 27,640 53,892
Borrowed funds.................................... 53,143 25,067 (1,878)(E) 76,332
---------- ---------- ------- ----------
Total interest expense.......................... 79,395 52,707 (1,878) 130,224
---------- ---------- ------- ----------
Net interest income after loan loss provision... 34,680 28,595 131 63,406
Provision for loan loss.............................. 1,200 - - 1,200
---------- ---------- ------- ----------
Net interest income after loan loss provision... 33,480 28,595 131 62,206
Non-interest income:
Service charges on deposit accounts............... 1,622 1,331 2,953
Loan servicing income............................. 1,456 - 1,456
Earnings on Bank-Owned Life Insurance............. 1,637 - 1,637
Gain on sale of mortgage loans, net............... 583 8,492 9,075
Gain (loss) on sale of securities available
for sale....................................... - (1,224) (1,224)
Other income...................................... 3,660 212 3,872
---------- ---------- ------- ----------
Total non-interest income....................... 8,958 8,811 - 17,769
---------- ---------- ------- ----------
Non-interest expense:
Compensation and benefits......................... 17,786 13,859 31,645
Office occupancy and equipment.................... 4,447 3,749 8,196
Data processing................................... 1,694 1,357 3,051
Amortization of goodwill and other
intangible assets.............................. 84 119 2,355 (E) 2,558
Other expense..................................... 5,042 5,991 11,033
---------- ---------- ------- ----------
Total non-interest expenses..................... 29,053 25,075 2,355 56,483
---------- ---------- ------- ----------
Income before income tax expense................ 13,385 12,331 (2,224) 23,492
Income tax expense................................... 4,221 4,064 (756)(E) 7,529
---------- ---------- ------- ----------
Net income...................................... $ 9,164 $ 8,267 $(1,468) $ 15,963
========== ========== ======= ==========
Basic earnings per share............................. $ 1.57 $ 2.55 $ 2.07
========== ========== ==========
Diluted earnings per share........................... $ 1.56 $ 2.52 $ 2.07
========== ========== ==========
Weighted average shares outstanding - basic.......... 5,854,465 3,239,465 7,704,930
========== ========== ==========
Weighted average shares outstanding - diluted........ 5,864,179 3,284,134 7,714,644
========== ========== ==========
See Notes to the Unaudited Pro Forma Consolidated Condensed Combined Financial
Statements.
90
Notes to the Unaudited Pro Forma Consolidated Condensed
Combined Financial Statements
A. Basis of Presentation
The pro forma information presented is not necessarily indicative of the
results of operations or the combined financial position that would have
resulted had the merger been consummated at the beginning of each of the periods
indicated, nor is it necessarily indicative of the results of operations in
future periods or the future financial position of the combined company. It is
anticipated that the merger will be completed in the first quarter of calendar
year 2002.
Under accounting principles generally accepted in the United States of
America, the transaction will be accounted for using the purchase method of
accounting and, as such, the assets and liabilities of People's will be recorded
at their estimated fair values. The allocation of the total purchase cost
reflected in the unaudited pro forma consolidated condensed combined financial
information is preliminary. The actual purchase accounting adjustments to
reflect the fair values of the assets acquired and liabilities assumed will be
based upon appraisals that are currently in process. A preliminary allocation of
the purchase cost has been made to major categories of assets and liabilities in
the accompanying unaudited pro forma consolidated condensed combined financial
information based on our estimates. Accordingly, the adjustments that have been
included in the unaudited pro forma consolidated condensed combined financial
information may change based upon the final allocation of the total purchase
cost of the acquisition of People's. The actual allocation of the purchase cost
and the resulting effect on income may differ from the unaudited pro forma
amounts included in this joint proxy statement - prospectus. However, based on
current information, management does not expect the final allocation of the
purchase price to differ materially from that used in the accompanying
statements of operations.
The unaudited pro forma consolidated condensed combined statements of
operations give effect to the merger as if the merger occurred on April 1, 2000.
The unaudited pro forma consolidated condensed combined balance sheet assumes
the merger was consummated on September 30, 2001. Certain reclassifications have
been included in the unaudited pro forma consolidated condensed combined balance
sheet and unaudited pro forma consolidated condensed combined income statements
to conform presentation.
Assumptions relating to the pro forma adjustments set forth in the
unaudited pro forma consolidated condensed combined financial statements are
summarized as follows:
Estimated fair values for the assets and liabilities of People's were
obtained as follows:
Cash and Cash Equivalents. The carrying amounts of cash and cash
equivalents approximate their fair value.
Investment and Mortgage-Backed Securities. Fair values for securities
are based on quoted market prices.
Stock in Federal Home Loan Bank and Other Restricted Equity
Securities. No ready market exists for these stocks and they have no quoted
market value; however, redemption of these stocks has historically been at
par value. Accordingly, the carrying amount is deemed to be a reasonable
estimate of fair value.
Loans. Fair values for loans held for investment and other loans are
estimated by segregating the portfolio by type of loan and discounting
scheduled cash flows using interest rates currently being offered for loans
with similar terms. A prepayment assumption is used as an
91
estimate of the portion of loans that will be repaid prior to their
scheduled maturity. The allowance for loan losses as recorded is deemed to
be a reasonable estimate of the credit adjustment.
Office Properties and Equipment. The book value is deemed to be a
reasonable estimate of fair value.
Deposits. The book value is deemed to be a reasonable estimate of fair
value.
FHLB Advances and Other Borrowings. Fair values for advances and other
borrowings are estimated by discounting scheduled cash flows using current
interest rates.
Identifiable Intangible Assets. A fair value for the core deposit
intangible asset was estimated by calculating a 4.5% premium on core
deposits of $256.0 million. A fair value for the non-compete intangible
asset was estimated based on the amounts to be paid under the non-compete
agreement.
Other Assets and Other Liabilities. Because these financial
instruments will typically be received or paid within three months, the
carrying amounts of such instruments are deemed to be a reasonable estimate
of fair value.
The premium on loans will be amortized to interest income over three to
seven years to approximate a constant yield to maturity. The premium on FHLB
advances will be amortized to interest expense over ten years to approximate a
constant yield to maturity. The core deposit intangible asset will be amortized
over ten years on a sum-of-the-years-digits basis. The non-compete intangible
asset will be amortized over the two-year contract period on a straight-line
basis.
B. Calculation of Purchase Price
The preliminary allocation of the cost to acquire People's is described in
the table below (in thousands):
Cash payment to People's stockholders at $22.00 per share for 55%
of the 3,252,250 shares of People's common stock outstanding $39,353
Estimated value of FIRSTFED common stock issued to acquire People's
common stock, assuming that 45% of the 3,252,250 outstanding shares
of People's common stock will be exchanged for shares of FIRSTFED
valued at $22.00 per share 32,197
Fair value of People's stock options assumed 1,935
Estimated transaction costs incurred by FIRSTFED 2,075
-------
Total cost $75,560
=======
Stock options to purchase approximately 256,000 shares of People's common
stock with a weighted average exercise price of $17.25 will be assumed by
FIRSTFED pursuant to the merger and converted into options to purchase
approximately 324,000 shares of FIRSTFED common stock with a weighted average
exercise price of $13.64. The fair value of stock options assumed was determined
using the binomial option pricing method over the remaining maturity of the
options, a discount rate between 2.80% and 4.87%, volatility of 24.5% and
expected dividends of $0.14 per share each quarter. Estimated transaction costs
of $2.1 million will be incurred upon consummation of the merger and reflected
as part of the purchase price for financial reporting purposes. These costs
consist primarily of investment banking, legal fees and other professional fees
and expenses associated with stockholder notifications.
92
C. Purchase Accounting Adjustments
Purchase accounting adjustments are estimated as follows (in thousands):
People's net assets at September 30, 2001 $38,007
Estimated transaction costs:
Employment contracts and severance costs $(2,710)
Systems and facilities conversion costs (950)
------
(3,660)
Less: related taxes at 34% 1,244
------
(2,416)
People's historical goodwill and other intangible assets (1,277)
-------
Adjusted net assets acquired $34,314
=======
Merger related compensation costs consist primarily of estimated costs
of People's employment contracts and severance plans. Facilities and system
costs primarily relate to the termination of data processing contracts and
systems. Refinements to the foregoing estimates may occur subsequent to the
completion of the merger.
D. Calculation of Goodwill
Excess of cost over net assets acquired for the merger was calculated as
follows (in thousands):
Total cost $ 75,560
Net assets acquired 34,314
--------
Total excess of cost over net assets acquired $ 41,246
========
The excess of cost over net assets acquired of $41.2 million was allocated
to assets and liabilities on a pro-rata basis after estimating market value as
described in Note A (in thousands):
Loans receivable $ 3,550
FHLB advances and other borrowings (20,000)
Core deposit intangible asset 11,520
Noncompete intangible asset 520
Goodwill 44,156
Deferred tax asset 1,500
--------
$ 41,246
========
93
E. Pro Forma Adjustments
Pro forma adjustments that were calculated for the merger are as
follows (in thousands):
Six Months Year
Ended Ended
September 30, March 31,
2001 2001
------------- ---------
Amortization of premium on loans receivable $ (310) $ (620)
Amortization of premium on FHLB advances 939 1,878
Amortization of core deposit intangible asset (943) (2,095)
Amortization of noncompete intangible asset (130) (260)
------- -------
Total adjustments $ (444) $(1,097)
======= =======
In addition to the above adjustments, reductions in interest income on
investments as a result of the cash payment to People's stockholders are
calculated based on a 2.5% interest rate. Income tax expense is adjusted using a
34% tax rate.
The following table summarizes the estimated net future impact of the
amortization of the purchase accounting adjustments made in connection with the
merger on FIRSTFED's results of operations (in thousands):
Projected Future
Amounts for Net Increase (Decrease)
Fiscal Years Ended In Income Before Taxes
March 31, of Amortized Amounts
------------------- ----------------------
2002 $ (887)
2003 (418)
2004 (135)
2005 75
2006 532
2007 and thereafter 6,339
F. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding over the period presented.
Diluted earnings per common share is calculated using the same method as basic
earnings per common share, but reflects potential dilution of common stock
equivalents. Pro forma basic and diluted weighted average number of common stock
utilized for the calculation of earnings per share for the periods presented
were calculated using FIRSTFED's historical basic and diluted weighted average
common stock plus 1,850,465 shares of common stock issued in the merger.
94
A Warning about Forward-looking Statements
This joint proxy statement - prospectus, including information included
or incorporated by reference in this document, contains certain forward-looking
statements with respect to the financial condition, results of operations,
plans, objectives, future performance and business of each of FIRSTFED and
People's, as well as certain information relating to the merger, including,
without limitation:
. statements relating to the cost savings and accretion to reported
earnings estimated to result from the merger;
. statements relating to revenues of the combined company after the
merger;
. statements relating to the expenses estimated to be incurred in
connection with the merger; and
. statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "estimates" or similar
expressions.
These forward-looking statements involve certain risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
. expected cost savings from the merger may not be fully realized
or realized within the expected time frame;
. revenues following the merger may be lower than expected;
. the anticipated sale of trust preferred securities by People's
prior to the merger or by FIRSTFED following the merger may
result in losses exceeding currently estimated amounts;
. competitive pressures among financial services companies may
increase significantly;
. costs or difficulties related to the integration of the business
of FIRSTFED and People's may be greater than expected;
. changes in the interest rate environment may reduce interest
margins;
. general economic conditions, either nationally or in
Massachusetts and Rhode Island, may be less favorable than
expected;
. legislative or regulatory changes may adversely affect the
business in which FIRSTFED or People's is engaged; and
. changes may occur in the securities markets.
FIRSTFED does not intend to update or otherwise revise any
forward-looking statements to reflect circumstances existing since their
preparation or to reflect the occurrence of unanticipated events, even in the
event that any or all of the underlying assumptions are shown to be in error.
Furthermore, FIRSTFED does not intend to update or revise the forward-looking
statements to reflect changes in general economic or industry conditions.
See "Where You Can Find More Information."
95
Description of FIRSTFED Common Stock
General
FIRSTFED is authorized to issue 25 million shares of common stock
having a par value of $0.01 per share and one million shares of preferred stock
having a par value of $0.01 per share. Each share of FIRSTFED common stock has
the same relative rights as, and is identical in all respects with, each other
share of common stock.
Common Stock
Dividends. FIRSTFED can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its board of directors. The
payment of dividends by FIRSTFED is subject to limitations that are imposed by
law and applicable regulation. The holders of common stock of FIRSTFED are
entitled to receive and share equally in any dividends as may be declared by the
board of directors of FIRSTFED out of funds legally available for the payment of
dividends. If FIRSTFED issues preferred stock, the holders of the preferred
stock may have a priority over the holders of the common stock with respect to
dividends.
Voting Rights. The holders of common stock of FIRSTFED possess
exclusive voting rights in FIRSTFED. They elect FIRSTFED's board of directors
and act on any other matters as are required to be presented to them under
applicable law or as are otherwise presented to them by the board of directors.
Each holder of common stock is entitled to one vote per share and does not have
any right to cumulate votes in the election of directors. FIRSTFED's certificate
of incorporation, however, provides that a holder of FIRSTFED common stock who
owns in excess of 10% of the then-outstanding shares of common stock cannot vote
any shares in excess of 10% unless permitted by the board of directors of
FIRSTFED. If FIRSTFED issues preferred stock, holders of preferred stock may
also possess voting rights. Certain matters require a vote of 80% of the
outstanding shares entitled to vote thereon.
Liquidation. In the event of liquidation, dissolution or winding up of
FIRSTFED, the holders of its common stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of FIRSTFED available for distribution. If FIRSTFED issues preferred
stock, the holders of the preferred stock may have a priority over the holders
of the common stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the common stock of FIRSTFED are not
entitled to preemptive rights with respect to any shares that may be issued. The
common stock is not subject to redemption.
Preferred Stock
FIRSTFED may issue preferred stock with such designations, powers,
preferences and rights as FIRSTFED's board of directors may from time to time
determine. The board of directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. None of the shares of the authorized preferred stock will be issued in
connection with the merger, and there are no plans to issue preferred stock.
96
Comparison of Rights of Stockholders
When the merger becomes effective, you may become a stockholder of
FIRSTFED if you elect to receive stock in the merger. The following is a summary
of the material differences between the rights of stockholders of FIRSTFED and
People's.
The rights of stockholders of FIRSTFED are currently governed by
FIRSTFED's certificate of incorporation, bylaws and applicable provisions of the
Delaware General Corporation Law. The rights of stockholders of People's are
currently governed by People's restated articles of organization, by-laws and
applicable provisions of the MBCL. There are certain differences in the
respective rights of the stockholders under the laws of the respective states
and under the respective governing corporate documents.
This summary is not a complete discussion of the provisions affecting,
and differences between, the rights of stockholders of FIRSTFED and People's,
and it is qualified in its entirety by reference to the FIRSTFED certificate of
incorporation and bylaws and the People's restated articles of organization and
by-laws. Copies of these documents are on file with the Securities and Exchange
Commission.
Authorized Stock
--------------------------------------------------------------------------------
FIRSTFED People's
---------------------------------------- --------------------------------------
. The FIRSTFED certificate of . People's Restated Articles of
incorporation authorizes 26 million Organization authorizes 30 million
shares of capital stock, consisting shares of capital stock, consisting
of 25 million shares of common of 20 million shares of common
stock, $0.01 par value, and one stock, $0.10 par value and 10
million shares of serial preferred million shares of serial preferred
stock, $0.01 par value. stock, $0.10 par value.
. As of October 1, 2001, there were . As of October 1, 2001, there were
6,220,249 shares of FIRSTFED common 3,252,250 shares of People's common
stock issued and outstanding. stock issued and outstanding.
. As of October 1, 2001, there were . Same.
no shares of preferred stock issued
or outstanding.
Voting Rights
--------------------------------------------------------------------------------
FIRSTFED People's
---------------------------------------- --------------------------------------
. The holders of the common stock . Same.
exclusively possess all voting
power, subject to the authority of
the board of directors to issue
preferred stock and offer voting
rights to the holders of same.
. Each share of common stock is . Each share of common stock is
entitled to one vote. Beneficial entitled to one vote.
owners of 10% or more of the
outstanding stock are subject to
voting limitations.
97
. Holders of common stock may not . Same.
cumulate their votes for the
election of directors.
Required Vote for Authorization of Certain Actions
--------------------------------------------------------------------------------
FIRSTFED People's
---------------------------------------- --------------------------------------
. Delaware law provides that in all . Massachusetts law provides that a
matters other than the election of corporation's articles of
directors, the affirmative vote of organization or bylaws may require
the majority of the shares present the vote of the holders of all of
or represented by proxy at the the shares, or a greater proportion
meeting and entitled to vote on the thereof than required under
a subject matter shall be the act Massachusetts law with respect to
of the stockholders, unless the any action to be taken by the
vote of a greater number is stockholders of a corporation.
required by law or the certificate
of incorporation or bylaws.
. Delaware law prohibits transactions . Massachusetts law prohibits certain
between a corporation and an transactions between a corporation
interested stockholder for a and an interested stockholder for a
three-year period following the three-year period following the
time the interested stockholder time that the stockholder became an
became such unless certain interested stockholder unless
conditions are met. Generally, an certain conditions are met.
interested stockholder is anyone Generally, an interested
who owns 15% or more of a stockholder is any person who owns
corporation and the affiliates and 5% or more of a corporation's
the associates of such person. If outstanding voting stock or any
the interested stockholder does not affiliate of the corporation who
get prior board approval of the owned 5% or more of the
business combination or obtain 85% corporation's voting stock within
of the voting stock of the the past three years. If the
corporation in the transaction in interested stockholder does not get
which it becomes interested, the (i) prior board approval of the
stockholder cannot engage in a business combination or the
business combination for three transaction in which it became an
years unless the business interested stockholder or (ii)
combination is approved both by the obtain 90% of the corporation's
directors and by the affirmative voting stock in the transaction in
vote of two-thirds of the which it became an interested
outstanding voting stock not owned stockholder, the stockholder cannot
by the interested stockholder. engage in a business combination
with the corporation for three
years unless such business
combination is approved by the
board of directors and two-thirds
of the outstanding shares of voting
stock not owned by the interested
stockholder. People's adopted an
amendment to its by-laws opting not
to be governed by this provision of
Massachusetts law.
. FIRSTFED's certificate of . Same.
incorporation provides that at
least 80% of the outstanding shares
of voting stock must approve
certain "business combinations"
involving an interested stockholder
or its affiliate. See "Selected
Provisions In The Certificate of
Incorporation And Bylaws Of
FIRSTFED-- Business Combinations
with Interested Stockholders."
However, if a majority of
98
disinterested directors not
affiliated with the interested
stockholder approves the business
combination or if the proposed
business combination meets certain
conditions that are designed to
afford stockholders a fair price in
consideration for their shares, a
majority vote of the outstanding
shares is sufficient to approve a
business combination.
Dividends
--------------------------------------------------------------------------------
FIRSTFED People's
---------------------------------------- --------------------------------------
. Holders of common stock are . Holders of common stock are
entitled, when declared by entitled, when declared by People's
FIRSTFED's board, to receive board, to receive dividends,
dividends, subject to the rights of subject to the rights of holders of
holders of preferred stock. preferred stock, as well as
regulatory and contractual
restrictions.
Appraisal Rights
--------------------------------------------------------------------------------
FIRSTFED People's
---------------------------------------- --------------------------------------
. Under Delaware law, the rights of . Under Massachusetts law, the rights
stockholders to dissent and obtain of stockholders to dissent and
the fair value of their shares in obtain the fair value of their
an appraisal proceeding may be shares in an appraisal proceeding
available in connection with a may be available in connection with
statutory merger or consolidation a statutory merger or consolidation
in certain specific situations. in certain specific situations.
Appraisal rights are not available Appraisal rights are not available
to a corporation's stockholders to a corporation's stockholders
when the corporation will be the when the corporation will be the
surviving corporation and a vote of surviving corporation and a vote of
its stockholders is not required to its stockholders is not required to
approve the merger. A Delaware approve the merger. Appraisal
corporation's certificate of rights may also be available in
incorporation may provide that Massachusetts in connection with a
appraisal rights shall be available sale of substantially all of the
to stockholders in the event of an assets of the corporation or in the
amendment to its certificate of event of certain amendments to its
incorporation, any merger or articles of organization.
consolidation in which the
corporation is a constituent
corporation or the sale of all or
substantially all of the assets of
the corporation. FIRSTFED's
certificate of incorporation does
not provide for such rights.
. Stockholders of a Delaware . There is no similar provision under
corporation also do not have Massachusetts law.
appraisal rights in a merger where,
on the record date fixed to
determine stockholders entitled to
vote on the transaction, the
corporation's stock is listed on a
national securities exchange,
listed on the
99
Nasdaq or held of record by more
than 2,000 stockholders, unless the
stockholder is required to accept
any consideration other than shares
of stock of the surviving
corporation or any other
corporation, which at the effective
date of the merger, will be listed
on a national securities exchange
or the Nasdaq or held of record by
more than 2,000 stockholders, cash
in lieu of fractional shares or
fractional depository receipts of a
corporation described above or any
combination of the two.
Stockholders' Meetings
--------------------------------------------------------------------------------
FIRSTFED People's
---------------------------------------- --------------------------------------
. FIRSTFED must deliver notice of the . People's must deliver notice of the
meeting and a description of its meeting and a description of its
purpose no fewer than 10 and no purpose no fewer than days seven
more than 60 days before the days before the meeting to each
meeting to each stockholder stockholder entitled to vote or to
entitled to vote. such notice.
. Such person as the board . The Chairman of the board, or in
designates, or in the absence of his absence, the president, or in
such a person, the Chairman of the his absence, such officer as the
board or, in his absence, such board designates, will chair the
person as chosen by a majority of meeting.
shares entitled to vote who are
present, will chair the meeting.
. Only the board of directors may . Only the Chairman of the board or
call a special meeting. president may call a special
meeting, after approval by a
majority vote of the board of
directors; provided that if there
is an interested stockholder, such
call will also require the
affirmative vote of a majority of
the directors not affiliated with
the interested stockholder who were
directors when the interested
stockholder became an interested
stockholder or were recommended to
succeed a non-affiliated director
by a majority of the non-affiliated
directors.
. For purposes of determining . For purposes of determining
stockholders entitled to vote at a stockholders entitled to vote at a
meeting, the board of directors may meeting, the board of directors may
fix a record date that is not less fix a record date that is not more
than 10 days nor more than 60 days than 60 days before the meeting.
before the meeting.
. The board of directors or any . A majority of directors or any
stockholder may nominate directors stockholder may nominate directors
for election or propose new for election. The board of
business. directors or any stockholder may
propose new business.
100
. To nominate a director or propose . The by-laws provide that to
new business, stockholders must nominate a director or propose new
give written notice to the business, stockholders must give
Secretary of FIRSTFED not less than written notice to the Clerk of
90 days prior to the meeting; People's not less than 60 days nor
provided, however, that if FIRSTFED more than 90 days prior to the
gives less than 100 days' notice of anniversary date of the last annual
the meeting to the stockholders, meeting; provided, however, that in
written notice of the stockholder the event the annual meeting is
proposal or nomination must be scheduled for a date more than 30
delivered to the Secretary within days before, or more than 60 days
10 days of the date notice of the after, such anniversary date, a
meeting was mailed to stockholders. stockholder's notice shall be
Each notice given by a stockholder timely if delivered no later than
with respect to a nomination to the the close of business on the later
board of directors or proposal for of the sixtieth day prior to the
new business must include certain scheduled date of such annual
information regarding the nominee meeting or the tenth day following
or proposal and the stockholder the date on which public
making the nomination or proposal. announcement of the date of such
meeting is first made. Each notice
given by a stockholder with respect
to a nomination to the board of
directors or proposal for new
business must include certain
information regarding the nominee
or proposal and the stockholder
making the nomination or proposal.
Action by Stockholders Without a Meeting
--------------------------------------------------------------------------------
FIRSTFED People's
---------------------------------------- --------------------------------------
. Under Delaware law, unless . Under Massachusetts law, any action
otherwise provided in a required or permitted to be taken
corporation's certificate of at a stockholders meeting may be
incorporation, stockholders may act taken without the meeting if all -
by written consent signed by the stockholders entitled to vote on
holders of outstanding shares the matter consent to the action in
having not less than the minimum writing.
number of votes necessary to take
such action at a meeting. Pursuant
to FIRSTFED's certificate of
incorporation, no action that
requires the approval of the
stockholders may be taken without a
meeting by the written consent of
stockholders.
Board of Directors
--------------------------------------------------------------------------------
FIRSTFED People's
---------------------------------------- --------------------------------------
. The certificate of incorporation . The by-laws provide that the number
provides that the number of of directors shall be no fewer than
directors shall be fixed three and that the board of
exclusively by the board of directors shall fix the number of
directors. The bylaws provide that directors and their classifications
the number of directors shall be by the affirmative vote of 80% of
such number as the board of the directors then in office,
directors shall have designated, unless there is an interested
except that in the absence of such stockholder, in which case such
designation shall be seven. action also requires the
affirmative vote of a majority of
101
the directors not affiliated with
the interested stockholder who were
directors when the interested
stockholder became an interested
stockholder or were recommended to
succeed a non-affiliated director
by a majority of the non-affiliated
directors.
. The board of directors is divided . Same.
into three classes as equal in
number as possible, and
approximately one-third of the
directors are elected at each
annual meeting.
. Vacancies on the board of directors . Vacancies on the board of directors
will be filled by majority vote of will be filled by the affirmative
the remaining directors. vote of a majority of the remaining
directors; provided that, if there
is an interested stockholder, the
affirmative vote of a majority of
the directors not affiliated with
the interested stockholder who were
directors when the interested
stockholder became an interested
stockholder or were recommended to
succeed a non-affiliated director
by a majority of the non-affiliated
directors is required to fill the
vacancy.
. Directors may be removed only for . Directors may be removed, with or
cause by the vote of at least 80% without cause, by the vote of at
of the outstanding shares entitled least 80% of (1) the directors then
to vote for directors. in office, provided that if there
is an interested stockholder, a
majority of the directors not
affiliated with the interested
stockholder who were directors when
the interested stockholder became
an interested stockholder or were
recommended to succeed a
non-affiliated director by a
majority of the non-affiliated
directors must vote for the
removal, or (2) the outstanding
shares entitled to vote for
directors at a meeting duly held
for the purpose of removing a
director.
Limitation of Personal Liability of Directors
--------------------------------------------------------------------------------
FIRSTFED People's
---------------------------------------- --------------------------------------
. Delaware law provides that a . Massachusetts law allows a
corporation's certificate of corporation to include in its
incorporation may include a articles of organization a
provision limiting the personal provision that limits or eliminates
liability of a director to the the personal liability of directors
corporation or its stockholders for to the corporation and its
monetary damages for breach of stockholders for monetary damages
fiduciary duty as a director. for breach of fiduciary duty as a
However, no such provision can director. No such provision,
eliminate or limit the liability of however, can eliminate or limit the
a director for: (1) any breach of liability of a director (i) for any
the director's duty of loyalty to breach of the director's duty of
the corporation or its loyalty to the corporation or its
stockholders, (ii) for acts or
omissions not in good faith or
which involve intentional
misconduct or a knowing violation
of law, (iii) under Sections 61 or
62 of the MBCL, or (iv) for any
transaction from which the director
derived an improper personal
benefit.
102
stockholders; (2) acts or omissions
not in good faith or which involve
intentional misconduct or a knowing
violation of the law; (3) violation
of Section 174 of the Delaware
General Corporation Law regarding
unlawful payment of dividends or
unlawful stock purchases or
redemptions; (4) any transaction
from which the director derived an
improper personal benefit; and (5)
any act or omission prior to the
adoption of such a provision in the
certificate of incorporation.
. FIRSTFED's certificate of . People's restated articles of
incorporation generally provides organization do not provide for the
that directors are not personally elimination of director liability
liable to the corporation for a to the corporation for a breach of
breach of fiduciary duty, except fiduciary duty.
under those circumstances in which
liability cannot be eliminated
under Delaware law.
Amendment of the Bylaws
--------------------------------------------------------------------------------
FIRSTFED People's
--------------------------------------------------------------------------------
. The bylaws may be amended or . Same; provided that if there is an
repealed by the vote of a majority interested stockholder, a majority
of the board of directors. of the directors not affiliated
with the interested stockholder who
were directors when the interested
stockholder became an interested
stockholder or were recommended to
succeed a non-affiliated director
by a majority of the non-affiliated
directors must approve the
amendment.
. The bylaws also may be amended or . Same; provided, however, that if a
repealed by the vote of at least majority of the board of directors
80% of the outstanding shares. (or, if there is an interested
stockholder, a majority of the
directors not affiliated with the
interested stockholder who were
directors when the interested
stockholder became an interested
stockholder or were recommended to
succeed a non-affiliated director
by a majority of the non-affiliated
directors) recommends the
amendment, such action shall
require only the affirmative vote
of a majority of the stockholders.
103
Amendment of the Certificate of Incorporation/Articles of Organization
--------------------------------------------------------------------------------
FIRSTFED People's
--------------------------------------------------------------------------------
. Provisions of the certificate of . The restated articles of
incorporation may be amended or organization may be amended or
repealed upon approval of at least repealed by the vote of at least
a majority of the board of 80% of the outstanding shares;
directors and by a majority of provided, however, that if the
shares entitled to vote on the board of directors recommends the
matter, unless otherwise provided amendment by the vote of at least
in the certificate of incorporation 80% of the directors (or, if there
or Delaware law. However, is an interested stockholder at any
amendments to the certificate of time within the 60-day period
incorporation that would revise the immediately preceding the meeting
provisions relating to the number, at which the vote is to be taken, a
terms and classification, election majority of the directors not
and removal procedures for affiliated with the interested
directors, the process for calling stockholder who were directors when
special meetings of stockholders, the interested stockholder became
voting restrictions applicable to an interested stockholder or were
beneficial owners of 10% or more of recommended to succeed a
the voting stock, stockholder non-affiliated director by a
approval of business combinations majority of the non-affiliated
with related persons, directors, recommends the
indemnification of directors, amendment), such action shall
officers and employees of FIRSTFED, require only the affirmative vote
and amendment of the bylaws and of a majority of the stockholders.
certificate of incorporation
require approval by at least 80% of
the outstanding shares.
104
Selected Provisions in the Certificate of Incorporation
and Bylaws of FIRSTFED
FIRSTFED's certificate of incorporation and bylaws contain certain
provisions that could make more difficult an acquisition of FIRSTFED by means of
a tender offer, proxy context or otherwise. Certain provisions will also render
the removal of the incumbent board of directors or management of FIRSTFED more
difficult. These provisions may have the effect of deterring a future takeover
attempt that is not approved by FIRSTFED's board of directors, but which
FIRSTFED stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have the opportunity to do so. The following
description of these provisions is only a summary and does not provide all of
the information contained in FIRSTFED's certificate of incorporation and bylaws.
See "Where You Can Find More Information" as to where to obtain a copy of these
documents.
Business Combinations with Interested Stockholders
The certificate of incorporation requires the approval of the holders
of at least 80% of FIRSTFED's outstanding shares of voting stock to approve
certain "business combinations" involving an interested stockholder or its
affiliate except in cases where the proposed transaction has been approved in
advance by a majority vote of those members of FIRSTFED's board of directors who
are unaffiliated with the related person and were directors prior to the time
when the related person became a related person, or were thereafter recommended
for appointment or election to the board of directors by a majority of
disinterested directors then on the board and are unaffiliated with the
interested stockholder.
The term "related person" includes any individual or entity that owns
beneficially or controls, directly or indirectly, 10% or more of the outstanding
shares of voting stock of FIRSTFED or an affiliate of that person or entity.
A "business combination" includes:
1. any merger or consolidation of FIRSTFED or any subsidiary with or
into any related person;
2. any sale, lease, exchange, mortgage, transfer, or other
disposition of 25% or more of the assets of FIRSTFED or combined
assets of FIRSTFED and its subsidiaries to a related person;
3. any merger or consolidation of a related person with or into
FIRSTFED or a subsidiary of FIRSTFED;
4. any sale, lease, exchange, mortgage, transfer, or other
disposition of 25% or more of the assets of a related person to
FIRSTFED or a subsidiary of FIRSTFED;
5. the issuance of any securities of FIRSTFED or a subsidiary of
FIRSTFED having an aggregate fair market value of 25% or more of
the combined fair market value of FIRSTFED and its subsidiaries
to a related person;
6. the liquidation or dissolution of FIRSTFED, if proposed by a
related person;
105
7. any reclassification of common stock of FIRSTFED or any
recapitalization involving the common stock of FIRSTFED that
increases the proportionate share of the outstanding shares that
is owned by a related person; or
8. any agreement or other arrangement providing for any of the
foregoing.
Limitation on Voting Rights
FIRSTFED's certificate of incorporation provides that no record owner
of any outstanding FIRSTFED common stock that is beneficially owned, directly or
indirectly, by a person who beneficially owns in excess of 10% of the then
outstanding shares of FIRSTFED common stock will be entitled or permitted to any
vote in respect of the shares held in excess of the 10% limit. Beneficial
ownership is determined pursuant to the federal securities laws and includes
shares beneficially owned by that person or any of his or her affiliates (as
defined in the certificate of incorporation), shares which that person or his or
her affiliates have the right to acquire upon the exercise of conversion rights
or options and shares as to which that person and his or her affiliates have or
share investment or voting power; however, no director or officer of FIRSTFED
will be deemed to be the beneficial owner of shares held by another director or
officer solely because the directors or officers are acting in their capacity as
such, nor shall any person be deemed to beneficially own shares for which he or
she holds a revocable proxy if such shares are not otherwise beneficially, or
deemed by FIRSTFED to be beneficially, owned by that person and his or her
affiliates. The 10% limit does not apply to FIRSTFED's employee stock ownership
plans or any similar plans nor to any plan trustee acting in such capacity.
Board of Directors
Classified Board. The board of directors of FIRSTFED is divided into
three classes, each of which contains approximately one-third of the number of
directors. The stockholders elect one class of directors each year for a term of
three years. The classified board makes it more difficult and time consuming for
a stockholder group to fully use its voting power to gain control of the board
of directors without the consent of the incumbent board of directors of
FIRSTFED.
Filling of Vacancies; Removal. FIRSTFED's certificate of incorporation
provides that any vacancy occurring in the board of directors, including a
vacancy created by an increase in the number of directors, may be filled only by
a majority vote of the directors then in office. The certificate of
incorporation of FIRSTFED provides that a director may be removed from the board
of directors prior to the expiration of his or her term only for cause and only
upon the vote of 80% of the outstanding shares of voting stock. These provisions
make it more difficult for stockholders to remove directors and replace them
with their own nominees.
Special Meetings of Stockholders
FIRSTFED's certificate of incorporation provides that only the board of
directors may call special meetings of the stockholders of FIRSTFED.
Stockholders are not able to call a special meeting or require that the board do
so. At a special meeting, stockholders may consider only the business specified
in the notice of meeting given by FIRSTFED. This provision prevents stockholders
from forcing stockholder consideration of a proposal between annual meetings
over the opposition of the FIRSTFED board by calling a special meeting of
stockholders.
Advance Notice Provisions for Stockholder Nominations and Proposals
FIRSTFED's certificate of incorporation and bylaws establish an advance
notice procedure for stockholders to nominate directors or bring other business
before an annual meeting of stockholders of
106
FIRSTFED. A person may not be nominated for election as a director unless that
person is nominated by or at the direction of the FIRSTFED board or by a
stockholder who has given appropriate notice to FIRSTFED before the meeting.
Similarly, a stockholder may not bring business before an annual meeting unless
the stockholder has given FIRSTFED appropriate notice of its intention to bring
that business before the meeting. FIRSTFED's Secretary must receive notice of
the nomination or proposal not less than 90 days prior to the annual meeting;
provided, however, that if FIRSTFED gives less than 100 days' notice of the
meeting to the stockholders, written notice of the stockholder proposal or
nomination must be delivered within 10 days of the date notice of the meeting
was mailed to stockholders. A stockholder who desires to raise new business must
provide certain information to FIRSTFED concerning the nature of the new
business, the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director must provide FIRSTFED with certain information concerning the nominee
and the proposing stockholder.
Advance notice of nominations or proposed business by stockholders
gives FIRSTFED's board of directors time to consider the qualifications of the
proposed nominees, the merits of the proposals and, to the extent deemed
necessary or desirable by the board of directors, to inform stockholders and
make recommendations about those matters.
Preferred Stock
The certificate of incorporation authorizes FIRSTFED's board of
directors to establish one or more series of preferred stock and, for any series
of preferred stock, to determine the terms and rights of the series, including
voting rights, conversion rates, and liquidation preferences. Although
FIRSTFED's board of directors has no intention at the present time of doing so,
it could issue a series of preferred stock that could, depending on its terms,
impede a merger, tender offer or other takeover attempt. FIRSTFED's board of
directors will make any determination to issue shares with those terms based on
its judgment as to the best interests of FIRSTFED and its stockholders.
Amendment of Certificate of Incorporation
FIRSTFED's certificate of incorporation requires the affirmative vote
of at least 80% of the outstanding voting stock entitled to vote to amend or
repeal certain provisions of the certificate of incorporation, including the
provision limiting voting rights, the provisions relating to approval of
business combinations with related persons, calling special meetings, the number
and classification of directors, director and officer indemnification by
FIRSTFED and amendment of FIRSTFED's bylaws and certificate of incorporation.
These supermajority voting requirements make it more difficult for the
stockholders to amend these provisions of the FIRSTFED certificate of
incorporation.
107
Legal Matters
The validity of the shares of FIRSTFED common stock to be issued in
connection with the merger will be passed upon for FIRSTFED by Muldoon Murphy &
Faucette LLP, Washington, D.C. It is a condition to the completion of the merger
that each of FIRSTFED and People's receive an opinion from their respective
counsel with respect to the tax treatment of the merger.
Experts
The consolidated financial statements of FIRSTFED and its subsidiaries
incorporated in this joint proxy statement - prospectus by reference to the
FIRSTFED Annual Report on Form 10-K for the year ended March 31, 2001 have been
so incorporated by reference in this document in reliance on the report of KPMG
LLP, independent certified public accountants, given upon the authority of that
firm as experts in accounting and auditing.
The consolidated financial statements of People's and its subsidiaries
incorporated in this joint proxy statement - prospectus by reference to the
People's Annual Report on Form 10-K for the year ended December 31, 2000 have
been so incorporated by reference in this document in reliance on the report
with respect to those financial statements of Wolf & Company, P.C., independent
public accountants, given upon the authority of that firm as experts in
accounting and auditing.
Where You Can Find More Information
FIRSTFED has filed with the Securities and Exchange Commission a
registration statement under the Securities Act that registers the distribution
to People's stockholders of the shares of FIRSTFED common stock to be issued in
connection with the merger. The registration statement, including the exhibits,
contains additional relevant information about FIRSTFED and FIRSTFED common
stock. The rules and regulations of the SEC allow FIRSTFED to omit certain
information included in the registration statement from this joint proxy
statement - prospectus.
FIRSTFED and People's file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that FIRSTFED and People's file at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. Please
call the SEC at 1-800-SEC-0330 for further information on the SEC's public
reference rooms. FIRSTFED's and People's public filings are also available to
the public from commercial document retrieval services and at the Internet World
Wide Website maintained by the SEC at "http://www.sec.gov."
The SEC allows FIRSTFED and People's to "incorporate by reference"
information into this joint proxy statement - prospectus. This means that
FIRSTFED and People's can disclose important information to you by referring you
to another document filed separately with the SEC. The information incorporated
by reference is deemed to be part of this document, except for any information
superseded by information contained directly in this document. This document
incorporates by reference the other documents that are listed below that
FIRSTFED and People's have previously filed with the SEC and additional
documents that FIRSTFED and People's file with the SEC between the date of this
joint proxy statement - prospectus and the date of their respective stockholder
meetings. These documents contain important information about FIRSTFED's and
People's financial condition.
108
FIRSTFED SEC Filings (File No. 1-12305)
. Management's discussion and analysis of financial condition and
results of operations on pages 20 through 42 of FIRSTFED's 2001
Annual Report to Stockholders
. Annual Report on Form 10-K for the year ended March 31, 2001
. Quarterly Reports on Form 10-Q for the quarters ended June 30,
2001 and September 30, 2001
. Current Report on Form 8-K filed on October 2, 2001
People's SEC Filings (File No. 0-07449)
. Annual Report on Form 10-K for the year ended December 31, 2000
. Quarterly Reports on Form 10-Q for the quarters ended March 31,
June 30, and September 30, 2001
. Items 10-13 of People's Definitive Proxy Statement to People's
Stockholders for the 2001 Annual Meeting of Stockholders filed on
April 30, 2001
. Current Reports on Form 8-K filed on April 25, June 12, July 2
and 19, and October 1, 2001
Documents incorporated by reference are available from FIRSTFED and
People's without charge (except for exhibits to the documents unless the
exhibits are specifically incorporated in this document by reference). You may
obtain documents incorporated by reference in this document by requesting them
in writing or by telephone from FIRSTFED or People's at the following addresses:
FIRSTFED AMERICA BANCORP, INC.
ONE FIRSTFED PARK
Swansea, Massachusetts 02777
Attention: Philip G. Campbell, Director of Marketing,
Corporate Planning and Investor Relations
Telephone No. (508) 235-1361
People's Bancshares, Inc.
545 Pleasant Street
New Bedford, Massachusetts 02740
Attention: Mary Ann Wilson, Assiatant Vice President,
Marketing Officer
Telephone: (508) 991-2601
If you would like to request documents from FIRSTFED or People's,
please do so by January 28, 2002 in order to receive them before the special
meeting of stockholders. If you request any incorporated documents, FIRSTFED
will mail them to you by first-class mail, or other equally prompt means, within
one business day of its receipt of your request.
FIRSTFED has supplied all information contained in this joint proxy
statement - prospectus relating to FIRSTFED, and People's has supplied all
information relating to People's.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the meeting. We have not
authorized anyone to provide you with information that is different from what is
contained or incorporated by reference in this document. This document is dated
December 20, 2001. You should not assume that the information contained in this
document is accurate as of any date other than that date, and neither the
mailing of this document to stockholders nor the issuance of FIRSTFED's
securities in the merger shall create any implication to the contrary.
109
Stockholder Proposals
FIRSTFED
To be considered for inclusion in FIRSTFED's proxy statement and form of
proxy relating to the 2002 Annual Meeting of Stockholders, a stockholder
proposal must be received by the Secretary of the Company at the address set
forth on the Notice of Special Meeting of Stockholders not later than February
22, 2002. If such annual meeting is held on a date more than 30 calendar days
from July 26, 2002, a stockholder proposal must be received by a reasonable time
before FIRSTFED begins to print and mail its proxy materials for such annual
meeting. Any such proposal will be subject to the proxy rules of the Securities
and Exchange Commission.
The bylaws of FIRSTFED set forth the procedures by which a stockholder may
properly bring business before a meeting of stockholders, including director
nominations. Pursuant to the bylaws, only business brought by or at the
direction of the board of directors may be conducted at a special meeting. The
FIRSTFED bylaws provide an advance notice procedure for a stockholder to
properly bring business before an annual meeting. The stockholder must give
written advance notice to the Secretary of FIRSTFED not less than 90 days before
the date originally fixed for such meeting; provided, however, that in the event
that less than 100 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 received not later than the close of business on the 10th day following
the date on which FIRSTFED's notice to stockholders of the annual meeting date
was mailed or such public disclosure was made. In order for a stockholder to
bring business before FIRSTFED's 2002 Annual Meeting of Stockholders, FIRSTFED
would have to receive notice of such business no later than April 29, 2002
assuming the 2002 Annual Meeting is held on July 26, 2002 and that FIRSTFED
provides at least 100 days' notice of the date of the meeting. The advance
notice by stockholders must include certain information required by the bylaws.
In the case of nominations to the board of directors, certain information
regarding the nominee must be provided. A copy of the bylaws may be obtained
from FIRSTFED. Nothing in this paragraph shall be deemed to require FIRSTFED to
include in its proxy statement or the proxy relating to any annual meeting any
stockholder proposal which does not meet all of the requirements for inclusion
established by the Securities and Exchange Commission in effect at the time such
proposal is received.
People's
People's will hold a 2002 annual meeting of stockholders only if the merger
is not consummated before the time of such annual meeting. Proposals of
stockholders intended to be included in the proxy statement and form of proxy
relating to the 2002 annual meeting of stockholders of People's must be received
in writing by People's at its principal office on or before January 12, 2002.
Pursuant to People's by-laws, for the 2002 annual meeting of stockholders,
any director nominations and new business submitted by stockholders must be
delivered to, or mailed to and received by, People's at its principal executive
office not less than 60 days nor more than 90 days prior to April 30, 2002;
provided, however, that in the event the annual meeting is scheduled to be held
on a date more than 30 days before April 30, 2002 or more than 60 days after
April 30, 2002, a stockholder's notice shall be timely if delivered to, or
mailed to and received by, People's at its principal executive office not later
than the close of business on the later of (A) the 60th day prior to the
scheduled date of such annual meeting or (B) the 10th day following the day on
which public announcement of the date of such annual meeting is first made by
People's. The proposal must also comply with the other requirements contained in
People's by-laws, including supporting documentation and other information.
Proxies solicited by the board of directors of People's will confer
discretionary voting authority with respect to these proposals, subject to SEC
rules governing the exercise of this authority. Any such proposal should be
mailed to: Clerk, People's Bancshares, Inc., 545 Pleasant Street, New Bedford,
Massachusetts 02740.
110
People's Management's Discussions and Analysis
People's Management's Discussion and Analysis of Financial Condition and Results
of Operations For the Three and Nine Months Ended September 30, 2001
The following analysis of People's consolidated results of operations and
financial condition for the three and nine months ended September 30, 2001
should be read in conjunction with the consolidated financial statements and
accompanying notes of People's presented on pages F-2 through F-44 in this joint
proxy - statement prospectus.
Overview
Net income for the three months ended September 30, 2001 was $890,000 or
$0.27 per diluted share, compared to $2.30 million or $0.76 per diluted share
for the corresponding period in 2000. Basic earnings per share was $0.27 for the
three months ended September 30, 2001, compared to $0.77 for the same period in
2000. Income before income taxes for the three months ended September 30, 2001
was $1.5 million, compared with $3.4 million for the three months ended
September 30, 2000. Return on average assets and return on average equity was
0.38% and 9.83%, respectively, for the three months ended September 30, 2001,
compared to 0.91% and 23.18%, respectively for the same period in 2000.
Through the sale of securities, People's continues to address regulatory
issues and reduce exposure to higher risk earnings assets. The results of
operations for the nine months ended September 30, 2001 include before tax
losses of $2.6 million on sales of approximately $294 million of securities and
portfolio loans. There were no sales of securities or portfolio loans during the
nine months ended September 30, 2000. The net interest margin and income has
decreased compared with the comparable period in 2000 due to the lower volume of
securities, partially offset by an increase in loan income resulting from
increased loan originations at People's Mortgage Corporation. People's net
interest margin was 2.71% for the nine months ended September 30, 2001, compared
to 2.83% in the nine months ended September 30, 2000.
Financial Condition
Total assets decreased $74.9 million or 7.47% to $928.5 million at
September 30, 2001 from $1,003.4 million at December 31, 2000. This reflects a
net decrease in securities available-for-sale of $234.7 million and a decrease
in loans of $58.8 million, offset by an increase in short-term investments of
$170.1 million and an increase of $60.2 million in loans held for sale.
Securities available for sale decreased $234.7 million to $253.4 million at
September 30, 2001 from $488.1 million at December 31, 2000. This decrease was
the result of the sales of $294 million of higher risk securities, which include
approximately $34.9 million in corporate bonds and trust preferred securities,
offset by a $24.7 million improvement in the unrealized losses on securities.
Loans decreased $58.8 million to $334.8 million at September 30, 2001 from
$393.5 million at December 31, 2000. The decrease reflects the sale of $13.8
million in purchased second mortgages and increased loan amortization due to the
low interest rate environment. The low mortgage interest rate environment has
accelerated refinancing and home buying activity resulting in increased mortgage
loan originations at People's Mortgage. This is reflected in the $60.2 million
increase in loans held for sale to $100.7 million at September 30, 2001 from
$40.5 million at December 31, 2000.
111
Proceeds from the sale of investments were used to fund the outflow of
deposits and to pay off short-term borrowings. Deposits decreased $48.3 million
or 7.74% to $576.2 million at September 30, 2001 from $624.6 million at December
31, 2000. This decrease is primarily a result of a reduction in higher cost
municipal certificate products and retail certificate products, partially offset
by an increase in core retail accounts. Short-term borrowings decreased $48.2
million.
Stockholders' equity was $38.0 million at September 30, 2001, as compared
to $17.8 million at December 31, 2000. The increase in stockholders' equity is
primarily due to a $16.8 million improvement in unrealized securities losses,
net of taxes, and growth in retained earnings.
Results of Operations
Net Interest Income
Net interest income decreased $1.4 million and $3.9 million for the three
and nine months ended September 30, 2001, compared to the same period in 2000.
This change reflects a decrease in average earning assets (primarily securities)
and a lower net interest margin, partially offset by decreased deposits and
borrowings. For the three and nine months ended September 30, 2001 average
earning assets decreased by $150.8 million and $113.1 million from the same
periods of 2000. Net interest margin was 2.71% for the nine months ended
September 30, 2001, compared to 2.83% for the same period in 2000.
Interest and dividend income decreased to $15.4 million and $51.1 million
for the three and nine months ended September 30, 2001 from $20.9 million and
$61.0 million for the comparable 2000 periods. The yield on average earning
assets decreased to 6.85% and 7.40% for the three and nine months ended
September 30, 2001 from 7.96% and 7.88% for the three and nine months ended
September 30, 2000. Yields on loans was 8.20% and 8.29% for the three and nine
months ended September 30, 2001, compared to 8.24% and 8.13% for the 2000
periods. Yields on investments decreased to 7.04% and 7.20% for the three and
nine months ended September 30, 2001, compared to 7.75% and 7.70% for the
comparable 2000 periods.
Interest expense was $9.5 million and $32.3 million for the three and nine
months ended September 30, 2001 compared to $13.6 million and $39.1 million for
the same periods in 2000. Deposit interest expense decreased $2.8 million and
$6.8 million for the three and nine months, compared to the same periods in
2000. Interest expense on borrowings decreased $1.4 million and $3.9 million for
the three and nine months ended September 30, 2001 compared to the same periods
in 2000.
