<PAGE>
As filed with the Securities and Exchange Commission on October __, 1997
Registration No. 333-34447
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MYSTIC FINANCIAL, INC.
(exact name of registrant as specified in its certificate of incorporation)
DELAWARE 6035 04-1609100
(state or other jurisdiction (Primary Standard (IRS Employer
of incorporation or Classification Code Number) Identification No.)
organization)
c\o MEDFORD CO-OPERATIVE BANK
60 HIGH STREET
MEDFORD, MASSACHUSETTS 02155
(617) 395-2800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
_______________
ROBERT H. SURABIAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MEDFORD CO-OPERATIVE BANK
60 HIGH STREET
MEDFORD, MASSACHUSETTS 02155
(617) 395-2800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_______________
Copies to:
RICHARD A. SCHABERG, ESQ.
THACHER PROFFITT & WOOD
1500 K STREET, N.W.
WASHINGTON, D.C. 20005
(202) 347-8400
_______________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box / X /
---
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Title of each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered(1) Offering Price Per Share(2) Aggregate Offering Price (2) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 2,711,125 $10.00 $27,111,250 $8,215.53
$.01 par Value
===================================================================================================================================
</TABLE>
(1) Includes the maximum number of shares that may be issued in connection with
this offering.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION ON SUCH DATE OR DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER
AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
<PAGE>
Mystic Financial, Inc.
Cross Reference Sheet showing location in the Prospectus of information required
by Items of Form S-1:
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND CAPTION LOCATION OR HEADINGS IN PROSPECTUS
- --------------------------------------- ----------------------------------
<S> <C>
1. Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover Pages
Pages of Prospectus
3. Summary Information, and Risk Factors Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price The Conversion -- Stock Pricing and Number of Shares to
be Issued
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page; The Conversion --
Subscription Rights -- Subscription Offering -- Direct
Community Offering -- Syndicated Offering -- Plan of
Distribution and Financial Advisory Arrangements
9. Description of Securities to be Certain Restrictions on Acquisition of the Company and
Registered the Bank; Description of Capital Stock of the Company;
Description of Capital Stock of the Bank
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Outside Front Cover Page; Selected Financial and Other
Registrant Data of the Bank; Mystic Financial, Inc.; Medford Co-
operative Bank; Dividend Policy; Market for the Common
Stock; Management's Discussion and Analysis of
Financial Condition and Results of Operations; Business
of the Company; Business of the Bank; Regulation;
Management of the Company; Management of the Bank;
The Conversion; Description of Capital Stock of the
Company; Description of Capital Stock of the Bank;
Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
</TABLE>
<PAGE>
PROSPECTUS
[LOGO]
==========================================
MYSTIC FINANCIAL, INC.
==========================================
(PROPOSED HOLDING COMPANY FOR MEDFORD CO-OPERATIVE BANK)
UP TO 2,357,500 SHARES OF COMMON STOCK
Mystic Financial, Inc., a Delaware corporation ("Mystic" or the "Company"),
the proposed holding company for Medford Co-operative Bank (the "Bank"), is
offering up to 2,357,500 shares of its common stock, par value $.01 per share
(the "Common Stock") in connection with the conversion of the Bank from a
Massachusetts chartered mutual co-operative bank to a Massachusetts chartered
stock co-operative bank and the issuance of the Bank's capital stock to Mystic
pursuant to the Bank's plan of conversion (the "Plan" or "Plan of Conversion").
The simultaneous conversion of the Bank to stock form, the issuance of the
Bank's stock to the Company and the offer and sale of the Common Stock by the
Company are herein referred to as the "Conversion." The shares of Common Stock
are being offered in a subscription offering pursuant to subscription rights in
the following order of priority: (i) to the Bank's qualifying deposit account
holders as of March 31, 1996 with a $50 minimum deposit as of that date
("Eligible Account Holders"), (ii) to the Bank's qualifying deposit account
holders as of March 31, 1997 with a $50 minimum deposit as of that date, who are
not otherwise Eligible Account Holders ("Supplemental Eligible Account Holders")
and (iii) to the Bank's tax-qualified employee stock ownership plan (as defined
in the Plan of Conversion) (the "Subscription Offering"). Concurrent with or at
any time during or after the Subscription Offering, the board of directors of
the Company may elect to offer those shares not subscribed for in the
Subscription Offering to the general public, with preference given to natural
persons residing in the communities of Medford, Malden, Everett, Stoneham,
Arlington, Winchester, Somerville, Melrose, Lexington and Bedford,
Massachusetts, the Bank's primary market area, through a direct community
offering (the "Direct Community Offering") subject to the Company's right to
reject orders in the Direct Community Offering in whole or in part. It is
anticipated that shares not subscribed for in the Subscription Offering and
Direct Community Offering, if any, will be offered to certain members of the
general public in a Syndicated Offering (the "Syndicated Offering"). The
Subscription Offering, Direct Community Offering and Syndicated Offering are
herein referred to collectively as the "Offerings." The Offerings will be
completed no later than twenty-four (24) months from the date upon which the
Plan of Conversion was approved by the Board of Directors of the Bank (June 10,
1999). All shares sold in the Offerings will be sold at a purchase price of
$10.00 per share. A minimum of 25 Shares must be purchased by each person
purchasing Conversion Stock to the extent Shares are available, provided,
however, that such minimum number of Shares will be reduced if the price per
Share times such minimum number of Shares exceeds $500. Directors, officers and
their associates may not purchase, in the aggregate, more than 30 percent of the
Common Stock. Each Director and officer will be subject to the same individual
purchase limitations as other Eligible Account Holders and Supplemental Eligible
Account Holders. The Bank has never issued stock in the past, and no assurances
can be given that an established and liquid market for the Common Stock will
develop. See "Market for Common Stock."
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER
THE DISCUSSION UNDER " RISK FACTORS" BEGINNING ON PAGE ONE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED BY THE FDIC, THE CO-OPERATIVE CENTRAL BANK OR ANY OTHER GOVERNMENT
AGENCY. THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE MASSACHUSETTS
DIVISION OF BANKS, THE SECURITIES
AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR THE SHARE INSURANCE FUND OF THE CO-OPERATIVE
CENTRAL BANK, NOR HAS ANY OF THE FOREGOING PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
==========================================================================================================
PURCHASE ESTIMATED FEES ESTIMATED NET
PRICE (2) AND EXPENSES CONVERSION PROCEEDS
(INCLUDING
UNDERWRITING FEES
AND COMMISSIONS)(3)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share(1).............................. $ 10.00 $ 0.38 $ 9.62
- ----------------------------------------------------------------------------------------------------------
Minimum Total............................. $17,425,000 $714,884 $16,710,116
- ----------------------------------------------------------------------------------------------------------
Midpoint Total............................ $20,500,000 $782,780 $19,717,220
- ----------------------------------------------------------------------------------------------------------
Maximum Total............................. $23,575,000 $850,676 $22,724,324
- ----------------------------------------------------------------------------------------------------------
Maximum, as Adjusted(4)................... $27,111,250 $928,756 $26,182,494
==========================================================================================================
</TABLE>
(1) The price per share will be fixed at $10.00 (the "Purchase Price").