During the first half of 2001, average Borrowed Funds were $325.6 million
compared to $417.4 million during the comparable period in 2000. Average
Borrowed Funds have decreased as People's has paid down short-term borrowings.
The average rate paid on Borrowed Funds was 5.99% and 5.63% for the three and
nine months ended September 30, 2001 compared to 5.89% and 5.65% for the same
periods in 2000.
Interest expense on subordinated debentures increased over the 2000 three
and nine month periods due to the average balances increasing from $13.8 million
to $23.8 million. The average rate paid on subordinated debentures was 10.69%
and 10.80% for the three and nine months ended September 30, 2001 compared to
10.49% and 10.28% for the same periods in 2000.
Interest expense on deposits decreased due to a more favorable mix and a
decrease in the volume of average deposits to $544.9 million for the nine months
ended September 30, 2001, compared to $572.3
112
million for the same period in 2000. The average cost of deposits decreased to
3.45% and 4.10% for the three and nine months ended September 30, 2001 from
4.91% and 4.72% for the same periods in 2000.
Other Income
Other income was $3.6 million and $9.0 million for the three and nine
months ended September 30, 2001, compared to $2.8 million and $7.5 million for
the same periods in 2000. The increase reflects $2.6 million in realized losses
on securities, offset by a $4.0 million increase in gains on loan sales for the
nine months ended September 30, 2001.
Operating Expenses
Total operating expenses were $8.1 million and $22.5 million for the three
and nine months ended September 30, 2001, compared to $6.5 million and $18.9
million for the same periods in 2000. These increases in operating expenses were
primarily due to an increase in professional fees for legal and consulting
services and an increase in other operating expenses directly related to the
increased volume of loan originations at People's Mortgage and an increase in
deposit insurance.
Salaries and benefits expense increased $1.0 million and $2.0 million for
the three and nine months ended September 30, 2001, compared to the same period
in 2000. The increase in salaries and benefits reflects increased expenses at
People's Mortgage, consistent with volume increases.
Professional fees increased $95,000 for the nine months ended September 30,
2001, compared to the same period in 2000. This increase primarily reflects
costs associated with shareholder and regulatory matters. Professional fees
decreased $4,000 for the nine months ended September 30, 2001 compared with the
comparable September 2000 period. Other general and administrative expenses
increased $307,000 and $1.1 million for the three and nine months ended
September 30, 2001, compared to the same periods in 2000 due to expenses
associated with the increased volume of loan originations at People's Mortgage
and an increase in deposit insurance.
The efficiency ratio for People's for the three and nine months ended
September 30, 2001 was 74.11% and 69.33% as compared with a ratio of 57.34% and
59.79% for the same periods in 2000. The efficiency ratio for People's,
excluding People's Mortgage, was 87.82% and 76.69% for the three and nine months
ended September 30, 2001, as compared with a ratio of 45.83% and 44.70% for the
same periods in 2000. The increased efficiency ratios reflect the decreased net
interest margin and increased operating expenses.
Provision for Income Taxes
People's recognized income tax expense of $562,000 and $2.0 million in the
three and nine months ended September 30, 2001, compared to income tax expense
of $1.2 million and $3.4 million for the same periods in 2000. The effective tax
rate for the three and nine months ended September 30, 2001 was 38% and the
effective tax rate was 32% for the corresponding period of 2000. The higher rate
during the three and nine months ended September 30, 2001 was the result of the
elimination of certain subsidiaries formed to hold securities which were taxed
at lower rates.
113
Non-Performing Assets and Allowance for Loan Losses
The allowance for loan losses has been established to absorb estimated
losses in the loan portfolio. The provision (credit) for loan losses and the
level of the allowance are evaluated periodically by management and the board of
directors. These provisions (credits) are the results of People's internal loan
review, historical loan loss experience, trends in delinquent and non-accrual
loans, known and inherent risks in the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, collateral
values, an estimate of potential loss exposure on significant credits,
concentrations of credit, and economic conditions based on facts then known.
Periodically, People's management reviews the loan portfolio, classifying
each loan into categories by assessing the degree of risk involved. Based upon
this review, and other factors, People's evaluates the adequacy of its allowance
for loans losses. Necessary adjustments are charged (credited) to operations
through the provision for loan losses. Loan losses are charged against the
allowance management believes the collectibility of the loan balance is
unlikely.
The allowance for loan losses is an estimate. Ultimate losses may vary from
current estimates and future additions to the allowance for loan losses may
become necessary. In addition, regulatory agencies, as an integral part of their
examination process, review the adequacy of People's allowance for loan losses
and may require People's to provide additions to the allowance for loan losses
based on their assessment, which may differ from management's.
At September 30, 2001, People's allowance for loan losses totaled $4.1
million, or 0.93% of total loans and loans held for sale and 428% of
non-performing loans, compared to $4.2 million, or 0.95% of total loans and
loans held for sale and 1,121% of non-performing loans, at December 31, 2000,
and compared to $4.2 million, or 0.94% of total loans and loans held for sale
and 1,180% of non-performing loans, at September 30, 2000. Net charge-offs for
the nine months ended September 30, 2001 were $108,000, compared to net
recoveries of $8,000 and $58,000 for the corresponding periods in 2000.
Non-performing assets, including loans of $950,000, OREO of $210,000 and
securities of $4.6 million, were $5.8 million or 0.62% of total assets at
September 30, 2001. At December 31, 2000, non-performing assets were $1.4
million, or 0.14% of total assets, including loans of $373,000, OREO of $50,000
and securities of $992,000. At September 30, 2000, non-performing assets were
$402,000 or 0.04% of total assets, including loans and OREO.
Liquidity and Capital Resources
People's liquidity management strategy focuses upon People's ability to
provide the cash reserves and cash equivalents necessary to honor contractual
liabilities and commitments, meet depositors' withdrawal demands, fund
operations and provide customers with adequate available credit. People's
primary sources of liquidity are customer deposits, principal and interest
payments on loans, interest and dividends on investments and proceeds from the
maturity or sale of investments. People's also has the ability to borrow from
the Federal Home Loan Bank of Boston on a collateralized basis. People's
believes that it has adequate liquidity to meet its current needs.
114
At September 30, 2001, People's capital exceeded all applicable
regulatory requirements imposed by statute or regulations.
Amount Percent
------------------------------------ ------------------------------------
Adequately Well Adequately Well
Capitalized Capitalized Capitalized Capitalized
-------- ------------- ------------- -------- ------------- -------------
Actual Minimums Minimums Actual Minimums Minimums
-------- ------------- ------------- -------- ------------- -------------
People's Bancshares, Inc.
Tier 1 leverage capital................. $63,480 $37,596 n/a 6.75% 4.00% n/a
Tier 1 capital.......................... 63,480 21,248 n/a 11.95 4.00 n/a
Total capital..................... 75,239 42,495 n/a 14.16 8.00 n/a
People's Savings Bank of Brockton
Tier 1 leverage capital................. $69,315 $37,546 $46,932 7.39% 4.00% 5.00%
Tier 1 capital.......................... 69,315 22,456 33,684 13.09 4.00 6.00
Total capital..................... 73,470 44,912 56,140 13.88 8.00 10.00
As discussed under the caption "Government Regulation" above, both People's
and People's Savings have agreed to maintain minimum Tier 1 leverage capital
ratios greater than the "Adequately Capitalized Minimums" shown in the foregoing
table.
Quantitative and Qualitative Disclosures About Market Risk
The objective of People's Savings' asset/liability management process is to
monitor and control the variation in repricing intervals between assets and
liabilities. People's quantifies and measures interest rate exposures using a
model to dynamically simulate net-interest income under various interest rate
scenarios over 12 month periods. Simulated scenarios include deliberately
extreme interest rate "shocks" and more gradual interest rate "ramps". Key
assumptions in these simulation analyses relate to behavior of interest rates
and spreads, the growth or shrinkage of product balances and the behavior of
People's deposit and loan customers. The most material assumption relates to the
prepayment of mortgage assets (including mortgage loans and securities). The
risk of prepayment tends to increase when interest rates fall. Since future
prepayment behavior of loan customers is uncertain, the resultant interest rate
sensitivity of loan assets cannot be determined exactly. Complicating
management's efforts to measure interest rate risk is the uncertainty of the
maturity, repricing and/or runoff of some of People's assets and liabilities.
People's board of director's limits on interest rate risk specify that if
interest rates rise or fall by 200 basis points, estimated net interest income
for the subsequent 12 months should decline by less than 10% and for the next 12
months should decline by less than 20%. Based upon People's Savings current
methodology, People's was not in compliance with this limit at September 30,
2001.
200 Basis Point 200 Basis Point
Increase Decrease
-------- --------
Year 1 (0.79)% (0.59)%
Year 2 18.56 36.64
The matching of the repricing characteristics of assets and liabilities may
be analyzed by examining the extent to which such assets and liabilities are
interest rate sensitive and by monitoring the interest rate sensitivity gap. The
following table, referred to as the "Gap Table," sets forth the amount of
interest-earning assets and interest-bearing liabilities outstanding at
September 30, 2001, that are expected to reprice or mature in each of the future
time periods shown. The Gap Table does not
115
necessarily indicate the impact of general interest rate movements on net
interest income because actual repricing dates of various assets and liabilities
are subject to customer discretion, competitive and other pressures. The actual
duration of mortgage loans and mortgage-backed securities can be significantly
impacted by changes in mortgage prepayments. Mortgage prepayment rates will vary
due to a number of factors, including the regional economy in the area where the
underlying mortgages were originated, seasonal factors, demographic variables
and the assumability of the underlying mortgages. However, the primary factors
affecting prepayment rates are prevailing interest rates and related mortgage
refinancing opportunities. In addition, callable features of certain assets and
liabilities may cause actual experience to vary from that indicated. Included in
this table are $20 million of callable securities at fair value, classified
according to their maturity dates, which are within the over five years
category. Also, included in this table are $264 million of callable borrowings,
classified according to their maturity dates, which are within the over five
years category. Of such borrowings, $78 million is callable within one year and
at various times thereafter. There can be no assurances that these borrowings
will not be called in the future, particularly in a rising interest rate
environment.
116
Interest Rate Sensitivity Analysis
At September 30, 2001
------------------------------------------------------------------------------
One year 1--2 2--3 3--4 4--5 Over 5
or Less Years Years Years Years Years
------- ----- ----- ----- ----- -----
(Dollars in thousands)
INTEREST SENSITIVE ASSETS:
Fed Funds Sold $170,000 $ -- $ -- $ -- $ -- $ --
Average interest rate 3
Securities 57,588 16,815 13,784 11,678 9,904 163,512
Average interest rate 5.70% 6.12% 6.17% 6.17% 6.17% 7.41%
Adjustable--rate loans 208,752 53,497 27,706 13,215 3,448 1,621
Average interest rate 7.23% 7.30% 8.08% 7.94% 8.39% 6.90%
Fixed--rate loans 29,806 25,316 17,359 12,772 14,165 31,946
Average interest rate 7.86% 7.86% 7.70% 7.69% 7.70% 7.31%
-------- -------- -------- -------- -------- ---------
Total 466,246 95,628 58,849 37,665 27,517 197,079
-------- -------- -------- -------- -------- ---------
INTEREST SENSITIVE LIABILITIES:
NOW -- -- -- -- -- 59,419
Average interest rate .50%
Savings -- -- -- -- -- 77,205
Average interest rate 1.62%
Money market 37,416 -- -- -- -- --
Average interest rate 2.59%
Term deposits 241,062 20,774 6,933 1,698 1,224 801
Average interest rate 4.26% 4.94% 5.73% 5.98% 6.09% 2.33%
Borrowed funds 941 -- -- 18,000 -- 263,500
Average interest rate 2.0% 5.89% 5.92%
Subordinated debentures -- -- -- -- -- 23,800
Average interest rate -- -- -- -- -- 10.72%
-------- -------- -------- -------- -------- ---------
Total $279,419 $ 20,774 $ 6,933 $ 19,698 $ 1,224 $ 424,725
-------- -------- -------- -------- -------- ---------
Interest rate sensitivity gap $186,827 $ 74,854 $ 51,916 $ 17,967 $ 26,293 $(227,646)
Cumulative interest rate
sensitivity gap 261,681 313,597 331,564 357,857 130,211
People's Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Years Ended December 31, 2000, 1999, and 1998
The following analysis of People's consolidated results of operations
and financial condition should be read in conjunction with the consolidated
financial statements and accompanying notes on pages F-10 through F-44 of this
joint proxy statement - prospectus. .
Government Regulation
People's has been incorporated as a business corporation under
Massachusetts law. Thus, People's is subject to regulation by the Secretary of
the Commonwealth of Massachusetts and the rights of its stockholders are
governed by Massachusetts corporate law. As a bank holding company, People's is
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System pursuant to the Bank Holding Company Act. As a state-chartered
savings bank whose deposits are insured by the
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Federal Deposit Insurance Corporation, or FDIC, People's Savings is subject to
regulation by federal and state regulatory authorities including, but not
limited to, the FDIC and the Commissioner of Banks of Massachusetts.
In granting approval of the reorganization in which People's Savings
became a wholly-owned subsidiary of People's, the Commissioner of Banks included
a provision which requires People's Savings and People's to maintain Tier 1
leverage capital ratio of at least 4.00%, which is equivalent to the minimum
Tier 1 leverage capital ratios of the FDIC and Federal Reserve Board. The
Commissioner of Banks has indicated to People's Savings that this minimum
capital requirement is not related to People's Savings' financial condition, but
instead reflects the policy of the Commissioner of Banks to impose minimum
capital requirements upon all one-bank holding company formations. The approval
also provides that if People's Savings' Tier 1 leverage capital ratio falls
below 4.00%, People's Savings must seek the Commissioner of Banks approval
before paying dividends to People's. As of December 31, 2000, People's Savings'
Tier 1 leverage capital ratio was 6.36%.
On December 5, 2000, People's entered into a formal agreement with the
Federal Reserve Bank of Boston pursuant to which People's has agreed, among
other matters, to obtain written approval from the Federal Reserve Bank and the
Director of the Division of Banking Supervision and Regulation of the Board of
Governors prior to declaring or paying any dividends or make any distributions
of interest, principal, or other sums on subordinated debentures. People's is
also required to maintain a minimum consolidated Tier 1 leverage capital ratio
of not less than 5%. The Tier 1 leverage capital ratio of People's was 5.67% at
December 31, 2000. This agreement also requires People's to receive written
approval from the Federal Reserve Bank to increase borrowings or renew any
existing debt. People's elected to suspend the common dividend in the first
quarter of 2001 and, therefore, did not seek approval.
On June 27, 2000, People's Savings entered into an informal agreement
with its regulators (the FDIC and the Massachusetts Commissioner of Banks)
pursuant to which People's Savings has agreed, among other matters, to develop
plans to reduce over time the level of its investment in trust preferred
securities to less than 100% of its Tier 1 leverage capital. In addition,
People's Savings has agreed to achieve and subsequently maintain a Tier 1
leverage capital ratio of not less than 6.5% of total assets. At December 31,
2000, the Tier 1 leverage capital ratio of People's Savings was 6.36%.
Additional provisions of this agreement require People's Savings to assess its
management and staffing needs, develop revised strategic and capital plans,
improve the quality of the investment portfolio and investment administration,
improve liquidity and the management thereof, develop a plan for reducing
interest rate risk exposure and address other operational issues.
Comparison of Financial Condition and Operating Results
Overview
People's net income amounted to $8.3 million or $2.52 per diluted share
for the year ended December 31, 2000, compared to $9.4 million or $2.77 per
diluted share for the year ended December 31, 1999, and $7.6 million or $2.25
per diluted share for the year ended December 31, 1998. Basic earnings per share
was $2.55 for the year ended December 31, 2000, compared to $2.81 for the year
ended December 31, 1999, and $2.30 for the year ended December 31, 1998. Income
before income taxes was $12.3 million for the year ended December 31, 2000
compared to $14.0 million for the year ended December 31, 1999 and $12.2 million
for the year ended December 31, 1998. Tax expense amounted to
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$4.1 million for the year ended December 31, 2000 compared to tax expense of
$4.6 million and $4.4 million for the years ended December 31, 1999 and 1998,
respectively. Return on average assets was 0.77% for the year ended December 31,
2000 compared to 0.93% and 0.89% for the years ended December 31, 1999 and 1998,
respectively. Return on average equity was 19.78% for 2000, 24.82% for 1999 and
23.33% for 1998.
The results of operations for the year ended December 31, 2000 were
impacted by before tax losses on sales of securities of $1.2 million and of
non-recurring charges of $577,000 related to a shareholder proxy contest and the
write-off of obsolete assets. People's also issued $10 million of trust
preferred securities and repurchased $2.1 million worth of common stock. The
results of operations for the year ended December 31, 1999 include credits to
the loan loss provision of $850,000 and charges related to branch reorganization
and the purchase of Allied Mortgage Group, LLC in September 1999 of $661,000.
The results of operations for the year ended December 31, 1998 included
write-offs of $920,000 of goodwill and organization costs.
During the latter half of 2000, People's and People's Savings have focused
on addressing issues raised by their respective regulators. People's management
has developed strategic and capital plans to improve liquidity, reduce interest
rate risk exposure and address other operational issues. Consistent with these
strategies $30.2 million of higher risk earnings assets were sold at a pre-tax
loss of $1.2 million and the capital raised in this sale was used to reduce
higher cost interest bearing liabilities. Additionally, as noted above,
effective December 31, 2000 People's reclassified held-to-maturity securities
with a book value of $514.8 million and a fair value of $473.1 million to the
available-for-sale classification.
People's strategy also includes taking actions to improve capital at both
People's and People's Savings. During 2000, People's announced the termination
of a common stock repurchase program and in an effort to accelerate capital
growth elected to suspend its common stock dividend. In July 2000, People's sold
$10 million in trust preferred securities and used the proceeds to increase the
capital level at People's Savings. People's and People's Savings have submitted
capital plans to the regulators which call for, among other things, a balance
sheet deleveraging program to be achieved by using cash flows provided by (1)
normal amortization of securities and loans, (2) callable securities under a
falling rate environment, and (3) sales of securities to reduce both borrowings
and volatile liabilities to the extent possible.
Financial Condition
Total assets decreased $67.7 million or 6.32% to $1.003 billion at December
31, 2000 from $1.071 billion at December 31, 1999. At December 31, 2000,
People's made a determination that it was appropriate to reclassify all
held-to-maturity securities to the available-for-sale classification. As a
result of this, the carrying value of securities was reduced by the unrealized
loss on that date of $41.6 million, and the after tax effect of the adjustment,
$27.2 million, has been reported as a reduction in stockholders' equity. This
decrease reflects People's objective of decreasing higher risk earning assets
while reducing higher cost interest-bearing liabilities and lessening future
interest-rate risk and balance sheet leverage.
Securities decreased $84.4 million to $488.1 million at December 31, 2000
from $572.6 million at December 31, 1999. This decrease was the result of sales
of $31.5 million higher risk securities, an increase of $41.8 million in
unrealized losses on available for sale securities, principal payments of
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$39.6 million, and maturities and calls of $23.1 million, offset by $41.5
million in purchases and $8.9 million in accretion on zero coupon bonds. The
increase in the unrealized loss on securities reflects the transfer of
held-to-maturity securities with a book value of $514.8 million and a fair value
of $473.1 million to available-for-sale classification effective December 31,
2000.
Loans and loans held for sale decreased $2.8 million, or 0.64%, to
$438.2 million at December 31, 2000, from $441.0 million at December 31, 1999.
This decrease was primarily due to the $19.7 million decrease in loans as
amortization and payoffs outpaced originations. Loans held for sale increased
$16.9 million, or 71.22% to $40.5 million at December 31, 2000 from $23.7
million at December 31, 1999. This increase is due to increased refinancing
activity at the end of 2000 as a result of decreasing interest rates. People's
Mortgage's 1-4 family residential loans originations increased to $644.9 million
for 2000, compared to $610.1 million for 1999. These loans were mostly sold to
investors, resulting in net gains of $8.5 million for 2000, compared to $7.5
million for 1999.
The allowance for loan losses was $4.2 million, or 0.95% of total loans
and loans held for sale at December 31, 2000, compared to $4.1 million, or 0.93%
of total loans and loans held for sale at December 31, 1999. The allowance for
loan losses amounted to 1,121% of non-performing loans at December 31, 2000,
compared to 814% of non-performing loans at December 31, 1999. Non-performing
loans and foreclosed real estate decreased to 0.04% of total assets at December
31, 2000, compared to 0.07% at December 31, 1999. Non-performing loans totaled
$373,000 and $503,000 at December 31, 2000 and 1999. Foreclosed real estate
consisting of residential real estate amounted to $50,000 at December 31, 2000,
compared to $285,000 at December 31, 1999.
Deposits increased $62.9 million during 2000 primarily as a result of
the growth of municipal deposit products which increased from $199.5 million at
December 31, 1999 to $219.6 million at December 31, 2000 and certificate
accounts which increased $28.5 million to $206.5 million at December 31, 2000
from $178.0 million at December 31, 1999. Non-certificate accounts, excluding
municipal deposits, increased from $184.1 million at December 31, 1999 to $198.4
million at December 31, 2000.
Funds available from decreased investments and increased deposits were
used to reduce borrowings in 2000. Total borrowed funds decreased $117.3 million
to $330.6 million at December 31, 2000 from $448.0 million at December 31, 1999.
Consistent with the deleveraging and liquidity strategies adopted in late 2000,
long-term borrowings decreased $126.2 million, while short-term borrowings
increased $8.9 million from 1999 to 2000. On July 26, 2000, People's
wholly-owned subsidiary, People's Bancshares Capital Trust II issued $10 million
in trust preferred securities.
Stockholders' equity totaled $17.8 million at December 31, 2000 and
$40.9 million at December 31, 1999. The decrease results primarily from the
year-end transfer of all securities classified as held-to-maturity securities to
the available-for sale category as discussed above. This transfer had the effect
of reducing the carrying value of securities by the unrealized losses on that
date by $41.6 million, and the after-tax effect of the adjustment, $27.2
million, was treated as a reduction in stockholders' equity. Other factors
affecting stockholders' equity during the year 2000 were net income of $8.3
million, $78,000 in proceeds from the exercise of stock options, $2.1 million in
treasury stock purchases and $2.7 million in common stock dividends. Book value
per share was $5.51 at December 31, 2000 compared to $12.27 at December 31,
1999.
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Results of Operations
Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends primarily upon the volume of interest-earning assets and
interest-bearing liabilities and the corresponding interest rates earned or
paid. Net interest income is significantly impacted by changes in interest rates
and market yield curves. Net interest income increased to $28.6 million in 2000
from $27.8 million in 1999 and $22.6 million in 1998.
Interest and dividend income amounted to $81.3 million in 2000,
compared to $73.3 million in 1999, and $61.8 million in 1998. The increases in
interest and dividend income in 2000 and 1999 were due to $56.3 million and
$153.8 million increases in average interest-earning assets, respectively. The
increases in average assets were primarily due to the investment of deposit
growth and borrowed funds into securities. The yield on average earning assets
increased to 7.87% in 2000 from 7.51% in 1999 and 1998, reflecting the impact of
rising interest rates in both 1999 and early 2000.
Interest and fees on loans amounted to $35.8 million in 2000, $34.7
million in 1999, and $36.4 million in 1998. The increase in 2000 was primarily
as a result of increased yields on loans, offset slightly by decreased average
loans outstanding. The rising interest rates of 1999 did not fully impact the
overall average yield on loans until 2000, resulting in a yield of 8.16% for
2000, compared to 7.65% for 1999. The decrease in 1999 was primarily as a result
of a decrease in average loans outstanding, offset slightly by increased yields
on loans. The yield on average loans for 1998, and to a lesser degree 1999 was
adversely affected by falling interest rates and the resulting effect of
prepayments on purchased and acquired loans' premiums.
Interest and dividends from securities increased to $45.3 million in
2000, from $38.4 million in 1999, and $25.1 million in 1998. The increase in
2000 was due to a $72.3 million increase in average securities over 1999 coupled
with an increase in the yield on securities from 7.42% in 1999 to 7.67% in 2000.
The increase in 1999 was due primarily to an increase in the average balance of
securities of $182.3 million offset by the yield earned in 1999 decreasing due
to decreased yields on mortgage-backed securities and flat yields on trust
preferred securities. Interest on short-term investments amounted to $232,000 in
2000, $256,000 in 1999, and $303,000 in 1998.
Interest expense amounted to $52.7 million in 2000, $45.5 million in
1999, and $39.2 million in 1998. People's Savings' average cost of funds was
5.35% in 2000, compared to 4.89% in 1999, and 5.02% in 1998. Interest on
deposits increased to $27.6 million for 2000, from $20.0 million for 1999, and
$15.2 million for 1998. The increase in deposit interest in 2000 is a result of
a $91.5 million increase in average interest-bearing deposits and the 67 basis
point increase in the cost of deposits from 1999. The increase in deposit
interest in 1999 was due to a $116.8 million increase in average
interest-bearing deposits. The increase in average balances in 2000 and 1999
reflects the expansion of municipal deposits products and certificates.
Interest on borrowed funds was $25.1 million in 2000, $25.5 million in
1999, and $24.0 million in 1998. The decrease in interest expense on borrowed
funds for 2000 was due to a $36.9 million decrease in average borrowed funds
partially offset by a 41 basis point increase in rates paid on borrowed funds
compared to 1999. The cost of borrowed funds in 2000 increased partly due to the
trust preferred
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securities issued in July 2000. Interest expense on borrowed funds increased in
1999 over 1998 as People's Savings increased average borrowings by $32.1 million
offset by decreased average rates paid on borrowed funds by 8 basis points.
The following sets forth changes in income and expense attributable to
changes in interest rates and changes in the volumes of interest-earning assets
and interest-bearing liabilities. The change attributable to both volume and
rate has been allocated proportionately to the change due to volume and the
change due to rate.
Rate-Volume Analysis
2000 Compared to 1999 1999 Compared to 1998
Increase (Decrease) Increase (Decrease)
-------------------------------- --------------------------------
Variance due to Variance due to
Total -------------------- Total --------------------
Change Volume Rate Change Volume Rate
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Income from Interest-Earning Assets
Loans and loans held for sale:
Real estate ........................... $ 204 $ (1,994) $ 2,198 $ (2,378) $ (2,839) 461
Other ................................. 923 822 101 672 911 (239)
-------- -------- -------- -------- -------- --------
Total loans ........................ 1,127 (1,172) 2,299 (1,706) (1,928) (222)
Short-term investments ................ (24) (73) 49 (47) (33) (14)
Securities ............................ 6,853 5,509 1,344 13,307 13,621 (314)
-------- -------- -------- -------- -------- --------
Total interest and dividend income.. 7,956 4,264 3,692 11,554 11,660 (106)
-------- -------- -------- -------- -------- --------
Expense on Interest-Bearing Liabilities
Deposits:
NOW ................................... 35 29 6 (33) 32 (65)
Savings ............................... 153 131 22 (75) 101 (176)
Money market .......................... 118 54 64 (14) 96 (110)
Time .................................. 7,324 4,633 2,691 4,893 5,593 (700)
-------- -------- -------- -------- -------- --------
Total interest on deposits ......... 7,630 4,847 2,783 4,771 5,822 (1,051)
Borrowed funds ........................ (468) (2,199) 1,731 1,533 1,846 (313)
-------- -------- -------- -------- -------- --------
Total interest expense ............. 7,162 2,648 4,514 6,304 7,668 (1,364)
-------- -------- -------- -------- -------- --------
Net interest income ............. $ 794 $ 1,616 $ (822) $ 5,250 $ 3,992 $ 1,258
======== ======== ======== ======== ======== ========
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Provision for Loan Losses
The provision for loan losses represents the charge to earnings
necessary to maintain the allowance for loan losses at a level adequate to
absorb estimated losses in the loan portfolio.
There were no provisions for loan losses in 2000, compared to a credit
of $850,000 in 1999, and provision of $600,000 in 1998. These provisions
(credits) were the result of the People's Savings' internal loan review,
historical loss experience, trends in delinquent and non-accrual loans, known
and inherent risks in the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, collateral values,
an estimate of potential loss exposure on significant credits, concentrations of
credit, and economic conditions based on facts then known. If the economy or
real estate values in People's Savings' market decline, provisions could be
necessary.
In 1999, credits to the allowance for loan losses amounted to $850,000.
A continuing trend of decreased non-performing loans and local real estate
conditions favorably affecting asset quality resulted in People's Savings'
unallocated portion of the allowance exceeding People's Savings' upper limit.
Net recoveries were $86,000 in 2000 and $80,000 in 1999, compared to
net charge-offs of $25,000 for 1998. Net charge-offs (recoveries) as a
percentage of average loans were (0.02)%, (0.02)%, and 0.01% for 2000, 1999, and
1998, respectively.
Other Income
People's Savings' other income totaled $8.8 million in 2000, $9.0
million in 1999, and $9.5 million in 1998. Customer service fees were $1.3
million in 2000, and 1999, and $1.4 million in 1998. Gains on sales of loans
increased to $8.5 million in 2000, from $7.5 million in 1999, and $6.5 million
in 1998. The increase in gains in 2000 on sales of loans is attributable to
increased originations from the addition of Allied Mortgage Group offices for a
full year in 2000. The increase in 1999 reflects increased loan fundings in
1999, as originations decreased slightly between 1998 and 1999.
In 2000, People's Savings realized net losses of $1.2 million from the
sale of securities, compared to net gains of $36,000 in 1999 and $1.4 million in
1998. The losses in 2000 resulted from the sale of approximately $30 million in
higher risk earning assets. The proceeds were used to pay down higher cost
borrowings to lessen future interest rate risk and balance sheet leverage.
Operating Expenses
Operating expenses totaled $25.1 million in 2000, $23.7 million in
1999, and $19.2 million in 1998. People's efficiency ratio (non-interest expense
divided by net interest income excluding provisions for loan losses, Other Real
Estate Owned, or OREO, expenses, non-recurring expenses, gains and losses on
securities and purchased loan transactions, and interest expense on subordinated
debentures) was 58.7%, 60.3%, and 57.7% for 2000, 1999, and 1998, respectively.
Salaries and benefits expense amounted to $13.9 million in 2000, $13.6 million
in 1999, and $10.5 million in 1998. The increase in 2000 reflects a full year of
salaries and benefits for Allied Mortgage Group, offset by staffing adjustments.
The increase in 1999 was primarily attributable to the growth of People's
Mortgage, including the purchase of Allied Mortgage Group in September 1999.
Occupancy and equipment expenses amounted to $3.7 million in 2000, $2.8 million
in 1999, and $2.2 million in 1998. The increases
123
were primarily due to the operations of new People's Mortgage offices opened and
acquired from 1997 to 1999.
Data processing fees amounted to $1.4 million in 2000, compared to $1.3
million in 1999 and 1998. Professional fees amounted to $1.4 million in 2000,
$955,000 in 1999, and $734,000 in 1998. People's Savings uses outside
professionals for various services, including attorneys, accountants,
shareholder services, and appraisers. Legal fees were $435,000 in 2000, $190,000
in 1999, and $185,000 in 1998. Other professional fees amounted to $991,000,
$765,000, and $549,000 for 2000, 1999, and 1998, respectively. The increase in
legal and other professional fees are primarily due to a shareholder proxy
contest.
People's Savings recognized net OREO income of $9,000 in 2000, net OREO
expense of $24,000 in 1999, and net OREO income of $29,000 in 1998. OREO
operating expenses such as property taxes, insurance, maintenance, and repairs,
totaled $4,000 for 2000, $43,000 for 1999, and $42,000 for 1998. People's
Savings recognized net gains on sales of OREO, after write-downs, of $13,000,
$19,000, and $71,000 in 2000, 1999, and 1998, respectively.
Other general and administrative expenses amounted to $4.7 million in
2000, $5.0 million in 1999, and $4.6 million in 1998. Amortization of intangible
assets amounted to $119,000 in 2000 compared to $75,000 in 1999, and $113,000 in
1998. Impaired goodwill of $475,000 related to an under-performing branch was
written off in 1998 and 1998 organization costs of $153,000 were expensed in
accordance with new accounting treatment. People's Savings' advertising expense
was $666,000 in 2000, $809,000 in 1999, and $729,000 in 1998. The increase in
1999 reflects marketing initiatives for new and existing deposit and loan
products. Insurance expense amounted to $98,000 in 2000 and 1999, and $89,000 in
1998. All other operating expenses decreased to $3.8 million during 2000,
compared to $4.0 million in 1999, and $3.1 million in 1998. The amount in 1999
includes non-recurring charges associated with branch closings.
Income Taxes
People's recorded income tax expense of $4.1 million in 2000, compared
to $4.6 million in 1999 and $4.4 million for 1998. People's effective tax rate
was 33.0% in 2000, 33.0% in 1999 and 35.9% in 1998. People's tax rate has
declined due to the favorable tax rate on income earned by People's security
corporations.
Cash Flows
Cash flows from operating activities during 2000, 1999 and 1998 have
primarily been affected by net income after adjustment for noncash items that
are principally: (1) the level of provisions (credits) for loan losses, (2) net
realized gains(losses) on sales of securities, (3) depreciation and
amortization, (4) loans originated for sale and subsequently sold, and (5) the
effects of deferred tax provisions and benefits. Operating activities resulted
in cash outflows of $15.7 million in 2000 and cash inflows of $41.6 million in
1999, and cash outflows of $33.3 million in 1998.
In 2000, cash provided from investing activities, increased deposits
and a capital securities issuance was used to reduce outstanding borrowings and
acquire treasury stock. This resulted in negative cash flows from financing
activities. This is consistent with the current deleveraging strategy designed
to
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provide better liquidity and improve interest rate risk management. People's
Savings' investment of cash flows, provided by increased deposits and borrowed
funds in 1999 and 1998 into securities, primarily mortgage-backed and trust
preferred securities, and mortgage loans were the primary reasons for People's
Savings' positive cash flows from financing activities and People's Savings'
negative cash flows from investing activities in 1999 and 1998. This corresponds
with People's leverage strategy during those periods.
Net cash flows provided by investing activities was $69.8 million for
the year ended December 31, 2000 and net cash flows used by investing activities
was $184.4 million in 1999 and $136.4 million in 1998. Net securities activities
provided cash inflows of $53.3 million for the year ended December 31, 2000.
Amortization and payoffs outpaced loan purchases and originations in 2000 and
1999 resulting in cash in flows of $19.0 million and $9.6 million, respectively.
Cash flows provided by investing activities in 2000 were primarily used to
reduce borrowings. People's Savings deployed cash flows into investment
purchases, net of proceeds from investment sales, maturities, and amortization,
of $190.2 million, and $89.2 million for the years ended December 31, 1999 and
1998, respectively. People's Savings also deployed cash flows into loan
purchases and originations, net of amortization and payoffs of $53.9 million for
the year ended December 31, 1998.
Net cash flows used in financing activities was $49.6 million for the
year ended December 31, 2000 and net cash flows provided by financing activities
was $118.8 million in 1999 and $174.8 million in 1998. Deposit increases of
$62.9 million, $9.6 million from the issuance of subordinated debentures and
funds provided by investing activities were used to repay borrowings, resulting
in net repayments of $117.3 million for the year ended December 31, 2000.
People's Savings funded the securities and loan purchases in 1999 and 1998
through increases in deposits of $90.7 million, and $115.8 million in 1999, and
1998, respectively, and borrowed funds, net of repayments amounting to $31.1
million in 1999 and $60.3 million in 1998. The deposit increase is primarily the
result of municipal deposit products.
Quantitative and Qualitative Disclosures About Market Risk
Asset/Liability Management
The earnings of most banking institutions are influenced by interest
rate fluctuations because their balance sheets, both assets and liabilities, are
predominately interest-bearing. The objective of People's Savings'
asset/liability management is to prudently minimize the interest rate risk of
its assets and liabilities. Interest rate risk is an inherent characteristic of
the banking industry. It is the responsibility of People's Savings' Investment
Committee, under the authority of the board of directors, to oversee People's
Savings' management of interest rate risk. The primary objective of
interest-rate risk management is to limit People's exposure to interest-rate
risk within policies approved by the board of directors. These policies reflect
People's tolerance for interest rate risk over both short-term and long-term
horizons.
The primary component of market risk is interest rate risk. Net
interest income, the primary component of People's net income, is subject to
substantial risk due to changes in interest rates or changes in market yield
curves, particularly if there is substantial variation in the timing between the
repricing of assets and the liabilities that fund them. People's manages
interest rate risk by simulating net interest income under various interest rate
scenarios. To a lesser extent, interest rate risk is managed by monitoring and
controlling the variation in repricing intervals between assets and liabilities.
125
People's quantifies and measures interest rate exposures using a model to
dynamically simulate net-interest income under various interest rate scenarios
over a 12 month period. Simulated scenarios include deliberately extreme
interest rate "shocks" and more gradual interest rate "ramps." Key assumptions
in these simulation analyses relate to behavior of interest rates and spreads,
the growth or shrinkage of product balances and the behavior of People's deposit
and loan customers. The most material assumption relates to the prepayment of
mortgage assets (including mortgage loans and securities). The risk of
prepayment tends to increase when interest rates fall. Since future prepayment
behavior of loan customers is uncertain, the resultant interest rate sensitivity
of loan assets cannot be determined exactly. Complicating management's efforts
to measure interest rate risk is the uncertainty of the maturity, repricing
and/or runoff of some of People's assets and liabilities.
To cope with these uncertainties, management gives careful attention to
these key assumptions. For example, many of People's interest-bearing deposit
products (e.g. interest checking, savings and money market deposits) have no
contractual maturity and, based on historical experience, have only a limited
sensitivity to movements in market rates. Because management believes it has
some control with respect to the extent and timing of rates paid on non-maturity
deposits, certain assumptions regarding rate changes are built in to the model.
In the case of prepayment of mortgage assets, assumption used in the model are
based upon the most recent Net Present Value model published by the OTS.
People's board of directors has established limits on interest-rate risk
which specify that changes in interest rates will not impact net interest income
for the subsequent 12 months and 24 months by more than 10% and 20%,
respectively. Based upon People's Savings' current methodology, People's was in
compliance with these limits at December 31, 2000. The following table reflects
the estimated exposure of People's net interest income for the next 12 months
assuming a shift of 200 basis points over the 12 months in market interest
rates. As of December 31, 2000, the simulation model projected a decrease of
approximately $(0.13) per share based upon a 200 basis point increase in rates
ratably over one year, compared to a flat rate scenario.
2% 2%
Rate Increase Rate Decrease
------------- -------------
December 31, 2000 Year 1 1.71% (1.61%)
Year 2 0.81% (8.31%)
The matching of the repricing characteristics of assets and liabilities may
be analyzed by examining the extent to which such assets and liabilities are
interest rate sensitive and by monitoring the interest rate sensitivity gap. The
following table, referred to as the Gap Table, sets forth the amount of
interest-earning assets and interest-bearing liabilities outstanding at December
31, 2000, that are expected to reprice or mature in each of the future time
periods shown. The Gap Table does not necessarily indicate the impact of general
interest rate movements on net interest income because actual repricing dates of
various assets and liabilities are subject to customer discretion, competitive
and other pressures. The actual duration of mortgage loans and mortgage-backed
securities can be significantly impacted by changes in mortgage prepayments.
Mortgage prepayment rates will vary due to a number of factors, including the
regional economy in the area where the underlying mortgages were originated,
seasonal factors, demographic variables and the assumability of the underlying
mortgages. However, the
126
major factors affecting prepayment rates are prevailing interest rates and
related mortgage refinancing opportunities. In addition, callable features of
certain assets and liabilities may cause actual experience to vary from that
indicated. Included in this table are $126.8 million of callable securities at
fair value, classified according to estimated call dates. Of these securities
$39.0 million is estimated to be called within one year and $87.8 million is
estimated to be called over one year but within two years. Also, included in
this table are $263.5 million of callable borrowings, classified according to
their maturity dates, which are within the over five years category. Of such
borrowings, $77.5 million is callable within one year and at various times
thereafter. There can be no assurances that these borrowings will not be called
in the future, particularly in a rising interest rate environment.
127
Interest Rate Sensitivity Analysis
(Dollars in thousands)
At December 31, 2000
--------------------------------------------------------------------------------------------------
One Year 1-2 2-3 3-4 4-5 Over
or Less Years Years Years Years 5 Years Total Fair Value
--------- --------- --------- --------- --------- --------- --------- ----------
Interest Sensitive Assets:
Securities ................ $ 114,263 $ 140,084 $ 48,631 $ 22,623 $ 5,364 $ 157,163 $ 488,128 $ 488,128
Average interest rate ..... 7.52% 7.54% 7.48% 7.54% 7.35% 8.11% 7.7%
Adjustable-rate loans ..... 115,081 50,880 43,264 19,415 6,419 8,792 243,851 242,228
Average interest rate ..... 8.62% 7.30% 7.42% 8.05% 8.35% 7.00% 8.02%
Fixed-rate loans .......... 79,422 24,698 21,328 15,999 12,080 40,801 194,328 191,800
Average interest rate ..... 8.12% 8.16% 8.03% 7.91% 8.02% 7.75% 7.99%
--------- --------- --------- --------- --------- --------- --------- ---------
Total .................. $ 308,766 $ 215,662 $ 113,223 $ 58,037 $ 23,863 $ 206,756 $ 926,307 $ 922,156
========= ========= ========= ========= ========= ========= ========= =========
Interest Sensitive Liabilities:
NOW ....................... $ -- $ -- $ -- $ -- $ -- $ 53,563 $ 53,563 $ 53,563
Average interest rate ..... -- -- -- -- -- .80% .80%
Savings ................... 4,882 -- -- -- -- 106,204 111,086 111,086
Average interest rate .... 5.65% -- -- -- -- 2.59% 2.73%
Money market .............. 45,582 -- -- -- -- -- 45,582 45,582
Average interest rate ..... 4.28% -- -- -- -- -- 4.28%
Term deposits ............. 339,274 21,342 4,003 856 6,968 -- 372,443 373,780
Average interest rate ..... 6.14% 6.23% 5.91% 5.41% 6.43% -- 6.14%
Borrowed funds ............ 49,110 -- -- -- 18,000 263,500 330,610 338,752
Average interest rate ..... 6.63% -- -- -- 5.88% 5.92% 6.02%
Subordinated debentures ... -- -- -- -- -- 23,800 23,800 19,850
Average interest rate ..... -- -- -- -- -- 10.57% 10.57%
--------- --------- --------- --------- --------- --------- --------- ---------
Total .................. $ 438,848 $ 21,342 $ 4,003 $ 856 $ 24,968 $ 447,067 $ 937,084 $ 942,613
========= ========= ========= ========= ========= ========= ========= =========
Interest rate sensitivity .... $(130,082) $ 914,320 $ 109,320 $ 57,181 $ (1,105) $(240,311) $ (10,777)
Interest rate sensitivity
cumulative gap ............ $(130,082) $ 64,238 $ 173,458 $ 230,639 $ 229,534 $ (10,777)
Certain shortcomings are inherent in this method of analysis. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate loans, have features which
restrict changes in interest rates both on a short-term basis and over the life
of the asset. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Finally, the ability of many borrowers to make
scheduled payments on their adjustable rate loans may decrease in the event of
an interest rate increase.
Liquidity and Capital Resources
Liquidity is the ability of People's Savings to have sufficient cash
reserves and cash equivalents to meet current and future loan commitments and
reasonable deposit withdrawals. Management monitors its liquidity requirements
so as to meet reasonable funding needs. People's Savings' principal sources of
liquidity are customer deposits, amortization and repayment of loan principal,
interest and dividends on loans and investments, maturity or sale of securities,
and collateralized borrowings from the Federal Home Loan Bank and proceeds from
the sale of loans. In addition to the aforementioned sources of
128
funds, People's Savings, as a member of the Depositors Insurance Fund, has the
ability to borrow from the fund for short-term cash needs by pledging certain
assets.
People's and People's Savings are required to meet certain minimum
regulatory capital requirements. Banks that are highly rated must maintain a
minimum leverage ratio of Tier 1 (or core) capital to total assets of at least
3.00%. All other banks must maintain a minimum leverage ratio that is at least
4.00%. Banks are also required to maintain minimum risk-based capital ratios of
Tier 1 and qualifying total capital to risk-weighted assets of 4.00% and 8.00%,
respectively. In connection with the agreements entered into with People's and
People's Savings' regulators (see Governmental Regulations above), People's and
People's Savings must maintain minimum Tier 1 leverage capital ratios of 5.00%
and 6.50%, respectively.
Tier 1 capital or core capital consists of common stockholders' equity,
non-cumulative perpetual preferred stock and minority interest in consolidated
subsidiaries, minus intangible assets and excludes unrealized gains or losses on
debt securities available for sale. Federal banking regulators limit the
inclusion in Tier 1 capital of deferred tax benefits whose recognition is
dependent on future taxable income to the lesser of 10% of core capital or to
the amount that could be realized within one year. Subordinated debt may also be
included in regulatory Tier 1 capital subject to a limitation that such amounts
not exceed 25% of Tier 1 capital. At December 31, 2000, $15.3 million was
included in consolidated Tier 1 capital. The entire amount of subordinated debt
is included in total capital.
People's had a consolidated Tier 1 leverage ratio of 5.67%, a
risk-weighted Tier 1 ratio of 10.68%, and a total risk-based capital ratio of
12.93% at December 31, 2000. People's had a consolidated Tier 1 leverage ratio
of 5.14%, a risk-weighted Tier 1 ratio of 9.41%, and a total risk-based capital
ratio of 10.11% at December 31, 1999.
People's Savings had a Tier 1 leverage ratio of 6.36%, a risk-weighted
Tier 1 ratio of 11.97%, and a total risk-based capital ratio of 12.72% at
December 31, 2000. People's Savings had a Tier 1 leverage ratio of 5.09%, a
risk-weighted Tier 1 ratio of 9.33%, and a total risk-based capital ratio of
10.04% at December 31, 1999.
Reference is made to the caption "Government Regulation" contained
elsewhere in this Discussion and Analysis of Financial Condition and Results of
Operation, for a summary of People's and People's Savings' target capital
levels.
Non-Performing Assets
People's Savings considers loans to be non-performing when doubt exists
as to the ultimate collection of interest or principal. Such loans are placed on
non-accrual status and related accrued interest is charged off against current
period interest income. In addition, People's Savings considers certain
restructured loans to be non-performing until the borrower demonstrates a
sustained payment performance, usually for a minimum of six months.
129
INDEX TO FINANCIAL STATEMENTS
Page
----
People's Bancshares, Inc. and Subsidiaries:
Consolidated Balance Sheets at September 30, 2001 (Unaudited) and December 31, 2000 ..................... F-2
Consolidated Statements of Income for the three and nine months ended September 30, 2001
and 2000 (Unaudited)................................................................................. F-3
Consolidated Statements of Changes in Stockholders' Equity for the nine months ended
September 30, 2001 (Unaudited)....................................................................... F-4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2001
and 2000 (Unaudited)................................................................................. F-5
Notes to Unaudited Consolidated Financial Statements..................................................... F-6
Annual Financial Statements:
Consolidated Balance Sheets at December 31, 2000 and 1999................................................ F-10
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998................... F-11
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31,
2000, 1999 and 1998.................................................................................. F-12
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998............................................................................................. F-13
Notes to Consolidated Financial Statements............................................................... F-14
Independent Auditors' Report.................................................................................. F-44
F-1
PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
(Unaudited)
------------- ------------
(Dollars in thousands)
ASSETS
Cash and due from banks.......................................................... $ 15,659 $ 16,406
Short-term investments........................................................... 170,100 -
-------- ----------
Total cash and cash equivalents......................................... 185,759 16,406
Securities available for sale.................................................... 253,412 488,128
Restricted equities securities, at cost.......................................... 19,869 19,869
Loans held for sale.............................................................. 100,726 40,546
Loans, net of allowance for loans losses of $4,155 in 2001 and
$4,182 in 2000................................................................ 334,803 393,451
Other real estate owned, net..................................................... 210 50
Banking premises and equipment, net.............................................. 16,751 17,705
Accrued interest receivable...................................................... 6,246 7,402
Intangible assets................................................................ 1,277 1,368
Deferred tax asset............................................................... 6,982 14,813
Other assets..................................................................... 2,457 3,697
-------- ----------
Total assets............................................................ $928,492 $1,003,435
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits......................................................................... $576,220 $ 624,561
Short-term borrowings............................................................ 941 49,110
Securities sold under agreement to repurchase.................................... 83,500 83,500
Other long-term debt............................................................. 198,000 198,000
Mortgagors' escrow accounts...................................................... 1,225 984
Accrued expenses and other liabilities........................................... 6,799 5,723
Subordinated debentures.......................................................... 23,800 23,800
-------- ----------
Total liabilities....................................................... 890,485 985,678
-------- ----------
Stockholders' equity:
Serial preferred stock-par value $0.10 per share; authorized
10,000,000 shares, none issued................................................ - -
Common stock-par value $0.10 per share; authorized 20,000,000 shares,
issued 3,725,250 and 3,696,734 shares......................................... 373 370
Additional paid-in capital....................................................... 24,113 23,853
Retained earnings................................................................ 33,359 30,165
Treasury stock, at cost-473,000 shares........................................... (8,364) (8,364)
Accumulated other comprehensive loss............................................. (11,474) (28,267)
-------- ----------
Total stockholders' equity.............................................. 38,007 17,757
-------- ----------
Total liabilities and stockholders' equity.............................. $928,492 $1,003,435
======== ==========
See accompanying notes to unaudited consolidated financial statements.
F-2
PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans............................. $ 8,889 $ 9,268 $28,099 $26,714
Interest and dividends on securities................... 4,847 11,619 20,396 34,098
Interest on short-term investments..................... 1,667 30 2,561 204
------- ------- ------- -------
Total interest and dividend income............... 15,403 20,917 51,056 61,016
------- ------- ------- -------
Interest expense:
Deposits............................................... 4,606 7,368 16,711 20,226
Short-term borrowings.................................. 5 1,128 22 3,550
Long-term debt and subordinated debentures............. 4,897 5,059 15,607 15,335
------- ------- ------- -------
Total interest expense........................... 9,508 13,555 32,340 39,111
------- ------- ------- -------
Net interest income....................................... 5,895 7,362 18,716 21,905
Other income:
Customer service fees.................................. 347 323 1,051 959
Losses on sales of securities available for sale, net.. (583) - (2,586) -
Gain on sales of loans, net............................ 3,809 2,409 10,314 6,362
Miscellaneous.......................................... 38 49 216 166
------- ------- ------- -------
Total other income............................... 3,611 2,781 8,995 7,487
------- ------- ------- -------
Operating expenses:
Salaries and employee benefits......................... 4,468 3,426 12,425 10,381
Occupancy and equipment................................ 898 898 2,782 2,818
Data processing........................................ 477 341 1,330 1,016
Professional fees...................................... 462 466 1,194 1,099
Other real estate owned net............................ 100 2 103 (12)
Other general and administrative....................... 1,649 1,342 4,707 3,581
------- ------- ------- -------
Total operating expenses......................... 8,034 6,475 22,541 18,883
------- ------- ------- -------
Income before income taxes................................ 1,452 3,668 5,170 10,509
Provision for income taxes................................ 562 1,191 1,976 3,411
------- ------- ------- -------
Net income................................................ $ 890 $ 2,477 $ 3,194 $ 7,098
======= ======= ======= =======
Net income per share:
Diluted earnings per share............................. $0.27 $0.76 $0.98 $2.16
Basic earnings per share............................... 0.27 0.77 0.98 2.19
Weighted average shares outstanding-assuming dilution
for stock options......................................... 3,278 3,270 3,275 3,293
Weighted average shares outstanding....................... 3,252 3,222 3,247 3,245
See accompanying notes to unaudited consolidated financial statements.
F-3
PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2001
Accumulated
Additional Other
Common Paid-in Retained Treasury Comprehensive
Stock Capital Earnings Stock Loss Total
--------- ----------- ----------- --------- --------------- --------
(Dollars in thousands)
(Unaudited)
Balance at December 31, 2000.................. $370 $23,853 $30,165 $(8,364) $(28,267) $17,757
Comprehensive income:
Net income.................................... - - 3,194 - - 3,194
Change in net unrealized gain/loss on
securities available for sale, net of tax.. - - - - 16,793 16,793
Exercise of stock options..................... 3 260 - - - 263
---- ------- ------- -------- --------- -------
Balance at September 30, 2001................. $373 $24,113 $33,359 $(8,364) $(11,474) $38,007
==== ======= ======= ======== ========= =======
See accompanying notes to unaudited consolidated financial statements.
F-4
PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
-----------------------------
2001 2000
-------- --------
(Dollars in thousands)
(Unaudited)
Cash flows from operating activities:
Net income.................................................................... $ 3,194 $ 7,098
Adjustment to reconcile net income to net cash used by operating activities:
Depreciation and amortization.............................................. 1,430 1,422
Net accretion o securities and purchased loans............................. (2,221) (6,022)
Losses on sales of securities available for sale, net...................... 2,586 -
Losses on sales of portfolio loans......................................... 143 -
Losses (gains) on other real estate owned.................................. 103 (12)
Net change in:
Loans held for sale..................................................... (60,180) (16,896)
Other assets, net of other liabilities.................................. 3,343 (1,469)
-------- ---------
Net cash used by operating activities............................. (51,602) (15,879)
-------- ---------
Cash flows from investing activities:
Activity in securities available for sale:
Purchases.................................................................. (60,271) (9,849)
Sales...................................................................... 277,502 -
Maturities, prepayments and calls.......................................... 7,017 5,841
Amortization of mortgage-backed securities................................. 35,466 4,085
Activity in securities held to maturity:
Purchases............................................................... - (31,544)
Maturities, prepayments and calls.......................................... - 15,774
Amortization of mortgage-backed securities.............................. - 23,042
Redemption of restricted equity securities.................................... - 1,832
Loan (originations and purchases), net of amortization, payoffs, and sales.... 57,800 15,772
Proceeds from sales of other real estate owned................................ 88 297
Additions to banking premises and equipment................................... (641) (1,661)
-------- ---------
Net cash provided by investing activities............................... 316,961 23,589
-------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits........................................... (48,341) 58,791
Net decrease in short-term borrowings......................................... (48,169) (4,757)
Proceeds from issuance of borrowings with maturities in excess
of three months............................................................ - 135,000
Repayment of borrowings with maturities in excess of three months............. - (204,700)
Increase (decrease) in mortgagors' escrow accounts............................ 241 (25)
Proceeds from exercise of stock options....................................... 263 58
Proceeds from issuance of subordinated debentures............................. - 9,638
Payment to acquire treasury stock............................................. - (2,095)
Cash dividends................................................................ - (2,042)
-------- ---------
Net cash used by financing activities................................... (96,006) (568)
-------- ---------
Net change in cash and cash equivalents.......................................... 169,353 7,142
Cash and cash equivalents at beginning of period................................. 16,406 11,875
-------- ---------
Cash and cash equivalents at end of period....................................... $185,759 $ 19,017
======== =========
Supplementary information:
Interest paid................................................................. $ 33,063 $ 38,907
Income taxes paid............................................................. 2,642 4,017
Transfer from loans to other real estate owned, net........................... 348 50
See accompanying notes to unaudited consolidated financial statements.
F-5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The accompanying consolidated financial statements of People's
Bancshares, Inc. and its subsidiaries furnished in this report are unaudited. In
the opinion of management, the information presented includes all adjustments,
which consist of normal recurring accruals necessary for a fair statement of the
results for the interim periods presented. Interim results are not necessarily
indicative of results to be expected for the year.
The unaudited consolidated interim financial statements furnished in
this report should be read in conjunction with the consolidated financial
statements of People's presented in its Annual Report on Form 10-K for the year
ended December 31, 2000.
(2) Earnings Per Share
Basic earnings per share is computed by dividing income available to
common stock by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflect additional common shares issuable
from the exercise of stock options calculated using the treasury stock method.
People's has 144,900 stock options outstanding that were excluded from the
calculation of diluted earnings per share since they were anti-dilutive.
(3) Comprehensive Income/ Loss
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income/loss.
The components of other comprehensive income (loss) are as follows:
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
---- ----
Net income $ 3,194 $7,098
Change in net unrealized gain (loss)
on securities available for sale 27,085 (390)
Tax effect (10,292) 125
-------- ------
Net of tax amount 16,793 (265)
-------- ------
Total comprehensive income $ 19,987 $6,833
-------- ------
(4) Accounting Pronouncements
The Financial Accounting Standards Board, or FASB, issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended by SFAS No. 137, was
effective for fiscal years beginning after June 15, 2000. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities,
F-6
including certain derivative instruments embedded in other contracts, and
requires that an entity recognize all derivatives as assets or liabilities in
the balance sheet and measure them at fair value. People's adopted this
statement on January 1, 2001 with no material impact on the consolidated
financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities--a
Replacement of FASB Statement No. 125," SFAS No. 140 replaces SFAS No. 125.
Certain disclosure provisions required by SFAS No. 140 were effective
immediately. Additional requirements related to SFAS No. 140 became effective
beginning March 31, 2001. These additional requirements had no effect on
People's consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141 "Business Combinations."
SFAS No. 141 requires all business combinations initiated after June 30, 2001,
to be accounted for using the purchase method. This statement had no effect on
People's consolidated financial position or results of operation.
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangibles" effective for fiscal years beginning January 1, 2002. With the
adoption of SFAS No. 142, goodwill will no longer be subject to amortization
over its estimated useful life, but will be subject to annual assessment for
impairment by applying a fair-value-based test. Recognized intangible assets,
such as core deposit intangibles, will be amortized over their useful lives.
People's anticipates no material impact on its consolidated financial position
or results of operation upon the adoption of SFAS No. 142.
In July 2001, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin No. 102 "Selected Loan Loss Methodology and
Documentation Issues." Bulletin No. 102 provides detailed guidance on the
development, documentation and application of a systematic methodology in
determining an allowance for loan losses. The additional documentation
requirements will not have any effect on People's financial statements.
In July 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires People's to recognize material
asset retirement obligations. People's has not yet determined the impact of this
statement on People's results of operation or financial condition.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
the cost to sell and broadens the reporting of individual operations. This
statement had no effect on People's consolidated financial position or results
of operations.
(5) Segment Information
People's has two reportable segments, People's Savings Bank of
Brockton and People's Mortgage Corporation. The People's Savings segment
attracts deposits from individuals, businesses and governments, and invests
those funds in residential and commercial mortgages and consumer, commercial and
construction loans. People's Mortgage originates 1-4 family residential loans
primarily for sale in the secondary market.
F-7
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. People's evaluates
performance based on profit or loss from operations before income taxes
excluding nonrecurring gains or losses.
People's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment appeals to different markets and, accordingly, requires different
technology and marketing strategies.
People's derives a significant portion of its revenues from interest
income and interest expense is the most significant expense. Management analyzes
the segments based on pre-tax income and therefore the segments are reported
below using pre-tax income for the nine months ended September 30, 2001 and
2000. People's does not allocate income taxes to the segments.
People's operations are combined with People's Savings. Its sources of
income are dividends from subsidiaries and interest on short-term investments.
Its expenses include interest on $23.8 million outstanding Capital Trust
securities and direct expenses including professional fees and other operating
costs.
Mortgage
Bank Company Total
------- -------- -------
SEPTEMBER 30, 2001
Net interest income............................................ $14,307 $4,409 $18,716
Other income (loss)............................................ (1,465) 10,400 8,995
Operating expense.............................................. 12,838 9,703 22,541
------- ------ -------
Income before income taxes..................................... $ 4 $5,166 $ 5,170
======= ====== =======
SEPTEMBER 30, 2000
Net interest income, after credit for loan losses.............. $20,126 $1,779 $21,905
Other income................................................... 1,123 6,324 7,487
Operating expense.............................................. 10,620 8,263 18,883
------- ------ -------
Income (loss) before income taxes.............................. $10,629 $ (120) $10,509
(6) Merger Agreement
As previously announced on October 1, 2001, People's and FIRSTFED
AMERICA BANCORP, INC. entered into a definitive merger agreement whereby
FIRSTFED will acquire People's Bancshares, Inc. for approximately $72 million in
cash and stock subject to receipt of regulatory and shareholder approvals and
satisfaction of other conditions. The merger is expected to be completed in the
first quarter of 2002. Upon consummation of the merger, former shareholders of
People's will own approximately 23% of FIRSTFED's outstanding shares and one
member of People's board of directors will be added to the board of directors of
FIRSTFED and First Federal Savings Bank of America.
Under the terms of the merger agreement, People's stockholders can
elect to receive either 1.2644 shares of FIRSTFED common stock (and cash in lieu
of any fractional share) or $22.00 in cash for each share of People's common
stock they own. The elections of People's stockholders will be subject to the
requirement that 55% of People's shares be exchanged for cash and 45% be
exchanged for FIRSTFED common stock.
F-8
People's can terminate the merger agreement should FIRSTFED common
stock decline in value by more than certain percentages during a specified
measurement period, provided that FIRSTFED can require People's to proceed with
the transaction by increasing the exchange ratio to a specified level. Should
the value of FIRSTFED common stock increase by more than 20%, the value of
FIRSTFED shares to be exchanged for each People's share would be capped at
$26.40.
The merger is subject to certain conditions, including without
limitation the approval of the stockholders and regulators of both companies,
absence of injunctions, and receipt of third party consents. Among other
conditions, FIRSTFED will not be required to consummate the merger if the fair
market value of People's and its subsidiaries' portfolio of trust preferred
securities, subordinated debt securities, corporate debt securities and zero
coupon debt instruments (including proceeds from sales of such securities), as
of a date within ten days prior to the effective date of the merger, has
declined by greater than 7% from its value on August 31, 2001. The value of such
portfolio as of September 30, 2001 had increased in value by 4.25% from its
value on August 31, 2001.
On October 16, 2001, as required under the merger agreement, for
transactions other than in ordinary course of business, People's requested and
FIRSTFED consented to a program allowing People's Savings to accelerate the sale
of trust preferred securities in excess of its $7 million quarterly commitment
to bank regulators. The program, which was also approved by People's Executive
Committee, contemplates the sale of approximately $60 to $70 million of trust
preferred securities and the remaining $21 million of zero coupon bonds held by
People's Savings at September 30, 2001. Realized losses from this program are
projected to approximate $6 million to $7 million and will reduce concentrations
of trust preferred securities from $111 million at September 30, 2001 to between
$40 million and $50 million, or less than 75% of People's Savings resulting Tier
1 leverage capital as of that date. Upon completion of the program, assuming the
realization of up to $7 million in losses, the resulting consolidated Tier 1
leverage capital ratio of People's will approximate 6.3% and the Tier 1 leverage
capital ratio of People's Savings will approximate 7.1%, thereby maintaining
Tier 1 leverage ratios well in excess of levels required under the various
regulatory agreements.
Through November 8, 2001, the $21 million of zero coupon agency bonds
held by People's Savings have been sold along with approximately $49.6 million
of trust preferred securities at an aggregate loss of $4.3 million. The total
concentration in trust preferred securities has been reduced to $61.6 million or
an estimated 91% of Tier 1 capital as of September 30, 2001, adjusted to reflect
realized securities losses.
F-9
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------------
2000 1999
--------------- ---------------
(Dollars in thousands)
ASSETS
Cash and due from banks................................................ $ 16,406 $ 11,875
Securities available for sale.......................................... 488,128 47,984
Securities held to maturity (fair value of $481,018)................... - 524,581
Restricted equity securities, at cost.................................. 19,869 21,701
Loans held for sale.................................................... 40,546 23,681
Loans, net of allowance for loan losses of $4,182 in 2000 and 393,451 413,215
$4,096 in 1999......................................................
Other real estate owned, net........................................... 50 285
Banking premises and equipment, net.................................... 17,705 16,630
Accrued interest receivable............................................ 7,402 7,051
Intangible assets...................................................... 1,368 1,460
Deferred tax assets.................................................... 14,813 1,165
Other assets........................................................... 3,697 1,548
---------- ----------
Total assets..................................................... $1,003,435 $1,071,176
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................................... $ 624,561 $ 561,614
Short-term borrowings.................................................. 49,110 40,250
Securities sold under agreements to repurchase......................... 83,500 74,700
Other long-term debt................................................... 198,000 333,000
Mortgagors' escrow accounts............................................ 984 1,106
Accrued expenses and other liabilities................................. 5,723 5,842
Subordinated debentures................................................ 23,800 13,800
---------- ----------
Total liabilities................................................ 985,678 1,030,312
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $0.10 par value, 10,000,000 shares - -
authorized, none issued..........................................
Common stock, $0.10 par value, 20,000,000 shares authorized; 370 369
3,696,734 and 3,689,734 shares issued............................
Additional paid-in capital.......................................... 23,853 23,776
Retained earnings................................................... 30,165 24,617
Accumulated other comprehensive loss................................ (28,267) (1,629)
Treasury stock, at cost-473,000 shares in 2000 and 358,000
shares in 1999................................................... (8,364) (6,269)
---------- ----------
Total stockholders' equity.................................... 17,757 40,864
---------- ----------
Total liabilities and stockholders' equity................. $1,003,435 $1,071,176
========== ==========
See accompanying notes to consolidated financial statements.
F-10
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ---------------
(Dollars in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans.................................... $ 35,798 $ 34,671 $ 36,377
Interest on debt securities:
Taxable.................................................... 43,427 36,981 23,907
Tax-exempt................................................. 343 125 134
Dividends..................................................... 1,502 1,313 1,071
Interest on short-term investments............................ 232 256 303
---------- ---------- ----------
Total interest and dividend income......................... 81,302 73,346 61,792
---------- ---------- ----------
Interest expense:
Deposits...................................................... 27,640 20,010 15,239
Short-term borrowings......................................... 4,187 1,905 3,640
Long-term debt and subordinated debentures.................... 20,880 23,630 20,362
---------- ---------- ----------
Total interest expense..................................... 52,707 45,545 39,241
---------- ---------- ----------
Net interest income.............................................. 28,595 27,801 22,551
Provision (credit) for loan losses............................... - (850) 600
---------- ---------- ----------
Net interest income, after provision (credit) for loan losses.... 28,595 28,651 21,951
---------- ---------- ----------
Other income:
Customer service fees......................................... 1,331 1,303 1,390
(Losses) gains on sales of securities available for sale, net. (1,224) 36 1,440
Gains on sales of loans, net.................................. 8,492 7,502 6,481
Miscellaneous................................................. 212 201 146
---------- ---------- ----------
Total other income......................................... 8,811 9,042 9,457
---------- ---------- ----------
Operating expenses:
Salaries and employee benefits................................ 13,859 13,638 10,508
Occupancy and equipment....................................... 3,749 2,803 2,163
Data processing............................................... 1,357 1,273 1,250
Professional fees............................................. 1,426 955 734
Other real estate owned, net.................................. (9) 24 (29)
Other general and administrative.............................. 4,693 5,025 4,612
---------- ---------- ----------
Total operating expenses................................... 25,075 23,718 19,238
---------- ---------- ----------
Income before income taxes and cumulative effect of 12,331 13,975 12,170
accounting change.............................................
Provision for income taxes....................................... 4,064 4,609 4,370
---------- ---------- ----------
Income before cumulative effect of accounting change............. 8,267 9,366 7,800
Cumulative effect of accounting change for organization
costs, net of tax of $106..................................... - - (186)
---------- ---------- ----------
Net income....................................................... $ 8,267 $ 9,366 $ 7,614
========== ========== ==========
Weighted average shares outstanding-assuming dilution 3,284,134 3,386,279 3,384,877
for stock options.............................................
Weighted average shares outstanding.............................. 3,239,465 3,327,668 3,310,943
Net income per share:
Diluted earnings per share.................................... $ 2.52 $ 2.77 $ 2.25
Basic earnings per share...................................... $ 2.55 $ 2.81 $ 2.30
See accompanying notes to consolidated financial statements.
F-11
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income(Loss) Stock Total
------------------------------------------------------------------------
(Dollars in thousands)
Balance at December 31, 1997................ $364 $23,400 $12,253 $ 332 $(6,213) $30,136
-------
Comprehensive income:
Net income............................... - - 7,614 - - 7,614
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment and tax
effects.................................. - - - (1,451) - (1,451)
-------
Total comprehensive income......... 6,163
-------
Cash dividends declared ($0.58 per share)... - - (1,919) - - (1,919)
Exercise of stock options................... 4 283 - - - 287
---- ------- ------- -------- ------ -------
Balance at December 31, 1998................ 368 23,683 17,948 (1,119) (6,213) 34,667
-------
Comprehensive income:
Net income............................... - - 9,366 - - 9,366
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment and tax
effects.................................. - - - (510) - (510)
-------
Total comprehensive income......... 8,856
-------
Purchase of treasury stock.................. - - - - (56) (56)
Cash dividends declared ($0.81 per share)... - - (2,697) - - (2,697)
Exercise of stock options .................. 1 93 - - - 94
---- ------- ------- -------- ------- -------
Balance at December 31, 1999................ 369 23,776 24,617 (1,629) (6,269) 40,864
Comprehensive loss:
Net income............................... - - 8,267 - - 8,267
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment and tax
effects.................................. - - - (26,638) - (26,638)
-------
Total comprehensive loss........... (18,371)
-------
Purchase of treasury stock.................. - - - - (2,095) (2,095)
Cash dividends declared ($0.84 per share)... - - (2,719) - - (2,719)
Exercise of stock options................... 1 77 - - - 78
---- ------- ------- --------- ------- -------
Balance at December 31, 2000................ $370 $23,853 $30,165 $ (28,267) $(8,364) $17,757
==== ======= ======= ========= ======= =======
See accompanying notes to consolidated financial statements.
F-12
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(Dollars in thousands)
Cash flows from operating activities:
Net income..................................................... $ 8,267 $ 9,366 $ 7,614
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision (credit) for loan losses.......................... - (850) 600
Depreciation and amortization............................... 1,915 1,504 1,671
Net accretion on securities and purchased loans............. (8,231) (5,322) (2,650)
Realized loss (gain) on sales of securities available
for sale, net............................................ 1,224 (36) (1,440)
Gains on sales of other real estate owned, net.............. (13) (19) (71)
Deferred tax provision (benefit)............................ 333 (448) (472)
Net change in:
Loans held for sale...................................... (16,865) 40,237 (39,183)
Other assets, net of other liabilities................... (2,329) (2,806) 642
-------- ----------- -----------
Net cash provided (used) by operating activities...... (15,699) 41,626 (33,289)
-------- ----------- -----------
Cash flow from investing activities:
Activity in securities available for sale:
Sales....................................................... 30,237 70,527 271,266
Maturities, prepayments and calls........................... 7,341 3,127 30,570
Purchases................................................... (9,979) (84,947) (348,410)
Activity in securities held to maturity:
Purchases................................................... (31,544) (245,971) (164,376)
Maturities, prepayments and calls........................... 15,774 11,369 36,007
Redemption (purchases) of restricted equity securities......... 1,832 (1,860) (5,017)
Proceeds from amortization of mortgage-backed securities....... 39,616 57,585 90,803
Proceeds from sales of purchased loans......................... - - 8,268
Loan (originations and purchases), net of amortization and
payoffs........................................................ 19,021 9,578 (53,904)
Proceeds from sale of other real estate owned.................. 377 312 418
Additions to banking premises and equipment, net............... (2,832) (4,097) (2,035)
-------- ----------- -----------
Net cash provided (used) by investing activities......... 69,843 (184,377) (136,410)
-------- ----------- -----------
Cash flows from financing activities:
Net increase in deposits....................................... 62,947 90,727 115,804
Net change in short-term borrowings............................ 8,860 31,550 (154,150)
Proceeds from issuance of borrowings with maturities
in excess of three months................................... 135,000 30,000 264,700
Repayment of borrowings with maturities in excess
of three months............................................. (261,200) (30,500) (50,200)
Increase (decrease) in mortgagors' escrow accounts............. (122) (302) 294
Proceeds from exercise of stock options........................ 78 94 287
Net proceeds from issuance of subordinated debentures.......... 9,638 - -
Payments to acquire treasury stock............................. (2,095) (56) -
Cash dividends................................................. (2,719) (2,697) (1,919)
-------- ----------- -----------
Net cash provided (used) by financing activities............ (49,613) 118,816 174,816
-------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.............. 4,531 (23,935) 5,117
Cash and cash equivalents at beginning of year.................... 11,875 35,810 30,693
-------- ----------- -----------
Cash and cash equivalents at end of year.......................... $ 16,406 $ 11,875 $ 35,810
======== =========== ===========
Supplementary information:
Interest paid.................................................. $ 52,211 $ 45,477 $ 38,973
Income taxes paid, net......................................... 4,527 6,292 4,286
Transfers from loans to other real estate owned................ 129 473 341
Change in due to/from broker, net.............................. 624 99 262
Transfer of securities from available for sale to
held to maturity............................................ - 150,261 -
Transfer of securities from held to maturity to
available for sale.......................................... 514,757 - -
See accompanying notes to consolidated financial statements.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1--Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of People's
Bancshares, Inc. and its wholly-owned subsidiaries, People's Savings Bank of
Brockton, People's Bancshares Capital Trust and People's Bancshares Capital
Trust II (see note 12). People's Savings has three active wholly owned
subsidiaries: People's Mortgage Corporation engages in mortgage banking and PSB
Security Corporation II and III engaged in the purchase and sale of investment
securities. The security corporations were liquidated in October 2000. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
In preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the consolidated
balance sheet and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near term relate
to the determination of the allowance for loan losses and deferred tax benefits
on the unrealized losses on securities available-for-sale.
Business
People's Savings provides a variety of financial services to
individuals and small businesses through its offices in southeastern
Massachusetts. Its primary deposit products are savings and term certificate
accounts and its primary lending products are residential and commercial
mortgage loans. People's Mortgage acts as the mortgage banking subsidiary.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from banks.
Securities
Debt securities, including trust preferred securities, that management
had the positive intent and ability to hold to maturity were previously
classified as "held to maturity" and reflected at amortized cost. Effective
December 31, 2000, and in connection with People's strategic initiatives,
management determined that it no longer had the intent and ability to hold all
debt securities to maturity. Accordingly, all securities held to maturity were
reclassified as available for sale. Securities classified as "available for
sale" are reflected at fair value, with unrealized gains and losses excluded
from earnings and reported in accumulated other comprehensive income (loss). For
regulatory purposes, unrealized gains or losses on debt securities available for
sale, after tax effects, are not recognized in capital.
Purchase premiums and discounts are amortized to earnings by the
interest method over the terms of the securities. Declines in the value of
securities that are deemed to be other than temporary are
F-14
reflected in earnings when identified. Gains and losses upon disposition of
securities are recorded on the trade date and are computed by the specific
identification method. Restricted equity securities include Federal Home Loan
Bank stock and Massachusetts Savings Bank Life Insurance stock.
Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate
cost or market value. Net unrealized losses are recognized in a valuation
allowance by charges to earnings, when applicable. Gains and losses on the sale
of loans are recognized at the time of sale based upon the difference between
the selling price and the carrying value of the loans sold. The Bank sells only
whole loans servicing released and, accordingly, records only cash gains.
Loans
People's Savings grants mortgage, commercial, and consumer loans to
customers and a substantial portion of the loan portfolio is represented by
mortgage loans in southeastern Massachusetts. The ability of People's Savings'
debtors to honor their contracts is dependent upon the real estate and
construction markets and general economic sectors.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balances adjusted for chargeoffs, the allowance for
loan losses, loan premiums, and any deferred fees or costs on originated loans.
Interest income is accrued on the unpaid principal balance. Net deferred loan
fees or costs and loan premiums are amortized as an adjustment of the related
loan yield using the interest method.
The accrual of interest on loans is discontinued at the time the loan
is 90 days delinquent unless the credit is well-secured and in process of
collection. Loans are placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged-off is reversed against interest income. The interest on
these loans is accounted for on the cash-basis until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Impaired loans are generally maintained on a non-accrual
basis. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. An insignificant delay or
insignificant shortfall in the amount of payments does not constitute
impairment. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis by the fair value of the
collateral.
F-15
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, People's Savings does not separately
identify individual consumer loans for impairment disclosures.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated
to have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries are
credited to the allowance. The allowance for loan losses is evaluated
periodically by management and the board of directors and is based upon
management's review of the collectibility of the loans in light of the results
of People's Savings' internal loan review, historical loan loss experience,
trends in delinquent and non-accrual loans, known and inherent risks in the
nature and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, collateral values, an estimate of potential loss
exposure on significant credits, concentrations of credit, economic conditions
based on facts then known. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available.
The allowance consists of specific, general and unallocated
components. The specific component relates to loans that are classified as
either doubtful, substandard or special mention. For such loans that are also
classified as impaired, an allowance is established when collateral value of the
impaired loan is lower than the carrying value of that loan. The general
component covers non-classified loans and is based on historical loss experience
adjusted for qualitative factors. An unallocated component is maintained to
cover uncertainties that could affect management's estimate of probable losses.
The unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for estimating
losses in the portfolio.
Derivative Financial Instruments
As part of People's Savings' asset/liability management, People's
Savings uses derivative financial instruments, such as interest rate contracts.
The interest rate contracts are not designated as a hedging instrument and as
such are classified as other assets and are recorded at fair value with changes
in fair value recorded in earnings.
Other Real Estate Owned
Other real estate owned, or OREO, is held for sale and consists of
properties acquired by foreclosure or by deed-in-lieu of foreclosure.
OREO properties are initially recorded at the lower of cost or
estimated fair value less disposition costs. Costs to administer OREO properties
are expensed. Valuations are periodically performed by management and provisions
for losses are charged to other real estate owned expenses if the carrying value
of a property exceeds its fair value less estimated disposition costs.
F-16
Banking Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements, and
equipment are carried at cost, less accumulated depreciation and amortization
computed on the straight-line method over the estimated useful lives of the
assets or the terms of the leases, if shorter.
Intangible Assets
Intangible assets are comprised of deposit premium intangibles and
goodwill. Goodwill is amortized using the straight-line amortization method over
15 years. Deposit premium intangibles are amortized over 5 years using
accelerated amortization methods.
Retirement Plan
The compensation cost of an employee's pension benefit is recognized
on the net periodic pension cost method over the employee's approximate service
period. The aggregate cost method is used for funding purposes.
Stock Compensation Plans
Statement of Financial Accounting Standards, or SFAS, No. 123,
"Accounting for Stock-Based Compensation" encourages all entities to adopt a
fair value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under
People's stock option plans have no intrinsic value at the grant date, and under
Opinion No. 25 no compensation cost is recognized for them. People's has elected
to continue with the accounting methodology in Opinion No. 25 and, as a result,
must make pro forma disclosures of net income and earnings per share and other
disclosures, as if the fair value based method of accounting had been applied.
The pro forma disclosures include the effects of all awards granted on or after
January 1, 1995.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
tax rates are enacted, deferred tax assets and liabilities are adjusted
accordingly through the provision for income taxes. People's Savings' base
amount of its federal income tax reserve for loan losses is a permanent
difference for which there is no recognition of a deferred tax liability.
However, the loan loss allowance maintained for financial reporting purposes is
a temporary difference with allowable recognition of a related deferred tax
asset, if it is deemed realizable.
The deferred tax benefit on the unrealized losses on debt securities
available-for-sale anticipate future taxable income of approximately $14.2
million to utilize the entire benefit. If economic conditions
F-17
deteriorate whereby the anticipated future taxable income does not materialize,
the recognition of these income tax benefits will be reversed to the extent
unrealized.
Advertising Costs
Advertising costs are expensed as incurred.
Earnings Per Share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
conversion. Potential common shares that may be issued by People's relate solely
to outstanding stock options, and are determined using the treasury stock
method. For the years ended December 31, 2000, 1999 and 1998, options applicable
to 158,000, 151,000 and 25,000 shares, respectively were anti-dilutive and
excluded from the diluted earnings per share calculation.
Comprehensive Income/Loss
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income/loss.
The components of other comprehensive income (loss) and related tax
effects are as follows:
Years Ended December 31,
--------------------------------------------
2000 1999 1998
-------- ------- -------
(Dollars in thousands)
Change in unrealized holding (gains) losses on available-for-
sale securities............................................. $ 822 $ 415 $ (842)
Unrealized loss on securities transferred from held to
maturity to available for sale.............................. (42,665) - -
Unrealized loss on securities transferred from available
for sale to held to maturity................................ - (1,221) -
Reclassification adjustment for (gains) losses realized
in income................................................... 1,224 (36) (1,440)
-------- ------- -------
Net unrealized losses.......................................... (40,619) (842) (2,282)
Tax effect..................................................... 13,981 332 831
-------- ------- -------
Net-of-tax amount.............................................. $(26,638) $ (510) $(1,451)
======== ======= =======
Subsequent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair
F-18
value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (a) a hedge of the exposure to changes in the fair value
of a recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted transaction, or (c)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. The Statement generally
provides for matching the timing of the recognition of the gain or loss on
derivatives designated as hedging instruments with the recognition of the
changes in the fair value of the item being hedged. Depending on the type of
hedge, such recognition will be in either net income or other comprehensive
income. For a derivative not designated as a hedging instrument, changes in fair
value will be recognized in net income in the period of change. People's adopted
this statement on January 1, 2001 with no material impact on the consolidated
financial statements.
2--Regulatory Matters and Stockholders' Equity
On December 5, 2000, People's entered into a formal agreement with the
Federal Reserve Bank of Boston in which People's agreed, among other matters, to
obtain written approval from the Reserve Bank and the Director of the Division
of Banking Supervision and Regulation of the Board of Governors prior to
declaring or paying any dividends or making any distributions of interest,
principal, or other sums on subordinated debentures. People's is required to
maintain a minimum consolidated Tier 1 leverage capital ratio of not less than
5%. The agreement with the Federal Reserve Bank also requires written approval
from the Reserve Bank for People's to increase borrowings or renew any existing
debt. The Tier 1 leverage capital ratio of People's was 5.67% at December 31,
2000.
On June 27, 2000, People's Savings entered into an informal agreement
with its regulators (the Federal Deposit Insurance Corporation and the
Massachusetts Commissioner of Banks) in which People's Savings agreed, among
other matters, to develop plans to reduce over time the level of its investment
in trust preferred securities to less than 100% of its Tier 1 leverage capital.
In addition, People's Savings has agreed to achieve and subsequently maintain a
Tier 1 leverage capital ratio of not less than 6.5% of total assets. Additional
provisions of the agreement with its regulators require People's Savings to
assess its management and staffing needs, develop revised strategic and capital
plans, improve the quality of its investment portfolio and investment
administration, improve liquidity and the management thereof, develop a plan for
reducing interest rate risk exposure and address other operational issues. The
Tier 1 leverage capital ratio of People's Savings was 6.36% at December 31,
2000.
Effective December 31, 2000, and in connection with developing a plan
to reduce over time People's Savings' level of trust preferred securities to
less than 100% of Tier 1 leverage capital, management determined that it no
longer had the intent and ability to hold all trust preferred securities to
maturity. As a result, all securities previously classified as held-to-maturity
were transferred to the available-for-sale category, and the net unrealized loss
on such securities of $27.2 million, net of tax effects of $14.5 million, was
charged to accumulated other comprehensive income in stockholders' equity at
December 31, 2000. Accordingly, at December 31, 2000, total stockholders equity
was reduced to $17.8 million or 1.77% of total assets. This transfer had no
impact on either People's or People's Savings' Tier 1 leverage capital, defined
generally as stockholders' equity (excluding net unrealized losses on debt
securities and reduced by intangible assets) plus subordinated debentures to the
extent allowed. Realized gains and losses on securities sales will be included
in net income as incurred. People's and People's Savings have submitted capital
plans to the regulators which call for, among other things, a balance sheet
deleveraging program to be achieved by using cash flows provided by (1) normal
F-19
amortization of securities and loans, (2) callable securities under a falling
rate environment, and (3) sales of securities, to reduce both borrowings and
volatile deposit liabilities to the extent possible.
As of March 26, 2001, People's Savings sold approximately $192 million
of loans and securities (including $13 million of trust preferred securities)
since December 31, 2000 at a loss of approximately $1 million. It is anticipated
that significant additional sales will be executed over time. No assurances can
be given as to the amount of losses that will ultimately be realized as a result
of these sales, or the overall impact that such sales will have on People's
Savings' net interest margin, stockholders' equity and regulatory capital
levels.
All bank holding companies (on a consolidated basis) and federally
insured depository institutions are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on People's and People's Savings' financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, People's and People's Savings must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require People's and People's Savings to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier 1 capital (as
defined) to risk-weighted assets (as defined) and of Tier 1 capital (as defined)
to average assets (as defined). Total and Tier 1 capital, as defined, exclude
the net unrealized losses on available-for-sale securities that are reflected as
"accumulated other comprehensive loss" on the consolidated balance sheet.
People's and People's Savings entered into agreements with their respective
regulators in which People's and People's Savings agreed, among other matters,
to achieve and maintain certain capital ratios. People's is required to maintain
a minimum consolidated Tier 1 leverage capital ratio of not less than 5.0% of
total assets and People's Savings is required to achieve and subsequently
maintain a Tier 1 leverage capital ratio of not less than 6.5% of total assets.
As of December 31, 2000, the most recent notification from the Federal
Deposit Insurance Corporation categorized People's Savings as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, People's Savings must maintain minimum total risk-based,
Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following
table. There are no conditions or events since the notification that management
believes have changed People's Savings' category.
F-20
People's and People's Savings' actual capital amounts and ratios as of
December 31, 2000 and 1999 are presented in the table.
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------ ---------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------- ------------ ------- -------- -------
(Dollars in thousands)
DECEMBER 31, 2000
Total Capital to Risk Weighted Assets:
Consolidated......................... $72,638 12.93% $44,961 8.0% $ N/A N/A%
People's Savings Bank................ 71,391 12.72 44,912 8.0 56,140 10.0
Tier 1 Capital to Risk Weighted Assets:
Consolidated......................... 59,997 10.68 22,481 4.0 N/A N/A
People's Savings Bank................ 67,209 11.97 22,456 4.0 33,684 6.0
Tier 1 Capital to Average Assets:
Consolidated......................... 59,997 5.67 52,887 5.0 N/A N/A
People's Savings Bank................ 67,209 6.36 68,698 6.5 52,844 5.0
DECEMBER 31, 1999
Total Capital to Risk Weighted Assets:
Consolidated......................... $58,929 10.11% $46,607 8.0% $ N/A N/A%
People's Savings Bank................ 58,425 10.04 46,569 8.0 58,211 10.0
Tier 1 Capital to Risk Weighted Assets:
Consolidated......................... 54,833 9.41 23,304 4.0 N/A N/A
People's Savings Bank................ 54,329 9.33 23,285 4.0 34,927 6.0
Tier 1 Capital to Average Assets:
Consolidated......................... 54,833 5.14 42,692 4.0 N/A N/A
People's Savings Bank................ 54,329 5.09 42,733 4.0 53,417 5.0
3--Acquisitions
On September 1, 1999, People's purchased selected fixed and prepaid
assets of Allied Mortgage Group, LLC for $2.2 million or $1.0 million over fair
value.
Intangible assets were recorded as a result of the purchase of Allied
Mortgage, the organization costs of forming People's Mortgage and People's as
well as the 1995 acquisitions of Minuteman Funding Corporation, certain deposits
of the Haymarket Bank, and the deposits of the Bank of Boston's Mansfield
Branch. At December 31, 2000 and 1999, intangible assets amounted to $1.4
million and $1.5 million. Amortization of intangibles amounted to $119,000,
$75,000 and $113,000 for 2000, 1999, and 1998, respectively.
Impaired goodwill of $475,000 related to an underperforming branch was
written off in 1998 and People's elected to early adopt the provisions of the
Accounting Standards Executive Committee, or ACSEC, Statement of Position 98-5,
"Reporting the Costs of Start-Up Activities" or SOP 98-5. SOP 98-5 requires the
costs of start-up activities to be expensed as incurred, instead of being
capitalized and amortized. As a result, People's wrote-off organization costs of
$292,000 effective January 1, 1998. The effect of the accounting change for the
year ended December 31, 1998, was to decrease income before income taxes by
$153,000 and net income by $97,000 or $0.03 per share.
F-21
4--Securities and Derivative Financial Instruments
The following tables summarize the amortized cost and estimated fair
value of securities:
December 31, 2000
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------- ----------- ---------- ------------
(Dollars in thousands)
Securities available for sale:
U.S. Government and federal agency
obligations.................................... $141,142 $ - $ (8,083) $133,059
Mortgage-backed securities........................ 214,571 781 (2,742) 212,610
Trust preferred securities........................ 141,057 - (29,053) 112,004
Corporate debt securities......................... 26,025 - (4,124) 21,901
Municipal bank anticipation notes................. 8,554 - - 8,554
-------- ---- -------- --------
Total securities available for sale............ $531,349 $781 $(44,002) $488,128
======== ==== ======== ========
December 31, 1999
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------- ----------- ---------- ------------
(Dollars in thousands)
Securities available for sale:
Mortgage-backed securities........................ $ 23,648 $ - $ (232) $ 23,416
Trust preferred securities........................ 1,991 - (159) 1,832
Corporate debt securities......................... 17,811 - (991) 16,820
Municipal bank anticipation notes................. 5,916 - - 5,916
-------- ---- -------- --------
Total securities available for sale............ $ 49,366 $ - $ (1,382) $ 47,984
======== ==== ======== ========
Securities available to maturity:
U.S. Government and federal agency
obligations.................................... $116,012 $ - $(16,691) $99,321
Mortgage-backed securities ....................... 248,096 248 (8,408) 239,936
Trust preferred securities........................ 139,433 - (16,002) 123,431
Corporate debt securities......................... 21,040 - (2,710) 18,330
-------- ---- -------- --------
Total securities held to maturity.............. $524,581 $248 $(43,811) $481,018
======== ==== ======== ========
At December 31, 2000 and 1999, securities with a carrying value of
$100,622,000 and $104,473,000, respectively, were pledged as collateral on
securities sold under agreements to repurchase. At December 31, 2000 and 1999,
U.S. Government obligations with a carrying value of $1,975,000 and $2,000,000,
respectively, were pledged as collateral for People's Savings' treasury, tax and
loan accounts. At December 31, 2000, securities with a carrying value of
$2,800,000 were pledged as collateral on retail repurchase agreements.
F-22
The amortized cost and estimated fair value of securities by
contractual maturity at December 31, 2000, follows. Expected maturities will
differ from contractual maturities on certain securities because of call and
prepayment provisions.
Amortized Fair
Cost Value
---------- ----------
(Dollars in thousands)
Within 1 year ............................... $ 7,944 $ 7,944
Over 1 year through 5 years ................. 5,610 5,248
After 5 years to 10 years ................... 6,992 6,563
Over 10 years ............................... 296,232 255,763
-------- --------
316,778 275,518
Mortgage-backed securities .................. 214,571 212,610
-------- --------
$531,349 $488,128
======== ========
For the years ended December 31, 2000, 1999, and 1998, proceeds from
sales of securities available for sale amounted to $30,237,000, $70,527,000, and
$271,266,000, respectively. Gross realized gains amounted to $108,000 and
$1,950,000 in 1999 and 1998, respectively, and gross realized losses amounted to
$1,224,000, $72,000, and $510,000, in 2000, 1999, and 1998, respectively.
At December 31, 2000, securities held to maturity with amortized cost
of $514.8 million and a fair value of $473.2 million were transferred to
securities available for sale.
During 1999, securities available for sale with amortized cost of
$150.3 million and a fair value of $148.7 million were transferred to securities
held to maturity.
During 2000, People's entered into an interest rate cap agreement
which potentially reduces interest rate risk, in exchange for the payment of a
premium when the contract is initiated. The notional amount of the contract is
$50 million and interest is paid to the extent LIBOR exceeds 7%. At December 31,
2000, the cost and fair value of the contract amounted to $140,000 and $111,000
respectively. The contract terminates on November 2, 2002.
F-23
5--Loans, Net
A summary of the balances of loans follows:
December 31,
---------------------------
2000 1999
------------ ---------
(Dollars in thousands)
Mortgage loans:
Residential 1-4 family .................... $ 266,363 $ 290,195
Residential multi-family .................. 8,767 9,455
Commercial real estate .................... 75,331 67,018
Construction .............................. 11,074 19,156
Equity lines of credit .................... 12,737 11,105
--------- ---------
374,272 396,929
Deferred loan origination fees, net .......... (199) (166)
--------- ---------
Total mortgage loans ................ 374,073 396,763
--------- ---------
Other loans:
Retail installment sale contracts ......... 565 294
Consumer .................................. 6,447 5,043
Commercial lines of credit ................ 6,860 5,614
Commercial ................................ 9,669 9,525
Education ................................. 19 72
--------- ---------
Total other loans ................... 23,560 20,548
--------- ---------
Total loans .................................. 397,633 417,311
Allowance for loan losses .................... (4,182) (4,096)
--------- ---------
Loans, net .......................... $ 393,451 $ 413,215
========= =========
An analysis of the allowance for loan losses follows:
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
------------ ------------ ---------
(Dollars in thousands)
Balance at beginning of year ..................................... $ 4,096 $ 4,866 $ 4,291
Provision (credit) for loan losses ............................ - (850) 600
Loans charged off ............................................. (156) (403) (575)
Recoveries .................................................... 242 483 550
------- ------- -------
Balance at end of year ........................................... $ 4,182 $ 4,096 $ 4,866
======= ======= =======
At December 31, 2000 and 1999, premiums on residential mortgage loans
purchased or acquired in acquisitions included in loans, net amounted to
$3,273,000 and $3,887,000, respectively. Amortization of premiums amounted to
$614,000, $1,362,000, and $2,807,000, for 2000, 1999, and 1998, respectively.
Impaired and nonaccrual loans at December 31, 2000 and 1999 amounted to
$373,000 and $503,000, respectively. These loans required a corresponding
valuation reserve of $22,000 and $62,000, respectively. No additional funds arc
committed to advanced in connection with impaired loans.
The average balance of impaired loans for the years ended December 31,
2000, 1999 and 1998 amounted to $497,000, $922,000 and $2,765,000, respectively.
Interest income recognized amounted to $12,000, $60,000 and $103,000,
respectively, all of which was recognized on a cash basis.
F-24
6--Other Real Estate Owned, Net
OREO consists of $50,000 and $285,000 of residential real estate at
December 31, 2000 and 1999.
OREO expenses (income) include the following:
Year Ended December 31,
---------------------------------------------
2000 1999 1998
------ -------- -------
(Dollars in thousands)
Net gain on sales ............................................ $(13) $(19) $(71)
Operating expenses, net of rental income ..................... 4 43 42
---- ---- ----
$ (9) $ 24 $(29)
==== ==== ====
7--Banking Premises and Equipment, Net
A summary of the cost, accumulated depreciation and amortization of
banking premises and equipment follows:
December 31,
------------------------------------
2000 1999
----------- ----------
(Dollars in thousands)
Land .............................................................. $ 2,022 $ 2,022
Buildings ......................................................... 11,876 9,600
Leasehold improvements ............................................ 951 936
Furniture and equipment ........................................... 9,896 9,342
-------- --------
24,745 21,900
Less accumulated depreciation and amortization .................... (7,040) (5,270)
-------- --------
$ 17,705 $ 16,630
======== ========
Depreciation and amortization expense for the years ended December 31,
2000, 1999, and 1998 amounted to $1.8 million, $1.4 million, and $1.1 million,
respectively.
Under terms of noncancellable lease agreements in effect at December
31, 2000, future minimum rent commitments net of sublease commitments for
banking premises and equipment are as follows:
Year Ending December 31, Amount
------------------------ ---------------------
(Dollars in thousands)
2001 .................................................... $ 652
2002 .................................................... 275
2003 .................................................... 194
2004 .................................................... 152
2005 .................................................... 153
Thereafter .............................................. 2,084
------
$3,510
======
The leases contain options to extend for periods from three to ten
years. The cost of such rentals is not included above. Total rent expense for
2000, 1999, and 1998, amounted to $1,190,000, $716,000, and $436,000,
respectively.
F-25
8--Income Taxes
Allocation of federal and state income taxes between current and
deferred portions is as follows:
Year Ended December 31,
------------------------------------
2000 1999 1998
------ ------ ------
(Dollars in thousands)
Current:
Federal .............................................. $3,485 $4,800 $4,315
State ................................................ 246 257 582
Utilization of tax credits ........................... - - (55)
------ ------ ------
Total current ..................................... 3,731 5,057 4,842
------ ------ ------
Deferred:
Federal .............................................. 247 (332) (331)
State ................................................ 86 (116) (84)
------ ------ ------
Total deferred .................................... 333 (448) (415)
------ ------ ------
Changes in valuation reserve ............................ - - (57)
------ ------ ------
Income tax provision before effect
of accounting change ................................. 4,064 4,609 4,370
Effect of change in accounting for
organization costs ................................... - - (106)
------ ------ ------
Income tax provision .................................... $4,064 $4,609 $4,264
====== ====== ======
The components of the net deferred tax asset are as follows:
December 31,
--------------------------
2000 1999
------- --------
(Dollars in thousands)
Deferred tax asset:
Federal ................................................... $16,598 $ 2,793
State ..................................................... 566 673
------- --------
17,164 3,466
------- --------
Deferred tax liability:
Federal ................................................... (1,748) (1,711)
State ..................................................... (603) (590)
------- --------
(2,351) (2,301)
------- --------
Net deferred tax asset ....................................... $14,813 $ 1,165
======= ========
The tax effects of each type of item that gives rise to deferred taxes
are as follows:
December 31,
--------------------------
2000 1999
------- --------
(Dollars in thousands)
Allowance for loan losses .................................... $ 1,126 $ 748
Deferred pension expense ..................................... 102 480
Unrealized loss on securities available for sale ............. 14,954 973
Investment in limited partnership ............................ (1,079) (1,015)
Depreciation and amortization ................................ (448) (46)
Other, net ................................................... 158 25
------- --------
Net deferred tax asset ....................................... $14,813 $ 1,165
======= ========
F-26
A summary of the change in the net deferred tax asset (liability) is as
follows:
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
------- ------ -------
(Dollars in thousands)
Balance at beginning of year .......................... $ 1,165 $ 385 $ (1,024)
Deferred tax (provision) benefit ...................... (333) 448 415
Deferred tax effects on unrealized (gains)
losses on securities available for sale ............ 13,981 332 831
Deferred tax resulting from change in
accounting method .................................. - - 106
Utilization of valuation reserve ...................... - - 57
------- ------ --------
Balance at end of year ................................ $14,813 $1,165 $ 385
======= ====== ========
The reasons for the differences between the tax at the statutory
federal income tax rate and the effective tax rates are summarized as follows:
Year Ended December 31,
---------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Statutory federal tax rate ............................ 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit ............ 1.8 0.7 2.8
Municipal income ................................... (0.8) (0.2) (0.3)
Other, net ......................................... (2.0) (1.5) (0.6)
----- ----- -----
Effective tax rates ................................... 33.0% 33.0% 35.9%
===== ===== =====
The federal income tax reserve for loan losses at People's Savings'
base year is $2,020,000. If any portion of the reserve is used for purposes
other than to absorb loan losses, approximately 150% of the amount actually used
(limited to the amount of the reserve) would be subject to taxation in the
fiscal year in which used. As People's Savings intends to use the reserve only
to absorb loan losses, a deferred income tax liability of approximately $825,000
has not been provided.
9--Deposits
A summary of deposit balances, by type, follows:
December 31,
--------------------------------
2000 1999
-------- --------
(Dollars in thousands)
Demand .......................................................... $ 41,887 $ 36,240
NOW ............................................................. 53,563 46,623
Savings ......................................................... 111,086 103,432
Money market .................................................... 45,582 36,190
-------- --------
Total non-certificate accounts ............................ 252,118 222,485
-------- --------
Term certificates of $100,000 or more ........................... 214,192 202,237
Term certificates less than $100,000 ............................ 158,251 136,892
-------- --------
Total certificate accounts ................................ 372,443 339,129
-------- --------
Total deposits ............................................ $624,561 $561,614
======== ========
F-27
Municipal deposits amounted to $219.6 million and $199.5 million at
December 31, 2000 and 1999, respectively.
A summary of certificate accounts, by maturity, follows:
December 31, 2000 December 31, 1999
------------------------ -------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- -------
(Dollars in thousands)
Within 1 year ........................................... $339,274 6.14% $313,449 5.37%
Over 1 year to 3 years .................................. 25,345 6.17 17,470 5.45
Over 3 years to 5 years ................................. 7,824 5.76 7,987 5.82
Over 5 years ............................................ - - 223 6.22
-------- --------
$372,443 6.14% $339,129 5.39%
======== ========
10--Short-term Borrowings
Short-term borrowings consists of the following:
December 31, 2000 December 31, 1999
------------------------ ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- -------- ------- --------
(Dollars in thousands)
Federal Home Loan Bank advances
maturing within 1 year ............................... $40,000 6.62% $40,250 5.08%
Federal Home Loan Bank line of credit ................... 8,641 6.77 - -
Retail repurchase agreements ............................ 469 5.50 - -
------- -------
$49,110 6.64% $40,250 5.08%
======= =======
People's Savings has a $15 million line of credit with the Federal
Home Loan Bank of Boston, or FHLB, at an interest rate that adjusts daily. The
FHLB advances are secured by a blanket lien on qualified collateral, defined
principally as 75% of the carrying value of first mortgage loans on
owner-occupied residential property and 90% of the market value of certain U.S.