Estimated fees and expenses per share and estimated net conversion proceeds per
share are based on the midpoint of the "Current Valuation Range, " as defined
below.
(2) Determined in accordance with an independent appraisal prepared by R.P.
Financial, L.C. ("R.P. Financial") as of August 15, 1997 and updated as of
[_______________, 1997], which states that the estimated pro forma market value
of the Common Stock was within a range from $17,425,000 to $23,575,000 (the
"Current Valuation Range"), with a midpoint of $20,500,000. The final aggregate
purchase price will be determined at the time of closing of the offering and is
subject to change due to changing market conditions and other factors. The
aggregate purchase price of the Common Stock sold in the Conversion will not be
below $17,425,000 and will not exceed $23,575,000 or $27,111,250 (15% above the
maximum of the Current Valuation Range, the "Super-Maximum") unless subscribers
and other purchasers are offered the opportunity to change or withdraw their
orders. See "Use of Proceeds," "Capitalization," "Pro Forma Data" and "The
Conversion--Stock Pricing and Number of Shares to be Issued."
(3) Includes estimated printing, postage, legal, accounting, marketing and
miscellaneous expenses which will be incurred in connection with the Conversion.
Actual proceeds may vary from estimated amounts. Assumes the sale of 2,050,000
shares with respect to the per share data. See "Use of Proceeds."
(4) The "Total Maximum, as adjusted " or the "Super-Maximum " gives effect to an
increase in the number of shares which could occur without a resolicitation of
subscribers or any right of cancellation due to an increase in if the Current
Valuation Range were to increase by up to 15% above the maximum of the Current
Valuation Range to reflect regulatory considerations or changes in market and
financial conditions.
THE DATE OF THIS PROSPECTUS IS _____________________, 1997.
____________________
____________________
=====================
TRIDENT SECURITIES, INC.
<PAGE>
[Insert Map Here]
ii
<PAGE>
SUMMARY
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information and consolidated financial statements
contained elsewhere herein. Certain terms in this summary are defined elsewhere
herein.
MYSTIC FINANCIAL, INC.
Mystic is a Delaware corporation recently organized by the Bank for
the purpose of acquiring all of the capital stock of the Bank to be issued in
the Conversion. Immediately following the Conversion, the only significant
assets of the Company will be the capital stock of the Bank, the Company's loan
to the ESOP and the net proceeds of the Offerings retained by the Company. The
Company will purchase all of the capital stock of the Bank to be issued upon the
Conversion in exchange for 50% of the net Conversion proceeds ($8.6 million at
the midpoint of the Current Valuation Range) with the remaining net proceeds to
be retained by the Company to be used for general business activities, including
a loan by the Company directly to the ESOP to enable the ESOP to purchase up to
8% of the Common Stock issued in connection with the Conversion. Initially, the
net proceeds are expected to be invested by the Company and the Bank primarily
in short- and medium-term investments and debt securities and to reduce the
Bank's borrowings from the Federal Home Loan Bank of Boston (the "FHLB"). See
"Use of Proceeds" and "The Conversion--General." The business of the Company
will consist initially of the business of the Bank. See "Business" and
"Regulation--Holding Company Regulation."
The Company's executive offices are located at the administrative
office of the Bank at 60 High Street, Medford, Massachusetts 02155. The
Company's telephone number is (781) 395-2800.
MEDFORD CO-OPERATIVE BANK
The Bank is a Massachusetts chartered mutual co-operative bank founded
in 1886 with four offices in Medford, which is located 8 miles north of Boston,
Massachusetts. The Bank's deposits have been federally insured since 1986 and
are currently insured by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation (the "FDIC") and the Share Insurance Fund of the Co-
operative Central Bank. The Bank has been a member of the Co-operative Central
Bank since 1932 and a member of the FHLB since 1988. For a discussion of the
powers of co-operative banks under Massachusetts law, see "Regulation -
Massachusetts Banking Laws and Supervision."
The business of the Bank primarily consists of attracting savings
deposits from the general public and investing such deposits in loans secured by
one- to four- family residential real estate located in its market area,
commercial loans secured by assets and commercial real estate of businesses
located in its market area and investment securities, including U.S. Government
and Agency securities and interest-earning deposits. The Bank also makes
consumer loans, including home equity loans, automobile loans and savings
passbook loans. The Bank offers both fixed-rate and adjustable-rate loans and
emphasizes the origination of residential real estate mortgage loans and
commercial loans with adjustable interest rates. The Bank also makes other
short term (one to three year) interest rate sensitive investments which allow
the Bank to monitor the interest rate risk, maturities and repricing intervals
of its assets and liabilities.
At June 30, 1997, the Bank had total assets of $149.7 million,
deposits of $129.3 million and net worth of $11.9 million, giving the Bank a
regulatory Tier 1 leverage capital ratio of 8.1%. Also at June 30, 1997, the
Bank's capital ratios exceeded all regulatory capital requirements.
Financial highlights of the Bank include the following:
Business strategy -- The Bank's business strategy is to operate as a
well capitalized, profitable and independent community bank dedicated
to financing home ownership and small business and consumer needs in
its market area and providing quality service to its customers. The
Bank
iii
<PAGE>
has implemented this strategy by: (i) monitoring the needs of
customers and providing quality service; (ii) emphasizing consumer-
oriented banking by originating residential mortgage loans and
consumer loans, and by offering various deposit accounts and other
financial services and products; (iii) recently increasing its
emphasis on commercial banking and lending by originating loans and
taking deposits for small businesses and providing greater services in
its commercial loan department; (iv) maintaining high asset quality
through conservative underwriting; and (v) producing stable earnings.
Asset Composition and Quality -- The Bank has consistently focused on
maintaining asset quality by originating primarily one- to four-family
residential mortgage loans and investing in high quality liquid
investments. At June 30, 1997, one- to four-family residential real
estate loans comprised 78.7% of net loans outstanding, and 64.8% of
the Bank's one- to four-family residential real estate loans had
adjustable interest rates. Unlike many New England financial
institutions, the Bank did not experience significant asset quality
problems during the recession of the early 1990s. More recently, the
Bank's non-performing assets, including non-performing loans and real
estate acquired by foreclosure, have declined from 1.37% of total
assets at June 30, 1993 to 0.24% of total assets at June 30, 1997. See
"Business -- Lending Activities ," "--Non-Performing Assets, Asset
Classification and Allowances for Losses" and "-- Investment
Activities."
Capital Position --The Bank's capital ratios are in excess of current
regulatory capital requirements. At June 30, 1997, the Bank's
regulatory Tier I leverage capital ratio was 8.1% of adjusted total
average assets, its Tier I risk-based capital was 13.3% of risk-
weighted assets and its total risk-based capital equaled 14.4% of
risk-weighted assets. As a result of the Conversion, the Bank will
increase such regulatory capital to levels substantially above
regulatory requirements. For a description of the Bank's capital
position on a pro forma basis, see "Pro Forma Data" and "Regulation."
The brief description of the Bank in these financial highlights should
be considered in the context of the more detailed descriptions in this
Prospectus, including " Risk Factors."