Government and federal agency securities. The retail repurchase agreements are
collateralized by securities.
11--Long-term Debt
Long-term debt consists of Federal Home Loan Bank advances and
securities sold under agreement to repurchase.
F-28
Information pertaining to fixed-rate repurchase agreements follows:
December 31, 2000 December 31, 1999
------------------------- ---------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- -------- -------- -----------
(Dollars in thousands)
Advances maturing:
2000 .......................................... $ - -% $23,500 6.00%
2002 .......................................... - - 40,700 6.11
2008 .......................................... 10,500 5.52 10,500 5.52
2010 .......................................... 73,000 6.49 - -
------- -------
$83,500 6.37% $74,700 5.99%
======= =======
Certain securities sold under agreements to repurchase have call
options. Under these options at December 31, 2000, $10.5 million is callable in
2001, $35.0 million is callable in 2003, and $38.0 million is callable in 2005.
Accrued interest payable on securities sold under agreements to repurchase
amounted to $592,000 and $619,000 at December 31, 2000 and 1999, respectively.
The following summarizes the carrying value, including accrued
interest, of the underlying securities and the related liability, including
accrued interest, and weighted average rates under the repurchase agreements at
December 31, 2000. All repurchase agreements mature after 90 days.
Repurchase Agreements
----------------------------------
Weighted
Securities Amount Average Rate
--------------- ------------ ----------------
(Dollars in thousands)
Mortgage-backed securities ........................ $ 41,060 $36,294 6.50%
U.S. Government and federal
agency obligations ............................. 59,820 47,798 6.27
-------- -------
$100,880 $84,092 6.37%
======== =======
At December 31, 2000, $16,788,000 was at risk under repurchase
agreements with Salomon Brothers Inc. and the weighted average maturity of these
repurchase agreements was 112 months.
The amount of securities collateralizing the agreements to repurchase
remains in securities and the obligation to repurchase securities sold is
reflected as a liability in the consolidated balance sheets. The securities
underlying the agreement are held by the dealers who arranged the transactions.
The dealers may have disposed of the securities in the normal course of their
operations, and have agreed to resell substantially identical securities at the
maturities of the agreements to People's Savings.
F-29
Information pertaining to fixed-rate FHLB advances follows:
December 31, 2000 December 31, 1999
-------------------------- ---------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- ---------- -------- ----------
(Dollars in thousands)
Advances maturing:
2000 .............................................. $ - -% $ 10,000 6.13%
2004 .............................................. - - 20,000 5.29
2005 .............................................. 18,000 5.89 18,000 5.89
2008 .............................................. 47,000 5.52 72,000 5.49
2009 .............................................. 94,000 5.93 164,000 5.70
2013 .............................................. 39,000 5.40 39,000 5.40
2014 .............................................. - - 10,000 3.99
-------- --------
$198,000 5.72% $333,000 5.38%
======== ========
Certain FHLB advances have call options. Under these options at
December 31, 2000, $67.0 million is callable in 2001, $74.0 million is callable
in 2002, $26.0 million is callable in 2003, and $13.0 million is callable in
2005. The $18.0 million maturing in 2005 is not callable.
12--Subordinated Debentures
On July 26, 2000, People's completed the private placement of $10
million in subordinated debentures to People's Bancshares Capital Trust II.
People's Bancshares Capital Trust II funded the purchase of the subordinated
debentures through the sale of 10,000 trust preferred securities with a
liquidation value of $10.0 million. Using interest payments made by People's on
the debentures, People's Bancshares Capital Trust II intends to pay semi-annual
dividends to preferred security holders. The annual percentage rate of the
interest payable on the subordinated debentures and distributions payable on the
preferred securities is 11.695%. Dividends on the preferred securities will be
cumulative and People's Bancshares Capital Trust II may defer the payments for
up to five years. The preferred securities mature in July 2030 unless People's
elects and obtains regulatory approval to accelerate the maturity date to as
early as July 2010.
On June 26, 1997, People's completed the sale of $13.8 million of
subordinated debentures to People's Bancshares Capital Trust I which funded the
purchase through a public offering of 1,380,000 trust preferred securities with
a liquidation value of $13.8 million. Using interest payments made by People's
on the debentures, People's Bancshares Capital Trust I intends to pay quarterly
dividends to preferred security holders. The annual percentage rate of interest
payable on the subordinated debentures and distributions payable on the
preferred securities is 9.76%. Dividends on the preferred securities are
cumulative and People's Bancshares Capital Trust I may defer the payments for up
to five years. The preferred securities mature in June 2027 unless People's
elects and obtains regulatory approval to accelerate the maturity date to as
early as June 2002.
Subordinated debt may be included in regulatory Tier 1 capital subject
to a limitation that such amounts not exceed 25% of Tier 1 capital. At December
31, 2000 and 1999, $15.3 million and $13.8 million, respectively was included in
regulatory Tier 1 capital. The remainder of subordinated debt was included in
Tier II capital. There is no limitation for inclusion of subordinated debt in
total risk-based
F-30
capital and, as such, all subordinated debt was included in total risk-based
capital. For the years ended December 31, 2000, 1999, and 1998, interest expense
on subordinated debentures amounted to $1.9 million, $1.4 million, and $1.4
million, respectively. Deferred debt financing costs of $1.3 million and
$950,000 are included in other assets at December 31, 2000 and 1999,
respectively. These costs are being amortized over the life of the debentures.
Amortization of deferred debt financing costs for 2000, 1999, and 1998 was
$39,000, $35,000, and $35,000, respectively, and is included in interest
expense.
13--Other Commitments and Contingencies
In the normal course of business, there are outstanding commitments
and contingencies that are not reflected in the consolidated financial
statements.
Special Termination Agreements
People's has severance agreements with certain officers that provide
for a lump-sum severance payment under certain circumstances following a "change
in control" as defined in the agreements.
Loan Commitments
People's Savings is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, lines of credit, and standby letters of credits. Such commitments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. People's Savings'
exposure to credit loss is represented by the contractual amount of these
commitments. People's Savings uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
The following financial instruments were outstanding, the contract
amounts of which represent credit risk:
December 31,
------------------------------------
2000 1999
----------- ---------
(Dollars in thousands)
Commitment to grant loans ........................................ $61,474 $38,765
Undisbursed amount on loans in progress .......................... 3,717 5,231
Unfunded commitments under lines of credit ....................... 32,747 24,787
Standby letters of credit ........................................ 439 635
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The commitments for lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. People's Savings evaluates each
customer's credit worthiness on a case-by-case basis. Funds disbursed under
these financial instruments are generally collateralized by real estate.
Standby letters of credit are conditional commitments issued by
People's Savings to guarantee the performance of a customer to a third party.
Those letters of credit are primarily issued to support borrowing
F-31
arrangements. All letters of credit outstanding have expiration dates within one
year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The letters of
credit are generally secured.
Other Contingencies
In the ordinary course of business, People's is involved in various legal
claims that, in the opinion of management, will not have a material effect on
People's consolidated financial position or results of operations.
14--Employee Benefit Plans
Pension Plan
People's Savings provides pension benefits for eligible employees through a
defined benefit pension plan. Substantially all employees participate in the
retirement plan on a non-contributing basis and are fully vested after three
years of service. Information pertaining to the activity in the plan is as
follows:
Plan Year Ended
October 31,
----------------------
2000 1999
--------- ---------
(Dollars in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year .............. $ 3,306 $ 2,821
Service cost ......................................... 558 550
Interest cost ........................................ 236 190
Actuarial gain ....................................... (171) (131)
Benefits paid ........................................ (68) (124)
--------- ---------
Benefit obligation at end of year .................... 3,861 3,306
--------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year ....... 2,990 2,627
Actual return on plan assets ......................... 471 478
Employer contribution ................................ 780 9
Benefits paid ........................................ (68) (124)
--------- ---------
Fair value of plan assets at end of year ............. 4,173 2,990
--------- ---------
Funded status ........................................... 312 (316)
Unrecognized net actuarial gain ......................... (886) (669)
Unamortized net surplus since adoption of SFAS No. 87 ... (100) (108)
--------- ---------
Accrued pension costs ................................... $ (674) $ (1,093)
========= =========
The components of net periodic pension cost are as follows:
Plan Years Ended October 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
Service cost ....................... $ 558 $ 550 $ 404
Interest cost ...................... 236 190 149
Expected return on plan assets ..... (332) (210) (167)
Amortization of transition asset ... (8) (7) (8)
Recognized net actuarial gain ........ (93) (29) (28)
----- ----- -----
$ 361 $ 494 $ 350
===== ===== =====
F-32
Total pension expense for the years ended December 31, 2000, 1999, and 1998
amounted to $368,000, $574,000, and $362,000, respectively. The accumulated
benefit obligation (substantially all vested) at October 31, 2000, amounted to
$3,092,000 which was less than the fair value of plan assets at that date.
For the plan years ended October 31, 2000, 1999, and 1998, actuarial
assumptions include an assumed discount rate on benefit obligations of 7.75%,
6.75%, and 7.25%, respectively and an expected long term rate of return on plan
assets of 10% for 2000 and 8% for 1999 and 1998. An annual salary increase of 4%
was used for all years.
401(k) Plan
People's has a 401(k) plan that provides for voluntary contributions by
participating employees ranging from one to fifteen percent of their
compensation, subject to certain limitations. Under terms of the plan, the
Company at its discretion will match one half of an employee's contribution to
the 401(k) plan subject to a maximum match of 3% of the employee's base salary.
People's expense for this plan for the years ended December 31, 2000, 1999, and
1998 was $397,000, $376,000, and $272,000, respectively.
15--Stock Option Plans
At December 31, 2000, People's has three stock-based compensation plans.
Under the 1995 Employee and Director Stock Option Plans and the 1996 Stock
Option and Incentive Plan, People's may grant options to its directors, officers
and employees for up to 564,000 shares of common stock. Both incentive stock
options and non-qualified stock options may be granted under the Plans. The
exercise price of each option equals the market price of People's stock on the
date of grant and an option's maximum term is ten years.
People's applies APB Opinion 25 and related Interpretations in accounting
for the plans. Accordingly, no compensation cost has been recognized for its
stock plans. Had compensation cost for People's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method prescribed by SFAS No. 123, People's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below.
Year Ended December 31,
---------------------------------------------
2000 1999 1998
--------- --------- ---------
(Dollars in thousands, except per share data)
Net income:
As reported ............... $ 8,267 $ 9,366 $ 7,614
Pro forma ................. 8,086 9,124 7,220
Basic earnings per share:
As reported ............... 2.55 2.81 2.30
Pro forma ................. 2.50 2.74 2.18
Diluted earnings per share:
As reported ............... 2.52 2.77 2.25
Pro forma ................. 2.46 2.69 2.13
F-33
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Year Ended December 31,
------------------------------
2000 1999 1998
-------- -------- --------
Dividend yield ....................... 5.18% 4.29% 2.31%
Expected life ........................ 9 years 9 years 9 years
Expected volatility .................. 46% 22% 34%
Risk-free interest rate .............. 6.05% 5.80% 5.50%
A summary of the status of People's stock option plans as of December 31,
2000, 1999, and 1998, and changes during the years then ended, is presented
below:
2000 1999 1998
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
(In thousands, except weighted average exercise price)
Shares under option:
Outstanding at beginning of year ....... 276 $ 16.79 244 $ 15.72 185 $ 10.55
Granted ................................ 41 16.25 52 19.59 90 24.00
Exercised .............................. (7) 11.05 (15) 6.49 (31) 9.09
Canceled ............................... (31) 20.03 (5) 22.20 - -
------ -------- ------ -------- ------ --------
Outstanding at end of year ................ 279 $ 16.49 276 $ 16.79 244 $ 15.72
====== ======== ====== ======== ====== ========
Options exercisable at year-end ........... 253 $ 16.10 236 $ 15.69 186 $ 13.68
Shares reserved for future grants ......... 62 72 119
Weighted-average fair value of
options granted during the year .......... $ 5.46 $ 4.02 $ 9.28
Information pertaining to options outstanding at December 31, 2000, is as
follows:
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
(In thousands) (In thousands)
$4.00 - 14.38 ........................... 118 5.2 years $10.27 118 $10.27
$15.13 - 25.00 .......................... 161 8.2 years 21.04 135 21.20
--- ---
Outstanding at end of year .............. 279 6.9 years $16.49 253 $16.10
=== ===
16--Related Party Transactions
In the ordinary course of business, People's has granted loans to principal
officers and directors and their affiliates. Such loans totaled $1,292,000 at
December 31, 2000, and $1,208,000 at December 31, 1999. During 2000, total
principal additions were $294,000 and total principal reductions were $210,000.
F-34
17--Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair values of all financial instruments where
it is practicable to estimate such values. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of People's.
The following methods and assumptions were used by People's in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and short-term
instruments approximate fair values.
Securities: Fair values for securities and restricted equity
securities, are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments or discounted cash flows. The carrying
values of interest-bearing deposits and restricted equity securities
approximate fair values.
Loans receivable: Fair values for loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. For installment
loans and loans that reprice frequently at market rates, the fair values
are based on carrying values. Fair values for non-performing loans are
estimated using discounted cash flow analyses or underlying collateral
values, where applicable. The carrying value of loans held for sale
approximates fair values.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, passbook savings, and certain
types of money market accounts) are their carrying amounts. Fair values for
fixed rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Short-term borrowings: The carrying amounts of short-term borrowings
maturing within ninety days approximate their fair values. Fair values of
other short-term borrowings are estimated using discounted cash flow
analyses based on People's current incremental borrowing rates for similar
types of borrowing arrangements.
Long-term borrowings: The fair values of People's long-term borrowings
are estimated using discounted cash flow analyses based on People's current
incremental borrowing rates for similar types of borrowing arrangements.
Subordinated debentures: Fair value for subordinated debentures is
based on the quoted market price of the trust preferred securities
underlying the subordinated debentures or market price of trust preferred
securities with similar terms.
F-35
Accrued interest: The carrying amounts of accrued interest approximate
fair value.
Off-balance-sheet instruments: Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
The estimated fair values, and related carrying amounts, of People's
financial instruments are as follows:
December 31,
-----------------------------------------
2000 1999
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in thousands)
Financial assets:
Cash and cash equivalents ....... $ 16,406 $ 16,406 $ 11,875 $ 11,875
Securities available for sale ... 488,128 488,128 47,984 47,984
Securities held to maturity ..... - - 524,581 481,018
Restricted equity securities .... 19,869 19,869 21,701 21,701
Loans held for sale ............. 40,546 40,546 23,681 23,681
Loans, net ...................... 393,451 393,482 413,215 401,979
Accrued interest receivable ..... 7,402 7,402 7,051 7,051
Financial liabilities:
Deposits ........................ 624,561 625,899 561,614 562,034
Short-term borrowings ........... 49,110 49,146 40,250 40,250
Long-term debt .................. 281,500 289,606 407,700 397,491
Accrued interest payable ........ 3,255 3,255 2,759 2,759
Subordinated debentures ......... 23,800 19,850 13,800 13,455
The estimated fair values of off-balance-sheet financial instruments at
December 31, 2000 and 1999 are immaterial.
18--Restrictions on Dividends, Loans and Advances
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by People's Savings to People's. The
total amount of dividends which may be paid at any date is generally limited to
the retained earnings of People's Savings, and loans and advances are limited to
10% of People's Savings' capital stock and surplus on a secured basis. In
addition, dividends paid by People's Savings to People's would be prohibited if
the effect thereof would cause People's Savings' capital to be reduced below
applicable minimum capital requirements. (See Note 2).
Based on an informal agreement between People's Savings and its regulators,
all of its capital is currently restricted.
19--Segment Information
People's has two reportable segments, People's Savings and People's
Mortgage. People's Savings' segment attracts deposits from individuals,
businesses and governments, and invests those funds in residential and
commercial mortgages and consumer, commercial and construction loans. People's
Mortgage originates 1-4 family residential loans primarily for sale in the
secondary market.
F-36
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. People's evaluates performance
based on profit or loss from operations before income taxes excluding
nonrecurring gains or losses.
People's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment appeals to different markets and, accordingly, requires different
technology and marketing strategies.
People's derives a significant portion of its revenues from interest income
and interest expense is the most significant expense. Management analyzes the
segments based on pre-tax income and therefore the segments are reported below
using pre-tax income for the years ended December 31. People's does not allocate
income taxes to the segments.
Mortgage
Bank Company Total
---------- ---------- ----------
(Dollars in thousands)
DECEMBER 31, 2000
Net interest income ..................... $ 26,142 $ 2,453 $ 28,595
Other income ............................ 317 8,494 8,811
Operating expenses ...................... 14,350 10,725 25,075
---------- ---------- ----------
Income before income taxes .............. $ 12,109 $ 222 $ 12,331
========== ========== ==========
Total assets ............................ $ 999,020 $ 46,272 $1,045,292
========== ========== ==========
Depreciation expense .................... $ 1,080 $ 677 $ 1,757
========== ========== ==========
Capital expenditures .................... $ 2,568 $ 264 $ 2,832
========== ========== ==========
DECEMBER 31, 1999
Net interest income, after credit for
loan losses ............................ $ 26,861 $ 1,790 $ 28,651
Other income ............................ 1,520 7,522 9,042
Operating expenses ...................... 14,208 9,510 23,718
---------- ---------- ----------
Income (loss) before income taxes ....... $ 14,173 $ (198) $ 13,975
========== ========== ==========
Total assets ............................ $1,065,415 $ 35,057 $1,100,472
========== ========== ==========
Depreciation expense .................... $ 1,019 $ 375 $ 1,394
========== ========== ==========
Capital expenditures .................... $ 2,081 $ 2,016 $ 4,097
========== ========== ==========
DECEMBER 31, 1998
Net interest income, after provision
for loan losses ........................ $ 19,724 $ 2,227 $ 21,951
Other income ............................ 2,972 6,485 9,457
Operating expenses ...................... 12,766 6,472 19,238
---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting change .......... $ 9,930 $ 2,240 $ 12,170
========== ========== ==========
Total assets ............................ $ 939,168 $ 71,580 $1,010,748
========== ========== ==========
Depreciation expense .................... $ 884 $ 166 $ 1,050
========== ========== ==========
Capital expenditures .................... $ 1,265 $ 770 $ 2,035
========== ========== ==========
F-37
The following reconciles the above tables to the amounts shown on the
consolidated financial statements for the years ended December 31:
2000 1999 1998
----------- ----------- -----------
(Dollars in thousands)
Total assets:
Total assets for reportable segments ....... $ 1,045,292 $ 1,100,472 $ 1,010,748
Elimination of intersegment assets ......... (41,857) (29,296) (66,108)
----------- ----------- -----------
$ 1,003,435 $ 1,071,176 $ 944,640
=========== =========== ===========
20--Condensed Financial Statements of Parent Company
Financial information pertaining only to People's Bancshares, Inc. is as
follows:
BALANCE SHEETS
December 31,
--------------------
2000 1999
-------- --------
(Dollars in thousands)
ASSETS
Cash and cash equivalents .................................................. $ 123 $ 92
Investment in common stock of Bank ......................................... 41,169 54,160
Investment in common stock of Trusts ....................................... 734 427
Deferred debt financing costs and other assets ............................. 1,289 953
-------- --------
Total assets ...................................................... $ 43,315 $ 55,632
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses ........................................................... $ 867 $ 24
Due to Bank ................................................................ 155 517
Subordinated debentures .................................................... 24,536 14,227
-------- --------
Total liabilities ................................................. 25,558 14,768
-------- --------
Stockholders' equity:
Serial preferred stock .................................................. - -
Common stock ............................................................ 370 369
Additional paid-in capital .............................................. 23,853 23,776
Retained earnings ....................................................... 30,165 24,617
Accumulated other comprehensive loss .................................... (28,267) (1,629)
Treasury stock, at cost - 473,000 shares in 2000
358,000 shares in 1999 ............................................... (8,364) (6,269)
-------- --------
Total stockholders' equity ........................................ 17,757 40,864
-------- --------
Total liabilities and stockholders' equity ........................ $ 43,315 $ 55,632
======== ========
F-38
STATEMENTS OF INCOME
Year Ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Income:
Dividends from Bank ....................................... $ 6,561 $ 4,140 $ 2,943
Dividends from Trusts ..................................... 42 42 42
Interest on securities .................................... - - 115
Interest on short-term investments ........................ 1 1 10
Gains on sale of securities available for sale ............ - - 65
-------- -------- --------
Total income ........................................ 6,604 4,183 3,175
-------- -------- --------
Expenses:
Interest on subordinated debentures ....................... 1,946 1,423 1,423
Operating expenses ........................................ 550 167 158
-------- -------- --------
Total operating expenses ............................ 2,496 1,590 1,581
-------- -------- --------
Income before income taxes ................................ 4,108 2,593 1,594
Income tax benefit ........................................ (834) (526) (458)
-------- -------- --------
Income before cumulative effect of accounting change ...... 4,942 3,119 2,052
Cumulative effect of accounting change for organization
costs, net of tax ...................................... - - (89)
-------- -------- --------
Income before equity in undistributed income of Bank ...... 4,942 3,119 1,963
Equity in undistributed income of Bank .................... 3,325 6,247 5,651
-------- -------- --------
Net income .......................................... $ 8,267 $ 9,366 $ 7,614
======== ======== ========
F-39
STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Cash flows from operating activities:
Net income ............................................................ $ 8,267 $ 9,366 $ 7,614
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of Bank ...................................... (3,325) (6,247) (5,651)
Amortization/write-off of organization costs ................................ - - 140
Gains on sales of securities available for sale ............................. - - (65)
Increase in accrued expenses ................................................ 843 24 -
Increase (decrease) in due to Bank .......................................... (362) 144 (360)
Decrease in other assets .................................................... 335 34 68
-------- -------- --------
Net cash provided by operating activities ............................. 5,758 3,321 1,746
-------- -------- --------
Cash flows from investing activities:
Investments in subsidiaries ................................................. (10,629) (620) (1,297)
Purchase of securities available for sale ................................... - - (519)
Sales of securities available for sale ...................................... - - 1,690
-------- -------- --------
Net cash used for investing activities ................................ (10,629) (620) (126)
-------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options ..................................... 78 94 287
Proceeds from issuance of subordinated debentures ........................... 9,638 - -
Payments to acquire treasury stock .......................................... (2,095) (56) -
Cash dividends paid on common stock ......................................... (2,719) (2,697) (1,919)
-------- -------- --------
Net cash provided (used) by financing activities ...................... 4,902 (2,659) (1,632)
-------- -------- --------
Net change in cash and cash equivalents ........................................ 31 42 (12)
Cash and cash equivalents, beginning of year ................................... 92 50 62
-------- -------- --------
Cash and cash equivalents, end of year ......................................... $ 123 $ 92 $ 50
======== ======== ========
F-40
21--Quarterly Data (Unaudited)
Quarterly consolidated operating results are summarized as follows:
2000
---------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
---------- --------- ---------- ---------
(Dollars in thousands, except per share data)
Interest and dividend income .................. $ 20,287 $ 20,917 $ 20,373 $ 19,725
Interest expense .............................. 13,597 13,555 13,010 12,545
-------- -------- -------- --------
Net interest income ........................... 6,690 7,362 7,363 7,180
Provision for loan losses ..................... - - - -
-------- -------- -------- --------
Net interest income, after provision for
loan losses................................. 6,690 7,362 7,363 7,180
Losses on sale of securities available for
sale........................................ (1,224) - - -
Gains on sales of loans, net .................. 2,130 2,409 2,155 1,798
Other income .................................. 418 372 367 386
Operating expenses ............................ 6,192 6,475 6,366 6,042
-------- -------- -------- --------
Income before income taxes .................... 1,822 3,668 3,519 3,322
Provision for income taxes .................... 653 1,191 1,120 1,100
-------- -------- -------- --------
Net income .................................... $ 1,169 $ 2,477 $ 2,399 $ 2,222
======== ======== ======== ========
Diluted earnings per share .................... $ 0.36 $ 0.76 $ 0.73 $ 0.67
Basic earnings per share ...................... 0.36 0.77 0.74 0.68
1999
------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(Dollars in thousands, except per share data)
Interest and dividend income .......................... $ 19,753 $ 18,658 $ 17,755 $ 17,180
Interest expense ...................................... 12,421 11,603 10,968 10,553
-------- -------- -------- --------
Net interest income ................................... 7,332 7,055 6,787 6,627
Provision for loan losses ............................. - (425) (425) -
-------- -------- -------- --------
Net interest income, after provision for
loan losses......................................... 7,332 7,480 7,212 6,627
Gains (losses) on sale of securities available for
sale................................................ - - (37) 73
Gains on sales of loans, net .......................... 2,480 1,643 1,605 1,774
Other income .......................................... 414 342 381 367
Operating expenses .................................... 6,899 6,039 5,413 5,367
-------- -------- -------- --------
Income before income taxes ............................ 3,327 3,426 3,748 3,474
Provision for income taxes ............................ 997 1,088 1,311 1,213
-------- -------- -------- --------
Net income ............................................ $ 2,330 $ 2,338 $ 2,437 $ 2,261
======== ======== ======== ========
Diluted earnings per share ............................ $ 0.69 $ 0.69 $ 0.72 $ 0.67
Basic earnings per share .............................. 0.70 0.71 0.73 0.68
F-41
Fluctuations in the quarterly results are due primarily to the effect
of the seasonality of the mortgage-banking subsidiary, gains/losses on sales of
securities and various non-recurring expenses. People's had non-recurring
charges in the second and third quarters of 2000 for equipment write-offs and
professional fees that totaled $577,000. People's had non-recurring charges of
$430,000 in the third quarter of 1999 related to the purchase of Allied Mortgage
and $231,000 in the second quarter of 1999 related to the relocation of an
existing branch.
F-42
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of People's Bancshares, Inc.:
We have audited the consolidated balance sheets of People's
Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
People's Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ WOLF & COMPANY, P.C.
------------------------
Boston, Massachusetts
January 26, 2001, except for Note 2 as to which the date is March 26, 2001.
F-43
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 1, 2001
BY AND BETWEEN
FIRSTFED AMERICA BANCORP, INC.
AND
PEOPLE'S BANCSHARES, INC.
================================================================================
TABLE OF CONTENTS
Page No.
Introductory Statements.......................................................................... 1
ARTICLE I THE MERGER........................................................................... 1
----------
Section 1.1. STRUCTURE OF THE MERGER...................................................... 1
-----------------------
Section 1.2. EFFECT ON OUTSTANDING SHARES OF TARGET COMMON STOCK.......................... 2
---------------------------------------------------
Section 1.3. ELECTION AND PRORATION PROCEDURES............................................ 3
---------------------------------
Section 1.4. EXCHANGE PROCEDURES.......................................................... 5
-------------------
Section 1.5. EFFECT ON OUTSTANDING SHARES OF ACQUIROR COMMON STOCK........................ 8
-----------------------------------------------------
Section 1.6. DIRECTORS OF ACQUIROR AFTER EFFECTIVE TIME................................... 8
------------------------------------------
Section 1.7. CERTIFICATE OF INCORPORATION AND BYLAWS OF ACQUIROR AFTER EFFECTIVE TIME..... 8
------------------------------------------------------------------------
Section 1.8. TARGET STOCK OPTIONS......................................................... 8
--------------------
Section 1.9. DISSENTERS' RIGHTS........................................................... 9
------------------
Section 1.10. BANK MERGER.................................................................. 10
-----------
Section 1.11. ALTERNATIVE STRUCTURE........................................................ 10
---------------------
ARTICLE II REPRESENTATIONS AND WARRANTIES....................................................... 10
------------------------------
Section 2.1. DISCLOSURE LETTERS........................................................... 10
------------------
Section 2.2. REPRESENTATIONS AND WARRANTIES OF TARGET..................................... 11
----------------------------------------
Section 2.3. REPRESENTATIONS AND WARRANTIES OF ACQUIROR................................... 26
------------------------------------------
ARTICLE III CONDUCT PENDING THE MERGER........................................................... 38
--------------------------
Section 3.1. CONDUCT OF TARGET'S BUSINESS PRIOR TO THE EFFECTIVE TIME..................... 38
--------------------------------------------------------
Section 3.2. FORBEARANCE BY TARGET........................................................ 38
---------------------
Section 3.3. CONDUCT OF ACQUIROR'S BUSINESS PRIOR TO THE EFFECTIVE TIME .................. 41
----------------------------------------------------------
Section 3.4. FORBEARANCE BY ACQUIROR...................................................... 41
-----------------------
ARTICLE IV COVENANTS............................................................................ 42
---------
Section 4.1. ACQUISITION PROPOSALS........................................................ 42
---------------------
Section 4.2. CERTAIN POLICIES AND ACTIONS OF TARGET....................................... 43
--------------------------------------
Section 4.3. ACCESS AND INFORMATION....................................................... 43
----------------------
Section 4.4. APPLICATIONS; CONSENTS....................................................... 44
----------------------
Section 4.5. ANTITAKEOVER PROVISIONS...................................................... 45
-----------------------
Section 4.6. ADDITIONAL AGREEMENTS........................................................ 45
---------------------
Section 4.7. PUBLICITY.................................................................... 45
---------
Section 4.8. STOCKHOLDER MEETING.......................................................... 45
-------------------
Section 4.9. REGISTRATION OF ACQUIROR COMMON STOCK........................................ 46
-------------------------------------
Section 4.10. AFFILIATE LETTERS............................................................ 47
-----------------
Section 4.11. NOTIFICATION OF CERTAIN MATTERS.............................................. 47
-------------------------------
Section 4.12. EMPLOYEES, DIRECTORS AND OFFICERS............................................ 47
---------------------------------
Section 4.13. INDEMNIFICATION.............................................................. 49
---------------
Section 4.14. SECTION 16 MATTERS........................................................... 51
------------------
i
ARTICLE V CONDITIONS TO CONSUMMATION..................................... 51
--------------------------
Section 5.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS.................. 51
--------------------------------------
Section 5.2. CONDITIONS TO THE OBLIGATIONS OF ACQUIROR............... 53
-----------------------------------------
Section 5.3. CONDITIONS TO THE OBLIGATIONS OF TARGET................. 54
---------------------------------------
ARTICLE VI TERMINATION.................................................... 55
-----------
Section 6.1. TERMINATION............................................. 55
-----------
Section 6.2. TERMINATION FEE......................................... 57
---------------
Section 6.3. EFFECT OF TERMINATION................................... 58
---------------------
ARTICLE VII CLOSING, EFFECTIVE DATE AND EFFECTIVE TIME.................. 58
------------------------------------------
Section 7.1. EFFECTIVE DATE AND EFFECTIVE TIME....................... 58
---------------------------------
Section 7.2. DELIVERIES AT THE CLOSING............................... 58
-------------------------
ARTICLE VIII CERTAIN OTHER MATTERS....................................... 59
---------------------
Section 8.1. CERTAIN DEFINITIONS; INTERPRETATION..................... 59
-----------------------------------
Section 8.2. SURVIVAL................................................ 62
--------
Section 8.3. WAIVER; AMENDMENT....................................... 62
-----------------
Section 8.4. COUNTERPARTS............................................ 62
------------
Section 8.5. GOVERNING LAW........................................... 62
-------------
Section 8.6. EXPENSES................................................ 63
--------
Section 8.7. NOTICES................................................. 63
-------
Section 8.8. ENTIRE AGREEMENT; ETC................................... 64
---------------------
Section 8.9. SUCCESSORS AND ASSIGNS; ASSIGNMENT...................... 64
----------------------------------
EXHIBITS
Exhibit A Stock Option Agreement
Exhibit B Form of Voting Agreement
Exhibit C Plan of Bank Merger
Exhibit D Form of Affiliate Letter
ii
AGREEMENT AND PLAN OF MERGER
This is an AGREEMENT AND PLAN OF MERGER, dated as of the 1st day of
October, 2001 ("AGREEMENT"), by and between FIRSTFED AMERICA BANCORP, INC., a
Delaware corporation ("ACQUIROR"), and PEOPLE'S BANCSHARES, INC., a
Massachusetts corporation ("TARGET").
INTRODUCTORY STATEMENTS
The parties hereto intend that the Merger as defined herein shall
qualify as a reorganization under the provisions of Section 368(a) of the IRC
(as defined in SECTION 8.1) for federal income tax purposes.
Acquiror and Target each desire to make certain representations,
warranties and agreements in connection with the business combination and
related transactions provided for herein and to prescribe various conditions to
such transactions.
As a condition and inducement to Acquiror's willingness to enter into
this Agreement, (i) Acquiror and Target are entering into a Stock Option
Agreement dated as of the date hereof in the form of Exhibit A (the "STOCK
OPTION AGREEMENT"), pursuant to which Target is granting to Acquiror an option
to purchase shares of Target Common Stock (as defined in SECTION 8.1) and (ii)
certain members of the Board of Directors of Target have entered into an
agreement dated as of the date hereof in the form of Exhibit B pursuant to which
---------
they will vote their shares of Target Common Stock in favor of this Agreement
and the transactions contemplated hereby.
In consideration of their mutual promises and obligations hereunder,
the parties hereto adopt and make this Agreement and prescribe the terms and
conditions hereof and the manner and basis of carrying it into effect, which
shall be as follows:
ARTICLE I
THE MERGER
----------
Section 1.1. STRUCTURE OF THE MERGER. On the Effective Date (as
defined in SECTION 7.1), Target will merge with and into Acquiror ("MERGER")
pursuant to the provisions of, and with the effect provided for in, the Delaware
General Corporation Law ("DGCL") and, to the extent necessary, pursuant to the
provisions of, and with the effect provided for in, the Massachusetts General
Corporation Law ("MGCL"). Upon consummation of the Merger, the separate
corporate existence of Target shall cease. Acquiror shall be the surviving
corporation (hereinafter sometimes referred to in such capacity as the
"SURVIVING CORPORATION") in the Merger and shall continue to be governed by the
DGCL and its name and separate corporate existence, with all of its rights,
privileges, immunities, powers and franchises, shall continue unaffected by the
Merger. From and after the Effective Time (as defined in SECTION 7.1), Acquiror
shall possess all of the properties and rights and be subject to all of the
liabilities and
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obligations of Target, all as more fully described in the DGCL, and, to the
extent necessary, in the MGCL.
Section 1.2. EFFECT ON OUTSTANDING SHARES OF TARGET COMMON STOCK.
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(a) Subject to the provisions of SECTIONS 1.3 and 6.1 hereof, by
virtue of the Merger, automatically and without any action on the part of the
holder thereof, each share of Target Common Stock issued and outstanding at the
Effective Time, other than Excluded Shares (as defined in SECTION 8.1), shall
become and be converted into, at the election of the holder as provided in and
subject to the limitations set forth in this Agreement, either (i) the right to
receive $22.00 in cash without interest (the "CASH CONSIDERATION") or (ii) the
number of shares Acquiror Common Stock (as defined in SECTION 8.1) equal to the
Exchange Ratio (as defined below) (the "STOCK CONSIDERATION"). The Cash
Consideration and the Stock Consideration are sometimes referred to herein
collectively as the "MERGER CONSIDERATION." The Exchange Ratio shall be equal
(rounded to the nearest ten-thousandth) to (x) 1.2644 if the Average Closing
Price (as defined in SECTION 6.1) is less than $20.88, or (y) if the Average
Closing Price is $20.88 or more, the result obtained by dividing (A) $26.40 by
(B) the Average Closing Price.
(b) Notwithstanding any other provision of this Agreement, no fraction
of a share of Acquiror Common Stock and no certificates or scrip therefor will
be issued in the Merger; instead, Acquiror shall pay to each holder of Target
Common Stock who would otherwise be entitled to a fraction of a share of
Acquiror Common Stock an amount in cash, rounded to the nearest cent, determined
by multiplying such fraction by the Average Closing Price.
(c) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Acquiror Common Stock shall have been changed into a
different number of shares or into a different class by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares, the Merger Consideration shall be adjusted appropriately to
provide the holders of Target Common Stock the same economic effect as
contemplated by this Agreement prior to such event.
(d) As of the Effective Time, each Excluded Share, other than
Dissenters' Shares (as defined in SECTION 1.9), shall be canceled and retired
and shall cease to exist, and no exchange or payment shall be made with respect
thereto. All shares of Acquiror Common Stock that are held by Target, if any,
other than shares held in a fiduciary capacity or in satisfaction of a debt
previously contracted, shall be canceled and shall constitute authorized but
unissued shares. In addition, no Dissenters' Shares shall be converted into the
Merger Consideration pursuant to this SECTION 1.2 but instead shall be treated
in accordance with the provisions set forth in SECTION 1.9 of this Agreement.
Section 1.3. ELECTION AND PRORATION PROCEDURES.
---------------------------------
(a) An election form (an "ELECTION FORM") and other appropriate and
customary transmittal materials, which shall specify that delivery shall be
effected, and risk of loss
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and title to the certificates theretofore representing Target Common Stock
("CERTIFICATES") shall pass, only upon proper delivery of such Certificates to a
bank or trust company designated by Acquiror and reasonably satisfactory to
Target (the "EXCHANGE AGENT") in such form as Target and Acquiror shall mutually
agree shall be mailed on the Mailing Date (as defined below) to each holder of
record of shares of Target Common Stock as of a record date which shall be the
same date as the record date for eligibility to vote on the Merger. The "MAILING
DATE" shall be the date on which proxy materials relating to the Merger are
mailed to holders of shares of Target Common Stock.
(b) Each Election Form shall entitle the holder of shares of Target
Common Stock (or the beneficial owner through appropriate and customary
documentation and instructions) to (i) elect to receive the Cash Consideration
for all of such holder's shares (a "CASH ELECTION"), (ii) elect to receive the
Stock Consideration for all of such holder's shares (a "STOCK ELECTION"), (iii)
elect to receive the Cash Consideration with respect to some of such holder's
shares and the Stock Consideration with respect to such holder's remaining
shares (a "MIXED ELECTION"), or (iv) make no election or to indicate that such
holder has no preference as to the receipt of the Cash Consideration or the
Stock Consideration (a "NON-ELECTION"). Holders of record of shares of Target
Common Stock who hold such shares as nominees, trustees or in other
representative capacities (a "REPRESENTATIVE") may submit multiple Election
Forms, provided that such Representative certifies that each such Election Form
covers all the shares of Target Common Stock held by that Representative for a
particular beneficial owner. Shares of Target Common Stock as to which a Cash
Election has been made (including pursuant to a Mixed Election) are referred to
herein as "CASH ELECTION SHARES." Shares of Target Common Stock as to which a
Stock Election has been made (including pursuant to a Mixed Election) are
referred to herein as "STOCK ELECTION SHARES." Shares of Target Common Stock as
to which no election has been made are referred to as "NON-ELECTION SHARES." The
aggregate number of shares of Target Common Stock with respect to which a Stock
Election has been made is referred to herein as the "STOCK ELECTION NUMBER."
(c) To be effective, a properly completed Election Form shall be
submitted to the Exchange Agent on or before 5:00 p.m., New York City time, on
the second business day immediately preceding Target's Stockholder Meeting (or
such other time and date as Target and Acquiror may mutually agree) (the
"ELECTION DEADLINE"). An election shall have been properly made only if the
Exchange Agent shall have actually received a properly completed Election Form
by the Election Deadline. An Election Form shall be deemed properly completed
only if accompanied by one or more Certificates (or customary affidavits and, if
required by Acquiror pursuant to SECTION 1.4(I), indemnification regarding the
loss or destruction of such Certificates or the guaranteed delivery of such
Certificates) representing all shares of Target Common Stock covered by such
Election Form, together with duly executed transmittal materials included with
the Election Form. Any Target stockholder may at any time prior to the Election
Deadline change his or her election by written notice received by the Exchange
Agent prior to the Election Deadline accompanied by a properly completed and
signed revised Election Form. Any Target stockholder may, at any time prior to
the Election Deadline, revoke his or her election by written notice received by
the Exchange Agent prior to the Election Deadline or by withdrawal prior to the
Election Deadline of his or her Certificates, or of the guarantee of delivery of
such
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Certificates, previously deposited with the Exchange Agent. All elections shall
be revoked automatically if the Exchange Agent is notified in writing by
Acquiror and Target that this Agreement has been terminated. If a stockholder
either (i) does not submit a properly completed Election Form by the Election
Deadline, or (ii) revokes its Election Form prior to the Election Deadline and
does not submit a new properly executed Election Form prior to the Election
Deadline, the shares of Target Common Stock held by such stockholder shall be
designated Non- Election Shares. Acquiror shall cause the Certificates
representing Target Common Stock described in (ii) to be promptly returned
without charge to the person submitting the Election Form upon written request
to that effect from the person who submitted the Election Form. Subject to the
terms of this Agreement and of the Election Form, the Exchange Agent shall have
reasonable discretion to determine whether any election, revocation or change
has been properly or timely made and to disregard immaterial defects in any
Election Form, and any good faith decisions of the Exchange Agent regarding such
matters shall be binding and conclusive.
(d) Notwithstanding any other provision contained in this Agreement,
45% of the total number of shares of Target Common Stock outstanding at the
Effective Time (the "STOCK CONVERSION NUMBER") shall be converted into the Stock
Consideration and the remaining outstanding shares of Target Common Stock shall
be converted into the Cash Consideration (in each case, excluding (i) shares of
Target Common Stock to be canceled as provided in SECTION 1.2(D) and (ii)
Dissenters' Shares (the shares remaining outstanding after such exclusion
constituting, for purposes of this Agreement, the "OUTSTANDING TARGET SHARES"));
PROVIDED, HOWEVER, that for federal income tax purposes, it is intended that the
Merger will qualify as a reorganization under the provisions of Section 368(a)
of the IRC and, notwithstanding anything to the contrary contained herein, in
order that the Merger will not fail to satisfy continuity of interest
requirements under applicable federal income tax principles relating to
reorganizations under Section 368(a) of the IRC, Acquiror shall increase the
number of shares of Target Common Stock that will be converted into the Stock
Consideration and reduce the number of shares of Target Common Stock that will
be converted into the right to receive the Cash Consideration to ensure that the
Stock Consideration will represent 40% of the value of the aggregate Merger
Consideration, increased by the value of any Excluded Shares, each as measured
as of the Effective Time.
(e) Within three business days after the later to occur of the
Election Deadline or the Effective Time, Acquiror shall cause the Exchange Agent
to effect the allocation among holders of Target Common Stock of rights to
receive the Cash Consideration and the Stock Consideration as follows:
(i) If the Stock Election Number exceeds the Stock Conversion
Number, then all Cash Election Shares and all Non-Election Shares shall be
converted into the right to receive the Cash Consideration, and each holder of
Stock Election Shares will be entitled to receive the Stock Consideration in
respect of that number of Stock Election Shares equal to the product obtained by
multiplying (x) the number of Stock Election Shares held by such holder by (y) a
fraction, the numerator of which is the Stock Conversion Number and the
denominator of which is the Stock Election Number, with the remaining number of
such holder's Stock Election Shares being converted into the right to receive
the Cash Consideration;
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(ii) If the Stock Election Number is less than the Stock
Conversion Number (the amount by which the Stock Conversion Number exceeds the
Stock Election Number being referred to herein as the "SHORTFALL NUMBER"), then
all Stock Election Shares shall be converted into the right to receive the Stock
Consideration and the Non-Election Shares and Cash Election Shares shall be
treated in the following manner:
(A) if the Shortfall Number is less than or equal to the
number of Non-Election Shares, then all Cash Election Shares shall be converted
into the right to receive the Cash Consideration and each holder of Non-Election
Shares shall receive the Stock Consideration in respect of that number of
Non-Election Shares equal to the product obtained by multiplying (x) the number
of Non-Election Shares held by such holder by (y) a fraction, the numerator of
which is the Shortfall Number and the denominator of which is the total number
of Non-Election Shares, with the remaining number of such holder's Non-Election
Shares being converted into the right to receive the Cash Consideration; or
(B) if the Shortfall Number exceeds the number of
Non-Election Shares, then all Non-Election Shares shall be converted into the
right to receive the Stock Consideration, and each holder of Cash Election
Shares shall receive the Stock Consideration in respect of that number of Cash
Election Shares equal to the product obtained by multiplying (x) the number of
Cash Election Shares held by such holder by (y) a fraction, the numerator of
which is the amount by which (1) the Shortfall Number exceeds (2) the total
number of Non-Election Shares and the denominator of which is the total number
of Cash Election Shares, with the remaining number of such holder's Cash
Election Shares being converted into the right to receive the Cash
Consideration.
For purposes of this SECTION 1.3(E), if Acquiror is obligated to
increase the number of Outstanding Target Shares to be converted into shares of
Acquiror Common Stock as a result of the application of the last clause of
SECTION 1.3(D) above, then the higher number shall be substituted for the Stock
Conversion Number in the calculations set forth in this SECTION 1.3(E).
Section 1.4. EXCHANGE PROCEDURES.
-------------------
(a) Appropriate transmittal materials ("LETTER OF TRANSMITTAL") in a
form satisfactory to Acquiror and Target shall be mailed within three business
days after the Effective Time to each holder of record of Target Common Stock as
of the Effective Time who did not previously submit a completed Election Form. A
Letter of Transmittal will be deemed properly completed only if accompanied by
certificates representing all shares of Target Common Stock to be converted
thereby.
(b) At and after the Effective Time, each Certificate (except as
specifically set forth in SECTION 1.2) shall represent only the right to receive
the Merger Consideration.
(c) Prior to the Effective Time, Acquiror shall deposit, or shall
cause to be deposited, with the Exchange Agent, for the benefit of the holders
of shares of Target Common Stock, for exchange in accordance with this SECTION
1.4, an amount of cash sufficient to pay the
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aggregate Cash Consideration and the aggregate amount of cash in lieu of
fractional shares to be paid pursuant to SECTION 1.2, and Acquiror shall reserve
for issuance with its transfer agent and registrar a sufficient number of shares
of Acquiror Common Stock to provide for payment of the aggregate Stock
Consideration.
(d) The Letter of Transmittal shall (i) specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent, (ii) be in a form and
contain any other provisions as Acquiror may reasonably determine and (iii)
include instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon the proper surrender of the
Certificates to the Exchange Agent, together with a properly completed and duly
executed Letter of Transmittal, the holder of such Certificates shall be
entitled to receive in exchange therefor (m) a certificate representing that
number of whole shares of Acquiror Common Stock that such holder has the right
to receive pursuant to SECTION 1.2, if any, and (n) a check in the amount equal
to the cash that such holder has the right to receive pursuant to SECTION 1.2,
if any, (including any cash in lieu of fractional shares, if any, that such
holder has the right to receive pursuant to SECTION 1.2) and any dividends or
other distributions to which such holder is entitled pursuant to this SECTION
1.4. Certificates so surrendered shall forthwith be canceled. As soon as
practicable following receipt of the properly completed Letter of Transmittal
and any necessary accompanying documentation, the Exchange Agent shall
distribute Acquiror Common Stock and cash as provided herein. The Exchange Agent
shall not be entitled to vote or exercise any rights of ownership with respect
to the shares of Acquiror Common Stock held by it from time to time hereunder,
except that it shall receive and hold all dividends or other distributions paid
or distributed with respect to such shares for the account of the persons
entitled thereto. If there is a transfer of ownership of any shares of Target
Common Stock not registered in the transfer records of Target, the Merger
Consideration shall be issued to the transferee thereof if the Certificates
representing such Target Common Stock are presented to the Exchange Agent,
accompanied by all documents required, in the reasonable judgment of Acquiror
and the Exchange Agent, (x) to evidence and effect such transfer and (y) to
evidence that any applicable stock transfer taxes have been paid.
(e) No dividends or other distributions declared or made after the
Effective Time with respect to Acquiror Common Stock issued pursuant to this
Agreement shall be remitted to any person entitled to receive shares of Acquiror
Common Stock hereunder until such person surrenders his or her Certificates in
accordance with this SECTION 1.4. Upon the surrender of such person's
Certificates, such person shall be entitled to receive any dividends or other
distributions, without interest thereon, which subsequent to the Effective Time
had become payable but not paid with respect to shares of Acquiror Common Stock
represented by such person's Certificates.
(f) The stock transfer books of Target shall be closed immediately
upon the Effective Time and from and after the Effective Time there shall be no
transfers on the stock transfer records of Target of any shares of Target Common
Stock. If, after the Effective Time, Certificates are presented to Acquiror,
they shall be canceled and exchanged for the Merger Consideration deliverable in
respect thereof pursuant to this Agreement in accordance with the procedures set
forth in this SECTION 1.4.
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(g) Any portion of the aggregate amount of cash to be paid pursuant to
SECTION 1.2, any dividends or other distributions to be paid pursuant to this
SECTION 1.4 or any proceeds from any investments thereof that remains unclaimed
by the stockholders of Target for six months after the Effective Time shall be
repaid by the Exchange Agent to Acquiror upon the written request of Acquiror.
After such request is made, any stockholders of Target who have not theretofore
complied with this SECTION 1.4 shall look only to Acquiror for the Merger
Consideration deliverable in respect of each share of Target Common Stock such
stockholder holds, as determined pursuant to SECTION 1.2 of this Agreement,
without any interest thereon. If outstanding Certificates are not surrendered
prior to the date on which such payments would otherwise escheat to or become
the property of any governmental unit or agency, the unclaimed items shall, to
the extent permitted by any abandoned property, escheat or other applicable
laws, become the property of Acquiror (and, to the extent not in its possession,
shall be paid over to it), free and clear of all claims or interest of any
person previously entitled to such claims. Notwithstanding the foregoing,
neither the Exchange Agent nor any party to this Agreement (or any affiliate
thereof) shall be liable to any former holder of Target Common Stock for any
amount delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(h) Acquiror and the Exchange Agent shall be entitled to rely upon
Target's stock transfer books to establish the identity of those persons
entitled to receive the Merger Consideration, which books shall be conclusive
with respect thereto. In the event of a dispute with respect to ownership of
stock represented by any Certificate, Acquiror and the Exchange Agent shall be
entitled to deposit any Merger Consideration represented thereby in escrow with
an independent third party and thereafter be relieved with respect to any claims
thereto.
(i) If any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Certificate
to be lost, stolen or destroyed and, if required by the Exchange Agent of
Acquiror, the posting by such person of a bond in such amount as the Exchange
Agent may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate the Merger Consideration deliverable in
respect thereof pursuant to SECTION 1.2.
Section 1.5. EFFECT ON OUTSTANDING SHARES OF ACQUIROR COMMON STOCK. At
and after the Effective Time, each share of Acquiror Common Stock issued and
outstanding immediately prior to the Effective Time shall remain an issued and
outstanding share of common stock of the Surviving Corporation and shall not be
affected by the Merger.
Section 1.6. DIRECTORS OF ACQUIROR AFTER EFFECTIVE TIME. Immediately
after the Effective Time, until their respective successors are duly elected or
appointed and qualified, the directors of the Surviving Corporation shall
consist of (i) the directors of Acquiror serving immediately prior to the
Effective Time and (ii) one director of Target as designated by Target pursuant
to SECTION 4.12(E) hereof.
Section 1.7. CERTIFICATE OF INCORPORATION AND BYLAWS OF ACQUIROR AFTER
--------------------------------------------------------
EFFECTIVE TIME. The certificate of incorporation and bylaws of Acquiror in
--------------
effect immediately
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prior to the Effective Time shall be the certificate of incorporation and bylaws
of the Surviving Corporation until thereafter amended in accordance with
applicable law.
Section 1.8. TARGET STOCK OPTIONS.
--------------------
(a) Each option to purchase shares of Target Common Stock issued by
Target and outstanding at the Effective Time (a "TARGET OPTION") pursuant to
Target's Amended and Restated Directors' Stock Option Plan, Target's Amended and
Restated Incentive and Nonqualified Stock Option Plan and Target's 1996 Stock
Option and Incentive Plan (collectively, the "Target Stock Plans") shall be
converted into an option to purchase shares of Acquiror Common Stock as follows:
(i) The aggregate number of shares of Acquiror Common Stock
issuable upon the exercise of the converted Target Option after the Effective
Time shall be equal to the product of the Exchange Ratio multiplied by the
number of shares of Target Common Stock issuable upon exercise of the Target
Option immediately prior to the Effective Time, such product to be rounded to
the nearest whole share of Acquiror Common Stock; and
(ii) the exercise price per share of each converted Target Option
shall be equal to the quotient of the exercise price of such Target Option
immediately prior to the Effective Time divided by the Exchange Ratio, such
quotient to be rounded to the nearest whole cent; PROVIDED, HOWEVER, that, in
the case of any Target Option that is intended to qualify as an incentive stock
option under Section 422 of the IRC, the number of shares of Acquiror Common
Stock issuable upon exercise of and the exercise price per share for such
converted Target Option determined in the manner provided above shall be further
adjusted in such manner as Acquiror may determine to be necessary to conform to
the requirements of Section 424(b) of the IRC. Options to purchase shares of
Acquiror Common Stock that arise from the operation of this SECTION 1.8 shall be
referred to as the "CONVERTED OPTIONS." All Converted Options shall be
exercisable for the same period and shall otherwise have the same terms and
conditions applicable to the Target Options that they replace. Prior to the
Effective Time, Acquiror shall take, or cause to be taken, all necessary action
to effect the intent of the provisions set forth in this SECTION 1.8.
(b) At the Effective Time, by virtue of the Merger and without the
need of any further corporate action, Acquiror shall assume the Target Stock
Plans, with the result that all obligations of Target under the Target Stock
Plans, including with respect to Target Options outstanding at the Effective
Time, shall be obligations of Acquiror from and after the Effective Time.
(c) Acquiror shall take all corporate action necessary to reserve for
future issuance a sufficient additional number of shares of Acquiror Common
Stock to provide for the satisfaction of its obligations with respect to the
Converted Options. Acquiror agrees to file and cause to become effective, no
later than five business days subsequent to the Effective Time, a registration
statement on Form S-8 (or any successor or other appropriate form) and make any
state filings or obtain state exemptions with respect to the Acquiror Common
Stock issuable upon exercise of the Converted Options. Such registration
statement shall be kept effective (and the
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current status of the prospectus or prospectuses required thereby shall be
maintained) at least for so long as any Converted Options or any unsettled
awards granted under the Target Stock Plans after the Effective Time may remain
outstanding.
(d) As soon as practicable after the Effective Time, Acquiror shall
deliver to the holders of Target Options appropriate notices setting forth such
holders' rights pursuant to the respective Target Stock Plans and the agreements
evidencing the grants of such Target Options and that such Target Options and
agreements have been assumed by Acquiror and shall continue in effect on the
same terms and conditions (subject to the adjustments required by this SECTION
1.8 after giving effect to the Merger).
Section 1.9. DISSENTERS' RIGHTS. Notwithstanding any other provision
------------------
of this Agreement to the contrary, shares of Target Common Stock that are
outstanding immediately prior to the Effective Time and which are held by
stockholders who shall have not voted in favor of the Merger or consented
thereto in writing and who properly shall have demanded appraisal for such
shares in accordance with the MGCL (collectively, the "DISSENTERS' SHARES")
shall not be converted into or represent the right to receive the Merger
Consideration. Such stockholders instead shall be entitled to receive payment of
the appraised value of such shares held by them in accordance with the
provisions of the MGCL, except that all Dissenters' Shares held by stockholders
who shall have failed to perfect or who effectively shall have withdrawn or
otherwise lost their rights to appraisal of such shares under the MGCL shall
thereupon be deemed to have been converted into and to have become exchangeable,
as of the Effective Time, for the right to receive, without any interest
thereon, the Merger Consideration upon surrender in the manner provided in
SECTION 1.4 of the Target Certificate or Target Certificates that, immediately
prior to the Effective Time, evidenced such shares. Target shall give Acquiror
(i) prompt notice of any written demands for appraisal of any shares of Target
Common Stock, attempted withdrawals of such demands and any other instruments
served pursuant to the MGCL and received by Target relating to stockholders'
rights of appraisal, and (ii) the opportunity to participate in all negotiations
and proceedings with respect to demands under the MGCL consistent with the
obligations of Target thereunder. Target shall not, except with the prior
written consent of Acquiror, (x) make any payment with respect to such demand,
(y) offer to settle or settle any demand for appraisal or (z) waive any failure
to timely deliver a written demand for appraisal or timely take any other action
to perfect appraisal rights in accordance with the MGCL.
Section 1.10 BANK MERGER. Concurrently with the execution and
-----------
delivery of this Agreement, First Federal Savings Bank of America ("ACQUIROR
BANK"), a wholly owned subsidiary of Acquiror, and People's Savings Bank of
Brockton ("TARGET BANK"), a wholly owned subsidiary of Target, shall enter into
the Plan of Bank Merger, in the form attached hereto as Exhibit C, pursuant to
---------
which Target Bank will merge with and into Acquiror Bank (the "BANK MERGER").
The parties intend that the Bank Merger will become effective on the Effective
Date. The Plan of Bank Merger shall provide that the directors of Acquiror Bank
as the surviving entity of the Bank Merger shall be all of the directors of
Acquiror Bank serving immediately prior to the Bank Merger and one director of
Target Bank (such person being the same person designated to Acquiror's board of
directors pursuant to SECTION 4.12(E) hereof) until their respective successors
are duly elected or appointed and qualified.
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Section 1.11 ALTERNATIVE STRUCTURE. Notwithstanding anything to the
---------------------
contrary contained in this Agreement, prior to the Effective Time, Acquiror may
specify that the structure of the transactions contemplated by this Agreement be
revised and the parties shall enter into such alternative transactions as
Acquiror may determine to effect the purposes of this Agreement; PROVIDED,
HOWEVER, that such revised structure shall not (i) alter or change the amount or
kind of the Merger Consideration, (ii) change the intended federal income tax
consequences of the transactions contemplated by this Agreement, or (iii)
impede, delay, or reduce the likelihood of, the receipt of any regulatory
approval referred to in, or the consummation of the transactions contemplated
by, this Agreement. This Agreement and any related documents shall be
appropriately amended in order to reflect any such revised structure, and
Acquiror shall promptly reimburse Target for any expenses incurred by Target in
connection with or as a result of any such amendments.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 2.1. DISCLOSURE LETTERS. Prior to the execution and delivery
------------------
of this Agreement, Acquiror and Target have each delivered to the other a letter
(each, its "DISCLOSURE LETTER") setting forth, among other things, facts,
circumstances and events the disclosure of which is required by their respective
representations and warranties (and making specific reference to the Section of
this Agreement to which they relate); provided that (i) no such fact,
circumstance or event is required to be set forth in the Disclosure Letter as an
exception to a representation or warranty if its absence is not reasonably
likely to result in the related representation or warranty being deemed untrue
or incorrect such that the effect thereof would result in the conditions set
forth in SECTION 5.2(A) or SECTION 5.3(A), as applicable, not being satisfied,
and (ii) the mere inclusion of a fact, circumstance or event in a Disclosure
Letter shall not be deemed an admission by a party that such item represents a
material exception or that such item is reasonably likely to result in a
Material Adverse Effect (as defined in SECTION 8.1 hereof). Any matter disclosed
pursuant to one section of a party's Disclosure Letter shall be deemed disclosed
for all purposes of such party's Disclosure Letter.
Section 2.2. REPRESENTATIONS AND WARRANTIES OF TARGET. Target
----------------------------------------
represents and warrants to Acquiror that, except as disclosed in Target's
Disclosure Letter:
(a) Organization.
------------
(i) Target is a corporation duly organized, validly existing
and in good standing under the laws of the Commonwealth of Massachusetts and is
registered as a bank holding company under the BHC Act (as defined in SECTION
8.1).
(ii) Target has all requisite corporate power and authority to
own, lease and operate its properties and to conduct the business currently
being conducted by it. Target is duly qualified or licensed as a foreign
corporation to transact business and is in good standing in each jurisdiction in
which the character of the properties owned or leased by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
where the failure
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to be so qualified or licensed and in good standing would not have a Material
Adverse Effect on Target.
(b) Subsidiaries.
------------
(i) Target's Disclosure Letter sets forth (A) the name,
percentage ownership and number of shares of stock owned or controlled by Target
of each Subsidiary (as defined in SECTION 8.1); and (B) the jurisdiction of
incorporation and ownership of each Subsidiary. All such Subsidiaries were
properly established pursuant to, and are in compliance with, the regulations
and procedures of the Federal Reserve Bank (as defined in SECTION 8.1), the FDIC
(as defined in SECTION 8.1) and/or the Massachusetts Commissioner of Banks.
(ii) Target owns of record and beneficially all the capital
stock of each of its Subsidiaries free and clear of any claims, liens,
encumbrances or restrictions and there are no agreements or understandings with
respect to the voting or disposition of any such shares. The outstanding shares
of capital stock of each Subsidiary have been validly authorized and are validly
issued, fully paid and nonassessable. Each of Target's Subsidiaries is a
corporation duly organized and validly existing under the laws of its
jurisdiction of incorporation, has all requisite corporate power and authority
to own, lease and operate its properties and to conduct the business currently
being conducted by it and is duly qualified or licensed as a foreign corporation
to transact business and is in good standing in each jurisdiction in which the
character of the properties owned or leased by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except where
the failure to be so qualified or licensed and in good standing would not have a
Material Adverse Effect on Target.
(iii) None of Target's Subsidiaries holds shares of its capital
stock in its treasury, and there are not, and on the Closing Date (as defined in
SECTION 7.1) there will not be, outstanding (A) any options, warrants or other
rights with respect to the capital stock of any Subsidiary, (B) any securities
convertible into or exchangeable for shares of such capital stock or any other
debt or equity security of any Subsidiary or (C) any other commitments of any
kind for the issuance of additional shares of capital stock or other debt or
equity security of any Subsidiary or options, warrants or other rights with
respect to such securities.
(iv) No Subsidiary of Target other than Target Bank is an
"insured depository institution" as defined in the FDIA (as defined in SECTION
8.1) and the applicable regulations thereunder.
(c) Capital Structure.
-----------------
(i) The authorized capital stock of Target consists of:
(A) 20,000,000 shares of Target Common Stock; and
(B) 10,000,000 shares of preferred stock, par value $0.10
per share.
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(ii) As of the date of this Agreement:
(A) 3,252,250 shares of Target Common Stock are issued
and outstanding, all of which are validly issued, fully paid and nonassessable;
(B) no shares of Target preferred stock are issued and
outstanding or held in Target's treasury;
(C) 256,116 shares of Target Common Stock are reserved
for issuance pursuant to outstanding Target Options under Target's employee
benefit plans;
(D) 647,197 shares of Target Common Stock are reserved
for issuance pursuant to the Stock Option Agreement; and
(E) 473,000 shares of Target Common Stock are held by
Target in its treasury or by its Subsidiaries.
(iii) Set forth in Target's Disclosure Letter is a complete and
accurate list of all outstanding Target Options, including the names of the
optionees, dates of grant, exercise prices, dates of vesting, dates of
termination, shares subject to each grant and whether stock appreciation,
limited or other similar rights were granted in connection with such options.
(iv) No bonds, debentures, notes or other indebtedness having
the right to vote on any matters on which stockholders of Target may vote are
issued or outstanding.
(v) Except as set forth in this SECTION 2.2(C), as of the date
of this Agreement, (A) no shares of capital stock or other voting securities of
Target are issued, reserved for issuance or outstanding and (B) neither Target
nor any of its Subsidiaries has or is bound by any outstanding subscriptions,
options, warrants, calls, rights, convertible securities, commitments or
agreements of any character obligating Target or any of its Subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold, any additional
shares of capital stock of Target or obligating Target or any of its
Subsidiaries to grant, extend or enter into any such option, warrant, call,
right, convertible security, commitment or agreement. As of the date hereof,
there are no outstanding contractual obligations of Target or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of Target or any of its Subsidiaries.
(d) Authority. Target has all requisite corporate power and authority
---------
to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement have been duly authorized by all necessary corporate actions
on the part of Target's Board of Directors, and no other corporate proceedings
on the part of Target are necessary to authorize this Agreement or to consummate
the transactions contemplated by this Agreement other than the approval and
adoption of this Agreement by the affirmative vote of the holders of a majority
of the outstanding shares of Target Common Stock. This Agreement has been duly
and validly executed and
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delivered by Target and constitutes a valid and binding obligation of Target,
enforceable against Target in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights and remedies
generally and, as to enforceability, to general principles of equity, whether
applied in a court of law or a court of equity.
(e) Fairness Opinion. Target has received the opinion of Fox-Pitt,
----------------
Kelton, Inc. ("FOX-PITT") to the effect that, as of the date hereof, the Merger
Consideration to be received by Target's stockholders is fair, from a financial
point of view, to such stockholders.
(f) No Violations; Consents.
-----------------------
(i) The execution, delivery and performance of this Agreement
by Target do not, and the consummation of the transactions contemplated by this
Agreement will not, (A) assuming that the consents and approvals referred to in
SECTION 2.2(F)(II) are obtained and the applicable waiting periods have expired
and the approval of Target's stockholders is obtained, violate any law, rule or
regulation or any judgment, decree, order, governmental permit or license to
which Target or any of its Subsidiaries (or any of their respective properties)
is subject, (B) violate the articles of organization or bylaws of Target or the
similar organizational documents of any of its Subsidiaries or (C) constitute a
breach or violation of, or a default under (or an event which, with due notice
or lapse of time or both, would constitute a default under), or result in the
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other encumbrance
upon any of the properties or assets of Target or any of its Subsidiaries under,
any of the terms, conditions or provisions of any note, bond, indenture, deed of
trust, loan agreement or other agreement, instrument or obligation to which
Target or any of its Subsidiaries is a party, or to which any of their
respective properties or assets may be subject, except, in the case of (C), for
any such breaches, violations or defaults that would not, individually or in the
aggregate, have a Material Adverse Effect on Target.
(ii) Except for (A) the filing of an application with the OTS
(as defined in SECTION 8.1) under the Bank Merger Act (as defined in SECTION
8.1) and the HOLA (as defined under SECTION 8.1) and approval of such
application, (B) the filing of articles of merger or consolidation with the
Secretary of State of Massachusetts pursuant to the MGCL, and the filing of a
certificate of merger with the Secretary of State of the State of Delaware
pursuant to the DGCL, (C) the registration under the Securities Act (as defined
in SECTION 8.1) of the shares of Acquiror Common Stock to be issued in exchange
for shares of Target Common Stock, (D) the registration or qualification of the
shares of Acquiror Common Stock to be issued in exchange for shares of Target
Common Stock under state securities or "blue sky" laws, (E) the listing of the
shares of Acquiror Common Stock to be issued in exchange for shares of Target
Common Stock on the American Stock Exchange, subject to official notice of
issuance, and (F) such filings, authorizations or approvals as may be set forth
in Target's Disclosure Letter, no consents or approvals of or filings or
registrations with any Governmental Entity (as defined in SECTION 8.1) or with
any third party are necessary in connection with the execution and delivery by
Target of this Agreement or the consummation by Target of the Merger and the
other transactions contemplated by this Agreement, including the Bank Merger. As
of the date hereof, Target knows of no reason pertaining to Target why any of
the approvals referred to in this SECTION 2.2(F)(II) should not be
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obtained without the imposition of any material condition or restriction
described in SECTION 5.1(B).
(g) Reports and Financial Statements.
--------------------------------
(i) Target and each of its Subsidiaries has timely filed all
reports, registration statements, prospectuses, forms and other documents
together with any amendments required to be made with respect thereto, required
to be filed since December 31, 1997 with (A) the FDIC, (B) the Federal Reserve
Board, (C) the NASD (as defined in SECTION 8.1), (D) the Massachusetts
Commissioner of Banks, (E) the Commonwealth of Massachusetts, and (F) the SEC
(as defined in SECTION 8.1) (including any filings on Form 8-K) (collectively,
"TARGET'S REPORTS") and have paid all fees and assessments due and payable in
connection therewith. As of their respective dates, none of Target's Reports
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading (except to the extent revised or superseded by a later-filed Target
Report). All of Target's Reports, as amended, filed with the SEC complied in all
material respects with the applicable requirements of the Securities Act or the
Exchange Act (as defined in SECTION 8.1), as the case may be, and the rules and
regulations of the SEC promulgated thereunder.
(ii) Each of the financial statements (including, in each
case, any notes thereto) of Target included in Target's Reports filed with the
SEC complied as to form, as of their respective dates of filing with the SEC, in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto. The financial
statements included in Target's Reports were prepared from the books and records
of Target and its Subsidiaries, fairly present the consolidated financial
position of Target and its Subsidiaries in each case at and as of the dates
indicated and the consolidated results of operations, retained earnings and cash
flows of Target and its Subsidiaries for the periods indicated, and, except as
otherwise set forth in the notes thereto, were prepared in accordance with GAAP
(as defined in SECTION 8.1) consistently applied throughout the periods covered
thereby; PROVIDED, HOWEVER, that the unaudited financial statements for interim
periods are subject to normal year-end adjustments (which will not be material
individually or in the aggregate) and lack a statement of cash flows and
footnotes to the extent permitted under applicable regulations.
(h) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Target's Reports filed with the SEC prior to the date of this Agreement, since
June 30, 2001, (i) Target and its Subsidiaries have not incurred any material
liability, except in the ordinary course of their business consistent with past
practice or in connecti on with this Agreement or the transactions contemplated
hereby, (ii) Target and its Subsidiaries have conducted their respective
businesses only in the ordinary and usual course of such businesses consistent
with their past practices, (iii) there has not been any event or occurrence that
has had, or is reasonably expected to have, a Material Adverse Effect on Target,
(iv) there has been no increase in the salary, compensation, pension or other
benefits payable or to become payable by Target or any of its Subsidiaries to
any of their respective directors, officers or employees, other than in
conformity with the policies and practices of such entity in the usual and
ordinary course of its business, (v) neither Target nor any
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of its Subsidiaries has paid or made any accrual or arrangement for payment of
bonuses or special compensation of any kind or any severance or termination pay
to any of their directors, officers or employees, and (vi) there has been no
change in any accounting principles, practices or methods of Target or any of
its Subsidiaries other than as required by GAAP.
(i) Absence of Claims. No litigation, controversy, claim, action,
-----------------
suit or other legal, administrative or arbitration proceeding before any court,
governmental agency or arbitrator is pending against Target or any of its
Subsidiaries and, to the knowledge of Target, no such litigation, controversy,
claim, action, suit or proceeding has been threatened. To the knowledge of
Target, there are no investigations, reviews or inquiries by any court or
governmental agency pending or threatened against Target or any of its
Subsidiaries. There are no judgments, decrees, injunctions, orders or rulings of
any Governmental Entity or arbitrator outstanding against Target or any of its
Subsidiaries.
(j) Absence of Regulatory Actions. Since December 31, 1997, neither
-----------------------------
Target nor any of its Subsidiaries has been a party to any cease and desist
order, written agreement or memorandum of understanding with, or any commitment
letter or similar undertaking to, or has been subject to any action, proceeding,
order or directive by, or has been a recipient of any extraordinary supervisory
letter from any Government Regulator (as defined in SECTION 8.1), or has adopted
any board resolutions at the request of any Government Regulator, in any case
which is currently in effect, or has been advised by any Government Regulator
that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such action, proceeding, order,
directive, written agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter, board resolutions or similar undertaking.
(k) Taxes. All federal, state, local and foreign tax returns required
-----
to be filed by or on behalf of Target or any of its Subsidiaries have been
timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns, all taxes required to be shown on returns for which extensions
have been granted and all other taxes required to be paid by Target or any of
its Subsidiaries have been paid in full or adequate provision has been made for
any such taxes on Target's balance sheet (in accordance with GAAP). As of the
date of this Agreement, there is no audit examination, deficiency assessment,
tax investigation or refund litigation with respect to any taxes of Target or
any of its Subsidiaries, and no claim has been made by any authority in a
jurisdiction where Target or any of its Subsidiaries do not file tax returns
that Target or any such Subsidiary is subject to taxation in that jurisdiction.
All taxes, interest, additions and penalties due with respect to completed and
settled examinations or concluded litigation relating to Target or any of its
Subsidiaries have been paid in full or adequate provision has been made for any
such taxes on Target's balance sheet (in accordance with GAAP). Target and its
Subsidiaries have not executed an extension or waiver of any statute of
limitations on the assessment or collection of any material tax due that is
currently in effect. Target and each of its Subsidiaries has withheld and paid
all taxes required to have been withheld and paid in connection with amounts
paid or owing to any employee, independent contractor, creditor, stockholder or
other third party, and Target and each of its Subsidiaries has timely complied
with all applicable information reporting requirements
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under Part III, Subchapter A of Chapter 61 of the IRC and similar applicable
state and local information reporting requirements.
(l) Agreements.
----------
(i) Except for this Agreement and the Stock Option Agreement,
Target and its Subsidiaries are not bound by any material contract (as defined
in Item 601(b)(10) of Regulation S-K promulgated by the SEC), to be performed
after the date hereof that has not been filed with or incorporated by reference
in Target's Reports.
(ii) Target's Disclosure Letter lists any contract,
arrangement, commitment or understanding (whether written or oral) to which
Target or any of its Subsidiaries is a party or is bound:
(A) with any executive officer or other key employee of
Target or any of its Subsidiaries the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving Target or any of its Subsidiaries of the nature contemplated by this
Agreement;
(B) with respect to the employment of any directors,
officers employees or consultants (other than at-will arrangements with
employees);
(C) any of the benefits of which will be increased, or the
vesting or payment of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement, or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement (including any stock option
plan, phantom stock or stock appreciation rights plan, restricted stock plan or
stock purchase plan);
(D) containing covenants that limit the ability of Target
or any of its Subsidiaries to compete in any line of business or with any
person, or that involve any restriction on the geographic area in which, or
method by which, Target (including any successor thereof) or any of its
Subsidiaries may carry on its business (other than as may be required by law or
any regulatory agency);
(E) pursuant to which Target or any of its Subsidiaries
may become obligated to invest in or contribute capital to any entity;
(F) not fully disclosed in Target's Reports that relates
to borrowings of money (or guarantees thereof) by Target or any of its
Subsidiaries in excess of $75,000; or
(G) which is a lease or license with respect to any
property, real or personal, whether as landlord, tenant, licensor or licensee,
involving a liability or obligation as obligor in excess of $100,000 on an
annual basis.
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Each of the agreements and other documents referenced in Target's
Disclosure Letter is a valid, binding and enforceable obligation of Target or a
Subsidiary, as applicable, and, to the knowledge of Target each of the other
parties sought to be bound thereby, subject to applicable bankruptcy, insolvency
and similar laws affecting creditors' rights and remedies generally and, as to
enforceability, to general principles of equity, whether applied in a court of
law or a court of equity. Target has previously delivered to Acquiror true and
complete copies of each agreement and other documents referenced in Section 2(l)
------------
of Target's Disclosure Letter.
(iii) Neither Target nor any of its Subsidiaries is in default
under (and no event has occurred which, with due notice or lapse of time or
both, would constitute a default under) or is in violation of any provision of
any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or
other agreement to which it is a party or by which it is bound or to which any
of its respective properties or assets is subject and, to the knowledge of
Target, no other party to any such agreement (excluding any loan or extension of
credit made by Target or any of its Subsidiaries) is in default in any respect
thereunder, except for such defaults or violations that would not, individually
or in the aggregate, have a Material Adverse Effect on Target.
(iv) Target and each of its Subsidiaries owns or possesses
valid and binding licenses and other rights to use without payment all patents,
copyrights, trade secrets, trade names, service marks and trademarks material to
its businesses, and neither Target nor any of its Subsidiaries has received any
notice of conflict with respect thereto that asserts the right of others. Each
of Target and its Subsidiaries has performed all the obligations required to be
performed by it and are not in default under any contact, agreement, arrangement
or commitment relating to any of the foregoing, except for failures to perform
or defaults that would not individually or in the aggregate, have a Material
Adverse Effect on Target.
(m) Labor Matters. Target and its Subsidiaries are in material
-------------
compliance with all applicable laws respecting employment, retention of
independent contractors and employment practices, terms and conditions of
employment and wages and hours. Neither Target nor any of its Subsidiaries is or
has, in the past five years, been a party to, or is or has, in the past five
years, been bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization with respect
to its employees, nor is Target or any of its Subsidiaries the subject of any
proceeding asserting that it has committed an unfair labor practice or seeking
to compel it or any such Subsidiary to bargain with any labor organization as to
wages and conditions of employment nor, to the knowledge of Target, has any such
proceeding been threatened, nor is there any strike, other labor dispute or
organizational effort involving Target or any of its Subsidiaries pending or, to
the knowledge of Target, threatened.
(n) Employee Benefit Plans.
----------------------
(i) Target's Disclosure Letter contains a complete and
accurate list of all pension, retirement, stock option, stock purchase, stock
ownership, savings, stock appreciation right, profit sharing, deferred
compensation, consulting, bonus, group insurance, severance and other benefit
plans, contracts, agreements and arrangements, including, but not limited to,
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"employee benefit plans," as defined in Section 3(3) of ERISA (as defined in
SECTION 8.1), incentive and welfare policies, contracts, plans and arrangements
and all trust agreements related thereto with respect to any present or former
directors, officers or other employees of Target or any of its Subsidiaries
(hereinafter referred to collectively as the "TARGET EMPLOYEE PLANS"). Target
has previously delivered or made available to Acquiror true and complete copies
of each agreement, plan and other documents referenced in Target's Disclosure
Letter. There has been no announcement or commitment by Target or any of its
Subsidiaries to create an additional Target Employee Plan, or to amend any
Target Employee Plan, except for amendments required by applicable law which do
not materially increase the cost of such Target Employee Plan. With respect to
each Target Employee Plan, Target has previously made available to Acquiror a
true and correct copy of (A) the annual report on the applicable form of the
Form 5500 series filed with the IRS (as defined in SECTION 8.1) for the most
recent three plan years, if required to be filed, (B) such Target Employee Plan,
including amendments thereto, (C) each trust agreement, insurance contract or
other funding arrangement relating to such Target Employee Plan, including
amendments thereto, (D) the most recent summary plan description and summary of
material modifications thereto for such Target Employee Plan, to the extent
available, if the Target Employee Plan is subject to Title I of ERISA, (E) the
most recent actuarial report or valuation if such Target Employee Plan is a
Target Pension Plan (as defined below) and any subsequent changes to the
actuarial assumptions contained therein and (F) the most recent determination
letter issued by the IRS if such Target Employee Plan is a Target Qualified Plan
(as defined below).
(ii) There is no pending or, to Target's knowledge,
threatened litigation, administrative action or proceeding relating to any
Target Employee Plan. All of the Target Employee Plans comply in all material
respects with all applicable requirements of ERISA, the IRC and other applicable
laws. There has occurred no "prohibited transaction" (as defined in Section 406
of ERISA or Section 4975 of the IRC) with respect to the Target Employee Plans
which is likely to result in the imposition of any penalties or taxes upon
Target or any of its Subsidiaries under Section 502(i) of ERISA or Section 4975
of the IRC.
(iii) No liability to the Pension Benefit Guarantee
Corporation has been or is expected by Target or any of its Subsidiaries to be
incurred with respect to any Target Employee Plan which is subject to Title IV
of ERISA ("TARGET PENSION PLAN") other than payment of premiums in the ordinary
course of business consistent with past practice, or with respect to any
"single-employer plan" (as defined in Section 4001(a) of ERISA) currently or
formerly maintained by Target or any ERISA Affiliate (as defined in SECTION
8.1). No Target Pension Plan had an "accumulated funding deficiency" (as defined
in Section 302 of ERISA), whether or not waived, as of the last day of the end
of the most recent plan year ending prior to the date hereof; the fair market
value of the assets of each Target Pension Plan exceeds the present value of the
benefit obligation (as presented in Target's most recent audited financial
statements) under such Target Pension Plan as of the end of the most recent plan
year with respect to the respective Target Pension Plan ending prior to the date
hereof, calculated on the basis of the actuarial assumptions used in Target's
audited financial statements; and no notice of a "reportable event" (as defined
in Section 4043 of ERISA) for which the 30-day reporting requirement has not
been waived has been required to be filed for any Target Pension Plan within
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the 12-month period ending on the date hereof. Neither Target nor any of its
Subsidiaries has provided, or is required to provide, security to any Target
Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to
Section 401(a)(29) of the IRC. Neither Target, its Subsidiaries, nor any ERISA
Affiliate has contributed to any "multiemployer plan," as defined in Section
3(37) of ERISA, on or after September 26, 1980.
(iv) Each Target Employee Plan that is an "employee pension
benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be
qualified under Section 401(a) of the IRC (or any such plan that existed within
the last three years) (a "TARGET QUALIFIED PLAN") has received a favorable
determination letter from the IRS, and Target and its Subsidiaries are not aware
of any circumstances likely to result in revocation of any such favorable
determination letter. No Target Qualified Plan is an "employee stock ownership
plan" (as defined in Section 4975(e)(7) of the IRC).
(v) Target and its Subsidiaries do not have any obligations
for post-retirement or post-employment benefits under any Target Employee Plan
that cannot be amended or terminated upon 60 days' notice or less without
incurring any liability thereunder, except for coverage required by Part 6 of
Title I of ERISA or Section 4980B of the IRC, or similar state laws, the cost of
which is borne by the insured individuals. With respect to Target or any of its
Subsidiaries, for the Target Employee Plans listed in Target's Disclosure
Letter, the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not result in any payment or series of
payments by Target or any of its Subsidiaries to any person which is an "excess
parachute payment" (as defined in Section 280G of the IRC) or is a nondeductible
payment under Section 162(m) of the IRC, increase or secure (by way of a trust
or other vehicle) any benefits payable under any Target Employee Plan or
accelerate the time of payment or vesting of any such benefit.
(o) Title to Assets. Target's Disclosure Letter contains a complete
---------------
and accurate list of all real property owned or leased by Target or Target's
Subsidiaries, including all properties of Target or its Subsidiaries classified
as "Real Estate Owned" or words of similar impact. Target and each of its
Subsidiaries has good and insurable title to its properties and assets
(including any intellectual property asset such as any trademark, service mark,
trade name or copyright) and property acquired in a judicial foreclosure
proceeding or by way of a deed in lieu of foreclosure or similar transfer
whether real or personal, tangible or intangible, in each case free and clear of
any liens, security interests, encumbrances, mortgages, pledges, restrictions,
charges or rights or interests of others, except (i) liens for taxes not yet due
and payable, (ii) pledges to secure deposits and other liens incurred in the
ordinary course of business, and (iii) such easements, restrictions, covenants
and encumbrances, if any, as are not material in character, amount or extent,
and do not materially detract from the value, or materially interfere with the
present use of the properties subject thereto or affected thereby. Each material
lease pursuant to which Target or any of its Subsidiaries is lessee or lessor is
valid and in full force and effect and neither Target nor any of its
Subsidiaries, nor, to Target's knowledge, any other party to any such lease is
in default or in violation of any material provisions of any such lease. All
material tangible properties of Target and each of its Subsidiaries are in a
good state of maintenance and repair (normal wear and tear excepted), and
conform with all applicable ordinances, regulations and
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zoning laws. To the knowledge of Target, none of the buildings, structures or
other improvements located on its real property encroaches upon or over any
adjoining parcel or real estate or any easement or right-of-way.
(p) Compliance with Laws. Target and each of its Subsidiaries has
--------------------
all permits, licenses, certificates of authority, orders and approvals of, and
has made all filings, applications and registrations with, all Governmental
Entities that are required in order to permit it to carry on its business as it
is presently conducted; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect, and, to the knowledge of
Target, no suspension or cancellation of any of them is threatened. Neither
Target nor any of its Subsidiaries is in violation of, and Target and its
Subsidiaries have not been given notice or been charged with any violation of,
any law, ordinance, regulation, order, writ, rule, decree or condition to
approval of any Governmental Entity which, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect on Target. All of
its buildings, structures or other improvements located on its real property are
in compliance with the requirements of the Americans with Disabilities Act of
1990, as amended.
(q) Fees. Other than financial advisory services performed for
----
Target by Fox- Pitt pursuant to an agreement dated May 10, 2001, a true and
complete copy of which has been previously delivered to Acquiror, neither Target
nor any of its Subsidiaries, nor any of their respective officers, directors,
employees or agents, has employed any broker or finder or incurred any liability
for any financial advisory fees, brokerage fees, commissions or finder's fees,
and no broker or finder has acted directly or indirectly for Target or any of
its Subsidiaries in connection with this Agreement or the transactions
contemplated hereby.
(r) Environmental Matters. With respect to Target and its
---------------------
Subsidiaries:
(i) Each of Target and its Subsidiaries, the Participation
Facilities (as defined in SECTION 8.1), and, to the knowledge of Target, the
Loan Properties (as defined in SECTION 8.1) are, and have been, in substantial
compliance with, and are not liable under, all Environmental Laws (as defined in
SECTION 8.1);
(ii) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or, to the
knowledge of Target, threatened, before any court, governmental agency or board
or other forum against Target or any of its Subsidiaries or any Participation
Facility (1) for alleged noncompliance (including by any predecessor) with, or
liability under, any Environmental Law or (2) relating to the presence of or
release into the environment of any Hazardous Material (as defined in SECTION
8.1), whether or not occurring at or on a site owned, leased or operated by
Target or any of its Subsidiaries or any Participation Facility;
(iii) To the knowledge of Target, there is no suit, claim,
action, demand, executive or administrative order, directive, investigation or
proceeding pending or threatened before any court, governmental agency or board
or other forum relating to or against any Loan Property (or Target or any of its
Subsidiaries in respect of such Loan Property) (1) relating to
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alleged noncompliance (including by any predecessor) with, or liability under,
any Environmental Law or (2) relating to the presence of or release into the
environment of any Hazardous Material, whether or not occurring at a Loan
Property;
(iv) Neither Target nor any of its Subsidiaries has received any
notice, demand letter, executive or administrative order, directive or request
for information from any Governmental Entity or any third party indicating that
it may be in violation of, or liable under, any Environmental Law;
(v) There are no underground storage tanks at any properties
owned or operated by Target or any of its Subsidiaries or any Participation
Facility and no underground storage tanks have been closed or removed from any
properties owned or operated by Target or any of its Subsidiaries or any
Participation Facility; and
(vi) During the period of (1) Target's or its Subsidiary's
ownership or operation of any of their respective current properties or (2)
Target's or its Subsidiary's participation in the management of any
Participation Facility, there has been no release of Hazardous Materials in, on
or under such properties except in material compliance with Environmental Laws.
To the knowledge of Target, prior to the period of (1) Target's or its
Subsidiary's ownership or operation of any of their respective current
properties or (2) Target's or its Subsidiary's participation in the management
of any Participation Facility, there was no release of Hazardous Material in, on
or under such properties except in material compliance with Environmental Laws.
(s) Loan Portfolio; Allowance; Asset Quality.
----------------------------------------
(i) With respect to each Loan (as defined in SECTION 8.1) owned
by Target or its Subsidiaries in whole or in part:
(A) The note and the related security documents are each
legal, valid and binding obligations of the maker or obligor thereof,
enforceable against such maker or obligor in accordance with their terms except
where the failure thereof, individually or in the aggregate, would not have a
Material Adverse Effect on Target and except that enforcement thereof may be
limited by the receivership, conservatorship and supervisory powers of bank
regulatory agencies generally as well as bankruptcy, insolvency, and similar
laws affecting creditors' rights and remedies generally and, as to
enforceability, to general principles of equity, whether applied in a court of
law or a court of equity;
(B) neither Target nor any of its Subsidiaries, nor any
prior holder of a Loan, has modified the note or any of the related security
documents in any material respect or satisfied, canceled or subordinated the
note or any of the related security documents except as otherwise disclosed by
documents in the applicable Loan file or as would not have a Material Adverse
Effect on Target;
A-21
(C) Target or a Subsidiary of Target is the sole holder of
legal and beneficial title to each Loan (or Target's or its Subsidiary's
applicable participation interest, as applicable), except as otherwise
referenced on the books and records of Target or a Subsidiary of Target;
(D) the original note and the related security documents are
included in the Loan files, and copies of any documents in the Loan files are
true and correct copies of the documents they purport to be and have not been
suspended, amended, modified, canceled or otherwise changed except as otherwise
disclosed by documents in the applicable Loan file;
(E) there is no pending or, to the knowledge of Target,
threatened condemnation proceeding or similar proceeding affecting the property
that serves as security for a Loan, except as otherwise referenced on the books
and records of Target;
(F) to the knowledge of Target, there is no litigation or
proceeding pending or, to the knowledge of Target, threatened relating to the
property that serves as security for a Loan that would have a material adverse
effect upon the related Loan; and
(G) with respect to a Loan held in the form of a
participation, the participation documentation is legal, valid, binding and
enforceable against Target or its Subsidiaries in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent conveyance and other laws of
general applicability relating to or affecting creditors' rights and to general
equity principles.
(ii) The allowance for loan losses reflected in Target's audited
balance sheet at December 31, 2000 was, and the allowance for loan losses shown
on the balance sheets in Target's Reports for periods ending after December 31,
2000, in the opinion of management, was or will be adequate to provide for all
known and reasonably estimable losses, net of any recoveries relating to such
extensions of credit previously charged off, on the Loans, such allowance for
loan losses complying in all material respects with all applicable loan loss
reserve requirements established in accordance with GAAP.
(iii) Target's Disclosure Letter sets forth a true and complete
listing, as of August 31, 2001, of:
(A) all Loans that have been classified (whether regulatory
or internal) as "Special Mention," "Substandard," "Doubtful," "Loss" or words of
similar import listed by category, including the amounts thereof; and
(B) Loans (1) that are contractually past due 90 days or
more in the payment of principal and/or interest, (2) that are on a non-accrual
status, (3) where the interest rate terms have been reduced and/or the maturity
dates have been extended by Target or a Subsidiary of Target due to concerns
regarding the borrower's ability to pay in accordance with
A-22
such initial terms, or (4) where a specific reserve allocation exists in
connection therewith, listed by category, including the amounts thereof.
(iv) Neither Target nor any of its Subsidiaries is a party to any
Loan that is in violation, in any material respect, of any law, regulation or
rule of any Governmental Entity. Any asset of Target or any of its Subsidiaries
that is classified as "Real Estate Owned" or words of similar import that is
included in any non-performing assets of Target or any of its Subsidiaries is
listed in Target's Disclosure Letter and is carried net of reserves at the lower
of cost or fair value, less estimated selling costs, based on current
independent appraisals or evaluations or current management appraisals or
evaluations; PROVIDED, HOWEVER, that "current" shall mean within the past 12
months.
(t) Deposits. The aggregate value of "brokered" deposits of Target
--------
and its Subsidiaries does not exceed $10,000,000.
u) Anti-takeover Provisions Inapplicable. Target and its
-------------------------------------
Subsidiaries have taken all actions required to exempt Acquiror, the Agreement,
the Plan of Bank Merger, the Merger and the Bank Merger from any provisions of
an antitakeover nature contained in their organizational documents, and the
provisions of any federal or state "anti-takeover," "fair price," "moratorium,"
"control share acquisition" or similar laws or regulations.
(v) Material Interests of Certain Persons. No officer or director of
-------------------------------------
Target has any material interest in any material contract or property (real or
personal), tangible or intangible, used in or pertaining to the business of
Target or Target Bank.
(w) Insurance. In the opinion of management, Target and its
---------
Subsidiaries are presently insured for amounts deemed reasonable by management
against such risks as companies engaged in a similar business would, in
accordance with good business practice, customarily be insured. All of the
insurance policies and bonds maintained by Target and its Subsidiaries are in
full force and effect, Target and its Subsidiaries are not in default thereunder
and all material claims thereunder have been filed in due and timely fashion.
(x) Investment Securities; Derivatives.
----------------------------------
(i) Except for restrictions that exist for securities that are
classified as "held to maturity," none of the investment securities held by
Target or any of its Subsidiaries is subject to any restriction (contractual or
statutory) that would materially impair the ability of the entity holding such
investment freely to dispose of such investment at any time.
(ii) Neither Target nor any of its Subsidiaries is a party to or
has agreed to enter into an exchange-traded or over-the-counter equity, interest
rate, foreign exchange or other swap, forward, future, option, cap, floor or
collar or any other contract that is a derivative contract (including various
combinations thereof) or owns securities that (A) are referred to generically as
"structured notes," "high risk mortgage derivatives," "capped floating rate
notes" or "capped floating rate mortgage derivatives" or (B) are likely to have
changes in value as a result
A-23
of interest or exchange rate changes that significantly exceed normal changes in
value attributable to interest or exchange rate changes.
(y) Indemnification. Except as provided in the articles of
---------------
organization or bylaws of Target and the similar organizational documents of its
Subsidiaries, neither Target nor any Subsidiary is a party to any agreement that
provides for the indemnification of any of its present or former directors,
officers or employees, or other persons who serve or served as a director,
officer or employee of another corporation, partnership or other enterprise at
the request of Target and, to the knowledge of Target, there are no claims for
which any such person would be entitled to indemnification under the certificate
of incorporation or bylaws of Target or the similar organizational documents of
any of its Subsidiaries, under any applicable law or regulation or under any
indemnification agreement.
(z) Books and Records. The books and records of Target and its
-----------------
Subsidiaries on a consolidated basis have been, and are being, maintained in
accordance with applicable legal and accounting requirements and reflect in all
material respects the substance of events and transactions that should be
included therein.
(aa) Corporate Documents. Target has previously furnished or made
-------------------
available to Acquiror a complete and correct copy of the articles of
organization, bylaws and similar organizational documents of Target and each of
Target's Subsidiaries, as in effect as of the date of this Agreement. Neither
Target nor any of Target's Subsidiaries is in violation of its articles of
organization, bylaws or similar organizational documents. The minute books of
Target and each of Target's Subsidiaries constitute accurate records in all
material respects of all actions taken by their respective boards of directors
(and each committee thereof) and their stockholders.
(bb) Registration Statement. The information regarding Target and
----------------------
its Subsidiaries to be supplied by Target for inclusion in the Registration
Statement (as defined in SECTION 4.9) will not, at the time the Registration
Statement becomes effective, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
(cc) Community Reinvestment Act Compliance. Target Bank is in
-------------------------------------
material compliance with the applicable provisions of the CRA (as defined in
SECTION 8.1) and the regulations promulgated thereunder, and Target Bank
currently has a CRA rating of satisfactory or better. To the knowledge of
Target, there is no fact or circumstance or set of facts or circumstances that
would cause Target Bank to fail to comply with such provisions or cause the CRA
rating of Target Bank to fall below satisfactory.
(dd) Undisclosed Liabilities. As of the date hereof, Target and its
-----------------------
Subsidiaries have not incurred any debt, liability or obligation of any nature
whatsoever (whether accrued, contingent, absolute or otherwise and whether due
or to become due) other than liabilities reflected on or reserved against in the
consolidated financial statements of Target as of June 30, 2001, ("UNDISCLOSED
LIABILITIES") except for (i) liabilities incurred since June 30, 2001 in the
A-24
ordinary course of business consistent with past practice that, either alone or
when combined with all similar liabilities, have not had, and would not
reasonably be expected to have, a Material Adverse Effect on Target and, (ii)
liabilities incurred for legal, accounting, financial advising fees and
out-of-pocket expenses in connection with the transactions contemplated by this
Agreement. In addition, as of the date hereof, there are no Undisclosed
Liabilities that exceed $100,000.
(ee) Tax Treatment of the Merger. Target has no knowledge of any
---------------------------
fact or circumstance relating to it that would prevent the transactions
contemplated by this Agreement from qualifying as a reorganization under Section
368(a) of the IRC.
Section 2.3. REPRESENTATIONS AND WARRANTIES OF ACQUIROR. Acquiror
------------------------------------------
represents and warrants to Target that, except as set forth in Acquiror's
Disclosure Letter:
(a) Organization.
------------
(i) Acquiror is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and is
registered as a savings and loan holding company.
(ii) Acquiror has all requisite corporate power and authority
to own, lease and operate its properties and to conduct the business currently
being conducted by it. Acquiror is duly qualified or licensed as a foreign
corporation to transact business and is in good standing in each jurisdiction in
which the character of the properties owned or leased by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
where the failure to be so qualified or licensed and in good standing would not
have a Material Adverse Effect on Acquiror.
(b) Subsidiaries.
------------
(i) Acquiror's Disclosure Letter sets forth (A) the name,
percentage ownership and number of shares of stock owned or controlled by
Acquiror of each Subsidiary; and (B) the jurisdiction of incorporation and
ownership of each Subsidiary. All such Subsidiaries were properly established
pursuant to, and are in compliance with, the regulations and procedures of the
OTS, the FDIC and/or the Massachusetts Commissioner of Banks.
(ii) Acquiror owns of record and beneficially all the capital
stock of each of its Subsidiaries free and clear of any claims, liens,
encumbrances or restrictions and there are no agreements or understandings with
respect to the voting or disposition of any such shares. The outstanding shares
of capital stock of each Subsidiary have been validly authorized and are validly
issued, fully paid and nonassessable. Each of Acquiror's Subsidiaries is a
corporation duly organized and validly existing under the laws of its
jurisdiction of incorporation, has all requisite corporate power and authority
to own, lease and operate its properties and to conduct the business currently
being conducted by it and is duly qualified or licensed as a foreign corporation
to transact business and is in good standing in each jurisdiction in which the
character of the properties owned or leased by it or the nature of the business
conducted by it makes such
A-25
qualification or licensing necessary, except where the failure to be so
qualified or licensed and in good standing would not have a Material Adverse
Effect on Acquiror.
(iii) None of Acquiror's Subsidiaries holds shares of its capital
stock in its treasury, and there are not, and on the Closing Date there will not
be, outstanding (A) any options, warrants or other rights with respect to the
capital stock of any Subsidiary, (B) any securities convertible into or
exchangeable for shares of such capital stock or any other debt or equity
security of any Subsidiary or (C) any other commitments of any kind for the
issuance of additional shares of capital stock or other debt or equity security
of any Subsidiary or options, warrants or other rights with respect to such
securities.
(iv) No Subsidiary of Acquiror other than Acquiror Bank is an
"insured depository institution" as defined in the FDIA and the applicable
regulations thereunder.
(c) Capital Structure.
-----------------
(i) The authorized capital stock of Acquiror consists of:
(A) 25,000,000 shares of Acquiror Common Stock; and
(B) 1,000,000 of preferred stock, par value $0.01 per
share.
(ii) As of the date of this Agreement:
(A) 6,220,249 shares of Acquiror Common Stock are issued and
outstanding, all of which are validly issued, fully paid and nonassessable;
(B) no shares of Acquiror preferred stock are issued and
outstanding;
(C) no shares of Acquiror preferred stock are held in
Acquiror's treasury;
(D) 1,632,590 shares of Acquiror Common Stock are reserved
for issuance pursuant to outstanding grants or awards under Acquiror's stock
option plans;
(E) 2,486,903 shares of Acquiror Common Stock are held by
Acquiror in its treasury or by its Subsidiaries.
(iii) No bonds, debentures, notes or other indebtedness having
the right to vote on any matters on which stockholders of Acquiror may vote are
issued or outstanding.
(iv) Except as set forth in this SECTION 2.3(C), as of the date
of this Agreement, (A) no shares of capital stock or other voting securities of
Acquiror are issued, reserved for issuance or outstanding and (B) neither
Acquiror nor any of its Subsidiaries has or is
A-26
bound by any outstanding subscriptions, options, warrants, calls, rights,
convertible securities, commitments or agreements of any character obligating
Acquiror or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, any additional shares of capital stock of Acquiror or
obligating Acquiror or any of its Subsidiaries to grant, extend or enter into
any such option, warrant, call, right, convertible security, commitment or
agreement. As of the date hereof, there are no outstanding contractual
obligations of Acquiror or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of Acquiror or any of its
Subsidiaries.
(v) The shares of Acquiror Common Stock to be issued in exchange
for shares of Target Common Stock upon consummation of the Merger in accordance
with this Agreement or upon exercise of any Converted Options have been duly
authorized and when issued in accordance with the terms of this Agreement or
upon such exercise, will be validly issued, fully paid and nonassessable and
subject to no preemptive rights.
(d) Authority. Acquiror has all requisite corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement have been duly authorized by all necessary corporate actions
on the part of Acquiror's Board of Directors, and no other corporate proceedings
on the part of Acquiror are necessary to authorize this Agreement or to
consummate the transactions contemplated by this Agreement other than the
approval and adoption of this Agreement by the affirmative vote of the holders
of a majority of the outstanding shares of Acquiror Common Stock. This Agreement
has been duly and validly executed and delivered by Acquiror and constitutes a
valid and binding obligation of Acquiror, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally and, as to enforceability, to general
principles of equity, whether applied in a court of law or a court of equity.
(e) Fairness Opinion. Acquiror has received the opinion of Keefe
----------------
Bruyette & Woods, Inc. to the effect that, as of the date hereof, the Merger
Consideration is fair, from a financial point of view, to Acquiror's
stockholders.