THE CONVERSION
As a mutual institution, the Bank has no stockholders. Conversion of
the Bank to a stock co-operative bank is being accomplished by simultaneously
(i) amending its charter to authorize the issuance of shares of capital stock
and otherwise to conform to the requirements of a stock institution, (ii)
issuing the Bank's capital stock to the newly formed Delaware corporation,
Mystic, and (iii) offering and selling the Common Stock in the Subscription
Offering and, if necessary, the Direct Community Offering and/or the Syndicated
Offering, as described below.
BUSINESS PURPOSES
The board of directors and management of the Bank believe that the
stock form is the preferred structure (as opposed to mutual form) of
organization for a financial institution, as evidenced in part by the decline in
the number of mutual thrift institutions from over 12,500 in 1929 to just over
800 today.
The Bank believes that converting to the stock form of organization
will allow the Bank to compete more effectively with local community banks and
thrift institutions (most of which are stock-owned) and with statewide and
regional banks (all of which are stock-owned), by, among other things,
increasing its access to capital markets. The Bank believes that by combining
quality service and products with a local ownership base, its customers and
community members who become stockholders will be more inclined to continue to
do business with, and perhaps bring additional business to the Bank.
iv
<PAGE>
Furthermore, since the Bank finds itself competing with local and
regional banks not only for customers, but also for employees, the Bank believes
that the stock form of organization will better afford it the opportunity to
attract and retain employees and management through various stock benefit plans
like the ESOP, which are generally not available to mutual financial
institutions. See "Business Purposes."
USE OF PROCEEDS
The Company intends to contribute 50% of the net proceeds ($8.6
million at the midpoint of the Current Valuation Range) from the Offerings to
the Bank. Those Conversion proceeds will be added to the general funds of the
Bank and used for general corporate purposes, including the origination of
loans, funding the construction and/or the acquisition costs of establishing new
branch locations, enhancing the Bank's liquidity ratios and enhancing future
access to capital markets. The balance of the funds will be retained as the
Company's initial capitalization, with a portion of those funds being loaned to
the ESOP to fund its purchase of Common Stock in the Offerings or, if necessary,
to purchase shares of Common Stock through open-market purchases following
completion of the Offerings. The Company may use the funds it retains to
support future expansion of operations or diversification into other banking-
related businesses and for other business or investment purposes, although
management has no current plans regarding such activities. Subject to
applicable limitations, the Company may also use available funds to repurchase
shares of Common Stock and for the payment of dividends. It is expected that in
the interim, all or part of the net proceeds will be invested in U.S. Government
and Agency securities and other short-term investments and to reduce borrowings
from the FHLB. See "Use of Proceeds."
SUBSCRIPTION OFFERING
Mystic is offering up to 2,357,500 shares (or up to 2,711,125 shares
at the Super-Maximum) of the Common Stock in the Subscription Offering. Each
Eligible Account Holder is receiving nontransferable subscription rights to
subscribe for up to $600,000 of the Common Stock together with associates or
groups acting in concert with such Eligible Account Holder. In the event of an
oversubscription, shares will be allocated among subscribers in accordance with
their subscription priorities and the Plan of Conversion. Each Supplemental
Eligible Account Holder is receiving nontransferable subscription rights on a
second priority basis to subscribe for up to $600,000 of the Common Stock,
together with associates or persons acting in concert with such Supplemental
Eligible Account Holder. The Bank's ESOP is receiving nontransferable
subscription rights on a third priority basis to subscribe for shares in the
aggregate up to 8% of the Common Stock. See "The Conversion -- Subscription
Offering."
DIRECT COMMUNITY OFFERING
Concurrent with or at any time during or after the Subscription
Offering, the board of directors of the Company may elect to offer those shares
not subscribed for in the Subscription Offering, if any, to the general public,
with preference given to natural persons residing in the communities of Medford,
Malden, Everett, Stoneham, Arlington, Winchester, Somerville, Melrose, Lexington
and Bedford, Massachusetts, the Bank's primary market area, subject to the
Bank's right to reject orders in the Direct Community Offering in whole or in
part. Purchasers in the Direct Community Offering together with their
associates, and groups acting in concert, are each eligible to purchase up to
$600,000 of the Common Stock. Purchase orders received during the Direct
Community Offering will be filled up to a maximum of 2% of the total number of
shares of Common Stock to be issued and sold, and any remaining shares will then
be allocated among unfilled purchase orders on an equal number of shares basis,
subject to the Company's right to reject orders for Common Stock in whole or in
part. The Direct Community Offering is expected to terminate on the same date as
the Subscription Offering but may be extended by the Company for up to an
additional 45 days, or such longer period as the Commissioner of Banks of the
Commonwealth of Massachusetts (the
v
<PAGE>
"Commissioner") may approve. If the Conversion is not completed within 45 days
of the completion of the Subscription Offering, and the Commissioner consents to
an extension of time to complete the Conversion, subscribers will be given the
right to increase, decrease or rescind their subscriptions.
SYNDICATED OFFERING
As a final step in the Conversion, if necessary, shares not purchased
in the Subscription Offering or Direct Community Offering, if any, will be
offered for sale in the Syndicated Offering to certain members of the general
public and/or through a syndicate of registered broker-dealers to be formed and
managed by Trident Securities, Inc. ("Trident Securities") acting as agent, to
assist the Company in the sale of the Common Stock.
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS
Applicable state and federal regulations provide that, prior to the
completion of the Conversion, no person shall transfer or enter into any
agreement or understanding to transfer the legal or beneficial ownership of the
subscription rights under the Plan or the shares of Common Stock to be issued
upon their exercise. PERSONS VIOLATING SUCH PROHIBITION MAY LOSE THEIR RIGHT TO
SUBSCRIBE FOR STOCK IN THE CONVERSION AND MAY BE SUBJECT TO SANCTIONS BY THE
COMMISSIONER OR THE FDIC. EACH PERSON EXERCISING SUBSCRIPTION RIGHTS WILL BE
REQUIRED TO CERTIFY THAT HIS OR HER PURCHASE OF COMMON STOCK IS SOLELY FOR THE
PURCHASER'S OWN ACCOUNT AND THAT THERE IS NO AGREEMENT OR UNDERSTANDING
REGARDING THE SALE OR TRANSFER OF SUCH SHARES.
PURCHASE LIMITATIONS
With the exception of the ESOP, which is expected to subscribe for 8%
of the shares of Common Stock issued in the Conversion, the Plan of Conversion
provides for the following purchase limitations: No Person, including, in each
case, all persons on a joint account, either alone or together with associates
of persons acting in concert with such person, may purchase shares of Common
Stock with an aggregate purchase price of more than $600,000 in the conversion.
THIS MAXIMUM PURCHASE LIMITATION MAY BE INCREASED CONSISTENT WITH FDIC AND
MASSACHUSETTS REGULATIONS IN THE SOLE DISCRETION OF THE COMPANY AND THE BANK
SUBJECT TO ANY REQUIRED REGULATORY APPROVAL. A minimum of 25 shares must be
purchased by each person purchasing Conversion Stock to the extent that shares
are available, provided, however, that such minimum number of shares will be
reduced if the price per share times such minimum number of shares exceed
$500.