(f) No Violations; Consents.
-----------------------
(i) The execution, delivery and performance of this Agreement by
Acquiror does not, and the consummation of the transactions contemplated by this
Agreement will not, (A) assuming that the consents and approvals referred to in
SECTION 2.3(F)(II) are obtained and the applicable waiting periods have expired
and the approval of Acquiror's stockholders is obtained, violate any law, rule
or regulation or any judgment, decree, order, governmental permit or license to
which Acquiror or any of its Subsidiaries (or any of their respective
properties) is subject, (B) violate the certificate of incorporation or bylaws
of Acquiror or the similar organizational documents of any of its Subsidiaries
or (C) constitute a breach or violation of, or a default under (or an event
which, with due notice or lapse of time or both, would constitute a default
under), or result in the termination of, accelerate the performance
A-27
required by, or result in the creation of any lien, pledge, security interest,
charge or other encumbrance upon any of the properties or assets of Acquiror or
any of its Subsidiaries under, any of the terms, conditions or provisions of any
note, bond, indenture, deed of trust, loan agreement or other agreement,
instrument or obligation to which Acquiror or any of its Subsidiaries is a
party, or to which any of their respective properties or assets may be subject,
except, in the case of (C), for any such breaches, violations or defaults that
would not, individually or in the aggregate, have a Material Adverse Effect on
Acquiror.
(ii) Except for (A) the filing of an application with the OTS
under the Bank Merger Act and the HOLA and approval of such application, (B) the
filing of articles of merger or consolidation with the Secretary of State of
Massachusetts pursuant to the MGCL, and the filing of a certificate of merger
with the Secretary of State of the State of Delaware pursuant to the DGCL (C)
the registration under the Securities Act of the shares of Acquiror Common Stock
to be issued in exchange for shares of Target Common Stock, (D) the registration
or qualification of the shares of Acquiror Common Stock to be issued in exchange
for shares of Target Common Stock under state securities or "blue sky" laws, (E)
the listing of the shares of Acquiror Common Stock to be issued in exchange for
shares of Target Common Stock on the American Stock Exchange, subject to
official notice of issuance and (F) such filings, authorizations or approvals as
may be set forth in Acquiror's Disclosure Letter, no consents or approvals of or
filings or registrations with any Governmental Entity or with any third party
are necessary in connection with the execution and delivery by Acquiror of this
Agreement or the consummation by Acquiror of the Merger and the other
transactions contemplated by this Agreement, including the Bank Merger. As of
the date hereof, Acquiror knows of no reason pertaining to Acquiror why any of
the approvals referred to in this SECTION 2.3(F)(II) should not be obtained
without the imposition of any material condition or restriction described in
SECTION 5.1(B).
(g) Reports and Financial Statements.
--------------------------------
(i) Acquiror and each of its Subsidiaries have timely filed all
reports, registration statements, prospectuses, forms and other documents,
together with any amendments required to be made with respect thereto, that they
were required to file since December 31, 1997 with (A) the FDIC, (B) the OTS,
(C) the AMEX (as defined in SECTION 8.1), or (D) the SEC (including any filings
on Form 8-K) (collectively, "ACQUIROR'S REPORTS") and have paid all fees and
assessments due and payable in connection therewith. As of their respective
dates, none of Acquiror's Reports contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading (except to the extent revised or
superseded by a later-filed Acquiror Report). All of Acquiror's Reports, as
amended, filed with the SEC complied in all material respects with the
applicable requirements of the Securities Act or the Exchange Act, as the case
may be, and the rules and regulations of the SEC promulgated thereunder.
(ii) Each of the financial statements (including, in each case,
any notes thereto) of Acquiror included in Acquiror's Reports filed with the SEC
complied as to form, as of their respective dates of filing with the SEC, in all
material respects with applicable accounting
A-28
requirements and with the published rules and regulations of the SEC with
respect thereto. The financial statements included in Acquiror's Reports were
prepared from the books and records of Acquiror and its Subsidiaries, fairly
present the consolidated financial position of Acquiror and its Subsidiaries in
each case at and as of the dates indicated and the consolidated results of
operations, retained earnings and cash flows of Acquiror and its Subsidiaries
for the periods indicated, and, except as otherwise set forth in the notes
thereto, were prepared in accordance with GAAP consistently applied throughout
the periods covered thereby; PROVIDED, HOWEVER, that the unaudited financial
statements for interim periods are subject to normal year-end adjustments (which
will not be material individually or in the aggregate) and lack a statement of
cash flows and footnotes to the extent permitted under applicable regulations.
(h) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Acquiror's Reports filed with the SEC prior to the date of this Agreement, since
June 30, 2001, (i) Acquiror and its Subsidiaries have not incurred any
liability, except in the ordinary course of their business consistent with past
practice or in connection with this Agreement or the transactions contemplated
hereby, (ii) Acquiror and its Subsidiaries have conducted their respective
businesses only in the ordinary and usual course of such businesses consistent
with their past practices, and (iii) there has not been any event or occurrence
that has had a Material Adverse Effect on Acquiror.
(i) Absence of Claims. There are no suits, actions or proceedings
-----------------
pending or, to the knowledge of Acquiror, threatened against or affecting
Acquiror or any of its Subsidiaries or any property or asset of Acquiror or any
of its Subsidiaries which, individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on Acquiror, nor are there any
judgments, decrees, injunctions, rules or orders of any Governmental Entity or
arbitrator outstanding against Acquiror which, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect on Acquiror.
(j) Absence of Regulatory Actions. Since December 31, 1997, neither
-----------------------------
Acquiror nor any of its Subsidiaries has been a party to any cease and desist
order, written agreement or memorandum of understanding with, or any commitment
letter or similar undertaking to, or has been subject to any action, proceeding,
order or directive by, or has been a recipient of any extraordinary supervisory
letter from any Government Regulator, or has adopted any board resolutions at
the request of any Government Regulator, in any case which is currently in
effect, or has been advised by any Government Regulator that it is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such action, proceeding, order, directive, written agreement,
memorandum of understanding, extraordinary supervisory letter, commitment
letter, board resolutions or similar undertaking.
(k) Taxes. All federal, state, local and foreign tax returns
-----
required to be filed by or on behalf of Acquiror or any of its Subsidiaries have
been timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns, all taxes required to be shown on returns for which extensions
have been granted and all other taxes required to be paid by Acquiror or any of
its Subsidiaries have been
A-29
paid in full or adequate provision has been made for any such taxes on
Acquiror's balance sheet (in accordance with GAAP). As of the date of this
Agreement, there is no audit examination, deficiency assessment, tax
investigation or refund litigation with respect to any taxes of Acquiror or any
of its Subsidiaries, and no claim has been made by any authority in a
jurisdiction where Acquiror or any of its Subsidiaries do not file tax returns
that Acquiror or any such Subsidiary is subject to taxation in that
jurisdiction. All taxes, interest, additions and penalties due with respect to
completed and settled examinations or concluded litigation relating to Acquiror
or any of its Subsidiaries have been paid in full or adequate provision has been
made for any such taxes on Acquiror's balance sheet (in accordance with GAAP).
Acquiror and its Subsidiaries have not executed an extension or waiver of any
statute of limitations on the assessment or collection of any material tax due
that is currently in effect. Acquiror and each of its Subsidiaries has withheld
and paid all taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other third party, and Acquiror and each of its Subsidiaries has
timely complied with all applicable information reporting requirements under
Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and
local information reporting requirements.
(l) Agreements.
----------
(i) Except for this Agreement and the Stock Option Agreement,
Acquiror and its Subsidiaries are not bound by any material contract (as defined
in Item 601(b)(10) of Regulation S-K promulgated by the SEC), to be performed
after the date hereof that has not been filed with or incorporated by reference
in Acquiror's Reports.
(ii) Neither Acquiror nor any of its Subsidiaries is in
default under (and no event has occurred which, with due notice or lapse of time
or both, would constitute a default under) or is in violation of any provision
of any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or
other agreement to which it is a party or by which it is bound or to which any
of its respective properties or assets is subject and, to the knowledge of
Acquiror, no other party to any such agreement (excluding any loan or extension
of credit made by Acquiror or any of its Subsidiaries) is in default in any
respect thereunder, except for such defaults or violations that would not,
individually or in the aggregate, have a Material Adverse Effect on Acquiror.
(iii) Acquiror and each of its Subsidiaries owns or possesses
valid and binding licenses and other rights to use without payment all patents,
copyrights, trade secrets, trade names, service marks and trademarks material to
its businesses, and neither Acquiror nor any of its Subsidiaries has received
any notice of conflict with respect thereto that asserts the rights of others.
Each of Acquiror and its Subsidiaries has performed all the obligations required
to be performed by it and are not in default under any contact, agreement,
arrangement or commitment relating to any of the foregoing, except for failures
to perform or defaults that would not individually or in the aggregate, have a
Material Adverse Effect on Acquiror.
(m) Labor Matters. Acquiror and its Subsidiaries are in material
-------------
compliance with all applicable laws respecting employment, retention of
independent contractors and employment practices, terms and conditions of
employment and wages and hours. Neither
A-30
Acquiror nor any of its Subsidiaries is or has, in the past five years, been a
party to, or is or has, in the past five years, been bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor organization with respect to its employees, nor is Acquiror or
any of its Subsidiaries the subject of any proceeding asserting that it has
committed an unfair labor practice or seeking to compel it or any such
Subsidiary to bargain with any labor organization as to wages and conditions of
employment nor, to the knowledge of Acquiror, has any such proceeding been
threatened, nor is there any strike, other labor dispute or organizational
effort involving Acquiror or any of its Subsidiaries pending or nor, to the
knowledge of Acquiror, threatened.
(n) Title to Assets. Acquiror and each of its Subsidiaries has good
---------------
and insurable title to its properties and assets (including any intellectual
property asset such as any trademark, service mark, trade name or copyright) and
property acquired in a judicial foreclosure proceeding or by way of a deed in
lieu of foreclosure or similar transfer whether real or personal, tangible or
intangible, in each case free and clear of any liens, security interests,
encumbrances, mortgages, pledges, restrictions, charges or rights or interests
of others, except (i) liens for taxes not yet due and payable, (ii) pledges to
secure deposits and other liens incurred in the ordinary course of business, and
(iii) such easements, restrictions, covenants and encumbrances, if any, as are
not material in character, amount or extent, and do not materially detract from
the value, or materially interfere with the present use of the properties
subject thereto or affected thereby. Each material lease pursuant to which
Acquiror or any of its Subsidiaries is lessee or lessor is valid and in full
force and effect and neither Acquiror nor any of its Subsidiaries, nor, to
Acquiror's knowledge, any other party to any such lease is in default or in
violation of any material provisions of any such lease. All material tangible
properties of Acquiror and each of its Subsidiaries are in a good state of
maintenance and repair (normal wear and tear excepted), and conform with all
applicable ordinances, regulations and zoning laws. To the knowledge of
Acquiror, none of the buildings, structures or other improvements located on its
real property encroaches upon or over any adjoining parcel or real estate or any
easement or right-of-way.
(o) Compliance with Laws. Acquiror and each of its Subsidiaries has
--------------------
all permits, licenses, certificates of authority, orders and approvals of, and
has made all filings, applications and registrations with, all Governmental
Entities that are required in order to permit it to carry on its business as it
is presently conducted; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect, and, to the knowledge of
Acquiror, no suspension or cancellation of any of them is threatened. Neither
Acquiror nor any of its Subsidiaries is in violation of, and Acquiror and its
Subsidiaries have not been given notice or been charged with any violation of,
any law, ordinance, regulation, order, writ, rule, decree or condition to
approval of any Governmental Entity which, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect on Acquiror.
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(p) Environmental Matters. With respect to Acquiror and its
---------------------
Subsidiaries:
(i) Each of Acquiror and its Subsidiaries, the Participation
Facilities and, to the knowledge of Acquiror, the Loan Properties and have been,
in substantial compliance with, and are not liable under, all Environmental
Laws;
(ii) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or, to the
knowledge of Acquiror, threatened, before any court, governmental agency or
board or other forum against Acquiror or any of its Subsidiaries or any
Participation Facility (1) for alleged noncompliance (including by any
predecessor) with, or liability under, any Environmental Law or (2) relating to
the presence of or release into the environment of any Hazardous Material,
whether or not occurring at or on a site owned, leased or operated by Acquiror
or any of its Subsidiaries or any Participation Facility;
(iii) To the knowledge of Acquiror, there is no suit, claim,
action, demand, executive or administrative order, directive, investigation or
proceeding pending or threatened before any court, governmental agency or board
or other forum relating to or against any Loan Property (or Acquiror or any of
its Subsidiaries in respect of such Loan Property) (1) relating to alleged
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (2) relating to the presence of or release into the
environment of any Hazardous Material, whether or not occurring at a Loan
Property;
(iv) Neither Acquiror nor any of its Subsidiaries has received
any notice, demand letter, executive or administrative order, directive or
request for information from any Governmental Entity or any third party
indicating that it may be in violation of, or liable under, any Environmental
Law;
(v) There are no underground storage tanks at any properties
owned or operated by Acquiror or any of its Subsidiaries or any Participation
Facility and no underground storage tanks have been closed or removed from any
properties owned or operated by Acquiror or any of its Subsidiaries or any
Participation Facility; and
(vi) During the period of (1) Acquiror's or its Subsidiary's
ownership or operation of any of their respective current properties or (2)
Acquiror's or its Subsidiary's participation in the management of any
Participation Facility, there has been no release of Hazardous Materials in, on
or, under such properties except in material compliance with Environmental Laws.
To the knowledge of Acquiror, prior to the period of (1) Acquiror's or its
Subsidiary's ownership or operation of any of their respective current
properties or (2) Acquiror's or its Subsidiary's participation in the management
of any Participation Facility, there was or release of Hazardous Material in, on
or, under or such properties except in material compliance with Environmental
Laws.
(q) Insurance. In the opinion of management, Acquiror and its
---------
Subsidiaries are presently insured for amounts deemed reasonable by management
against such risks as companies engaged in a similar business would, in
accordance with good business
A-32
practice, customarily be insured. All of the insurance policies and bonds
maintained by Acquiror and its Subsidiaries are in full force and effect,
Acquiror and its Subsidiaries are not in default thereunder and all material
claims thereunder have been filed in due and timely fashion.
(r) Books and Records. The books and records of Acquiror and
-----------------
its Subsidiaries on a consolidated basis have been, and are being, maintained in
accordance with applicable legal and accounting requirements and reflect in all
material respects the substance of events and transactions that should be
included therein.
(s) Corporate Documents. Acquiror has previously furnished or
-------------------
made available to Target a complete and correct copy of the certificate of
incorporation, bylaws and similar organizational documents of Acquiror and each
of Acquiror's Subsidiaries as in effect as of the date of this Agreement.
Neither Acquiror nor any of Acquiror's Subsidiaries is in violation of its
certificate of incorporation, bylaws or similar organizational documents. The
minute books of Acquiror and each of Acquiror's Subsidiaries accurate records in
all material respects of all actions taken by their respective boards of
directors (and each committee thereof) and their stockholders.
(t) Registration Statement. The information regarding Acquiror
----------------------
and its Subsidiaries to be supplied by Acquiror for inclusion in the
Registration Statement will not, at the time the Registration Statement becomes
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
(u) Community Reinvestment Act Compliance. Acquiror Bank is in
-------------------------------------
material compliance with the applicable provisions of the CRA and the
regulations promulgated thereunder, and Acquiror Bank currently has a CRA rating
of satisfactory or better. To the knowledge of Acquiror, there is no fact or
circumstance or set of facts or circumstances that would cause Acquiror Bank to
fail to comply with such provisions or cause the CRA rating of Acquiror Bank to
fall below satisfactory.
(v) Undisclosed Liabilities. As of the date hereof, Acquiror
-----------------------
and its Subsidiaries have not incurred any debt, liability or obligation of any
nature whatsoever (whether accrued, contingent, absolute or otherwise and
whether due or to become due) other than liabilities reflected on or reserved
against in the consolidated financial statements of Acquiror as of June 30,
2001, except for (i) liabilities incurred since June 30, 2001 in the ordinary
course of business consistent with past practice that, either alone or when
combined with all similar liabilities, have not had, and would not reasonably be
expected to have, a Material Adverse Effect on Acquiror and, (ii) liabilities
incurred for legal, accounting, financial advising fees and out-of- pocket
expenses in connection with the transactions contemplated by this Agreement.
(w) Tax Treatment of the Merger. Acquiror has no knowledge of
---------------------------
any fact or circumstance relating to it that would prevent the transactions
contemplated by this Agreement from qualifying as a reorganization under Section
368(a) of the IRC.
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(x) Availability of Funds. Acquiror has and will have available
---------------------
to it at the Effective Time, sources of capital sufficient to pay the aggregate
Cash Consideration and to pay any other amounts payable pursuant to this
Agreement and to effect the transactions contemplated hereby.
(y) Employee Benefit Plans.
----------------------
(i) All pension, retirement, stock option, stock purchase,
stock ownership, savings, stock appreciation right, profit sharing, deferred
compensation, consulting, bonus, group insurance, severance and other benefit
plans, contracts, agreements and arrangements, including, but not limited to,
"employee benefit plans," as defined in Section 3(3) of ERISA, incentive and
welfare policies, contracts, plans and arrangements and all trust agreements
related thereto with respect to any present or former directors, officers or
other employees of Acquiror or any of its Subsidiaries are hereinafter referred
to collectively as the "ACQUIROR EMPLOYEE PLANS." Acquiror has previously
delivered or made available to Target true and complete copies of each Acquiror
Employee Plan. There has been no announcement or commitment by Acquiror or any
of its Subsidiaries to amend any Acquiror Employee Plan, except for amendments
required by applicable law which do not materially increase the cost of such
Acquiror Employee Plan.
(ii) There is no pending or, to Acquiror's knowledge,
threatened litigation, administrative action or proceeding relating to any
Acquiror Employee Plan. All of the Acquiror Employee Plans comply in all
material respects with all applicable requirements of ERISA, the IRC and other
applicable laws. There has occurred no "prohibited transaction" (as defined in
Section 406 of ERISA or Section 4975 of the IRC) with respect to the Acquiror
Employee Plans which is likely to result in the imposition of any penalties or
taxes upon Acquiror or any of its Subsidiaries under Section 502(i) of ERISA or
Section 4975 of the IRC in an amount which would be material.
(iii) No liability to the Pension Benefit Guarantee
Corporation has been or is expected by Target or any of its Subsidiaries to be
incurred with respect to any Acquiror Employee Plan which is subject to Title IV
of ERISA ("ACQUIROR PENSION PLAN") other than payment of premiums in the
ordinary course of business consistent with past practice, or with respect to
any "single-employer plan" (as defined in Section 4001(a) of ERISA) currently or
formerly maintained by Acquiror or any ERISA Affiliate. No Acquiror Pension Plan
had an "accumulated funding deficiency" (as defined in Section 302 of ERISA),
whether or not waived, as of the last day of the end of the most recent plan
year ending prior to the date hereof; the fair market value of the assets of
each Acquiror Pension Plan exceeds the present value of the benefit obligation
(as presented in Acquiror's most recent audited financial statements) under such
Acquiror Pension Plan as of the end of the most recent plan year with respect to
the respective Acquiror Pension Plan ending prior to the date hereof, calculated
on the basis of the actuarial assumptions used in Acquiror's audited financial
statements; and no notice of a "reportable event" (as defined in Section 4043 of
ERISA) for which the 30-day reporting requirement has not been waived has been
required to be filed for any Acquiror Pension Plan within the 12-month period
ending on the date hereof. Neither Acquiror nor any of its Subsidiaries has
provided, or is
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required to provide, security to any Acquiror Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the
IRC. Neither Acquiror, its Subsidiaries, nor any ERISA Affiliate has contributed
to any "multiemployer plan," as defined in Section 3(37) of ERISA, on or after
September 26, 1980.
(iv) Each Acquiror Employee Plan that is an "employee
pension benefit plan" (as defined in Section 3(2) of ERISA) and which is
intended to be qualified under Section 401(a) of the IRC (or any such plan that
existed within the last three years (an "ACQUIROR QUALIFIED PLAN")) has received
a favorable determination letter from the IRS, and Acquiror and its Subsidiaries
are not aware of any circumstances likely to result in revocation of any such
favorable determination letter. Each Acquiror Qualified Plan that is an
"employee stock ownership plan" (as defined in Section 4975(e)(7) of the IRC)
has satisfied all of the applicable requirements of Sections 409 and 4975(e)(7)
of the IRC and the regulations thereunder in all respects and any assets of any
such Acquiror Qualified Plan that, as of the end of the plan year, are not
allocated to participants' individual accounts are pledged as securities for,
and may be applied to satisfy, any securities acquisition indebtedness.
(z) Loan Portfolio; Allowance; Asset Quality.
----------------------------------------
(i) With respect to each Loan owned by Acquiror or its
Subsidiaries in whole or in part:
(A) The note and the related security documents are
each legal, valid and binding obligations of the maker or obligor thereof,
enforceable against such maker or obligor in accordance with their terms except
where the failure thereof, individually or in the aggregate, would not have a
Material Adverse Effect on Acquiror and except that enforcement thereof may be
limited by the receivership, conservatorship and supervisory powers of bank
regulatory agencies generally as well as bankruptcy, insolvency, and similar
laws affecting creditors' rights and remedies generally and, as to
enforceability, to general principles of equity, whether applied in a court of
law or a court of equity;
(B) neither Acquiror nor any of its Subsidiaries, nor
any prior holder of a Loan, has modified the note or any of the related security
documents in any material respect or satisfied, canceled or subordinated the
note or any of the related security documents except as otherwise disclosed by
documents in the applicable Loan file or as would not have a Material Adverse
Effect on Acquiror;
(C) Acquiror or a Subsidiary of Acquiror is the sole
holder of legal and beneficial title to each Loan (or Acquiror's or its
Subsidiary's applicable participation interest, as applicable), except as
otherwise referenced on the books and records of Acquiror or a Subsidiary of
Acquiror;
(D) the original note and the related security
documents are included in the Loan files, and copies of any documents in the
Loan files are true and correct copies of the documents they purport to be and
have not been suspended, amended, modified,
A-35
canceled or otherwise changed except as otherwise disclosed by documents in the
applicable Loan file;
(E) there is no pending or, to the knowledge of
Acquiror, threatened condemnation proceeding or similar proceeding affecting the
property that serves as security for a Loan, except as otherwise referenced on
the books and records of Acquiror;
(F) to the knowledge of Acquiror, there is no
litigation or proceeding pending or, to the knowledge of Acquiror, threatened
relating to the property that serves as security for a Loan that would have a
material adverse effect upon the related Loan; and
(G) with respect to a Loan held in the form of a
participation, the participation documentation is legal, valid, binding and
enforceable against Acquiror or its Subsidiaries in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent conveyance and other laws of
general applicability relating to or affecting creditors' rights and to general
equity principles.
(ii) The allowance for loan losses reflected in Acquiror's
audited balance sheet at December 31, 2000 was, and the allowance for loan
losses shown on the balance sheets in Acquiror's Reports for periods ending
after December 31, 2000, in the opinion of management, was or will be adequate
to provide for all known and reasonably estimable losses, net of any recoveries
relating to such extensions of credit previously charged off, on the Loans, such
allowance for loan losses complying in all material respects with all applicable
loan loss reserve requirements established in accordance with GAAP.
(iii) Neither Acquiror nor any of its Subsidiaries is a
party to any Loan that is in violation in any material respect of any law,
regulation or rule of any Governmental Entity. Any asset of Acquiror or any of
its Subsidiaries that is classified as "Real Estate Owned" or words of similar
import is carried net of reserves at the lower of cost or fair value, less
estimated selling costs, based on current independent appraisals or evaluations
or current management appraisals or evaluations; PROVIDED, HOWEVER, that
"current" shall mean within the past 12 months.
(aa) Material Interests of Certain Persons. No officer or director of
Acquiror, has any material interest in any material contract or property (real
or personal), tangible or intangible, used in or pertaining to the business of
Acquiror or Acquiror Bank.
ARTICLE III
CONDUCT PENDING THE MERGER
--------------------------
Section 3.1. CONDUCT OF TARGET'S BUSINESS PRIOR TO THE EFFECTIVE
---------------------------------------------------
TIME. Except as expressly contemplated or permitted by this Agreement, during
----
the period from the date of this Agreement to the Effective Time, Target shall,
and shall cause each of its Subsidiaries to, use commercially reasonable efforts
to (i) conduct its business in the regular, ordinary and usual
A-36
course consistent with past practice, and (ii) maintain and preserve intact its
business organization, properties, leases, employees and advantageous business
relationships and retain the services of its officers and key employees.
Section 3.2. FORBEARANCE BY TARGET. Without limiting the covenants
---------------------
set forth in SECTION 3.1 hereof, except as expressly contemplated or permitted
by this Agreement (and Acquiror acknowledges that any action taken by Target or
any of its Subsidiaries prior to the Effective Time which is contemplated or
permitted by this Agreement shall not be deemed a breach of any representation,
warranty, agreement or covenant herein) or as set forth in Target's Disclosure
Letter during the period from the date of this Agreement to the Effective Time,
Target shall not, nor shall Target permit any of its Subsidiaries to, without
the prior written consent of Acquiror which consent shall not be unreasonably
withheld:
(a) (i) incur, modify, extend or renegotiate any indebtedness
for borrowed money, assume, guarantee, endorse or otherwise as an accommodation
become responsible for the obligations of any other individual, corporation or
other entity, other than the creation of deposit liabilities, borrowings from
the Federal Home Loan Bank that mature within one year, sales of certificates of
deposit that mature within two years and entering into repurchase agreements;
PROVIDED, HOWEVER, that in no event shall such indebtedness or other similar
arrangements with an individual, corporation or other entity exceed an aggregate
of $5,000,000;
(ii) prepay any such indebtedness or other similar
arrangements so as to cause Target to incur any prepayment penalty thereunder;
(b) (i) adjust, split, combine or reclassify any
capital stock;
(ii) make, declare or pay any dividend, or make any
other distribution on its capital stock (provided that, Target Bank shall be
authorized to pay dividends to Target subject to any applicable regulatory
approval);
(iii) grant any stock appreciation rights or any
limited rights under the Target Employee Plans or grant any individual,
corporation or other entity any right to acquire any shares of its capital
stock; or
(iv) issue any additional shares of capital stock or
any securities or obligations convertible or exercisable for any shares of its
capital stock except pursuant to the exercise of stock options outstanding as of
the date hereof;
(c) sell, transfer, mortgage, encumber or otherwise dispose of
any of its material properties or assets to any individual, corporation or other
entity other than a Subsidiary, or cancel, release or assign any indebtedness to
any such person or any claims held by any such person, except in the ordinary
course of business consistent with past practice or pursuant to contracts or
agreements in force at the date of this Agreement;
A-37
(d) except pursuant to contracts or agreements in force at the
date of or permitted by this Agreement, make any equity investment, either by
purchase of stock or securities, contributions to capital, property transfers,
or purchase of any property or assets of any other individual, corporation or
other entity other than a Subsidiary;
(e) enter into, renew, amend or terminate any contract or
agreement, or make any change in any of its leases or contracts, other than with
respect to those involving aggregate payments of less than, or the provision of
goods or services with a market value of less than, $25,000 per annum and other
than contracts or agreements covered by SECTION 3.2(F);
(f) make, renegotiate, renew, increase, extend, modify or
purchase any loan, lease (credit equivalent), advance, credit enhancement or
other extension of credit, or make any commitment in respect of any of the
foregoing, except (i) in conformity with existing lending practices in amounts
not to exceed an aggregate of $1,000,000 with respect to any individual
borrower, or (ii) loans or advances as to which Target has a binding obligation
to make such loan or advances as of the date hereof;
(g) except for loans or extensions of credit made on terms
generally available to the public, make or increase any loan or other extension
of credit, or commit to make or increase any such loan or extension of credit,
to any director or executive officer of Target or Target Bank, or any entity
controlled, directly or indirectly, by any of the foregoing, other than renewals
of existing loans or commitments to loan;
(h) (i) increase in any manner the compensation or fringe
benefits of any of its employees or directors other than in the ordinary course
of business consistent with past practice and pursuant to policies currently in
effect, or pay any bonus, pension, retirement allowance or contribution not
required by any existing plan or agreement to any such employees or directors;
(ii) become a party to, amend or commit itself to any
pension, retirement, profit-sharing or welfare benefit plan or agreement or
employment agreement with or for the benefit of any employee or director;
(iii) voluntarily accelerate the vesting of, or the
lapsing of restrictions with respect to, any stock options or other stock-based
compensation; or
(iv) elect to any senior executive office any person
who is not a member of the senior executive officer team of Target as of the
date of this Agreement or elect to the Board of Directors of Target any person
who is not a member of the Board of Directors of Target as of the date of this
Agreement, or hire any employee with annual compensation in excess of $50,000;
(i) settle any claim, action or proceeding involving payment by
it of money damages in excess of $25,000 or impose any material restriction on
its operations or the operations of any of its Subsidiaries;
A-38
(j) amend its articles of organization or bylaws, or similar
governing documents;
(k) other than sales of trust preferred securities and other
investment securities in accordance with arrangements or understandings with the
FDIC and the Massachusetts Commissioner of Banks, restructure or materially
change its investment securities portfolio or its interest rate risk position,
through purchases, sales or otherwise, or the manner in which the portfolio is
classified or reported;
(l) make any investment in any debt security, including
mortgage-backed and mortgage-related securities, other than U.S. government and
U.S. government agency securities with final maturities not greater than one
year;
(m) make any capital expenditures in excess of $25,000
individually and $100,000 in the aggregate other than pursuant to binding
commitments existing on the date hereof and other than expenditures necessary to
maintain existing assets in good repair or to make payment of necessary taxes;
(n) establish or commit to the establishment of any new branch or
other office facilities or file any application to relocate or terminate the
operation of any banking office;
(o) take any action that is intended or expected to result in any
of its representations and warranties set forth in this Agreement being or
becoming untrue in any material respect at any time prior to the Effective Time,
or in any of the conditions to the Merger set forth in Article V not being
satisfied or in a violation of any provision of this Agreement except, in every
case, as may be required by applicable law;
(p) engage in any transaction that is not in the usual and
ordinary course of business and consistent with past practices;
(q) implement or adopt any change in its accounting principles,
practices or methods, other than as may be required by GAAP or regulatory
guidelines;
(r) knowingly take any action that would prevent or impede the
Merger from qualifying as a reorganization within the meaning of Section 368 of
the IRC; or
(s) agree to take, make any commitment to take, or adopt any
resolutions of its board of directors in support of, any of the actions
prohibited by this SECTION 3.2.
Any request by Target or response thereto by Acquiror shall be
made in accordance with the notice provisions of SECTION 8.7 and shall note that
it is a request pursuant to this SECTION 3.2.
A-39
Section 3.3. CONDUCT OF ACQUIROR'S BUSINESS PRIOR TO THE
-------------------------------------------
EFFECTIVE TIME. Except as expressly contemplated or permitted by this Agreement,
--------------
during the period from the date of this Agreement to the Effective Time,
Acquiror shall, and shall cause each of its Subsidiaries to, use commercially
reasonable efforts to (i) conduct its business in the regular, ordinary and
usual course consistent with past practice, and (ii) maintain and preserve
intact its business organization, properties, leases, employees and advantageous
business relationships and retain the services of its officers and key
employees.
Section 3.4. FORBEARANCE BY ACQUIROR. Without limiting the
-----------------------
covenants set forth in SECTION 3.3 hereof, except as expressly contemplated or
permitted by this Agreement (and Target acknowledges that any action taken by
Acquiror or any of its Subsidiaries prior to the Effective Time which is
contemplated or permitted by this Agreement shall not be deemed a breach of any
representation, warranty, agreement or covenant herein), and except to the
extent required by law or regulation or any Governmental Entity, during the
period from the date of this Agreement to the Effective Time, Acquiror shall
not, nor shall Acquiror permit any of its Subsidiaries to, without the prior
written consent of Target, which consent shall not be unreasonably withheld:
(a) take any action that is intended to or expected to result
in any of its representations and warranties set forth in this Agreement being
or becoming untrue in any material respect at any time prior to the Effective
Time, or in any of the conditions to the Merger set forth in Article V not being
satisfied or in a violation of any provision of this Agreement except, in every
case, as may be required by applicable law;
(b) knowingly take any action that would prevent or impede the
Merger from qualifying as a reorganization within the meaning of Section 368 of
the IRC; or
(c) agree to take, make any commitment to take, or adopt any
resolutions of its board of directors in support of, any of the actions
prohibited by this SECTION 3.4.
Notwithstanding anything herein to the contrary, nothing in this Agreement
shall prohibit Acquiror from entering into an agreement with respect to the
acquisition of a third party, whether by way of a merger, consolidation or any
similar transaction or by purchase, lease or other acquisition of all or
substantially all of the assets of such third party, if such action would not
reasonably be expected to delay or make the consummation of the Merger less
likely.
ARTICLE IV
COVENANTS
---------
Section 4.1. ACQUISITION PROPOSALS. Target agrees that neither it
---------------------
nor any of its Subsidiaries, nor any of the respective officers and directors
of Target or any of its Subsidiaries, shall, and Target shall not authorize or
permit any of its employees, agents or representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its Subsidiaries) to, (a) initiate, solicit or encourage any inquiries or the
making of any proposal or offer (including, without limitation, any proposal or
offer to Target's stockholders) with respect
A-40
to an Acquisition Proposal (as defined in SECTION 8.1) or (b) engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal; provided, however, that nothing contained in this Agreement shall
prevent Target or its Board of Directors from (i) complying with Rule 14e-2 or
Item 1012(a) of Regulation M-A promulgated under the Exchange Act with regard to
an Acquisition Proposal, (ii) making any required disclosure to Target's
stockholders, or (iii) (A) providing information in response to a request
therefor by a person who has made an unsolicited bona fide written Acquisition
Proposal (an "UNSOLICITED ACQUISITION PROPOSAL") if the Board of Directors
receives from the person so requesting such information an executed
confidentiality agreement on terms substantially equivalent to those contained
in the confidentiality agreement between Acquiror and Target, dated as of July
25, 2001; or (B) engaging in any negotiations or discussions with any person who
has made an Unsolicited Acquisition Proposal, if and only to the extent that, in
each such case referred to in clause (A) or (B) above, (x) the Board of
Directors of Target, after consultation with and receipt of advice from outside
legal counsel, in good faith deems such action to be necessary for the proper
discharge of its duties to Target's stockholders under applicable law and (y)
the Board of Directors of Target, after consultation with its financial advisor,
determines in good faith that the transaction presented by such Unsolicited
Acquisition Proposal, taking into account all legal, financial and regulatory
aspects of the proposal, the person making the proposal and the prospects and
interests of Target and its stockholders, is a more favorable transaction than
the transaction contemplated by this Agreement (a "SUPERIOR PROPOSAL"). Target
will notify Acquiror immediately in reasonable detail orally (within one
business day) and in writing (within three business days) if any such
Unsolicited Acquisition Proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with Target after the date hereof, the identity of the
person making such inquiry, proposal or offer and the substance thereof and will
keep Acquiror informed of any material developments with respect thereto
promptly after the occurrence thereof. Subject to the foregoing, Target will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing. Target will take the necessary steps to inform the
appropriate individuals or entities referred to in the first sentence hereof of
the obligations undertaken in this SECTION 4.1. Target will promptly request
each person (other than Acquiror) that has executed a confidentiality agreement
prior to the date hereof in connection with its consideration of a business
combination with Target or any of its Subsidiaries to return or destroy all
confidential information previously furnished to such person by or on behalf of
Target or any of its Subsidiaries. Nothing in this SECTION 4.1 shall (x) permit
Target to terminate this Agreement (except as specifically provided in Article
VI hereof) or (y) affect any other obligation of Target under this Agreement.
Section 4.2. CERTAIN POLICIES AND ACTIONS OF TARGET. At the request
--------------------------------------
of Acquiror, Target shall cause Target Bank to modify and change its loan,
litigation and real estate valuation policies and practices (including loan
classifications and levels of reserves) and investment and asset/liability
management policies and practices so as to be consistent with those of Acquiror
Bank; PROVIDED, HOWEVER, that Target shall not be required to take such action
prior to the date on which all regulatory and stockholder approvals required to
consummate the
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transactions contemplated hereby are received, and until after receipt of
written confirmation from Acquiror that it is not aware of any fact or
circumstance that would prevent completion of the Merger, and PROVIDED, FURTHER,
that such policies and procedures are not prohibited by GAAP or any applicable
laws and regulations. Target's representations, warranties and covenants
contained in this Agreement shall not be deemed to be untrue or breached in any
respect for any purpose as a consequence of any modifications or changes
undertaken solely on account of this SECTION 4.2.
Section 4.3. ACCESS AND INFORMATION.
----------------------
(a) Upon reasonable notice, Target shall (and shall cause its
Subsidiaries to) afford Acquiror and its representatives (including, without
limitation, directors, officers and employees of Acquiror and its affiliates and
counsel, accountants and other professionals retained by Acquiror) such
reasonable access during normal business hours throughout the period prior to
the Effective Time to the books, records (including, without limitation, tax
returns and work papers of independent auditors), contracts, properties,
personnel and to such other information relating to Target and Target Bank as
Acquiror may reasonably request; PROVIDED, HOWEVER, that no investigation
pursuant to this SECTION 4.3 shall affect or be deemed to modify any
representation or warranty made by Target in this Agreement. In furtherance, and
not in limitation of the foregoing, Target shall make available to Acquiror all
information necessary and appropriate for the preparation and filing of all real
property and real estate transfer tax returns and reports required by reason of
the Merger or the Bank Merger.
(b) As soon as reasonably available, but in no event more than 45
days after the end of each fiscal quarter (and 90 days in the case of the fourth
fiscal quarter), Target shall deliver to Acquiror its Quarterly and Annual
Reports, as filed with the SEC under the Exchange Act. Target shall deliver to
Acquiror any Current Reports on Form 8-K promptly after filing such reports with
the SEC and shall provide Acquiror with a copy of any press release promptly
after such release is made available to the public.
(c) Acquiror will not, and will cause its representatives not to,
use any information obtained pursuant to this SECTION 4.3 for any purpose
unrelated to the consummation of the transactions contemplated by this
Agreement. Subject to the requirements of applicable law, Acquiror will keep
confidential, and will cause its representatives to keep confidential, all
information and documents obtained pursuant to this SECTION 4.3 unless such
information (i) was already known to Acquiror or an affiliate of Acquiror, other
than pursuant to a confidentiality agreement or other confidential relationship,
(ii) becomes available to Acquiror or an affiliate of Acquiror from other
sources not known by such party to be bound by a confidentiality agreement or
other obligation of secrecy, (iii) is disclosed with the prior written approval
of Target or (iv) is or becomes readily ascertainable from published information
or trade sources.
(d) During the period of time beginning on the date of this
Agreement and continuing to the Effective Time, Target shall permit one
representative of Acquiror (in Acquiror's sole discretion) to attend any and all
meetings of the Investment Committee of Target Bank's Board of Directors. Target
shall furnish such person with advance notice of such
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meetings as if such person were a member of the Investment Committee of Target
Bank's Board of Directors.
(e) From and after the date hereof, Acquiror and Target shall meet
on a regular basis to discuss and plan for the conversion of Target's and its
Subsidiaries' data processing and related electronic informational systems to
those used by Acquiror and its Subsidiaries with the goal of conducting such
conversion simultaneously with the consummation of the Bank Merger.
Section 4.4. APPLICATIONS; CONSENTS.
----------------------
(a) As soon as practicable after the date hereof, Acquiror shall use
its reasonable best efforts to prepare and file all necessary applications,
notices and filings to obtain all permits, consents, approvals and
authorizations of all third parties and Governmental Entities that are necessary
or advisable to consummate the transactions contemplated by this Agreement.
Target shall furnish Acquiror with all information concerning Target's and its
Subsidiaries' directors, officers and stockholders and such other matters as may
be reasonably necessary or advisable in connection with any application, notice
or filing made by or on behalf of Acquiror to any Governmental Entity in
connection with the transactions contemplated by this Agreement and the Plan of
Bank Merger.
(b) As soon as practicable after the date hereof, each of the
parties hereto shall, and shall cause its Subsidiaries to, use its reasonable
best efforts to obtain any consent, authorization or approval of any third party
which, if not obtained, would result in the condition set forth in SECTION
5.1(E) not being satisfied.
Section 4.5. ANTITAKEOVER PROVISIONS. Target and its Subsidiaries
-----------------------
shall take all steps required by any relevant federal or state law or regulation
or under any relevant agreement or other document to exempt or continue to
exempt Acquiror, Acquiror Bank, the Agreement, the Plan of Bank Merger and the
Merger from any provisions of an antitakeover nature in Target's or its
Subsidiaries' articles of organization and bylaws, or similar organizational
documents, and the provisions of any federal or state antitakeover laws.
Section 4.6. ADDITIONAL AGREEMENTS. Subject to the terms and
---------------------
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly, or cause to be done promptly, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as expeditiously as
possible, including using efforts to obtain all necessary actions or
non-actions, extensions, waivers, consents and approvals from all applicable
Governmental Entities, effecting all necessary registrations, applications and
filings (including, without limitation, filings under any applicable state
securities laws) and obtaining any required contractual consents and regulatory
approvals.
Section 4.7. PUBLICITY. The initial press release announcing this
---------
Agreement shall be a joint press release and thereafter Target and Acquiror
shall consult with each other prior
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to issuing any press releases or otherwise making public statements with respect
to the Merger and any other transaction contemplated hereby and in making any
filings with any Governmental Entity or with any national securities exchange or
national market system with respect thereto; PROVIDED, HOWEVER, that nothing in
this SECTION 4.7 shall be deemed to prohibit any party from making any
disclosure which its counsel deems necessary in order to satisfy such party's
disclosure obligations imposed by law or the rules of a national securities
exchange or national market system.
Section 4.8. STOCKHOLDER MEETING. Acquiror and Target each shall
-------------------
take all action necessary, in accordance with applicable law and its charter and
bylaws, to convene a meeting of its stockholders (each a "STOCKHOLDER MEETING")
as promptly as practicable for the purpose of considering and voting on approval
and adoption of the transactions provided for in this Agreement. Except to the
extent legally required for the discharge by the Board of Directors of Target of
its duties to stockholders after receiving the advice of outside legal counsel,
the Board of Directors of each of Acquiror and Target shall (i) recommend at its
Stockholder Meeting that the stockholders vote in favor of and approve the
transactions provided for in this Agreement and (ii) Acquiror and Target shall
use their reasonable best efforts to solicit such approvals. Acquiror and Target
shall coordinate and cooperate with respect to the timing of the Stockholder
Meetings so that, if practicable, the Stockholder Meetings shall be held on the
same date and at the same time.
Section 4.9. REGISTRATION OF ACQUIROR COMMON STOCK.
-------------------------------------
(a) Acquiror and Target shall cooperate in preparing and each shall
cause to be filed with the SEC, as promptly as reasonably practicable following
the date hereof, mutually acceptable proxy materials which shall constitute the
Joint Proxy Statement-Prospectus relating to the matters to be submitted to the
Acquiror stockholders at the Acquiror Stockholders Meeting and the matters to be
submitted to the Target stockholders at the Target Stockholders Meeting (such
proxy statement/prospectus, and any amendments or supplements thereto, the
"JOINT PROXY STATEMENT-PROSPECTUS") and Acquiror shall prepare and file with the
SEC a registration statement on Form S-4 with respect to the issuance of
Acquiror Common Stock in the Merger (such Form S-4, and any amendments or
supplements thereto, the "REGISTRATION STATEMENT"). The Joint Proxy
Statement-Prospectus will be included as a prospectus in and will constitute a
part of the Registration Statement as Acquiror's prospectus. Each of Acquiror
and Target shall use its reasonable best efforts to have the Joint Proxy
Statement-Prospectus cleared by the SEC and the Registration Statement declared
effective by the SEC and to keep the Registration Statement effective as long as
is necessary to consummate the Merger and the transactions contemplated hereby.
Acquiror and Target shall, as promptly as practicable after receipt thereof,
provide the other party copies of any written comments and advise the other
party of any oral comments, received from the SEC with respect to the Joint
Proxy Statement-Prospectus or Registration Statement. The parties shall
cooperate and provide the other with a reasonable opportunity to review and
comment on any amendment or supplement to the Joint Proxy Statement-Prospectus
and the Registration Statement prior to filing such with the SEC, and will
provide each other with a copy of all such filings made with the SEC.
Notwithstanding any other provision herein to the contrary, no amendment or
supplement (including by incorporation by
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reference) to the Joint Proxy Statement-Prospectus or the Registration Statement
shall be made without the approval of both parties, which approval shall not be
unreasonably withheld or delayed; provided that with respect to documents filed
by a party which are incorporated by reference in the Registration Statement or
Joint Proxy Statement-Prospectus, this right of approval shall apply only with
respect to information relating to the other party or its business, financial
condition or results of operations. Acquiror will use reasonable best efforts to
cause the Joint Proxy Statement-Prospectus to be mailed to Acquiror's
stockholders, and Target will use reasonable best efforts to cause the Joint
Proxy Statement-Prospectus to be mailed to Target's stockholders, in each case
as promptly as practicable after the Registration Statement is declared
effective under the Securities Act. Each party will advise the other party,
promptly after it receives notice thereof, of the time when the Registration
Statement has become effective, the issuance of any stop order, the suspension
of the qualification of the Acquiror Common Stock issuable in connection with
the Merger for offering or sale in any jurisdiction, or any request by the SEC
for amendment of the Joint Proxy Statement-Prospectus or the Registration
Statement. If at any time prior to the Effective Time any information relating
to Acquiror or Target, or any of their respective affiliates, officers or
directors, should be discovered by Acquiror or Target which should be set forth
in an amendment or supplement to any of the Registration Statement or the Joint
Proxy Statement-Prospectus so that any of such documents would not include any
misstatement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, the party which discovers such information shall promptly
notify the other party hereto and, to the extent required by law, rules or
regulations, an appropriate amendment or supplement describing such information
shall be promptly filed with the SEC and disseminated to the stockholders of
Acquiror and Target.
(b) Acquiror shall also take any action required to be taken under
any applicable state securities laws in connection with the Merger and each of
Target and Acquiror shall furnish all information concerning it and the holders
of Target Common Stock as may be reasonably requested in connection with any
such action.
(c) Acquiror shall use its reasonable best efforts to cause the
shares of Acquiror Common Stock to be issued in the Merger and upon the exercise
of Converted Options to be approved for listing on the AMEX, subject to official
notice of issuance, prior to the Closing Date.
Section 4.10 AFFILIATE LETTERS. Target shall use its reasonable best
-----------------
efforts to cause each director, executive officer and other person, if any, who
is an "affiliate" of Target under Rule 145 of the Securities Act to deliver to
Acquiror as soon as practicable and prior to the mailing of the Joint Proxy
Statement-Prospectus executed letter agreements, each substantially in the form
attached hereto as Exhibit D, providing that such person will comply with Rule
145.
Section 4.11 NOTIFICATION OF CERTAIN MATTERS. Each party shall give
-------------------------------
prompt notice to the other of: (i) any event or notice of, or other
communication relating to, a default or event that, with notice or lapse of time
or both, would become a default, received by it or any of its Subsidiaries
subsequent to the date of this Agreement and prior to the Effective Time, under
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any contract material to the financial condition, properties, businesses or
results of operations of each party and its Subsidiaries taken as a whole to
which each party or any Subsidiary is a party or is subject; and (ii) any event,
condition, change or occurrence which individually or in the aggregate has, or
which, so far as reasonably can be foreseen at the time of its occurrence, is
reasonably likely to result in a Material Adverse Effect. Each of Target and
Acquiror shall give prompt notice to the other party of any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with any of the transactions contemplated by
this Agreement.
Section 4.12 EMPLOYEES, DIRECTORS AND OFFICERS.
---------------------------------
(a) All persons who are employees of Target or a Subsidiary of Target
immediately prior to the Effective Time and whose employment is not specifically
terminated at or prior to the Effective Time (a "CONTINUING EMPLOYEE") shall, at
the Effective Time, become employees of Acquiror or a Subsidiary of Acquiror, as
appropriate; PROVIDED, HOWEVER, that in no event shall any of Target's employees
be officers of Acquiror or a Subsidiary of Acquiror, or have or exercise any
power or duty conferred upon such an officer, unless and until duly elected or
appointed to such position in accordance with the bylaws of Acquiror or a
Subsidiary of Acquiror, as appropriate. Except for Continuing Employees who have
employment agreements with Target or a Subsidiary of Target, all of the
Continuing Employees shall be employed at the will of Acquiror or a Subsidiary
of Acquiror and no contractual right to employment shall inure to such employees
because of this Agreement.
(b) Each Continuing Employee of Target Bank ("TARGET BANK CONTINUING
EMPLOYEE") shall be eligible to participate in the Acquiror Pension Plan and the
Acquiror 401(k) Plan with credit for prior service with Target Bank for purposes
of eligibility and vesting, but not for purposes of benefit accrual under the
acquiror Pension Plan and Acquiror shall evaluate the eligibility of all other
Continuing Employees for purposes of providing benefits comparable to those
available to Target Bank Continuing Employees. Each Target Bank Continuing
Employee shall be treated as a new employee of Acquiror for purposes of the
Acquiror Employee Stock Ownership Plan following the Effective Date and Acquiror
shall evaluate the eligibility of all other Continuing Employees for purposes of
the Acquiror Employee Stock Ownership Plan. As of the Effective Time, Acquiror
shall make available employer-provided health and other employee welfare benefit
plans to each Continuing Employee on the same basis as it provides such coverage
to Acquiror employees except that any pre-existing condition, eligibility
waiting period or other limitations or exclusions otherwise applicable under
such plans to new employees shall not apply to a Continuing Employee or their
covered dependents who were covered under a similar Target plan on the Effective
Date of the Merger. Acquiror shall cause its health and dental plans to provide
full credit under such plans for any deductibles, co-payments and out-of-pocket
expenses incurred by the Continuing Employees and their covered dependents
during the portion of the calendar year prior to their participation in such
plans of Acquiror.
(c) Target shall take such action as may be necessary under the plan
and applicable law to freeze benefit accruals under the Target Pension Plan as
of a date not later than the Effective Date. Following the Effective Date,
Acquiror may, in its sole discretion, cause the
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Target Pension Plan to be terminated, merged into the Acquiror Pension Plan, or
Acquiror may maintain the frozen plan as a separate plan. Target shall also take
such action to terminate the Target 401(k) Plan not later than immediately prior
to the Effective Date. Subject to receipt of a favorable determination letter
from the IRS regarding the termination of the Target 401(k) Plan, distributions
shall be made to participants as provided in the Target 401(k) Plan.