The term "acting in concert" is defined in the Plan of Conversion to
mean: persons seeking to combine or pool their voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. When persons act together for such purpose, their group is deemed to
have acquired their stock. The term "associate" of a person is defined in the
Plan of Conversion to mean: (i) any corporation or organization (other than the
Bank or a majority-owned subsidiary of the Bank) of which such person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity (excluding tax-qualified
employee plans); and (iii) any relative or spouse of such person, or any
relative of such spouse who has the same home as such person . The Company and
the Bank may presume that certain persons are acting in concert based upon,
among other things, joint account relationships and the fact
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that such persons have filed joint Schedules 13D with the SEC with respect to
other companies.
POTENTIAL BENEFITS OF CONVERSION TO MANAGEMENT
ESOP. The Company and the Bank have adopted an ESOP to become
effective on the effective date of the Conversion. The ESOP intends to purchase
an aggregate of 8% of the shares of Common Stock issued in the Conversion. For
additional information, see "Management of the Bank -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan and Trust."
Employment Agreements. Effective upon the Conversion, the Company and
the Bank each will enter into employment agreements with certain of their
respective officers that will provide for benefits and cash payments to be made
to such officers in the event of a change in control of the Company or the Bank.
The aggregate payments that would be made to the executive officers of the
Company named in the Company's employment agreements, assuming termination of
employment following a change in control under the circumstances described in
those agreements based on current salary levels, would be approximately
$1,267,000. The aggregate payments that would be made to the officers of the
Bank named in the Bank's employment agreements, assuming termination of
employment following a change in control of the Bank based on current salary
levels, would be approximately $503,000. These provisions may have the effect
of increasing the cost of acquiring the Company and the Bank, thereby
discouraging future attempts to take over the Company or the Bank. See
"Management of the Bank -- Certain Benefit Plans and Agreements -- Employment
Agreements Between the Company and Two Senior Executives" and "-- Employment
Agreements Between the Bank and Two Commercial Lending Officers."
Option Plan. No earlier than one year after the consummation of the
Conversion, the Company intends to submit for stockholder approval a stock
option and incentive plan for the benefit of the officers, key employees and
directors of the Company and the Bank (the "Option Plan"), pursuant to which the
Company intends to reserve a number of authorized but unissued shares of Common
Stock equal to an aggregate of 10% of the Common Stock issued in the Conversion
for issuance pursuant to stock options. The value of any options granted under
the Option Plan will be determined based on the increase, if any, in the market
value of the Common Stock compared to the exercise price of the options. The
exercise price of any options granted under the Option Plan will not be less
than the fair market value of a share of Common Stock on the date of grant.
Provided the Option Plan is implemented more than one year after completion of
the Conversion, it is expected that the Option Plan will provide for the
accelerated vesting of awards to occur upon a change in control of the Company
or the Bank. A majority of stockholders present and voting at any annual or
special meeting considering the approval of the Option Plan must approve the
Option Plan before it can be implemented by the Company. It is expected that
all awards under the Option Plan will vest over a period of time at a rate not
greater than 20% per year.
While the Company does not currently intend to implement the Option
Plan within one year following completion of the Conversion, FDIC regulations
provide that if the Option Plan is implemented within one year following
completion of the Conversion, no individual officer or employee may receive more
than 25% of the options granted, and non-employee directors may not receive more
than 5% individually or more than 30% in the aggregate of the options granted.
See "Management of the Bank --Future Stock Benefit Plans -- Option Plan."
Restricted Stock Plan. In addition, no earlier than one year after
the consummation of the Conversion, the Company intends to submit for
stockholder approval a restricted stock plan ("Restricted Stock Plan") for the
benefit of the officers, key employees and directors of the Company and the
Bank. When implemented, the Restricted Stock Plan is expected to purchase a
number of shares of Common Stock either from the Company or in the open market
equal to an aggregate of 4% of the Common Stock issued in the Conversion.
Whether such shares will be purchased in the open market or from the Company,
and the timing of all such purchases, will depend on the market and other
conditions and the alternative uses of capital available to the Company. The
actual value of any awards made under the Restricted Stock Plan will depend
upon, among other factors, the market value of the Common Stock at the time of
award and upon payment. At the
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minimum, midpoint, maximum and 15% above the maximum of the Current Valuation
Range, the reduction to stockholders' equity to fund the Restricted Stock Plan
would be $697,000, $820,000, $943,000 and $1.1 million, respectively, assuming
purchases were made in the market at the $10.00 per share Purchase Price. All
awards under the Restricted Stock Plan will be payable over a period or time, at
a rate not greater than 20% per year. A majority of stockholders present and
voting at any annual or special meeting considering approval of the Restricted
Stock Plan must approve the Restricted Stock Plan before it can be implemented
by the Company. It is expected that the Plan will provide for the accelerated
vesting of awards to occur upon a change in control of the Company or the Bank.
Consistent with applicable regulations, if the Restricted Stock Plan is
implemented within one year following completion of the Conversion (which timing
is not currently contemplated), no employee will receive grants exceeding 25% of
the shares available under the Restricted Stock Plan, and no non-employee
director will receive grants individually exceeding 5% of the shares available
under the Restricted Stock Plan or 30% in the aggregate of the awards granted.
See "Management of the Bank --Future Stock Benefit Plans -- Restricted Stock
Plan."
INDEPENDENT APPRAISAL AND PURCHASE PRICE
R.P. Financial, a firm experienced in valuing banking institutions,
has made an independent appraisal of the estimated aggregate pro forma market
value of the Common Stock. The Current Valuation Range in R.P. Financial's
appraisal as of August 15, 1997 and updated as of ___________, 1997, is from
$17,425,000 to $23,575,000, with a midpoint of $20,500,000. Such appraisal is
not intended and must not be construed as a recommendation of any kind as to the
advisability of purchasing such shares. The appraisal considered a number of
factors and was based upon estimates derived from those factors, all of which
are subject to change from time to time. In preparing the valuation, R.P.
Financial relied upon and assumed the accuracy and completeness of financial and
statistical information provided by the Bank. R.P. Financial did not verify the
consolidated financial statements provided or independently value the assets of
the Bank.
The Company has determined to issue and sell the Common Stock at a
purchase price of $10.00 per share. The aggregate actual purchase price for all
of the Common Stock will be consistent with the independent appraisal of the
estimated aggregate pro forma market value of the Company immediately after the
Conversion. Depending upon market financial conditions prior to completion of
the Conversion, the actual number of shares being issued in the Conversion may
be increased or decreased from the maximum of 2,357,500 shares being offered
hereby. Any material change in the Current Valuation Range would require the
approval of the Commissioner and the FDIC. Purchasers will be given the right to
increase, decrease or rescind their orders in the event that the aggregate
purchase price is below $17,425,000 (the low end of the Current Valuation Range)
or more than the Super-Maximum of $27,111,250 (15% above the high end of the
Current Valuation Range). See "The Conversion -- Stock Pricing and Number of
Shares to be Issued."
DIVIDENDS
The Company's board of directors anticipates declaring and paying
quarterly cash dividends on the Common Stock at an annual rate of 2%, or $0.20
per share per year based on the Purchase Price per share of $10.00. The first
quarterly cash dividend is expected to be declared and paid during the first
full quarter following the consummation of the Conversion. Pursuant to the
Bank's dividend policy, there are certain limitations on the Bank's ability to
pay dividends in excess of current earnings for three years following the
Conversion. In addition, the board of directors may determine to pay periodic
special cash dividends in addition to, or in lieu of, regular cash dividends.
Declarations and payments of any dividends (regular and special) by the board of
directors will depend upon a number of factors, including the amount of the net
proceeds retained by the Company, capital requirements, regulatory limitations,
the Bank's and the Company's financial condition and results of operations, tax
considerations and general economic conditions. In order to pay such cash
dividends, however, the Company must have available cash either from the net
proceeds raised in the Offerings and retained by the Company, dividends received
from the Bank or earnings on Company assets. There are certain limitations on
the payment of dividends from the Bank to the Company.
viii
<PAGE>
See "Regulation -- Massachusetts Banking Laws and Supervision." No assurances
can be given that any dividends will be declared or, if declared, what the
amount of dividends will be or whether such dividends, if commenced, will
continue. See "Dividends."
MARKET FOR COMMON STOCK
The Bank, as a mutual co-operative bank, has never issued capital
stock and consequently there is no established market for the Common Stock at
this time. Accordingly, there can be no assurance that an active public trading
market for the Company's Common Stock will develop or be maintained in the
foreseeable future. However, Trident Securities has agreed to act as a market
maker for the Company's Common Stock following consummation of the Conversion
and the Company has applied to list the common stock on the Nasdaq National
Market under the symbol "MYST." There can be no assurance, however, that the
Company will meet the Nasdaq National Market listing requirements. Accordingly,
purchasers of Common Stock should have a long-term investment intent and
recognize that the absence of an active and liquid trading market may make it
difficult to sell the Common Stock, and may have an adverse effect on the price.
See " Risk Factors --Limited Market for Common Stock" and "Market for Common
Stock."
Trident Securities will consult with, advise and assist the Company in
the distribution of shares in the Subscription Offering. Trident Securities will
also act as marketing advisor and represent the Company as placement agent on a
best efforts basis in the sale of the Common Stock in the Direct Community
Offering. Members of its staff will conduct training sessions for directors,
officers and employees of the Bank regarding the offering process. Trident will
also provide assistance in the establishment and supervision of the Stock
Information Center. If the Subscription Offering and Direct Community Offering
are extended beyond ______________, 1997 (the "Expiration Date"), Trident
Securities may make sales to the general public and/or assemble and manage a
syndicate of selected dealers to assist the Company in the sale of the Common
Stock during the Syndicated Offering.
The engagement of Trident Securities by the Bank and the work
performed thereunder (including any due diligence investigation) should not be
construed by prospective investors as constituting an endorsement of or
recommendation to purchase the shares of Common Stock by Trident Securities or a
verification of the accuracy or completeness of the information contained in
this Prospectus. Trident Securities has not prepared or delivered a fairness or
similar opinion regarding the terms of the Offerings or the prices at which the
Common Stock may trade.
RISK FACTORS
Special attention should be given by prospective investors to the
factors discussed under " Risk Factors," including, (i) anticipated low return
on equity following the Conversion, (ii) the potential for delay in consummating
the Conversion in order to obtain regulatory approval, (iii) the growth of the
Bank's commercial and commercial real estate loan portfolio, (iv) the possible
dilutive effect of stock based compensation plans which may be implemented at a
later date, (v) regulatory environment, (vi) anti-takeover provisions and voting
control of management, (vii) the potentially adverse impact of interest rates
and economic conditions on the banking industry and the Bank and (viii) the
limited market for the Common Stock.
ix
<PAGE>
________________________________________________________________________________
SUMMARY OVERVIEW
The following is intended to be a condensed overview of the foregoing
information and does not purport to be complete. It must be read in conjunction
with other information contained in this Prospectus. Terms used in the summary
are defined elsewhere herein.
Securities Offered and Purchase Price...... The Company is offering up to
2,357,500 shares of Common Stock
(subject to adjustment) at a
Purchase Price of $10.00 per share.
See "The Conversion --Stock Pricing
and Number of Shares to be Issued."
Subscription Offering...................... The Company is offering
nontransferable subscription rights
on a first priority basis to
Eligible Account Holders, each of
whom has the right to subscribe for
the purchase of up to $600,000 of
Common Stock. On a second priority
basis, to the extent any shares of
Common Stock are available after
satisfying the subscriptions of the
Eligible Account Holders, each
Supplemental Eligible Account
Holder has the right to subscribe
for the purchase of up to $600,000
of Common Stock. On a third
priority basis, to the extent any
shares of Common Stock are
available after satisfying
subscriptions of Eligible Account
Holders and Supplemental Eligible
Account Holders, the Bank's ESOP
has the right to subscribe for up
to 8% of the total number of shares
of Common Stock offered in the
Conversion. See "The Conversion--
Subscription Offering."
Direct Community Offering.................. To the extent any shares of Common
Stock are available after
satisfying the subscriptions of
Eligible Account Holders, the
Supplemental Eligible Account
Holders and the ESOP in the
Subscription Offering, shares of
Common Stock are being offered by
the Company to the general public,
with preference given to natural
persons who are residents of the
communities of Medford, Malden,
Everett, Stoneham, Arlington,
Winchester, Somerville, Melrose,
Lexington and Bedford,
Massachusetts. Purchasers in the
Direct Community Offering ,
together with their associates and
groups acting in concert, are each
eligible to purchase up to $600,000
of Common Stock. See "The
Conversion --Direct Community
Offering."
Syndicated Offering....................... As a final step in the Conversion,
if necessary, shares not purchased
in the Subscription Offering or
Direct
________________________________________________________________________________
x
<PAGE>
________________________________________________________________________________
Community Offering, if any, will be
offered for sale in the Syndicated
Offering to certain members of the
general public and/or through a
syndicate of registered brokers-
dealers to be formed and managed by
Trident Securities acting as agent,
to assist the Company in the sale
of the Common Stock.
Independent Appraisal...................... The Bank has retained R.P.
Financial to prepare an appraisal
of the estimated pro forma market
value of the Common Stock. The
Purchase Price of $10.00 per share
and the range in the number of
shares being offered in the
Subscription and Direct Community
Offerings have been determined by
the Bank's board of directors based
upon the appraisal. R.P. Financial
has advised the Company, in its
opinion dated as of August 15, 1997
and updated as of _____________,
1997, that the Current Valuation
Range ranged from $17,425,000 to
$23,575,000 with a mid-point of
$20,500,000. Pursuant to the Plan
of Conversion, the Company may
issue additional shares of Common
Stock in an aggregate dollar amount
of up to 15% above the high end of
the Current Valuation Range for an
aggregate of up to $27,111,250 in
gross Conversion proceeds without a
resolicitation. R.P. Financial's
estimated valuation should not be
considered a recommendation as to
the advisability of purchasing
shares of Common Stock, and there
can be no assurance that persons
who purchase shares in the
Conversion will thereafter be able
to sell the shares at comparable
prices consistent with such
valuation. See "The Conversion --
Stock Pricing and Number of Shares
to be Issued."
Exercise of Subscription Rights............ Delivery of forms to order Common
Stock offered in the Subscription
Offering and the Direct Community
Offering will be preceded or
accompanied by a Prospectus. Any
person receiving an order form who
desires to purchase shares must do
so prior to the Expiration Date by
delivering to the Company a
properly executed order form
together with full payment. Once
tendered, subscription orders
cannot be revoked or modified
without the consent of the Company.