(d) The foregoing subparagraph (b) notwithstanding, Acquiror agrees to
honor in accordance with their terms all benefits vested as of the Effective
Time under the Target Employee Plans and all vested benefits or other vested
amounts earned or accrued through such time under contracts, arrangements
commitments or understandings described in Target's Disclosure Letter, including
benefits and amounts which vest or are otherwise accrued as a result of the
consummation of the transactions contemplated by this Agreement, in each case to
the extent permitted by Government Regulators; provided, that Acquiror shall
cooperate with Target in seeking any consents or approvals that may be necessary
in connection with the payment of such benefits and amounts.
(e) Prior to the Effective Date, Target will designate by notice to
the Acquiror one director from Target's Board of Directors reasonably acceptable
to Acquiror and Acquiror's Board of Directors shall nominate such person to be
elected as a director for a three year term by the stockholders of Acquiror at
its annual meeting to be held in 2002. The person appointed to Acquiror's Board
of Directors shall be the same person appointed to Acquiror Bank's Board of
Directors in accordance with SECTION 1.10 hereof.
Section 4.13 INDEMNIFICATION.
---------------
(a) From and after the Effective Time through the sixth anniversary of
the Effective Date, Acquiror agrees to indemnify and hold harmless each present
and former director and officer of Target and its Subsidiaries and each officer
or employee of Target and its Subsidiaries that is serving or has served as a
director or trustee of another entity expressly at Target's or Target Bank's
request or direction (each, an "INDEMNIFIED PARTY"), against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, amounts paid
in settlement, losses, claims, damages or liabilities (collectively, "COSTS")
incurred in connection with any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, whether asserted or claimed prior to, at or after the Effective
Time, and to advance any such Costs to each Indemnified Party as they are from
time to time incurred, based in whole or in part on, or arising in whole or in
part out of, or pertaining to (i) the fact that such Indemnified Party is or was
a director, officer or employee of Target or one of its Subsidiaries or as a
director or trustee of another entity expressly at Target's or Target Bank's
request or direction, in each case to the fullest extent such Indemnified Party
would have been indemnified as a director, officer or employee of Target or one
of its Subsidiaries under applicable law or (ii) this Agreement, the Stock
Option Agreement, or any of the transactions contemplated hereby or thereby and
all actions taken or omitted to be taken by an Indemnified Party in connection
herewith or therewith.
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(b) Any Indemnified Party wishing to claim indemnification under
SECTION 4.13(A), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify Acquiror thereof, but the failure to so
notify shall not relieve Acquiror of any liability it may have hereunder to such
Indemnified Party if such failure does not materially and substantially
prejudice Acquiror. In the event of any such claim, action, suit, proceeding or
investigation, (i) Acquiror shall have the right to assume the defense thereof
with counsel reasonably acceptable to the Indemnified Party and Acquiror shall
not be liable to such Indemnified Party for any legal expenses of other counsel
subsequently incurred by such Indemnified Party in connection with the defense
thereof, except that if Acquiror does not elect to assume such defense within a
reasonable time or counsel for the Indemnified Party at any time advises that
there are issues which raise conflicts of interest between Acquiror and the
Indemnified Party (and counsel for Acquiror does not disagree), the Indemnified
Party may retain counsel satisfactory to such Indemnified Party, and Acquiror
shall remain responsible for the reasonable fees and expenses of such counsel as
set forth above, to be paid promptly as statements therefor are received;
PROVIDED, HOWEVER, that Acquiror shall be obligated pursuant to this paragraph
(b) to pay for only one firm of counsel for all Indemnified Parties in any one
jurisdiction with respect to any given claim, action, suit, proceeding or
investigation unless the use of one counsel for such Indemnified Parties would
present such counsel with a conflict of interest; (ii) the Indemnified Party
will reasonably cooperate in the defense of any such matter; and (iii) Acquiror
shall not be liable for any settlement effected by an Indemnified Party without
its prior written consent, which consent may not be withheld unless such
settlement is unreasonable in light of such claims, actions, suits, proceedings
or investigations against, or defenses available to, such Indemnified Party.
(c) Acquiror shall promptly pay all reasonable Costs, including
attorneys' fees, that may be incurred by any Indemnified Party in successfully
enforcing the indemnity and other obligations provided for in this SECTION 4.13
to the fullest extent permitted under applicable law. The rights of each
Indemnified Party hereunder shall be in addition to any other rights such
Indemnified Party may have under applicable law.
(d) Without limiting any of the obligations under paragraph (A) of
this SECTION 4.13, Acquiror agrees that all rights to indemnification existing
in favor of, and all limitations on the personal liability of, the Indemnified
Parties provided for in Target's Articles of Organization and bylaws, the
similar governing documents of the Target Subsidiaries and any agreements as in
effect as of the date hereof with respect to matters occurring prior to or at
the Effective Time, including the Merger, shall survive the Merger and continue
in full force and effect, without any amendment thereto, for a period of not
less than six years after the Effective Time; PROVIDED, HOWEVER, that all rights
to indemnification in respect of any Claim asserted or made prior to the end of
such period shall continue until the final disposition of such Claim. Prior to
the Effective Time, Target shall purchase an extended reporting period
endorsement (the "POLICY EXTENSION") under the Target's existing directors' and
officers' liability insurance coverage for the Target's directors and officers
which shall provide such directors and officers with coverage for six years
following the Effective Time (which policy shall provide substantially the same
coverage and amounts shall contain terms and conditions which are no more
favorable to the insured persons as the directors' and officers' liability
insurance coverage presently maintained by Target) with respect to acts or
omissions occurring prior to or at the Effective
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Time which were committed by such officers and directors in their capacity as
such; provided that with the consent of Target given in writing prior to the
Effective Time, Acquiror may substitute therefore policies of at least the same
coverage and amounts containing terms and conditions which are not less
advantageous to such directors and officers of Target than the terms and
conditions of such Policy Extension. Acquiror shall take any and all actions
necessary or advisable to maintain such Policy Extension (or substitute) on the
terms so purchased (or substituted) and shall not modify or amend the terms
thereof in any manner. Notwithstanding the foregoing, nothing in this SECTION
4.13 shall permit Target to expend for each year of coverage purchased in excess
of 125% of the per annum premium paid by Target, as of the date hereof, for
Target's existing directors' and officers' liability insurance policy.
(e) In the event Acquiror or any of its successors or assigns (i)
consolidates with or merges into any other person or entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person or entity, then, and in each such case, to the extent
necessary, proper provision shall be made so that the successors and assigns of
Acquiror assume the obligations set forth in this SECTION 4.13.
(f) The provisions of this SECTION 4.13 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
representatives.
Section 4.14 SECTION 16 MATTERS. Prior to the Effective Time, Target
------------------
and Acquiror shall take all such steps as may be required to cause any
dispositions of Target Common Stock (including derivative securities with
respect to Target Common Stock) or acquisitions of Acquiror Common Stock
resulting from the transactions contemplated by this Agreement by each
individual who is subject to the reporting requirements of Section 16(a) of the
Exchange Act with respect to Target to be exempt under Rule 16b-3 promulgated
under the Exchange Act. Target agrees to promptly furnish Acquiror with all
requisite information necessary for Acquiror to take the actions contemplated by
this SECTION 4.14.
ARTICLE V
CONDITIONS TO CONSUMMATION
--------------------------
Section 5.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
--------------------------------------
obligations of each party to effect the Merger shall be subject to the
satisfaction of the following conditions:
(a) Stockholder Approval. This Agreement shall have been approved by
--------------------
the requisite vote of Acquiror's and Target's stockholders in accordance with
applicable laws and regulations.
(b) Regulatory Approvals. All approvals, consents or waivers of any
--------------------
Governmental Entity required to permit consummation of the
transactions contemplated by this Agreement shall have been obtained and shall
remain in full force and effect, and all statutory waiting periods shall have
expired; PROVIDED, HOWEVER, that none of such approvals, consents or
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waivers shall contain any condition or requirement that Acquiror raise a
material amount of additional capital, restrict materially its operations or
growth or dispose of securities to be acquired from Target in amounts materially
in excess of the amounts required to be disposed of by Target under the
regulatory agreements applicable to Target as of the date hereof and that would
so adversely impact the economic or business benefits to Acquiror of the
transactions contemplated hereby that, had such condition or requirement been
known, Acquiror would not, in its reasonable judgment, have entered into this
Agreement.
(c) No Injunctions or Restraints; Illegality. No party hereto shall
----------------------------------------
be subject to any order, decree or injunction of a court or agency of competent
jurisdiction that enjoins or prohibits the consummation of the Merger or the
Bank Merger and no Governmental Entity shall have instituted any proceeding for
the purpose of enjoining or prohibiting the consummation of the Merger or the
Bank Merger or any transactions contemplated by this Agreement. No statute, rule
or regulation shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits or makes illegal consummation of the Merger.
(d) Registration Statement; Blue Sky Laws. The Registration
-------------------------------------
Statement shall have been declared effective by the SEC and shall be effective
and no proceedings shall be pending or threatened by the SEC to suspend the
effectiveness of the Registration Statement, and Acquiror shall have received
all required approvals by state securities or "blue sky" authorities with
respect to the transactions contemplated by this Agreement.
(e) Third Party Consents. Acquiror and Target shall have obtained
--------------------
the consent or approval of each person (other than the governmental approvals or
consents referred to in SECTION 5.1(B)) whose consent or approval shall be
required to consummate the transactions contemplated by this Agreement, except
those the failure of which to obtain would not, individually or in the
aggregate, have a Material Adverse Effect on Acquiror (after giving effect to
the consummation of the transactions contemplated hereby).
(f) Tax Opinion. Acquiror and Target shall have received opinions of
-----------
Muldoon Murphy & Faucette LLP and Goodwin Procter LLP, respectively, dated as of
the Effective Date, in form and substance customary in transactions of the type
contemplated hereby, and reasonably satisfactory to Target and Acquiror, as the
case may be, substantially to the effect that on the basis of the facts,
representations and assumptions set forth in such opinions which are consistent
with the state of facts existing at the Effective Time, the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the IRC and that accordingly:
(i) No gain or loss will be recognized by Acquiror or Target as
a result of the Merger;
(ii) Except to the extent of any cash received as part of the
Merger Consideration or in lieu of a fractional share interest in Acquiror
Common Stock, no gain or loss will be recognized by the stockholders of Target
who exchange their Target Common Stock for Acquiror Common Stock pursuant to the
Merger;
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(iii) The tax basis of Acquiror Common Stock received by
stockholders who exchange their Target Common Stock for Acquiror Common Stock in
the Merger will be the same as the tax basis of Target Common Stock surrendered
pursuant to the Merger, reduced by any amount allocable to a fractional share
interest for which cash is received and increased by any gain recognized on the
exchange; and
(iv) The holding period of Acquiror Common Stock received by each
stockholder in the Merger will include the holding period of Target Common Stock
exchanged therefor, provided that such stockholder held such Target Common Stock
as a capital asset on the Effective Date.
Such opinions may be based on, in addition to the review of such
matters of fact and law as counsel considers appropriate, representations
contained in certificates of officers of Acquiror, Target and others.
(g) AMEX Listing. The shares of Acquiror Common Stock issuable as
part of the Merger Consideration or upon the exercise of Converted Options shall
have been approved for listing on the AMEX, subject to official notice of
issuance.
Section 5.2. CONDITIONS TO THE OBLIGATIONS OF ACQUIROR. The
-----------------------------------------
obligations of Acquiror to effect the Merger shall be further subject to the
satisfaction of the following additional conditions, any one or more of which
may be waived by Acquiror:
(a) Representations and Warranties; Performance of Obligations. (i)
----------------------------------------------------------
Each of the obligations of Target required to be performed by it at or prior to
the Closing pursuant to the terms of this Agreement shall have been duly
performed and complied with in all material respects, (ii) each of the
representations and warranties of Target contained in SECTIONS 2.2(A) (except as
relates to qualification), (B) (except as relates to qualification), (C), (D),
(F)(I)(A) and (B), (U) and (EE) of this Agreement shall be true and correct
(except for inaccuracies that are de minimis) as of the date of this Agreement
and as of the Effective Time as though made at and as of the Effective Time,
(iii) there shall not exist any inaccuracies in the representations and
warranties of Target contained in this Agreement (including the representations
and warranties set forth in the Sections designated above) such that the effect
of such inaccuracies individually or in the aggregate has, or is reasonably
likely to have, a Material Adverse Effect on Target, and (iv) Acquiror shall
have received a certificate to the foregoing effect signed by the chief
executive officer and the chief financial or principal accounting officer of
Target.
(b) Good Standing and Other Certificates. Acquiror shall have received
------------------------------------
d certificates (such certificates to be dated as of a day as close as
practicable to the Closing Date) from appropriate authorities as to the
corporate existence of Target and its Subsidiaries and such other documents and
certificates to evidence fulfillment of the conditions set forth in SECTIONS 5.1
and 5.2 as Acquiror may reasonably require.
(c) Corporate Authorization. All corporate action required to be taken
-----------------------
by , or on the part of, Target and Target Bank to authorize the
execution, delivery and performance of
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this Agreement and the consummation by Target and Target Bank of the
transactions contemplated thereby shall have been duly and validly taken by the
Board of Directors and stockholders of Target or Target Bank, as the case may
be, and Acquiror shall have received certified copies of the resolutions
evidencing such authorization.
(d) No Material Adverse Effect. At any time after the date of this
--------------------------
Agreement there shall not have occurred any event or occurrence that has had, or
is reasonably expected to have, a Material Adverse Effect on Target.
(e) Maintenance of Value of Certain Securities. There shall not have
------------------------------------------
been a reduction of greater than 7% in the aggregate fair market value of the
trust preferred securities, subordinated debt securities, corporate debt
securities and zero coupon debt instruments held by Target and its Subsidiaries
as of August 31, 2001 ("SELECTED SECURITIES PORTFOLIO") as of a date within ten
business days of the Effective Date. For purposes of determining the aggregate
fair market value of the Selected Securities Portfolio under this SECTION
5.2(E), the proceeds of any sales of securities within the Selected Securities
Portfolio shall be added to the market value of the securities remaining in the
Selected Securities Portfolio as of the Effective Date.
(f) Lease for Branch. Target shall have entered into a lease agreement
----------------
agreement with respect to the Target Bank branch office located at 116 Torrey
Street, Brockton, Massachusetts, which such lease shall be for a term of at
least two years but not more than four years from the date of the execution of
such lease, and which such lease shall be on terms and conditions substantially
similar to the lease in effect on such property as of the date hereof.
Section 5.3. CONDITIONS TO THE OBLIGATIONS OF TARGET. The obligations
---------------------------------------
of Target to effect the Merger shall be further subject to the satisfaction of
the following additional conditions, any one or more of which may be waived by
Target:
(a) Representations and Warranties; Performance of Obligations. (i)
----------------------------------------------------------
Each of the obligations of Acquiror required to be performed by it at or prior
to the Closing pursuant to the terms of this Agreement shall have been duly
performed and complied with in all material respects, (ii) each of the
representations and warranties of Acquiror contained in SECTIONS 2.3(A) (except
as relates to qualification), (B) (except as relates to qualification), (C),
(D), (F)(I)(A) and (B), and (W) of this Agreement shall be true and correct
(except for inaccuracies that are de minimis) as of the date of this Agreement
and as of the Effective Time as though made at and as of the Effective Time,
(iii) there shall not exist any inaccuracies in the representations and
warranties of Acquiror contained in this Agreement (including the
representations and warranties set forth in the Sections designated above) such
that the effect of such inaccuracies individually or in the aggregate has, or is
reasonably likely to have, a Material Adverse Effect on Acquiror, and (iv)
Target shall have received a certificate to the foregoing effect signed by the
chief executive officer and the chief financial or principal accounting officer
of Acquiror.
(b) Deposit of Merger Consideration. Acquiror shall have cash to pay
-------------------------------
deposited with the Exchange Agent sufficient cash to pay the aggregate Cash
Consideration.
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(c) Good Standing and Other Certificates. Target shall have received
------------------------------------
certificates (such certificates to be dated as of a day as close as practicable
to the Closing Date) from appropriate authorities as to the corporate existence
of Acquiror and its Subsidiaries and such other documents and certificates to
evidence fulfillment of the conditions set forth in SECTIONS 5.1 and 5.3 as
Target may reasonably require.
(d) Corporate Authorization. All corporate action required to be taken
-----------------------
by, or on the part of, Acquiror and Acquiror Bank to authorize the execution,
delivery and performance of this Agreement and the consummation by Acquiror and
Acquiror Bank of the transactions contemplated thereby shall have been duly and
validly taken by the Board of Directors and stockholders of Acquiror or Acquiror
Bank, as the case may be, and Target shall have received certified copies of the
resolutions evidencing such authorization.
ARTICLE VI
TERMINATION
-----------
Section 6.1. TERMINATION. This Agreement may be terminated, and the
-----------
Merger abandoned, at any time prior to the Effective Time, either before or
after any requisite stockholder approval:
(a) by the mutual consent of Acquiror and Target in a written
instrument, if the Board of Directors of each so determines by vote of a
majority of the members of its entire Board; or
(b) by either the Board of Directors of Acquiror or Target, in the
event of the failure of either party's stockholders to approve this Agreement at
its Stockholder Meeting called to consider such approval; PROVIDED, HOWEVER,
that a party shall only be entitled to terminate this Agreement pursuant to this
clause if it has complied in all material respects with its obligations under
SECTION 4.8; or
(c) by either the Board of Directors of Acquiror or Target, if either
(i) any approval, consent or waiver of a Governmental Entity required to permit
consummation of the transactions contemplated by this Agreement shall have been
denied and such denial shall be nonappealable or (ii) any Governmental Entity of
competent jurisdiction shall have issued a final, nonappealable order enjoining
or otherwise prohibiting consummation of the transactions contemplated by this
Agreement; or
(d) by either the Board of Directors of Acquiror or Target, in the
event that the Merger is not consummated by June 30, 2002, unless the failure to
so consummate by such time is due to the breach of any representation, warranty
or covenant contained in this Agreement by the party seeking to terminate; or
(e) by either the Board of Directors of Acquiror or Target (provided
that the party seeking termination is not then in material breach of any
representation, warranty, covenant or other agreement contained herein), in the
event of a breach of any representation, warranty,
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covenant or agreement on the part of the other party set forth in this
Agreement, which breach (i) cannot be cured within thirty (30) days following
receipt of written notice from the party seeking termination and (ii) is such
that the conditions set forth in SECTION 5.2(A) or 5.3(A), as the case may be,
would not be satisfied; or
(f) by either the Board of Directors of Acquiror or Target, if the
Board of Directors of the other party does not publicly recommend in the Joint
Proxy Statement- Prospectus that stockholders approve and adopt this Agreement
or if, after recommending in the Joint Proxy Statement-Prospectus that
stockholders approve and adopt this Agreement, the Board of Directors, of the
other party withdraws, qualifies or revises such recommendation in any respect
materially adverse to the party seeking to terminate this Agreement; or
(g) by the Board of Directors of Target, if it determines by a vote
of a majority of the members of the Target Board of Directors, at any time
during the three business-day period commencing on the Determination Date, if
both of the following conditions are satisfied:
(i) The Average Closing Price shall be less than $13.92; and
(ii) (A) the quotient obtained by dividing the Average Closing
Price by $17.40 (such quotient being referred to herein as the "ACQUIROR RATIO")
shall be less than (B) the number obtained by taking the quotient obtained by
dividing the Index Value on the Determination Date by the Index Value on the
Starting Date and subtracting 0.15 from such quotient (such number being
referred to herein as the "INDEX RATIO");
subject, however, to the following three sentences. If Target elects to exercise
its termination right pursuant to this SECTION 6.1(G), it shall give prompt
written notice to Acquiror; PROVIDED, that such notice of election to terminate
may be withdrawn at any time within the aforementioned three-business-day
period. During the three-business day period commencing with its receipt of such
notice, Acquiror shall have the option to elect to increase the Exchange Ratio
to equal (rounded to the next highest ten-thousandth) the lesser of (i) the
quotient obtained by dividing (A) the product of $13.92 and the Exchange Ratio
(as then in effect) by (B) the Average Closing Price, and (ii) the quotient
obtained by dividing (A) the product of the Index Ratio and the Exchange Ratio
(as then in effect) by (B) the Acquiror Ratio. If Acquiror makes an election
contemplated by the preceding sentence, within such three-business day period,
it shall give prompt written notice to Target of such election and the revised
Exchange Ratio, whereupon no termination shall have occurred pursuant to this
SECTION 6.1(G) and this Agreement shall remain in effect in accordance with its
terms (except as the Exchange Ratio shall have been so modified), and any
references in this Agreement to the Exchange Ratio shall thereafter be deemed to
refer to the Exchange Ratio as adjusted pursuant to this SECTION 6.1(G).
For purposes of SECTION 6.1(G), the following terms shall have the meanings
indicated:
"AVERAGE CLOSING PRICE" shall mean the average of the daily last sales
prices of Acquiror Common Stock as reported on the AMEX (as reported in THE
WALL STREET JOURNAL) for the 20 consecutive trading days in which such
shares are trading ending at the close of trading on the last day of
trading before the Determination Date.
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"DETERMINATION DATE" shall mean the later of the date on which (i)
the approval of the OTS, without regard to any requisite waiting period in
respect thereof, shall be received by Acquiror or, at Target's option, the
date on which it receives written notice from Acquiror of such approval or
(ii) the Target Stockholder Meeting occurs.
"INDEX" shall mean the SNL New England Thrift Index.
"INDEX VALUE" on a given date shall mean the value of the Index.
"STARTING DATE" shall mean September 28, 2001.
If Acquiror declares or effects a stock dividend, reclassification,
recapitalization, split-up, combination or exchange of shares of similar
transaction between the date of this Agreement and the Determination Date, the
prices for Acquiror Common Stock shall be appropriately adjusted for the
purposes of applying SECTIONS 6.1(G); or
(h) by the Board of Directors of Target, if the Board of Directors of
Target authorizes Target to enter into an agreement with respect to an
Acquisition Transaction that the Board of Directors of Target has determined is
a Superior Proposal; provided, that Target shall not terminate this Agreement
pursuant to this SECTION 6.1(H) and enter into an agreement for an Acquisition
Transaction until the expiration of three business days following Acquiror's
written notice advising Acquiror that Target has received a Superior Proposal
specifying the material terms and conditions of such Superior Proposal (and
including a copy thereof), identifying the person making such Superior Proposal
and stating whether Target intends to enter into a definitive agreement for an
Acquisition Transaction. After providing such notice, Target shall provide a
reasonable opportunity to Acquiror during such period to make such adjustments
to the terms and conditions of this Agreement as would enable Target to proceed
with the Merger on such adjusted terms.
Section 6.2. TERMINATION FEE. (a) In recognition of the efforts,
---------------
expenses and other opportunities foregone by Acquiror while structuring the
Merger, the parties hereto agree that subject to obtaining any necessary
regulatory approval, Target shall pay to Acquiror a termination fee of
$3,000,000 in cash on demand (less any expenses previously reimbursed pursuant
to SECTION 6.2(B)) if
(i) Target terminates this Agreement pursuant to SECTION 6.1(H); or
(ii) Target's stockholders fail to approve this Agreement at Target's
Stockholders Meeting and within 24 months after the termination of this
Agreement, Target or any of its Subsidiaries, without having received Acquiror's
prior written consent, shall have entered into an agreement to engage in an
Acquisition Transaction with any person other than Acquiror or any of its
Subsidiaries or the Board of Directors of Target shall have recommended that the
stockholders of Target approve or accept an Acquisition Transaction with any
person other than Acquiror or any of its Subsidiaries.
A-55
Notwithstanding the foregoing, Target shall not be obligated to pay to
Acquiror the termination fee described in this SECTION 6.2 in the event that at
or prior to such time as such fee becomes payable (i) Acquiror and Target
validly terminate this Agreement pursuant to SECTION 6.1(A), (ii) Acquiror
validly terminates this Agreement pursuant to SECTION 6.1(C) or (iii) if Target
validly terminates or could validly terminate this Agreement pursuant to
SECTIONS 6.1(C), 6.1(D), 6.1(E) or 6.1(G).
(b) In the event the stockholders of Target shall not have approved
the Agreement at Target's Stockholders Meeting, Target shall reimburse Acquiror,
upon demand and upon reasonable documentation therefor, Acquiror's reasonable
out-of-pocket expenses.
Section 6.3. EFFECT OF TERMINATION. In the event of termination of
---------------------
this Agreement by either Acquiror or Target as provided in SECTION 6.1, this
Agreement shall forthwith become void and, subject to SECTION 6.2, have no
effect, and there shall be no liability on the part of any party hereto or their
respective officers and directors, except (i) SECTION 4.3(D), SECTION 6.2,
SECTION 8.6 and SECTION 8.7, shall survive any termination of this Agreement,
and (ii) that notwithstanding anything to the contrary contained in this
Agreement, no party shall be relieved or released from any liabilities or
damages arising out of its willful breach of any provision of this Agreement.
ARTICLE VII
CLOSING, EFFECTIVE DATE AND EFFECTIVE TIME
------------------------------------------
Section 7.1. EFFECTIVE DATE AND EFFECTIVE TIME. The closing of the
---------------------------------
transactions contemplated hereby ("CLOSING") shall take place at the offices of
Muldoon Murphy & Faucette LLP, 5101 Wisconsin Avenue, N.W., Washington, D.C.
20016, unless another place is agreed to by Acquiror and Target, on a date
specified by the parties ("CLOSING DATE") that is no later than seven days
following the date on which the expiration of the last applicable waiting period
in connection with notices to and approvals of Governmental Entities shall occur
and all conditions to the consummation of this Agreement are satisfied or waived
(excluding conditions that, by their nature, cannot be satisfied until the
Closing Date) unless extended by mutual agreement of the parties. Prior to or on
the Closing Date, Acquiror and Target shall execute certificates of merger and
articles of merger in accordance with all appropriate legal requirements, which
shall be filed as required by law on the Closing Date, and the Merger provided
for therein shall become effective upon such filing or on such date as may be
specified in such certificates of merger and articles of merger. The date of
such filing or such later effective date as specified in the certificates or
articles of merger is herein referred to as the "EFFECTIVE DATE." The "EFFECTIVE
TIME" of the Merger shall be as set forth in the certificate of merger and
articles of merger.
Section 7.2. DELIVERIES AT THE CLOSING. Subject to the provisions of
-------------------------
Articles V and VI, on the Closing Date there shall be delivered to Acquiror and
Target the documents and instruments required to be delivered under Article V.
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ARTICLE VIII
CERTAIN OTHER MATTERS
---------------------
Section 8.1. CERTAIN DEFINITIONS; INTERPRETATION. For purposes of this
-----------------------------------
Agreement:
"ACQUIROR COMMON STOCK" means the common stock, par value $.01 per
share, of Acquiror;
"ACQUISITION PROPOSAL" means any proposal or offer with respect to an
Acquisition Transaction or any public announcement of a proposal, plan or
intention to engage in an Acquisition Transaction or any agreement to engage in
an Acquisition Transaction;
"ACQUISITION TRANSACTION" means any of the following (other than the
transactions contemplated hereunder): (i) any merger, consolidation, share
exchange, business combination, or other similar transaction involving Target or
Target Bank; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 25% or more of the consolidated assets of Target and its
Subsidiaries in a single transaction or series of transactions; or (iii) any
tender offer or exchange offer for 25% or more of the outstanding shares of
Target's capital stock or the filing of a registration statement under the
Securities Act in connection therewith;
"AMEX" means the American Stock Exchange;
"BANK MERGER ACT" means the Bank Merger Act, as amended;
"BHC ACT" means the Bank Holding Company Act of 1956, as amended;
"CRA" means the Community Reinvestment Act;
"ENVIRONMENTAL LAW" means (i) any federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, directive, executive or administrative order,
judgment, decree, injunction, legal requirement or agreement with any
Governmental Entity relating to (A) the protection, preservation or restoration
of the environment (which includes, without limitation, air, water vapor,
surface water, groundwater, drinking water supply, soil, surface land,
subsurface land, plant and animal life or any other natural resource), or to
human health or safety as it relates to Hazardous Materials, or (B) the exposure
to, or the use, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal of, Hazardous
Materials, in each case as amended and as now in effect. The term Environmental
Law includes, without limitation, the Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Water Pollution Control Act of 1972,
the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976, the Federal Solid Waste Disposal and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and
Rodenticide Act, the Federal Occupational Safety and Health Act of 1970 as it
relates to Hazardous Materials, the Federal Hazardous Substances Transportation
Act, the Emergency Planning and Community Right-To-Know Act, the Safe
A-57
Drinking Water Act, the Endangered Species Act, the National Environmental
Policy Act, the Rivers and Harbors Appropriation Act or any so-called
"Superfund" or "Superlien" law, each as amended and as now in effect;
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended;
"ERISA AFFILIATE" means any entity that is considered one employer
with Acquiror or Target, as the case may be, under Section 4001(b)(1) of ERISA
or Section 414 of the IRC;
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended;
"EXCLUDED SHARES" shall consist of (i) Dissenters' Shares and (ii)
shares held directly or indirectly by Acquiror (other than shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted);
"FDIA" means the Federal Deposit Insurance Act, as amended;
"FDIC" means the Federal Deposit Insurance Corporation;
"FEDERAL RESERVE BOARD" means the Board of Governors of the Federal
Reserve System;
"GAAP" means generally accepted accounting principles;
"GOVERNMENT REGULATOR" means any federal or state governmental
authority charged with the supervision or regulation of depository institutions
or depository institution holding companies or engaged in the insurance of bank
deposits;
"GOVERNMENTAL ENTITY" means any court, administrative agency or
commission or other governmental authority or instrumentality;
"HAZARDOUS MATERIAL" means any substance (whether solid, liquid or
gas) which is currently or hereafter listed, defined, designated or classified
as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any
Environmental Law, whether by type or by quantity, including any substance
containing any such substance as a component. Hazardous Material includes,
without limitation, any toxic waste, pollutant, contaminant, hazardous
substance, toxic substance, hazardous waste, special waste, industrial
substance, oil or petroleum, or any derivative or by-product thereof, radon,
radioactive material, asbestos, asbestos-containing material, urea formaldehyde
foam insulation, lead and polychlorinated biphenyl;
"HOLA" means the Home Owners' Loan Act, as amended;
"IRC" means the Internal Revenue Code of 1986, as amended;
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"IRS" means the Internal Revenue Service;
"KNOWLEDGE" means, with respect to a party hereto, actual knowledge of
the members of the Board of Directors of that party or any officer of that party
with the title ranking not less than senior vice president;
"LOAN" means a loan, lease, advance, credit enhancement, guarantee or
other extension of credit;
"LOAN PROPERTY" means any property in which the applicable party (or a
subsidiary of it) holds a security interest and, where required by the context,
includes the owner or operator of such property, but only with respect to such
property;
"MATERIAL ADVERSE EFFECT" means an effect which is material and
adverse to the business, financial condition or results of operations of Target
or Acquiror, as the context may dictate, and its Subsidiaries taken as a whole;
PROVIDED, HOWEVER, that any such effect resulting from any (i) changes in laws,
rules or regulations or generally accepted accounting principles or regulatory
accounting requirements or interpretations thereof that apply to both Acquiror
and Acquiror Bank and Target and Target Bank, as the case may be, or to
financial and/or depository institutions generally, (ii) changes in economic
conditions affecting financial institutions generally, including but not limited
to, changes in the general level of market interest rates, or (iii) the effects
of actions taken in compliance with or related to this Agreement on the
operating performance, business or financial results of the parties, including,
without limitation, (x) the effects of sales by Target of investment securities
that are not prohibited by this Agreement, (y) the transactions described in
Section 3.1 of Target's Disclosure Letter; and (z) expenses incurred by parties
-----------
in connection with the transactions contemplated hereby or relating to any
litigation related to this Agreement, shall not be considered in determining if
a Material Adverse Effect has occurred;
"NASD" means the National Association of Securities Dealers, Inc.;
"OTS" means the Office of Thrift Supervision;
"PARTICIPATION FACILITY" means any facility in which the applicable
party (or a Subsidiary of it) participates in the management and, where required
by the context, includes the owner or operator of such property, but only with
respect to such property;
"PERSON" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization or other entity;
"SEC" means the Securities and Exchange Commission;
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder;
"SUBSIDIARY" means a corporation, partnership, joint venture or other
entity in which Target or Acquiror, as the case may be, has, directly or
indirectly, an equity interest
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representing 50% or more of any class of the capital stock thereof or other
equity interests therein;
"TARGET COMMON STOCK" means the common stock, par value $0.10 per
share, of Target; and
"TAXES" means all income, franchise, gross receipts, real and personal
property, real property transfer and gains, wage and employment taxes.
When a reference is made in this Agreement to Sections or Exhibits
such reference shall be to a Section of, or Exhibit to, this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for ease of reference only and shall not affect the meaning or
interpretation of this Agreement. Whenever the words "INCLUDE," "INCLUDES" or
"INCLUDING" are used in this Agreement, they shall be deemed followed by the
words "WITHOUT LIMITATION." Any singular term in this Agreement shall be deemed
to include the plural, and any plural term the singular. Any reference to gender
in this Agreement shall be deemed to include any other gender.
Section 8.2. SURVIVAL. Only those agreements and covenants of the
--------
parties that are by their terms applicable in whole or in part after the
Effective Time, including SECTIONS 4.12, 4.13 and 6.2 of this Agreement, shall
survive the Effective Time. All other representations, warranties, agreements
and covenants shall be deemed to be conditions of the Agreement and shall not
survive the Effective Time.
Section 8.3. WAIVER; AMENDMENT. Prior to the Effective Time, any
-----------------
provision of this Agreement may be: (i) waived in writing by the party
benefitted by the provision or (ii) amended or modified at any time (including
the structure of the transaction) by an agreement in writing between the parties
hereto except that, after the vote by the stockholders of Target, no amendment
or modification may be made that would reduce the amount or alter or change the
kind of consideration to be received by holders of Target Common Stock or
contravene any provision of the MGCL, the DGCL or the federal banking laws,
rules and regulations.
Section 8.4. COUNTERPARTS. This Agreement may be executed in
------------
counterparts each of which shall be deemed to constitute an original, but all of
which together shall constitute one and the same instrument.
Section 8.5. GOVERNING LAW. This Agreement shall be governed by, and
-------------
interpreted in accordance with, the laws of the State of Delaware, without
regard to conflicts of laws principles.
Section 8.6. EXPENSES. Each party hereto will bear all expenses
--------
incurred by it in connection with this Agreement and the transactions
contemplated hereby, except that Acquiror shall bear and pay the filing fees
payable in connection with the Registration Statement and each party shall bear
and pay a proportional amount of the expenses incurred in connection with the
printing and mailing of the Joint Proxy Statement-Prospectus.
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Section 8.7. NOTICES. All notices, requests, acknowledgments and other
-------
communications hereunder to a party shall be in writing and shall be deemed to
have been duly given when delivered by hand, overnight courier or facsimile
transmission (confirmed in writing) to such party at its address or facsimile
number set forth below or such other address or facsimile transmission as such
party may specify by notice (in accordance with this provision) to the other
party hereto.
If to Acquiror, to:
FIRSTFED AMERICA BANCORP, INC.
ONE FIRSTFED PARK
Swansea, MA 02777
Attention: Robert F. Stoico
Chairman, President and
Chief Executive Officer
Facsimile: (508) 672-0190
With copies to:
Lawrence M.F. Spaccasi, Esq.
Muldoon Murphy & Faucette LLP
5101 Wisconsin Ave., NW
Washington, DC 20016
Facsimile: (202) 966-9409
If to Target, to:
People's Bancshares, Inc.
73 Belmont Street
Easton, MA 02740
Attention: Richard S. Stracyznski
President and Chief Executive Officer
Facsimile: (508) 991-9605
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With copies to:
Eric R. Fischer, Esq.
Goodwin Procter LLP
Exchange Place
Boston, MA 02109
Facsimile: (617) 523-1231
Section 8.8. ENTIRE AGREEMENT; ETC. This Agreement, together with the
----------------------
Disclosure Letters and the Exhibits hereto, represents the entire understanding
of the parties hereto with reference to the transactions contemplated hereby and
supersedes any and all other oral or written agreements heretofore made. Except
for SECTION 4.13, which confers rights on the parties described therein, nothing
in this Agreement is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
Section 8.9. SUCCESSORS AND ASSIGNS; ASSIGNMENT. This Agreement shall
----------------------------------
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that this Agreement may
not be assigned by either party hereto without the written consent of the other
party.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers as of the date first above
written.
ACQUIROR
By: /s/ Robert F. Stoico
------------------------------------------
Robert F. Stoico
Chairman of the Board, President and Chief
Executive Officer
TARGET
By: /s/ Richard S. Stracyznski
------------------------------------------
Richard S. Stracyznski
President and Chief Executive Officer
By: /s/ James K. Hunt
-----------------------------------------
James K. Hunt
Chief Financial Officer and Treasurer
A-63
APPENDIX B
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated October 1, 2001, between People's
Bancshares, Inc., a Massachusetts corporation ("Issuer"), and FIRSTFED AMERICA
BANCORP, INC., a Delaware corporation ("Grantee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan
of Merger of even date herewith (the "Merger Agreement"), which agreement has
been executed by the parties hereto immediately prior to this Stock Option
Agreement (this "Agreement"); and
WHEREAS, as a condition to Grantee's entering into the Merger
Agreement and in consideration therefor, Issuer has agreed to grant Grantee the
Option (as hereinafter defined).
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
1. (a) Subject to the terms hereof, Issuer hereby grants to
Grantee an unconditional, irrevocable option (the "Option") to purchase up to
647,197 fully paid and nonassessable shares of Issuer's Common Stock, par value
$0.10 per share ("Common Stock"), at a price of $22.00 per share (the "Option
Price"); provided, however, that in no event shall the number of shares of
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Common Stock for which this Option is exercisable exceed 19.9% of the Issuer's
issued and outstanding shares of Common Stock without giving effect to any
shares subject to or issued pursuant to the Option. The number of shares of
Common Stock that may be received upon the exercise of the Option and the Option
Price are subject to adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock
are either (i) issued or otherwise become outstanding after the date of this
Agreement (other than pursuant to this Agreement, including, without limitation,
Section 5 hereof) or (ii) redeemed, repurchased, retired or otherwise cease to
be outstanding after the date of this Agreement, then the number of shares of
Common Stock subject to the Option shall be increased or decreased, as
appropriate, so that, after such issuance, such number equals 19.9% of the
number of shares of Common Stock then issued and outstanding without giving
effect to any shares subject or issued pursuant to the
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Option. Nothing contained in this Section 1(b) or elsewhere in this Agreement
shall be deemed to authorize Issuer or Grantee to breach any provision of the
Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise the
Option, in whole or part, and from time to time, if, but only if, both an
Initial Triggering Event (as hereinafter defined) and a Subsequent Triggering
Event (as hereinafter defined) shall have occurred prior to the occurrence of an
Exercise Termination Event (as hereinafter defined) and the Holder is not in
material breach of the agreements or covenants contained in this Agreement or
the Merger Agreement, provided that the Holder shall have sent the written
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notice of such exercise (as provided in subsection (e) of this Section 2) within
six months following such Subsequent Triggering Event (or such longer period as
provided in Section 10), provided further, however, that if the Option cannot be
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exercised on any day because of any injunction, order or similar restraint
issued by a court of competent jurisdiction, the period during which the Option
may be exercised shall be extended so that the Option shall expire no earlier
than on the later of (i) the date on which it would otherwise expire or (ii) the
tenth business day after such injunction, order or restraint shall have been
dissolved or when such injunction, order or restraint shall have become
permanent and no longer subject to appeal, as the case may be. Each of the
following shall be an "Exercise Termination Event": (i) the Effective Time (as
defined in the Merger Agreement) of the Merger; (ii) termination of the Merger
Agreement in accordance with the provisions thereof if such termination occurs
prior to the occurrence of an Initial Triggering Event except a termination by
Grantee pursuant to Section 6.1(e) of the Merger Agreement (unless the breach by
Issuer giving rise to such right of termination is non-volitional); or (iii) the
passage of 12 months after termination of the Merger Agreement if such
termination follows the occurrence of an Initial Triggering Event or is a
termination by Grantee pursuant to Section 6.1(e) of the Merger Agreement
(unless the breach by Issuer giving rise to such right of termination is
non-volitional). The term "Holder" shall mean the holder or holders of the
Option.
(b) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an "Issuer
Subsidiary"), without having received Grantee's prior written consent,
shall have entered into an agreement to engage in an Acquisition
Transaction (as hereinafter defined) with any person (the term "person"
for purposes of this Agreement having the meaning assigned thereto in
Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and the rules and regulations thereunder) other
than Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or
the Board of Directors of Issuer shall have recommended that the
stockholders of Issuer approve or accept any Acquisition Transaction with
any person other than Grantee or a Grantee Subsidiary. For purposes of
this Agreement, "Acquisition Transaction" shall mean (A) a merger or
consolidation, or any similar transaction, involving Issuer or any
Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X
promulgated by the Securities and Exchange Commission (the
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"SEC")) of Issuer, (B) a purchase, lease or other acquisition or
assumption of all or a substantial portion of the assets or deposits of
Issuer or any Significant Subsidiary of Issuer, (C) a purchase or other
acquisition (including by way of merger, consolidation, share exchange or
otherwise) of securities representing 15% or more of the voting power of
Issuer, or (D) any substantially similar transaction; provided, however,
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that in no event shall any merger, consolidation, purchase or similar
transaction involving only the Issuer and one or more of its Subsidiaries
or involving only two or more of such Subsidiaries, be deemed to be an
Acquisition Transaction, provided that any such transaction is not entered
into in violation of the terms of the Merger Agreement;
(ii) Issuer or any Issuer Subsidiary, without having
received Grantee's prior written consent, shall have authorized,
recommended, proposed or publicly announced its intention to authorize,
recommend or propose, an Acquisition Transaction with any person other
than Grantee or a Grantee Subsidiary, or the Board of Directors of Issuer
shall have publicly withdrawn or modified, or publicly announced its
intent to withdraw or modify, in any manner adverse to Grantee, its
recommendation that the stockholders of Issuer approve the transactions
contemplated by the Merger Agreement;
(iii) Any person, other than Grantee, any Grantee
Subsidiary or any Issuer Subsidiary acting in a fiduciary capacity in the
ordinary course of its business, shall have acquired beneficial ownership
or the right to acquire beneficial ownership of 15% or more of the
outstanding shares of Common Stock (the term "beneficial ownership" for
purposes of this Agreement having the meaning assigned thereto in Section
13(d) of the 1934 Act, and the rules and regulations thereunder);
(iv) Any person other than Grantee or any Grantee
Subsidiary shall have made a BONA FIDE proposal to Issuer or its
stockholders by public announcement or written communication that is or
becomes the subject of public disclosure to engage in an Acquisition
Transaction;
(v) After a proposal is made by a third party to Issuer
or its stockholders to engage in an Acquisition Transaction, Issuer shall
have breached any covenant or obligation contained in the Merger
Agreement and such breach (x) would entitle Grantee to terminate the
Merger Agreement and (y) shall not have been cured prior to the Notice
Date (as defined below); or
(vi) Any person other than Grantee or any Grantee
Subsidiary, other than in connection with a transaction to which Grantee
has given its prior written consent, shall have filed an application or
notice with the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"), the Office of Thrift Supervision
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("OTS") or any other federal or state bank regulatory authority for approval to
engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either
of the following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial
ownership of 25% or more of the then outstanding shares of Common Stock;
or
(ii) The occurrence of the Initial Triggering Event
described in paragraph (i) of subsection (b) of this Section 2, except
that the percentage referred to in clause (C) shall be 25%.
(d) Issuer shall notify Grantee promptly in writing of the
occurrence of any Initial Triggering Event or Subsequent Triggering Event of
which it has notice, it being understood that the giving of such notice by
Issuer shall not be a condition to the right of the Holder to exercise the
Option.
(e) In the event the Holder is entitled to and wishes to
exercise the Option, it shall send to Issuer a written notice (the date of which
being herein referred to as the "Notice Date") specifying (i) the total number
of shares it will purchase pursuant to such exercise and (ii) a place and date
not earlier than three business days nor later than 60 business days from the
Notice Date for the closing of such purchase (the "Closing Date"); provided that
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if prior notification to or approval of the Federal Reserve Board, the OTS or
any other regulatory agency is required in connection with such purchase, the
Holder shall promptly file the required notice or application for approval and
shall expeditiously process the same and the period of time that otherwise would
run pursuant to this sentence shall run instead from the date on which any
required notification periods have expired or been terminated or such approvals
have been obtained and any requisite waiting period or periods shall have
passed. Any exercise of the Option shall be deemed to occur on the Notice Date
relating thereto.
(f) At the closing referred to in subsection (e) of this
Section 2, the Holder shall pay to Issuer the aggregate purchase price for the
shares of Common Stock purchased pursuant to the exercise of the Option in
immediately available funds by wire transfer to a bank account designated by
Issuer, provided that failure or refusal of Issuer to designate such a bank
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account shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of
immediately available funds as provided in subsection (f) of this Section 2,
Issuer shall deliver to the Holder a certificate or certificates representing
the number of shares of Common Stock purchased by the Holder and, if the Option
should be exercised in part only, a new Option evidencing the rights of the
Holder thereof to purchase the balance of the shares purchasable hereunder, and
the Holder
B-4
shall deliver to Issuer this Agreement and a letter agreeing that the Holder
will not offer to sell or otherwise dispose of such shares in violation of
applicable law or the provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement between the registered
holder hereof and Issuer and to resale restrictions arising under
the Securities Act of 1933, as amended. A copy of such agreement is
on file at the principal office of Issuer and will be provided to
the holder hereof without charge upon receipt by Issuer of a written
request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if the Holder shall have delivered to Issuer a copy of a letter from the staff
of the SEC, or an opinion of counsel, in form and substance reasonably
satisfactory to Issuer, to the effect that such legend is not required for
purposes of the 1933 Act; (ii) the reference to the provisions of this
Agreement in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference; and (iii) the
legend shall be removed in its entirety if the conditions in the preceding
clauses (i) and (ii) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Issuer of the written
notice of exercise of the Option provided for under subsection (e) of this
Section 2 and the tender of the applicable purchase price in immediately
available funds, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of Issuer shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
the Holder. Issuer shall pay all expenses, and any and all United States
federal, state and local taxes and other charges that may be payable in
connection with the preparation, issue and delivery of stock certificates under
this Section 2 in the name of the Holder or its assignee, transferee or
designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance
B-5
or performance of any of the covenants, stipulations or conditions to be
observed or performed hereunder by Issuer; and (iii) promptly to take all action
as may from time to time be required (including (x) complying with all premerger
notification, reporting and waiting period requirements specified in 15 U.S.C.
ss. 18a and regulations promulgated thereunder and (y) in the event, under the
Bank Holding Company Act of 1956, as amended, the Change in Bank Control Act of
1978, as amended, or any other federal or state banking law, prior approval of
or notice to the Federal Reserve Board, the OTS or to any state regulatory
authority is necessary before the Option may be exercised, cooperating fully
with the Holder in preparing such applications or notices and providing such
information to the Federal Reserve Board, the OTS or such state regulatory
authority as they may require) in order to permit the Holder to exercise the
Option and Issuer duly and effectively to issue shares of Common Stock pursuant
hereto.
4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other Agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any Stock Option
Agreements and related Options for which this Agreement (and the Option granted
hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common
Stock that are purchasable upon exercise of the Option pursuant to Section 1 of
this Agreement, the number of shares of Common Stock purchasable upon the
exercise of the Option and the Option Price shall be subject to adjustment from
time to time as provided in this Section 5. In the event of any change in, or
distributions in respect of, the Common Stock by reason of stock dividends,
split-ups, mergers, recapitalizations, combinations, subdivisions, conversions,
exchanges of shares, distributions on or in respect of the Common Stock that
would be prohibited under the terms of the Merger Agreement, or the like, the
type and number of shares of Common Stock purchasable upon exercise hereof and
the Option Price shall be appropriately adjusted in such manner as shall fully
preserve the economic benefits provided hereunder and proper provision shall be
made in any agreement governing any such transaction to provide for such proper
adjustment and the full satisfaction of the Issuer's obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event that
occurs prior to an Exercise Termination Event, Issuer shall, at the request of
Grantee (whether on its own behalf
B-6
or on behalf of any subsequent holder of this Option (or part thereof) or any of
the shares of Common Stock issued pursuant hereto) delivered within six months
of such Subsequent Triggering Event (or such longer period as provided in
Section 10), promptly prepare, file and keep current a shelf registration
statement under the 1933 Act covering this Option and any shares issued and
issuable pursuant to this Option and shall use its reasonable best efforts to
cause such registration statement to become effective and remain current in
order to permit the sale or other disposition of this Option and any shares of
Common Stock issued upon total or partial exercise of this Option ("Option
Shares") in accordance with any plan of disposition requested by Grantee. Issuer
will use its reasonable best efforts to cause such registration statement first
to become effective and then to remain effective for such period not in excess
of 180 days from the day such registration statement first becomes effective or
such shorter time as may be reasonably necessary to effect such sales or other
dispositions. Grantee shall have the right to demand two such registrations. The
foregoing notwithstanding, if, at the time of any request by Grantee for
registration of the Option or Option Shares as provided above, Issuer is in
registration with respect to an underwritten public offering of shares of Common
Stock, and if in the good faith judgment of the managing underwriter or managing
underwriters, or, if none, the sole underwriter or underwriters, of such
offering the inclusion of the Holder's Option or Option Shares would interfere
with the successful marketing of the shares of Common Stock offered by Issuer,
the number of Option Shares otherwise to be covered in the registration
statement contemplated hereby may be reduced; provided, however, that after any
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such required reduction the number of Option Shares to be included in such
offering for the account of the Holder shall constitute at least 25% of the
total number of shares to be sold by the Holder and Issuer in the aggregate; and
provided further, however, that if such reduction occurs, then the Issuer shall
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file a registration statement for the balance as promptly as practicable and no
reduction shall thereafter occur. Each such Holder shall provide all information
reasonably requested by Issuer for inclusion in any registration statement to be
filed hereunder. If requested by any such Holder in connection with such
registration, Issuer shall become a party to any underwriting agreement relating
to the sale of such shares, but only to the extent of obligating itself in
respect of representations, warranties, indemnities and other agreements
customarily included in secondary offering underwriting agreements for the
Issuer. Upon receiving any request under this Section 6 from any Holder, Issuer
agrees to send a copy thereof to any other person known to Issuer to be entitled
to registration rights under this Section 6, in each case by promptly mailing
the same, postage prepaid, to the address of record of the persons entitled to
receive such copies. Notwithstanding anything to the contrary contained herein,
in no event shall Issuer be obligated to effect more than two registrations
pursuant to this Section 6 by reason of the fact that there shall be more than
one Grantee as a result of any assignment or division of this Agreement.