Orders will not be accepted via
facsimile. See "The Conversion --
Subscription Offering -- Use of
Order Forms."
Payment for Shares......................... Payment for subscriptions may be
made (i) in cash (if delivered in
person); (ii) by check, bank draft
or money order; or (iii) by
authorization of withdrawal from
deposit accounts maintained at the
Bank. Payment for shares will not
be accepted by wire transfer. See
"The Conversion --Subscription
Offering -- Payment for Shares."
Purchase Limitations....................... A maximum of $600,000 in Common
Stock may be purchased in the
aggregate in all categories in the
________________________________________________________________________________
xi
<PAGE>
________________________________________________________________________________
Conversion by any person together
with any associate or group acting
in concert with such person. This
maximum purchase limitation does
not apply to the ESOP, which may
purchase up to 8% of the shares
issued in the Conversion. A minimum
of 25 shares of Common Stock must
be purchased by any person
purchasing any shares in the
Conversion to the extent sufficient
shares are available. See
"Summary -- Purchase Limitations."
Nontransferability of Subscription Rights.. The subscription rights of Eligible
Account Holders, Supplemental
Eligible Account Holders and the
ESOP are nontransferable. Persons
violating the prohibition against
transferring such rights may lose
the right to subscribe for Common
Stock in the Conversion and may be
subject to sanctions by the
Commissioner or the FDIC. See "The
Conversion -- Subscription
Rights."
Expiration Date for the Subscription
Offering.................................. The Expiration Date for the
Subscription Offering is 3:30 p.m.
Eastern Standard Time on
_____________, 1997, unless
extended by the Bank. See "The
Conversion -- Subscription
Offering."
Expiration Date for the Direct Community
Offering.................................. The Expiration Date for the Direct
Community Offering is 3:30 p.m.
Eastern Standard Time on
_____________, 1997, unless
extended by the Bank. See "The
Conversion -- Direct Community
Offering."
Market for Stock........................... As a mutual institution, the Bank
has never issued capital stock and,
consequently, there is no existing
market for the Common Stock. The
Company has applied to have the
Common Stock quoted on the Nasdaq
National Market under the symbol
"MYST." See "Market for Common
Stock."
Dividend Policy............................ The Company's board of directors
currently anticipates declaring and
paying cash dividends on the Common
Stock at an initial rate of
approximately 2%, or $0.20 per
share of the aggregate Purchase
Price, commencing during the first
full quarter following consummation
of the Conversion. Pursuant to the
Bank's dividend policy, there are
certain limitations on the Bank's
ability to pay dividends in excess
of current earnings for the three
years following the Conversion. See
"Dividends."
Risk Factors............................... A purchase of the Common Stock
involves a substantial degree of
risk. Prospective investors should
carefully consider the matters set
forth under " Risk Factors." The
shares of Common Stock offered
hereby are not insured by the FDIC,
the Share Insurance Fund of the Co-
operative Central Bank or any other
government agency.
________________________________________________________________________________
xii
<PAGE>
________________________________________________________________________________
No Board Recommendations................... The Bank's board of directors does
not make any recommendations to
depositors or other potential
investors regarding whether such
persons should purchase the Common
Stock. An investment in the Common
Stock must be made pursuant to each
investor's evaluation of his or her
best interests.
Stock Information Center................... If you have any questions regarding
the Conversion, call the Stock
Information Center at (781)
_____________.
________________________________________________________________________________
xiii
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected financial data concerning the
Bank at the dates and for the periods indicated. The following data is qualified
in its entirety by the detailed information and consolidated financial
statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................... $149,653 $131,366 $124,966 $121,063 $115,799
Loans, net............................ 114,568 94,760 80,217 77,988 80,284
Investment securities/(1)/
Available for sale.................. 3,819 1,568 1,463 1,422 --
Held to maturity.................... 17,504 16,926 25,051 25,152 --
Held for investment.................... -- -- -- -- 16,160
Deposits.............................. 129,303 119,634 113,825 110,665 106,179
Borrowings............................ 7,532 -- -- -- --
Total surplus......................... 11,940 10,949 10,366 9,683 8,864
ASSET QUALITY DATA:
Non-performing loans.................. 365 622 868 839 1,127
Allowance for loan losses............. 977 742 757 749 746
Foreclosed real estate................ -- -- 104 270 460
NUMBER OF:
Mortgage loans outstanding........... 1,384 1,329 1,236 1,290 1,406
Deposit accounts..................... 18,809 18,465 17,753 17,016 16,562
Full-service offices................. 3 3 2 2 2
NUMBER OF EMPLOYEES:
Full-time............................. 44 42 40 38 34
Part-time............................. 22 22 15 14 9
</TABLE>
_____________________
(1) Effective June 30, 1994, the Bank adopted Statement of Financial Accounting
Standards No. 115 ("SFAS No. 115") which requires the classification of the
Bank's investment securities as "trading securities," "held to maturity" or
"available for sale." All of the Bank's equity securities are classified as
"available for sale." At June 30, 1993 all of the Bank's investment
securities were held for investment and carried at amortized cost.
xiv
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest and dividend income.................. $9,899 $8,928 $8,165 $7,784 $8,176
Interest expense.............................. 4,911 4,569 3,885 3,474 3,960
------ ------ ------ ------ ------
Net interest income....................... 4,988 4,359 4,280 4,310 4,216
Provision for loan losses..................... 272 100 100 152 300
------ ------ ------ ------ ------
Net interest income after provision
for loan losses........................... 4,716 4,259 4,180 4,158 3,916
Other income.................................. 882 658 536 543 531
Operating expenses............................ 4,330 3,878 3,576 3,144 2,931
------ ------ ------ ------ ------
Income before income taxes.................... 1,268 1,039 1,140 1,557 1,516
Provision for income taxes.................... 527 440 480 658 657
------ ------ ------ ------ ------
Income before cumulative effect of
change in accounting principle............ 741 599 660 899 859
Cumulative effect of change in
accounting for income taxes............... -- -- -- -- --
------ ------ ------ ------ ------
Net income....................................... $ 741 $ 599 $ 660 $ 899 $1,080
====== ====== ====== ====== ======
</TABLE>
xv
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED JUNE 30,
----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS:
Interest rate spread/(1)/...................... 3.63% 3.48% 3.57% 3.67% 3.78%
Net interest margin/(2)/....................... 3.84 3.67 3.73 3.81 3.93
Return on average assets....................... 0.54 0.48 0.55 0.75 0.97
Return on average equity....................... 6.40 5.53 6.46 9.61 12.98
Operating expenses as a percentage of average.. 3.15 3.08 2.97 2.62 2.63
total assets
Efficiency ratio/(3)/............................ 73.76 77.30 74.25 64.78 61.74
ASSET QUALITY RATIOS:
Non-performing loans as a percent of net loans. 0.32 0.66 1.08 1.08 1.40
Non-performing assets as a percent
of total assets................................ 0.24 0.47 0.78 0.92 1.37
Allowance for loan losses as a percent of non-
performing loans............................... 267.67 119.29 87.21 89.27 66.19
Net charge-offs to average loans, net.......... 0.04 0.13 0.12 0.19 0.24
CAPITAL RATIOS:
Average equity to average assets............... 8.42 8.60 8.47 7.81 7.46
Regulatory Tier I leverage capital ratio....... 8.08 8.51 8.30 8.00 7.65
Total surplus to total assets................... 7.98 8.33 8.30 8.00 7.65
</TABLE>
(1) Interest rate spread represents the difference between weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
(3) Operating expenses divided by the sum of net interest income and other
income.
xvi
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE FOLLOWING FACTORS, AS WELL
AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE DECIDING TO MAKE
AN INVESTMENT IN THE SHARES OF COMMON STOCK. WHEN USED IN THIS PROSPECTUS, THE
WORDS OR PHRASES "WILL LIKELY RESULT," "ARE EXPECTED TO," "WILL CONTINUE," "IS
ANTICIPATED," "ESTIMATE," "PROJECT," "BELIEVE" OR SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY " FORWARD-LOOKING STATEMENTS ." THE COMPANY WISHES TO
CAUTION READERS THAT ALL FORWARD-LOOKING STATEMENTS ARE NECESSARILY SPECULATIVE
AND NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE MADE, AND TO ADVISE READERS THAT VARIOUS RISKS AND
UNCERTAINTIES, INCLUDING REGIONAL AND NATIONAL ECONOMIC CONDITIONS, CHANGES IN
LEVELS OF MARKET INTEREST RATES, CREDIT RISKS OF LENDING ACTIVITIES, AND
COMPETITIVE AND REGULATORY FACTORS, COULD AFFECT THE COMPANY'S FINANCIAL
PERFORMANCE AND COULD CAUSE THE COMPANY'S ACTUAL RESULTS FOR FUTURE PERIODS TO
DIFFER MATERIALLY FROM THOSE ANTICIPATED OR PROJECTED. THE RISKS HIGHLIGHTED
HEREIN SHOULD NOT BE ASSUMED TO BE THE ONLY THINGS THAT COULD AFFECT FUTURE
PERFORMANCE OF THE COMPANY.
ANTICIPATED LOW RETURN ON EQUITY FOLLOWING CONVERSION
For the year ended June 30, 1997, the Bank's return on average equity was
6.40%. On a pro forma basis, for the year ended June 30, 1997, assuming the sale
of the midpoint of 2,050,000 shares of Common Stock in the Conversion at the
beginning of the year, the Bank's return on equity would have been 3.69%. With a
relatively high capital position as a result of the Conversion, and with the
possible difficulty in finding good quality loans in which to invest, it is
unlikely that the Company will be able to immediately generate earnings to
support its higher level of capital. In addition, the expenses associated with
the ESOP, the Restricted Stock Plan and possible branching costs, along with
other post-Conversion expenses and the expenses associated with having publicly
traded stock, are expected to contribute to increased operating expenses (in
comparison to past results of operations). As a result, it is expected that the
Company's return on equity initially will be lower than historical levels and
will be below industry norms for stock banks. Consequently, investors expecting
a return on equity which will meet or exceed industry standards for the
foreseeable future should carefully evaluate and consider the risk of a subpar
return on equity.
POSSIBLE DELAYS IN CONSUMMATION OF THE CONVERSION
Consummation of the Conversion is contingent upon the receipt of approvals of
the Commissioner and the FDIC. The Bank's Plan of Conversion was approved by the
Commissioner on _____________, 1997, and was approved by the Bank's depositors
on ___________, 1997. The FDIC, pursuant to its rule requiring state-chartered
banks to provide notice to the FDIC of their intention to convert to stock form
and prohibiting consummation of such a conversion unless the FDIC provides a
notice of non-objection with respect to the transaction, has provided to the
Bank a letter dated _____________, 1997 indicating that, subject to the
satisfaction of certain conditions, the FDIC plans to issue such notice of non-
objection in connection with the Conversion. The conditions are that: (i) the
Bank must receive final approval from the Commissioner and (ii) the Bank must
advise the FDIC of the results of the Offerings and deliver an updated appraisal
taking those results into account, discussing any material developments during
the subscription period, and explaining any rejected stock orders. If the FDIC
concludes that the updated appraisal presents a fair value of the Bank and that
the Bank has adequately justified any rejected stock orders, it will issue a
letter of non-objection to the Conversion.
Accordingly, consummation of the Conversion may be significantly delayed or
terminated in the event such approvals have not been received by the Bank. If
such approvals are not obtained, all subscription funds held will be returned
promptly with interest at the Bank's passbook rate, currently 2.6%, and all
withdrawal authorizations will be terminated.
GROWTH OF THE BANK'S COMMERCIAL LOAN AND COMMERCIAL REAL ESTATE LOAN PORTFOLIO
Since 1995, the Bank's lending activities have increasingly emphasized
commercial and
1
<PAGE>
commercial real estate loans to small businesses in its market area. At June 30,
1997, the Bank's total loan portfolio included commercial loans of $3.7 million,
or 3.2% of net loans and commercial real estate loans of $17.8 million or 15.6%
of net loans. Commercial loans accounted for 10.7% and 8.6% of the Bank's total
loan originations during the fiscal years 1997 and 1996, respectively, and
commercial real estate loans accounted for 23.6% and 15.8% of the Bank's total
loan originations during the fiscal years 1997 and 1996, respectively.
Additionally, because the Bank has originated most of its current commercial and
commercial real estate loans within the past three to five years, the commercial
and commercial real estate loan portfolio is unseasoned, and there can be no
guarantee as to the long-term performance of such loans.
The Bank attempts to collateralize all of its commercial loans with real
estate or tangible commercial assets. Loans secured by commercial real estate
properties generally involve a higher degree of risk than the single-family
mortgages traditionally emphasized by banking institutions engaged in
residential real estate lending. Because payments on loans secured by commercial
real estate properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject, to a
greater extent, to adverse conditions in the real estate market or the economy.
Commercial and commercial real estate loans may also involve relatively large
loan balances to single borrowers or groups of related borrowers. The repayment
of commercial loans is typically dependent on the successful operation and
income stream of the borrower. Such loans can be significantly affected by
economic conditions. In addition, commercial and commercial real estate lending
generally requires substantially greater oversight efforts compared to
residential real estate lending.
POSSIBLE DILUTIVE EFFECT OF FUTURE STOCK BENEFIT PLANS
In the future, the Company intends to implement the Restricted Stock Plan and
the Option Plan for the benefit of certain officers, directors and employees of
the Bank and the Company. It is not currently anticipated that such plans would
be implemented during the first year following the date of the consummation of
the Conversion. When a decision is made to implement the Restricted Stock Plan
and/or the Option Plan, such plans must be approved by a majority of the
Company's shareholders and the Commissioner. The maximum number of shares which
would be issued under the proposed Restricted Stock Plan and Stock Option Plan
would not exceed 4% and 10%, respectively, of the stock to be issued in the
Conversion either through open market purchases or the issuance of authorized
but unissued shares of Common Stock from the Company. If the Restricted Stock
Plan is funded by the issuance of authorized but unissued shares, the voting
interests of existing shareholders will be diluted by 3.8%. If all of the Stock
Options intended to be granted were to be exercised using authorized but
unissued Common Stock and if the Restrict Stock Plan is funded with authorized
but unissued shares, the voting interests of existing stockholders would be
diluted by 12.3%.