7. (a) At any time within 90 days after the occurrence of a
Repurchase Event (as defined below), (i) following a request of the Holder,
delivered prior to an Exercise Termination Event, Issuer (or any successor
thereto) shall repurchase the Option from the Holder at a price (the "Option
Repurchase Price") equal to the amount by which (A) the Market/Offer Price (as
defined below) exceeds (B) the Option Price, multiplied by the number of shares
for which this Option may then be exercised and (ii) at the request of the owner
of Option Shares
B-7
from time to time (the "Owner"), delivered prior to an Exercise Termination
Event (or such longer period as provided in Section 10), Issuer shall repurchase
such number of the Option Shares from the Owner as the Owner shall designate at
a price (the "Option Share Repurchase Price") equal to the Market/Offer Price
multiplied by the number of Option Shares so designated. The term "Market/Offer
Price" shall mean the highest of (i) the price per share of Common Stock at
which a tender offer or exchange offer therefor has been made, (ii) the price
per share of Common Stock to be paid by any third party pursuant to an agreement
with Issuer, (iii) the highest closing price for shares of Common Stock within
the six-month period immediately preceding the date the Holder gives notice of
the required repurchase of this Option or the Owner gives notice of the required
repurchase of Option Shares, as the case may be, or (iv) in the event of a sale
of all or a substantial portion of Issuer's assets, the sum of the price paid in
such sale for such assets and the current market value of the remaining assets
of Issuer as determined by a nationally recognized investment banking firm
selected by the Holder or the Owner, as the case may be, and reasonably
acceptable to Issuer, divided by the number of shares of Common Stock of Issuer
outstanding at the time of such sale. In determining the Market/Offer Price, the
value of consideration other than cash shall be determined by a nationally
recognized investment banking firm selected by the Holder or Owner, as the case
may be, and reasonably acceptable to Issuer.
(b) The Holder and the Owner, as the case may be, may exercise
its right to require Issuer to repurchase the Option and any Option Shares
pursuant to this Section 7 by surrendering for such purpose to Issuer, at its
principal office, this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that the Holder
or the Owner, as the case may be, elects to require Issuer to repurchase this
Option and/or the Option Shares in accordance with the provisions of this
Section 7. Within the later to occur of (i) five business days after the
surrender of the Option and/or certificates representing Option Shares and the
receipt of such notice or notices relating thereto and (ii) the time that is
immediately prior to the occurrence of a Repurchase Event, Issuer shall deliver
or cause to be delivered to the Holder the Option Repurchase Price and/or to the
Owner the Option Share Repurchase Price therefor or the portion thereof that
Issuer is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that Issuer is prohibited under applicable
law or regulation, or as a consequence of administrative policy, from
repurchasing the Option and/or the Option Shares in full, Issuer shall
immediately so notify the Holder and/or the Owner and thereafter deliver or
cause to be delivered, from time to time, to the Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after delivery of a
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notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation from delivering to the Holder and/or the
Owner, as appropriate, the Option Repurchase Price and the Option Share
Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its
best efforts to obtain all required regulatory and legal approvals and
B-8
to file any required notices as promptly as practicable in order to accomplish
such repurchase), the Holder or Owner may revoke its notice of repurchase of the
Option or the Option Shares either in whole or to the extent of the prohibition,
whereupon, in the latter case, Issuer shall promptly (i) deliver to the Holder
and/or the Owner, as appropriate, that portion of the Option Repurchase Price or
the Option Share Repurchase Price that Issuer is not prohibited from delivering;
and (ii) deliver, as appropriate, either (A) to the Holder, a new Stock Option
Agreement evidencing the right of the Holder to purchase that number of shares
of Common Stock obtained by multiplying the number of shares of Common Stock for
which the surrendered Stock Option Agreement was exercisable at the time of
delivery of the notice of repurchase by a fraction, the numerator of which is
the Option Repurchase Price less the portion thereof theretofore delivered to
the Holder and the denominator of which is the Option Repurchase Price, or (B)
to the Owner, a certificate for the Option Shares it is then so prohibited from
repurchasing.
(d) For purposes of this Section 7, a "Repurchase Event" shall
be deemed to have occurred (i) upon the consummation of any merger,
consolidation or similar transaction involving Issuer or any purchase, lease or
other acquisition of all or a substantial portion of the assets of Issuer, other
than any such transaction which would not constitute an Acquisition Transaction
pursuant to the provisos to Section 2(b)(i) hereof or (ii) upon the acquisition
by any person of beneficial ownership of 50% or more of the then outstanding
shares of Common Stock, provided that no such event shall constitute a
Repurchase Event unless a Subsequent Triggering Event shall have occurred prior
to an Exercise Termination Event. The parties hereto agree that Issuer's
obligations to repurchase the Option or Option Shares under this Section 7 shall
not terminate upon the occurrence of an Exercise Termination Event unless no
Subsequent Triggering Event shall have occurred prior to the occurrence of an
Exercise Termination Event.
8. (a) In the event that prior to an Exercise Termination
Event, Issuer shall enter into an agreement (i) to consolidate with or merge
into any person, other than Grantee or one of its Subsidiaries, and shall not be
the continuing or surviving corporation of such consolidation or merger, (ii) to
permit any person, other than Grantee or one of its Subsidiaries, to merge into
Issuer and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Common Stock shall
be changed into or exchanged for stock or other securities of any other person
or cash or any other property or the then outstanding shares of Common Stock
shall after such merger represent less than 50% of the outstanding voting shares
and voting share equivalents of the merged company, or (iii) to sell or
otherwise transfer all or substantially all of its assets to any person, other
than Grantee or one of its Subsidiaries, then, and in each such case, the
agreement governing such transaction shall make proper provision so that the
Option shall, upon the consummation of any such transaction and upon the terms
and conditions set forth herein, be converted into, or exchanged for, an option
(the "Substitute Option"), at the election of the Holder, of either (x) the
Acquiring Corporation (as hereinafter defined) or (y) any person that controls
the Acquiring Corporation.
B-9
(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the
continuing or surviving corporation of a consolidation or merger with
Issuer (if other than Issuer), (ii) Issuer in a merger in which Issuer is
the continuing or surviving person, and (iii) the transferee of all or
substantially all of Issuer's assets.
(2) "Substitute Common Stock" shall mean the common
stock issued by the issuer of the Substitute Option upon exercise of the
Substitute Option.
(3) "Assigned Value" shall mean the Market/Offer Price,
as defined in Section 7.
(4) "Average Price" shall mean the average closing
price of a share of the Substitute Common Stock for the one year
immediately preceding the consolidation, merger or sale in question, but
in no event higher than the closing price of the shares of Substitute
Common Stock on the day preceding such consolidation, merger or sale;
provided that if Issuer is the issuer of the Substitute Option, the
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Average Price shall be computed with respect to a share of common stock
issued by the person merging into Issuer or by any company which controls
or is controlled by such person, as the Holder may elect.
(c) The Substitute Option shall have the same terms as the
Option, provided, that if the terms of the Substitute Option cannot, for legal
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reasons, be the same as the Option, such terms shall be as similar as possible
and in no event less advantageous to the Holder. The issuer of the Substitute
Option shall also enter into an agreement with the then Holder or Holders of the
Substitute Option in substantially the same form as this Agreement, which shall
be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number
of shares of Substitute Common Stock as is equal to the Assigned Value
multiplied by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall then be equal to the Option
Price multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock for which the Option is then exercisable and the
denominator of which shall be the number of shares of Substitute Common Stock
for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs,
shall the Substitute Option be exercisable for more than 19.9% of the shares of
Substitute Common Stock outstanding prior to exercise of the Substitute Option.
In the event that the Substitute Option would be exercisable for more than 19.9%
of the shares of Substitute Common Stock outstanding
B-10
prior to exercise but for this clause (e), the issuer of the Substitute Option
(the "Substitute Option Issuer") shall make a cash payment to Holder equal to
the excess of (i) the value of the Substitute Option without giving effect to
the limitation in this clause (e) over (ii) the value of the Substitute Option
after giving effect to the limitation in this clause (e). This difference in
value shall be determined by a nationally recognized investment banking firm
selected by the Holder or the Owner, as the case may be, and reasonably
acceptable to the Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in
subsection (a) of this Section 8 unless the Acquiring Corporation and any person
that controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option
(the "Substitute Option Holder"), the Substitute Option Issuer shall repurchase
the Substitute Option from the Substitute Option Holder at a price (the
"Substitute Option Repurchase Price") equal to the amount by which (i) the
Highest Closing Price (as hereinafter defined) exceeds (ii) the exercise price
of the Substitute Option, multiplied by the number of shares of Substitute
Common Stock for which the Substitute Option may then be exercised, and at the
request of the owner (the "Substitute Share Owner") of shares of Substitute
Common Stock (the "Substitute Shares"), the Substitute Option Issuer shall
repurchase the Substitute Shares at a price (the "Substitute Share Repurchase
Price") equal to the Highest Closing Price multiplied by the number of
Substitute Shares so designated. The term "Highest Closing Price" shall mean the
highest closing price for shares of Substitute Common Stock within the six-month
period immediately preceding the date the Substitute Option Holder gives notice
of the required repurchase of the Substitute Option or the Substitute Share
Owner gives notice of the required repurchase of the Substitute Shares, as
applicable.
(b) The Substitute Option Holder and the Substitute Share
Owner, as the case may be, may exercise its respective right to require the
Substitute Option Issuer to repurchase the Substitute Option and the Substitute
Shares pursuant to this Section 9 by surrendering for such purpose to the
Substitute Option Issuer, at its principal office, the agreement for such
Substitute Option (or, in the absence of such an agreement, a copy of this
Agreement) and certificates for Substitute Shares accompanied by a written
notice or notices stating that the Substitute Option Holder or the Substitute
Share Owner, as the case may be, elects to require the Substitute Option Issuer
to repurchase the Substitute Option and/or the Substitute Shares in accordance
with the provisions of this Section 9. As promptly as practicable, and in any
event within five business days after the surrender of the Substitute Option
and/or certificates representing Substitute Shares and the receipt of such
notice or notices relating thereto, the Substitute Option Issuer shall deliver
or cause to be delivered to the Substitute Option Holder the Substitute Option
Repurchase Price and/or to the Substitute Share Owner the Substitute Share
Repurchase Price therefor or, in either case, the portion thereof which the
Substitute Option Issuer is not then prohibited under applicable law and
regulation from so delivering.
B-11
(c) To the extent that the Substitute Option Issuer is
prohibited under applicable law or regulation, or as a consequence of
administrative policy, from repurchasing the Substitute Option and/or the
Substitute Shares in part or in full, the Substitute Option Issuer following a
request for repurchase pursuant to this Section 9 shall immediately so notify
the Substitute Option Holder and/or the Substitute Share Owner and thereafter
deliver or cause to be delivered, from time to time, to the Substitute Option
Holder and/or the Substitute Share Owner, as appropriate, the portion of the
Substitute Share Repurchase Price, respectively, which it is no longer
prohibited from delivering, within five business days after the date on which
the Substitute Option Issuer is no longer so prohibited; provided, however, that
-------- -------
if the Substitute Option Issuer is at any time after delivery of a notice of
repurchase pursuant to subsection (b) of this Section 9 prohibited under
applicable law or regulation from delivering to the Substitute Option Holder
and/or the Substitute Share Owner, as appropriate, the Substitute Option
Repurchase Price and the Substitute Share Repurchase Price, respectively, in
full (and the Substitute Option Issuer shall use its best efforts to receive all
required regulatory and legal approvals as promptly as practicable in order to
accomplish such repurchase), the Substitute Option Holder or Substitute Share
Owner may revoke its notice of repurchase of the Substitute Option or the
Substitute Shares either in whole or to the extent of the prohibition,
whereupon, in the latter case, the Substitute Option Issuer shall promptly (i)
deliver to the Substitute Option Holder or Substitute Share Owner, as ap-
propriate, that portion of the Substitute Option Repurchase Price or the
Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Substitute Option Holder, a new Substitute Option evidencing the right of the
Substitute Option Holder to purchase that number of shares of the Substitute
Common Stock obtained by multiplying the number of shares of the Substitute
Common Stock for which the surrendered Substitute Option was exercisable at the
time of delivery of the notice of repurchase by a fraction, the numerator of
which is the Substitute Option Repurchase Price less the portion thereof
theretofore delivered to the Substitute Option Holder and the denominator of
which is the Substitute Option Repurchase Price, or (B) to the Substitute Share
Owner, a certificate for the Substitute Common Shares it is then so prohibited
from repurchasing.
10. The periods for exercise of certain rights under Sections 2, 6,
7 and 14 shall be extended: (i) to the extent necessary to obtain all regulatory
approvals for the exercise of such rights, and for the expiration of all
statutory waiting periods; and (ii) to the extent necessary to avoid liability
under Section 16(b) of the 1934 Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
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transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to
authorize and reserve and to permit it to issue, and at all times from the date
hereof through the termination of this Agreement in accordance with its terms
will have reserved for issuance upon the exercise of the Option, that number of
shares of Common Stock equal to the maximum number of shares of Common Stock at
any time and from time to time issuable hereunder, and all such shares, upon
issuance pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to
enter into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or
other securities acquired by Grantee upon exercise of the Option will not be,
acquired with a view to the public distribution thereof and will not be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under the 1933 Act.
13. (a) Grantee may, at any time following a Repurchase Event and
prior to the occurrence of an Exercise Termination Event (or such later period
as provided in Section 10), relinquish the Option (together with any Option
Shares issued to and then owned by Grantee) to Issuer in exchange for a cash fee
equal to the Surrender Price (as defined below); provided, however, that Grantee
-------- -------
may not exercise its rights pursuant to this Section 13 if Issuer has
repurchased the Option (or any portion thereof) or any Option Shares pursuant to
Section 7. The "Surrender Price" shall be equal to $3,000,000 (i) plus, if
applicable, Grantee's purchase price paid with respect to any Option Shares so
surrendered and (ii) minus, if applicable, the sum of (A) the excess of (1) the
net cash amounts, if any, received by Grantee pursuant to the arms' length sale
of Option Shares (or any other securities into which such Option Shares were
converted or exchanged) to any unaffiliated party, over (2) Grantee's purchase
price of such Option Shares and (B) the net cash amounts, if any, received by
Grantee pursuant to an arms' length sale of a portion of the Option to any
unaffiliated party.
(b) Grantee may exercise its right to relinquish the Option
and any Option Shares pursuant to this Section 13 by surrendering to Issuer, at
its principal office, this
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Agreement together with certificates for Option Shares, if any, accompanied by a
written notice stating (i) that Grantee elects to relinquish the Option and
Option Shares, if any, in accordance with the provisions of this Section 13 and
(ii) the Surrender Price. The Surrender Price shall be payable in immediately
available funds on or before the second business day following receipt of such
notice by Issuer.
(c) To the extent that Issuer is prohibited under applicable
law or regulation, or as a consequence of administrative policy, from paying the
Surrender Price to Grantee in full, Issuer shall immediately so notify Grantee
and thereafter deliver or cause to be delivered, from time to time, to Grantee,
the portion of the Surrender Price that it is no longer prohibited from paying,
within five business days after the date on which Issuer is no longer so
prohibited, provided, however, that if Issuer at any time after delivery of a
-------- -------
notice of surrender pursuant to paragraph (b) of this Section 13 is prohibited
under applicable law or regulation, or as a consequence of administrative
policy, from paying to Grantee the Surrender Price in full, (i) Issuer shall (A)
use its reasonable best efforts to obtain all required regulatory and legal
approvals and to file any required notices as promptly as practicable in order
to make such payments, (B) within five days of the submission or receipt of any
documents relating to any such regulatory and legal approvals, provide Grantee
with copies of the same, and (C) keep Grantee advised of both the status of any
such request for regulatory and legal approvals, as well as any discussions with
any relevant regulatory or other third party reasonably related to the same and
(ii) Grantee may revoke such notice of surrender by delivery of a notice of
revocation to Issuer and, upon delivery of such notice of revocation, the
Exercise Termination Date shall be extended to a date six months from the date
on which the Exercise Termination Date would have occurred if not for the
provisions of this Section 13(c) (during which period Grantee may exercise any
of its rights hereunder, including any and all rights pursuant to this Section
13).
14. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Subsequent Triggering Event shall have occurred prior to an Exercise
Termination Event, Grantee, subject to the express provisions hereof, may assign
in whole or in part its rights and obligations hereunder within 90 days
following such Subsequent Triggering Event (or such longer period as provided in
Section 10); provided, however, that until the date 15 days following the date
-------- -------
on which the Federal Reserve Board or the OTS, as applicable, approves an
application by Grantee to acquire the shares of Common Stock subject to the
Option, Grantee may not assign its rights under the Option except in (i) a
widely dispersed public distribution, (ii) a private placement in which no one
party acquires the right to purchase in excess of 2% of the voting shares of
Issuer, (iii) an assignment to a single party (e.g., a broker or investment
banker) for the purpose of conducting a widely dispersed public distribution on
Grantee's behalf, or (iv) any other manner approved by the Federal Reserve Board
or the OTS, as applicable.
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15. Each of Grantee and Issuer will use its best efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including without limitation making application to list the
shares of Common Stock issuable hereunder on the Nasdaq National Market upon
official notice of issuance and applying to the Federal Reserve Board and/or the
OTS, as applicable, for approval to acquire the shares issuable hereunder, but
Grantee shall not be obligated to apply to state banking authorities for
approval to acquire the shares of Common Stock issuable hereunder until such
time, if ever, as it deems appropriate to do so.
16. (a) Notwithstanding any other provision of this Agreement, in no
event shall the Grantee's Total Profit (as hereinafter defined) exceed
$3,000,000 and, if it otherwise would exceed such amount, the Grantee, at its
sole election, shall either (i) reduce the number of shares of Common Stock
subject to this Option, (ii) deliver to the Issuer for cancellation Option
Shares previously purchased by Grantee, (iii) pay cash to the Issuer, or (iv)
any combination thereof, so that Grantee's actually realized Total Profit shall
not exceed $3,000,000 after taking into account the foregoing actions.
(b) Notwithstanding any other provision of this Agreement,
this Option may not be exercised for a number of shares as would, as of the date
of exercise, result in a Notional Total Profit (as defined below) of more than
$3,000,000; provided, that nothing in this sentence shall restrict any exercise
--------
of the Option permitted hereby on any subsequent date.
(c) As used herein, the term "Total Profit" shall mean the
aggregate amount (before taxes) of the following: (i) the amount received by
Grantee pursuant to Issuer's repurchase of the Option (or any portion thereof)
pursuant to Section 7 of this Agreement, (ii)(x) the amount received by Grantee
pursuant to Issuer's repurchase of Option Shares pursuant to Section 7, less (y)
the Grantee's purchase price for such Option Shares, (iii)(x) the net cash
amounts received by Grantee pursuant to the sale of Option Shares (or any other
securities into which such Option Shares are converted or exchanged) to any
unaffiliated party, less (y) the Grantee's purchase price of such Option Shares,
(iv) any amounts received by Grantee on the transfer of the Option (or any
portion thereof) to any unaffiliated party, (v) any equivalent amount with
respect to the Substitute Option, and (vi) the amount of cash received by
Grantee pursuant to Section 6.2 of the Merger Agreement and Section 13 of this
Agreement.
(d) As used herein, the term "Notional Total Profit" with
respect to any number of shares as to which Grantee may propose to exercise this
Option shall be the Total Profit determined as of the date of such proposed
exercise assuming that this Option were exercised on such date for such number
of shares and assuming that such shares, together with all other Option Shares
held by Grantee and its affiliates as of such date, were sold for cash at the
closing market price for the Common Stock as of the close of business on the
preceding trading day (less customary brokerage commissions).
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(e) This Section 16 shall survive the termination of this
Agreement and of the Merger Agreement.
17. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party hereto and that
the obligations of the parties hereto shall be enforceable by either party
hereto through injunctive or other equitable relief.
18. If any term, provision, covenant or restriction contained in
this Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5
hereof), it is the express intention of Issuer to allow the Holder to acquire or
to require Issuer to repurchase such lesser number of shares as may be
permissible, without any amendment or modification hereof.
19. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
20. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws thereof.
21. This Agreement may be executed in two counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
22. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
23. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and
permitted assigns, any rights,
B-16
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided herein.
24. Capitalized terms used in this Agreement and not defined herein
shall have the meanings assigned thereto in the Merger Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the date first above written.
ISSUER
By: /s/ Richard S. Stracyznski
-------------------------------------
Richard S. Stracyznski
President and Chief Executive Officer
GRANTEE
By: /s/ Robert F. Stoico
-------------------------------------
Robert F. Stoico
Chairman, President and Chief
Executive Officer
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APPENDIX C
December 20, 2001
Board of Directors
FIRSTFED AMERICA BANCORP, INC.
One FirstFed Park
Swansea, MA 02777
Dear Gentlemen:
You have requested our opinion as an independent investment banking firm
regarding the fairness, from a financial point of view, to the stockholders of
FIRSTFED AMERICA BANCORP, INC. ("FAB"), of the consideration to be paid by FAB
in the merger (the "Merger") between FAB and People's Bancshares, Inc. ("PBKB").
We have not been requested to opine as to, and our opinion does not in any
manner address, FAB's underlying business decision to proceed with or effect the
Merger.
Pursuant to the Agreement and Plan of Merger, dated October 1, 2001, by and
among FAB and PBKB (the "Agreement"), at the effective time of the Merger, FAB
will acquire all of PBKB's issued and outstanding shares of common stock. PBKB
shareholders will have the right to elect to receive $22.00 cash or 1.2644
shares of FAB stock for each share of PBKB's common stock outstanding, subject
to the requirement that the aggregate consideration to be paid by FAB equals 45%
stock and 55% cash. In the event that PBKB shareholders elect to receive more
than 45% stock, such elections will be adjusted pro rata such that the aggregate
consideration paid by FAB will be 45% stock and 55% cash. In addition, the
Merger Agreement limits the value of the consideration to be received by PBKB
shareholders in the event the market value of FAB stock increases to or above
$20.88 and permits the Board of PBKB to terminate the transaction in the event
the market value of the FAB stock falls below $13.92, subject to the right of
FAB to pay additional consideration to PBKB shareholders. The complete terms of
the proposed transaction are described in the Agreement, and this summary is
qualified in its entirety by reference thereto.
Keefe, Bruyette & Woods, Inc., as part of its investment banking business, is
regularly engaged in the evaluation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, and distributions of
listed and unlisted securities. We are familiar with the market for common
stocks of publicly traded banks, savings institutions and bank and savings
institution holding companies.
Board of Directors
FIRSTFED AMERICA BANCORP, INC.
December 20, 2001
Page 2
In connection with this opinion we reviewed certain financial and other business
data supplied to us by FAB including (i) the Agreement and Plan of Merger by and
among FAB and PBKB, including the Stock Option Agreement, dated October 1, 2001
between PBKB and FAB (ii) Annual Report, Proxy Statement and Form 10-K for the
years ended March 31, 2001, and 2000, (iii) Form 10-Q for the quarter ended June
30, 2001 and other information we deemed relevant. We discussed with senior
management and the boards of directors of FAB and its wholly owned subsidiary,
First Federal Savings Bank of America, the current position and prospective
outlook for FAB. We considered historical quotations and the prices of recorded
transactions in FAB's common stock since its initial public offering. We
reviewed financial and stock market data of other savings institutions,
particularly in the Northeastern region of the United States, and the financial
and structural terms of several other recent transactions involving mergers and
acquisitions of savings institutions or proposed changes of control of
comparably situated companies.
For PBKB, we reviewed the audited financial statements, 10-K's, and Proxy
Statements for the years ended December 31, 1998, 1999 and 2000, Form 10-Q for
the quarters ended March 31, 2001 and June 30, 2001 and certain other
information deemed relevant. We also discussed with senior management of PBKB,
the current position and prospective outlook for PBKB.
For purposes of this opinion we have relied, without independent verification,
on the accuracy and completeness of the material furnished to us by FAB and PBKB
and the material otherwise made available to us, including information from
published sources, and we have not made any independent effort to verify such
data. With respect to the financial information, including forecasts and asset
valuations we received from FAB, we assumed (with your consent) that they had
been reasonably prepared reflecting the best currently available estimates and
judgment of FAB's management. In addition, we have not made or obtained any
independent appraisals or evaluations of the assets or liabilities, and
potential and/or contingent liabilities of FAB or PBKB. We have further relied
on the assurances of management of FAB and PBKB that they are not aware of any
facts that would make such information inaccurate or misleading. We express no
opinion on matters of a legal, regulatory, tax or accounting nature or the
ability of the Merger, as set forth in the Agreement, to be consummated.
In rendering our opinion, we have assumed that in the course of obtaining the
necessary approvals for the Merger, no restrictions or conditions will be
imposed that would have a material adverse effect on the contemplated benefits
of the Merger to FAB or the ability to consummate the Merger. Our opinion is
based on the market, economic and other relevant considerations as they exist
and can be evaluated on the date hereof.
Board of Directors
FIRSTFED AMERICA BANCORP, INC.
December 20, 2001
Page 3
Consistent with the engagement letter with you, we have acted as financial
advisor to FAB in connection with the Merger and will receive a fee for such
services. In addition, FAB has agreed to indemnify us for certain liabilities
arising out of our engagement by FAB in connection with the Merger.
Based upon and subject to the foregoing, as outlined in the foregoing paragraphs
and based on such other matters as we considered relevant, it is our opinion
that as of the date hereof, the consideration to be paid by FAB in the Merger is
fair, from a financial point of view, to the stockholders of FAB.
This opinion may not, however, be summarized, excerpted from or otherwise
publicly referred to without our prior written consent, although this opinion
may be included in its entirety in the proxy statement of FAB used to solicit
stockholder approval of the Merger. It is understood that this letter is
directed to the Board of Directors of FAB in its consideration of the Agreement,
and is not intended to be and does not constitute a recommendation to any
stockholder as to how such stockholder should vote with respect to the Merger.
Very truly yours,
/s/ Keefe, Bruyette & Woods, Inc.
---------------------------------
Keefe, Bruyette & Woods, Inc.
APPENDIX D
December 20, 2001
The Board of Directors
People's Bancshares, Inc.
545 Pleasant Street
New Bedford, Massachusetts 02740
Gentlemen:
Fox-Pitt, Kelton Inc. ("Fox-Pitt, Kelton") understands that People's Bancshares,
Inc. ("People's") and FIRSTFED AMERICA BANCORP, INC. ("FIRSTFED") have entered
into an agreement and plan of merger dated as of October 1, 2001 (the "Merger
Agreement"), which provides, among other things, for the merger of People's with
and into FIRSTFED (the "Merger"). Pursuant to the Merger Agreement and subject
to certain exceptions set forth therein, at the effective time of the Merger,
each issued and outstanding share of common stock, par value $0.10 per share, of
People's ("People's Common Stock") (other than shares owned, directly or
indirectly, by People's, FIRSTFED or any subsidiary thereof) shall be converted
into, at the election of the holder and subject to the limitations set forth in
the Merger Agreement, the right to receive (i) $22.00 in cash without interest
(the "Cash Consideration), (ii) 1.2644 shares of FIRSTFED common stock (the
"Stock Consideration") or (iii) a combination of the Cash Consideration and the
Stock Consideration.
Holders of People's Common Stock may elect to receive the Cash Consideration,
the Stock Consideration or a combination of the Cash Consideration and the Stock
Consideration (as elected, the "Merger Consideration"), provided that (i) 45% of
the aggregate consideration to be received by holders of People's Common Stock
shall consist of the Stock Consideration and (ii) 55% shall consist of the Cash
Consideration.
The terms and conditions of the Merger are more fully set forth in the Merger
Agreement.
You have asked for Fox-Pitt, Kelton's opinion as to whether the Merger
Consideration is fair, from a financial point of view, to the holders of
People's Common Stock.
The Board of Directors
December 20, 2001
Page 2
In arriving at the opinion set forth below, Fox-Pitt, Kelton has, among other
things:
a) reviewed and analyzed certain publicly available financial statements for
People's and FIRSTFED and financial information made available to us by the
management of People's and FIRSTFED;
b) analyzed certain internal financial statements, including financial
projections, and other financial and operating data prepared by the
management of People's;
c) discussed the past, present and future operations, financial condition and
prospects of People's and FIRSTFED with the management of the respective
companies;
d) reviewed the stock price performance and trading activity of People's
Common Stock and FIRSTFED common stock;
e) compared the financial performance and condition of People's and FIRSTFED
with that of certain other comparable publicly traded companies;
f) reviewed the financial terms, to the extent publicly available, of certain
merger and acquisition transactions comparable, in whole or in part, to the
Merger;
g) reviewed and discussed with the management of People's and FIRSTFED the
strategic objectives of the Merger and certain other benefits of the
Merger;
h) reviewed the Merger Agreement; and
i) performed such other analyses as we have deemed appropriate.
Fox-Pitt, Kelton has assumed and relied upon, without independent verification,
the accuracy and completeness of all of the financial and other information it
has reviewed for the purposes of providing this opinion, and we have not assumed
any responsibility for independent verification of such information. Fox-Pitt,
Kelton has not assumed any responsibility for any independent valuation or
appraisal of the assets and liabilities of People's or FIRSTFED nor have we been
furnished with any such valuation or appraisal. Fox-Pitt, Kelton has not assumed
any responsibility for reviewing loan files or visiting branch locations. With
respect to any financial projections, Fox-Pitt, Kelton has assumed that they
have been reasonably prepared by the management of People's on bases reflecting
the best currently available estimates and judgments of the future financial
performance of People's. We express no view as to the validity of such
projections or the assumptions on which they are based. We have assumed that the
Merger described in the Merger Agreement will be consummated on the terms set
forth therein without material waiver or modification. Fox-Pitt, Kelton's
opinion is necessarily based upon economic, market and other conditions as they
exist and can be evaluated on December 19, 2001.
In the normal course of its investment banking business, Fox-Pitt, Kelton is
regularly engaged in the valuation of banking, thrift and finance company
securities in connection with acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private
The Board of Directors
December 20, 2001
Page 3
placements and valuations for various other purposes. As specialists in the
securities of banking, thrift and finance companies, Fox-Pitt, Kelton has
experience in, and knowledge of, the valuation of such enterprises.
In the normal course of its business, Fox-Pitt, Kelton may trade equity
securities of People's and FIRSTFED for its own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. We have acted as financial advisor to People's in connection
with the Merger, have received a fee in connection with our engagement, have
received a fee upon delivery of our opinion dated September 30, 2001, and will
receive an additional fee upon the closing of the Merger.
It is understood that this letter is solely for the information of the Board of
Directors of People's and is not intended to confer any rights or remedies upon
any other entity or persons, and may not be used for any other purpose without
our prior written consent except for inclusion in a prospectus/proxy or
information statement related to the Merger that we have had an opportunity to
review in advance. This opinion does not constitute a recommendation to any
holder of People's Common Stock as to how such shareholder should vote on the
Merger.
Based upon and subject to the foregoing, Fox-Pitt, Kelton is of the opinion
that, on the date hereof, the Merger Consideration is fair, from a financial
point of view, to the holders of People's Common Stock.
Very truly yours,
/s/ FOX-PITT, KELTON INC.
FOX-PITT, KELTON INC.
APPENDIX E
MASSACHUSETTS GENERAL LAWS ANNOTATED
PART I. ADMINISTRATION OF THE GOVERNMENT
TITLE XXII. CORPORATIONS
CHAPTER 156B. CERTAIN BUSINESS CORPORATIONS
SECTION 85. DISSENTING STOCKHOLDER; RIGHT TO DEMAND PAYMENT FOR STOCK; EXCEPTION
A stockholder in any corporation organized under the laws of Massachusetts
which shall have duly voted to consolidate or merge with another corporation or
corporations under the provisions of sections seventy-eight or seventy-nine who
objects to such consolidation or merger may demand payment for his stock from
the resulting or surviving corporation and an appraisal in accordance with the
provisions to sections eighty-six to ninety-eight, inclusive, and such
stockholder and the resulting or surviving corporation shall have the rights and
duties and follow the procedure set forth in those sections. This section shall
not apply to the holders of any shares of stock of a constituent corporation
surviving a merger if, as permitted by subsection (c) of section seventy-eight,
the merger did not require for its approval a vote of the stockholders of the
surviving corporation.
SECTION 86. SECTIONS APPLICABLE TO APPRAISAL; PREREQUISITES
If a corporation proposes to take a corporate action as to which any
section of this chapter provides that a stockholder who objects to such action
shall have the right to demand payment for his shares and an appraisal thereof,
sections eighty-seven to ninety-eight, inclusive, shall apply except as
otherwise specifically provided in any section of this chapter. Except as
provided in sections eighty-two and eighty-three, no stockholder shall have such
right unless (1) he files with the corporation before taking of the vote of the
shareholders on such corporate action, written objection to the proposed action
stating that he intends to demand payment for his shares if the action is taken
and (2) his shares are not voted in favor of the proposed action.
SECTION 87. STATEMENT OF RIGHTS OF OBJECTING STOCKHOLDERS IN NOTICE OF MEETING;
FORM
The notice of the meeting of stockholders at which the approval of such
proposed action is to be considered shall contain a statement of the rights of
objecting stockholders. The giving of such notice shall not be deemed to create
any rights in any stockholder receiving the same to demand payment for his
stock, and the directors may authorize the inclusion in any such notice of a
statement of opinion by the management as to the existence or non-existence of
the right of the stockholders to demand payment for their stock on account of
the proposed corporate action. The notice may be in such form as the directors
or officers calling the meeting deem advisable; but the following form of notice
shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting and
effected by the corporation, any stockholder (1) who files with the corporation
before the taking of the vote on the approval of such action, written objection
to the proposed action stating that he intends to
E-1
demand payment for his shares if the action is taken and (2) whose shares are
not voted in favor of such action has or may have the right to demand in writing
from the corporation (or, in the case of a consolidation or merger, the name of
the resulting or surviving corporation shall be inserted), within twenty days
after the date of mailing to him of notice in writing that the corporate action
has become effective, payment for his shares and an appraisal of the value
thereof. Such corporation and any such stockholder shall in such cases have the
rights and duties and shall follow the procedure set forth in sections 88 to 98,
inclusive, of chapter 156B of the General Laws of Massachusetts."
SECTION 88. NOTICE OF EFFECTIVENESS OF ACTION OBJECTED TO
The corporation taking such action, or in the case of a merger or
consolidation the surviving or resulting corporation, shall, within ten days
after the date on which such corporate action became effective, notify each
stockholder who filed a written objection meeting the requirements of section
eighty-six and whose shares were not voted in favor of the approval of such
action, that the action approved at the meeting of the corporation of which he
is a stockholder has become effective. The giving of such notice shall not be
deemed to create any rights in any stockholder receiving the same to demand
payment for his stock. The notice shall be sent by registered or certified mail,
addressed to the stockholder at his last known address as it appears in the
records of the corporation.
SECTION 89. DEMAND FOR PAYMENT; TIME FOR PAYMENT
If within twenty days after the date of mailing of a notice under
subsection (e) of section eighty-two, subsection (f) of section eighty-three, or
section eighty-eight, any stockholder to whom the corporation was required to
give such notice shall demand in writing from the corporation taking such
action, or in the case of a consolidation or merger from the resulting or
surviving corporation, payment for his stock, the corporation upon which such
demand is made shall pay to him the fair value of his stock within thirty days
after the expiration of the period during which such demand may be made.
SECTION 90. DEMAND FOR DETERMINATION OF VALUE; BILL IN EQUITY; VENUE
If during the period of thirty days provided for in section eighty-nine
the corporation upon which such demand is made and any such objecting
stockholder fail to agree as to the value of such stock, such corporation or any
such stockholder may within four months after the expiration of such thirty-day
period demand a determination of the value of the stock of all such objecting
stockholders by a bill in equity filed in the superior court in the county where
the corporation in which such objecting stockholder held stock had or has its
principal office in the commonwealth.
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SECTION 91. PARTIES TO SUIT TO DETERMINE VALUE; SERVICE
If the bill is filed by the corporation, it shall name as parties
respondent all stockholders who have demanded payment for their shares and with
whom the corporation has not reached agreement as to the value thereof. If the
bill is filed by a stockholder, he shall bring the bill in his own behalf and in
behalf of all other stockholders who have demanded payment for their shares and
with whom the corporation has not reached agreement as to the value thereof, and
service of the bill shall be made upon the corporation by subpoena with a copy
of the bill annexed. The corporation shall file with its answer a duly verified
list of all such other stockholders, and such stockholders shall thereupon be
deemed to have been added as parties to the bill. The corporation shall give
notice in such form and returnable on such date as the court shall order to each
stockholder party to the bill by registered or certified mail, addressed to the
last known address of such stockholder as shown in the records of the
corporation, and the court may order such additional notice by publication or
otherwise as it deems advisable. Each stockholder who makes demand as provided
in section eighty-nine shall be deemed to have consented to the provisions of
this section relating to notice, and the giving of notice by the corporation to
any such stockholder in compliance with the order of the court shall be a
sufficient service of process on him. Failure to give notice to any stockholder
making demand shall not invalidate the proceedings as to other stockholders to
whom notice was properly given, and the court may at any time before the entry
of a final decree make supplementary orders of notice.
SECTION 92. DECREE DETERMINING VALUE AND ORDERING PAYMENT; VALUATION DATE
After hearing the court shall enter a decree determining the fair value of
the stock of those stockholders who have become entitled to the valuation of and
payment for their shares, and shall order the corporation to make payment of
such value, together with interest, if any, as hereinafter provided, to the
stockholders entitled thereto upon the transfer by them to the corporation of
the certificates representing such stock if certificated or, if uncertificated,
upon receipt of an instruction transferring such stock to the corporation. For
this purpose, the value of the shares shall be determined as of the day
preceding the date of the vote approving the proposed corporate action and shall
be exclusive of any element of value arising from the expectation or
accomplishment of the proposed corporate action.
SECTION 93. REFERENCE TO SPECIAL MASTER
The court in its discretion may refer the bill or any question arising
thereunder to a special master to hear the parties, make findings and report the
same to the court, all in accordance with the usual practice in suits in equity
in the superior court.
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SECTION 94. NOTATION ON STOCK CERTIFICATES OF PENDENCY OF BILL
On motion the court may order stockholder parties to the bill to submit
their certificates of stock to the corporation for the notation thereon of the
pendency of the bill and may order the corporation to note such pendency in its
records with respect to any uncertificated shares held by such stockholder
parties, and may on motion dismiss the bill as to any stockholder who fails to
comply with such order.
SECTION 95. COSTS; INTEREST
The costs of the bill, including the reasonable compensation and expenses
of any master appointed by the court, but exclusive of fees of counsel or of
experts retained by any party, shall be determined by the court and taxed upon
the parties to the bill, or any of them, in such manner as appears to be
equitable, except that all costs of giving notice to stockholders as provided in
this chapter shall be paid by the corporation. Interest shall be paid upon any
award from the date of the vote approving the proposed corporate action, and the
court may on application of any interested party determine the amount of
interest to be paid in the case of any stockholder.
SECTION 96. DIVIDENDS AND VOTING RIGHTS AFTER DEMAND FOR PAYMENT
Any stockholder who has demanded payment for his stock as provided in this
chapter shall not thereafter be entitled to notice of any meeting of
stockholders or to vote such stock for any purpose and shall not be entitled to
the payment of dividends or other distribution on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the date of the vote approving the proposed corporate action) unless:
(1) A bill shall not be filed within the time provided in section ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the corporation,
or in the case of a consolidation or merger, the resulting or surviving
corporation, deliver to it a written withdrawal of his objections to and an
acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
SECTION 97. STATUS OF SHARES PAID FOR
The shares of the corporation paid for by the corporation pursuant to the
provisions of this chapter shall have the status of treasury stock, or in the
case of a consolidation or merger the shares or the securities of the resulting
or surviving corporation into which the shares of such objecting stockholder
would have been converted had he not objected to such consolidation or merger
shall have the status of treasury stock or securities.
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SECTION 98. EXCLUSIVE REMEDY; EXCEPTION
The enforcement by a stockholder of his right to receive payment for his
shares in the manner provided in this chapter shall be an exclusive remedy
except that this chapter shall not exclude the right of such stockholder to
bring or maintain an appropriate proceeding to obtain relief on the ground that
such corporate action will be or is illegal or fraudulent as to him.
E-5
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article TENTH of the Certificate of Incorporation of FIRSTFED AMERICA
BANCORP, INC. requires indemnification of officers and directors as follows:
TENTH:
-----
A. Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a Director or
an Officer of the Corporation or is or was serving at the request of the
Corporation as a Director, Officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a Director, Officer, employee or agent or in any other
capacity while serving as a Director, Officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to
the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered
by such indemnitee in connection therewith; provided, however, that, except
as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this
Article TENTH shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter and "advancement of expenses"); provided, however,
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a Director or
Officer (and not in any other capacity in which service was or is rendered
by such indemnitee, including, without limitation, services to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right
to appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section or
otherwise. The rights to indemnification and to the advancement of expenses
conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to
be a Director, Officer, employee or agent and shall inure to the benefit of
the indemnitee's heirs, executors and administrators.
II-1
C. If a claim under Section A or B of this Article TENTH is not paid
in full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be
twenty days, the indemnitee may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim. If successful in
whole or in part in any such suit, or in a suit brought by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expenses
of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking the Corporation shall be entitled to recover such expenses
upon a final adjudication that, the indemnitee has not met any applicable
standard for indemnification set forth in the Delaware General Corporation
Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification
of the indemnitee is proper in the circumstances because the indemnitee has
met the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its stockholders)
that the indemnitee has not met such applicable standard of conduct, shall
create a presumption that the indemnitee has not met the applicable
standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving
that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article TENTH or otherwise shall be on
the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's Certificate of Incorporation, Bylaws, agreement, vote of
stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any Director, Officer, employee or agent of the
Corporation or subsidiary or Affiliate or another corporation, partnership,
joint venture, trust or other enterprise against any expense, liability or
loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the Delaware General
Corporation Law.
F. The Corporation may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article TENTH with respect to the
indemnification and advancement of expenses of Directors and Officers of
the Corporation.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
II-2
2.1 Agreement and Plan of Merger, dated as of October 1, 2001, by and
between FIRSTFED AMERICA BANCORP, INC. and People's Bancshares, Inc.
is included as Appendix A to the Joint Proxy Statement-Prospectus,
which is part of this Registration Statement.
3.1 Certificate of Incorporation of FIRSTFED AMERICA BANCORP, INC.
(incorporated by reference into this document from the Exhibits to
FIRSTFED's Registration Statement on Form S-1 (File No. 333-12855)
filed on September 27, 1996).
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC. (incorporated by reference
into this document from the Exhibits to FIRSTFED's Registration
Statement on Form S-1 (File No. 333-12855) filed on September 27,
1997).
4.1 FIRSTFED AMERICA BANCORP, INC. Specimen Stock Certificate
(incorporated by reference into this document from the Exhibits to
FIRSTFED's Registration Statement on Form S-1 (File No. 333-12855)
filed on September 27, 1996).
5.1 Opinion of Muldoon Murphy & Faucette LLP regarding legality.*
8.1 Opinion of Muldoon Murphy & Faucette LLP regarding tax matters.
8.2 Opinion of Goodwin Procter LLP regarding tax matters.
10.1 Stock Option Agreement, dated October 1, 2001, between People's
Bancshares, Inc. and FIRSTFED AMERICA BANCORP, INC. (included as
Appendix B to the Joint Proxy Statement-Prospectus, which is part of
this Registration Statement).
21.1 Subsidiaries of the Registrant (incorporated by reference to "Part I -
Subsidiary Activities" in "Item 1. Business - General" of FIRSTFED's
Annual Report on Form 10-K for the year ended March 31, 2001).
23.1 Consent of Muldoon Murphy & Faucette LLP (included in Exhibit 5.1).
23.2 Consent of Muldoon Murphy & Faucette LLP (included in Exhibit 8.1).
23.3 Consent of Goodwin Procter LLP (included in Exhibit 8.2).
23.4 Consent of KPMG, LLP, independent auditors for FIRSTFED AMERICA
BANCORP, INC.
23.5 Consent of Wolf & Company, P.C., former independent auditors for
People's Bancshares, Inc.
23.6 Consent of Keefe, Bruyette & Woods, Inc.
23.7 Consent of Fox-Pitt, Kelton Inc.
II-3
24.1 Powers of Attorney.*
99.1 Opinion of Keefe, Bruyette & Woods, Inc. (included as Appendix C to
the Joint Proxy Statement-Prospectus, which is part of this
Registration Statement).
99.2 Opinion of Fox-Pitt, Kelton Inc. (included as Appendix D to the Joint
Proxy Statement-Prospectus, which is part of this Registration
Statement).
99.3 Form of FIRSTFED AMERICA BANCORP, INC. Proxy Card.*
99.4 Form of People's Bancshares, Inc. Proxy Card.*
99.5 Consent of B. Benjamin Cavallo.*
______________________
*Previously filed
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in this Registration Statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end
of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table
in the effective Registration Statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement.
II-4
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act, each
filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Exchange Act (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by
reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to deliver or cause
to be delivered with the Joint Proxy Statement-Prospectus, to
each person to whom the Joint Proxy Statement-Prospectus is sent
or given, the latest annual report to security holders that is
incorporated by reference in the Joint Proxy Statement-Prospectus
and furnished pursuant to and meeting the requirements of Rule
14a-3 or Rule 14c-3 under the Exchange Act.
(d) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) of the
Securities Act, the issuer undertakes that such reoffering
prospectus will contain the information called for by the
applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(e) The undersigned Registrant hereby undertakes that every
prospectus: (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act and is
used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(f) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that,
in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a
II-5
claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
(g) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into
the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the
request.
(h) The undersigned Registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration
Statement when it became effective.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act, FIRSTFED AMERICA
BANCORP, INC., the Registrant, has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Swansea, Commonwealth of Massachusetts, on December 20, 2001.
FIRSTFED AMERICA BANCORP, INC.
By: /s/ Robert F. Stoico
-----------------------------
Robert F. Stoico
President, Chief Executive Officer,
and Chairman of the Board
POWER OF ATTORNEY
-----------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on December 20, 2001.
Name Title
---- -----
/s/ Robert F. Stoico President, Chief Executive Officer, and
---------------------------- Chairman of the Board (principal
Robert F. Stoico executive officer)
/s/ * Executive Vice President, Chief Operating
---------------------------- Officer and Chief Financial Officer
Edward A. Hjerpe, III (principal accounting and financial
officer)
/s/ * Director
----------------------------
Gilbert C. Oliveira
/s/ * Director
----------------------------
Thomas A. Rodgers, Jr.
/s/ * Director
----------------------------
Richard W. Cederberg
II-7
/s/ * Director
--------------------------
John S. Holden, Jr.
/s/ * Director
--------------------------
Dr. Paul A. Raymond
/s/ * Director
--------------------------
Anthony L. Sylvia
* Robert F. Stoico, by signing his name hereto does sign this document on behalf
of the above noted individuals, pursuant to a power of attorney duly executed by
such individuals which have been filed as an exhibit to this registration
statement.
/s/ Robert F. Stoico
-------------------------
Name: Robert F. Stoico
Attorney-in Fact
II-8
EXHIBIT INDEX
-------------
2.1 Agreement and Plan of Merger, dated as of October 1, 2001, by and
between FIRSTFED AMERICA BANCORP, INC. and People's Bancshares,
Inc. is included as Appendix A to the Joint Proxy
Statement-Prospectus, which is part of this Registration
Statement.
3.1 Certificate of Incorporation of FIRSTFED AMERICA BANCORP, INC.
(incorporated by reference into this document from the Exhibits
to FIRSTFED's Registration Statement on Form S-1 (File No.
333-12855) filed on September 27, 1996).
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC. (incorporated by
reference into this document from the Exhibits to FIRSTFED's
Registration Statement on Form S-1 (File No. 333-12855) filed on
September 27, 1997).
4.1 FIRSTFED AMERICA BANCORP, INC. Specimen Stock Certificate
(incorporated by reference into this document from the Exhibits
to FIRSTFED's Registration Statement on Form S-1 (File No.
333-12855) filed on September 27, 1996).
5.1 Opinion of Muldoon Murphy & Faucette LLP regarding legality.*
8.1 Opinion of Muldoon Murphy & Faucette LLP regarding tax matters.
8.2 Opinion of Goodwin Procter LLP regarding tax matters.
10.1 Stock Option Agreement, dated October 1, 2001, between People's
Bancshares, Inc. and FIRSTFED AMERICA BANCORP, INC. (included as
Appendix B to the Joint Proxy Statement-Prospectus, which is part
of this Registration Statement).
21.1 Subsidiaries of the Registrant (incorporated by reference to
"Part I - Subsidiary Activities" in "Item 1. Business - General"
of FIRSTFED's Annual Report on Form 10-K for the year ended March
31, 2001).
23.1 Consent of Muldoon Murphy & Faucette LLP (included in Exhibit
5.1).
23.2 Consent of Muldoon Murphy & Faucette LLP (included in Exhibit
8.1).
23.3 Consent of Goodwin Procter LLP (included in Exhibit 8.2).
23.4 Consent of KPMG, LLP, independent auditors for FIRSTFED AMERICA
BANCORP, INC.
23.5 Consent of Wolf & Company, P.C., former independent auditors for
People's Bancshares, Inc.
23.6 Consent of Keefe, Bruyette & Woods, Inc.
23.7 Consent of Fox-Pitt, Kelton Inc.
24.1 Powers of Attorney.*
99.1 Opinion of Keefe, Bruyette & Woods, Inc. (included as Appendix C
to the Joint Proxy Statement-Prospectus, which is part of this
Registration Statement).
99.2 Opinion of Fox-Pitt, Kelton Inc. (included as Appendix D to the
Joint Proxy Statement-Prospectus, which is part of this
Registration Statement).
99.3 Form of FIRSTFED AMERICA BANCORP, INC. Proxy Card.*
99.4 Form of People's Bancshares, Inc. Proxy Card.*
99.5 Consent of B. Benjamin Cavallo*
___________________
*Previously filed.