REGULATORY ENVIRONMENT
The Bank is subject to extensive regulation, supervision and examination by
the Commissioner and the FDIC. Such regulation and supervision establishes a
comprehensive framework of activities in which a bank may engage and is intended
primarily for the protection of depositors and the deposit insurance fund which
is administered by the FDIC. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities. Any change in such regulation, whether by the
Commissioner, the FDIC or the U.S. Congress, could have a significant impact on
the Bank and its operations. In response to an increase in the number of
financial institution failures in the early 1990s, Congress passed legislation
which has significantly increased the regulation of financial institutions
through, among other things, the imposition of higher capital requirements and
restrictions on activities and an increase in the penalties that may be imposed
on financial institutions for regulatory violations. See "Regulation."
ANTI-TAKEOVER PROVISIONS AND VOTING CONTROL OF MANAGEMENT
It is the present intention of the board of directors of Mystic to remain an
independent, locally-owned financial institution. The Certificate of
Incorporation and bylaws of the Company provide, among other things, for
restrictions on the acquisition of more than 10% of the Company's outstanding
Common Stock
2
<PAGE>
following consummation of the Conversion. In addition, the Certificate of
Incorporation prohibits an owner of Common Stock in excess of 10% of the then-
outstanding shares to vote those shares held in excess of the 10% limit.
Also, the Certificate of Incorporation requires an affirmative vote of at
least 80% of outstanding shares for certain business combinations. The
Certificate of Incorporation also authorizes the issuance of serial preferred
stock, the rights and preferences of which may be designated by the board of
directors without stockholder approval. Additionally, the board of directors is
divided into three classes, each class serving a staggered term and containing
approximately one-third of the members of the board of directors. The classified
board of directors is intended to provide for continuity of the board of
directors and make it more difficult and time consuming for a stockholder group
to use its voting power to gain control of the board of directors without
consent of the incumbent board of directors. The Certificate of Incorporation
does not provide for cumulative voting for any purpose. Also, the bylaws of the
Company provide that special meetings of stockholders of the Company may be
called only by the Chairperson of the board, the President or by resolution of
at least three-fourths of the directors then in office. Moreover, stockholder
action by written consent in lieu of a meeting is not permitted. These and other
provisions are designed to encourage or may have the effect of encouraging any
prospective acquiror to negotiate directly with the board of directors. These
provisions may discourage non-negotiated takeover attempts which certain
stockholders may deem to be in their interest and may tend to perpetuate
existing management.
In addition, directors and executive officers of the Bank expect to purchase
approximately 7.06% at the minimum of the Current Valuation Range, or 5.22% at
the maximum of the Current Valuation Range, of the shares of Common Stock issued
in the Conversion assuming such shares are available to satisfy their
subscriptions. Such purchases will be made for investment and not with a view to
re-sale and will be subject to a restriction that the shares not be sold for a
period of one year following the date of purchase except in certain
circumstances. See "The Conversion --Restrictions on Transferability by
Directors and Officers." In addition, the Bank's executive officers will control
approximately ____% of the stock issued in the Conversion through the ESOP
(assuming that one annual allocation has been made under the ESOP) assuming the
rates of compensation paid in fiscal 1997 to executive officers were used to
determine ESOP awards. Under the terms of the ESOP, the unallocated shares will
be voted by the independent ESOP trustee in the same proportions as the
allocated shares. Voting control by management and directors over shares
purchased in the Conversion or acquired under the ESOP could, based upon the
assumptions set forth above, total approximately 9.38% at the minimum of the
Current Valuation Range, or approximately 7.54%, at the maximum of the Current
Valuation Range, of the shares issued in the Conversion. Such voting control
could, together with additional stockholder support, defeat stockholder
proposals requiring an 80% super-majority vote. As a result, these provisions
may discourage proxy contests and other takeover attempts that certain
stockholders may deem to be in their best interests and may tend to perpetuate
existing management of the Company. See "Certain Restrictions on Acquisition of
the Company and the Bank" for more information concerning anti-takeover
provisions and management's voting control.
POTENTIALLY ADVERSE IMPACT OF INTEREST RATES AND ECONOMIC AND INDUSTRY
CONDITIONS
The Banking Industry. The results of operations of banking institutions are
materially affected by general economic conditions, the monetary and fiscal
policies of the federal government and the regulatory policies of governmental
authorities and other factors that affect market rates of interest. The results
of operations of banking institutions depend to a large extent on their level of
"net interest income," which is the difference between interest income on
interest-earning assets, such as loans and investments, and interest expense on
interest-bearing liabilities, such as deposits and borrowings. A significant
portion of the assets of most banking institutions consists of long-term
residential mortgages and loans with shorter terms to maturity. The repricing
periods of these assets are generally not as short as those of the banking
institution's interest-bearing liabilities. As a result, the yield on interest-
earning assets of most banking institutions has adjusted to changes in interest
rates at a slower rate than the cost of their interest-bearing liabilities.
Banking institutions in recent years have experienced significant fluctuations
in net interest income due to rapidly changing interest rates and to differences
in the repricing characteristics of their interest-earning assets and interest-
bearing liabilities. Because most banking institutions continue to hold assets
which reprice more slowly
3
<PAGE>
than their liabilities, any significant increase in interest rates would be
expected to have an adverse impact on net interest income.
The Bank. The results of operations of the Bank are affected by the same
factors as those described above with respect to banking institutions generally.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management" and "Business --Lending Activities."
LIMITED MARKET FOR COMMON STOCK
The Bank, as a mutual co-operative bank, has never issued capital stock and
consequently there is no established market for the Common Stock at this time.
Accordingly, there can be no assurance that an active public trading market for
the Company's Common Stock will develop or be maintained in the foreseeable
future. However, Trident Securities has agreed to act as a market maker for the
Company's Common Stock following consummation of the Conversion and the Company
has applied to list the Common Stock on the Nasdaq National Market under the
symbol "MYST." In order for its securities to be listed on the Nasdaq National
Market, the Company must meet net tangible assets, pretax income, public float,
minimum price, shareholder and market maker requirements. Although the Company
believes that it currently meets those requirements, there can be no assurance
that the Company will meet the Nasdaq National Market listing requirements at
the time of the Conversion, in the future or at all. Accordingly, purchasers of
Common Stock should have a long-term investment intent and recognize that the
absence of an active and liquid trading market may make it difficult to sell the
Common Stock, and may have an adverse effect on the price. See "Market for
Common Stock."
MYSTIC FINANCIAL, INC.
Mystic was recently organized at the direction of the board of directors of
the Bank for the purpose of acquiring all of the capital stock of the Bank to be
issued in the Conversion. The Company has received approval from the Federal
Reserve Board ("FRB") to become a bank holding company and, upon completion of
the Conversion, will be subject to regulation by the FRB. See "The Conversion--
General" and " Regulation--Holding Company Regulation." Upon consummation of the
Conversion, the Company will have no significant assets other than the shares of
the Bank's capital stock acquired in the Conversion and an amount equal to
approximately 50% of the net proceeds of the Conversion, including the loan to
the ESOP, and will have no significant liabilities. The Company intends to use a
portion of the net proceeds it retains to loan to the ESOP funds to enable the
ESOP to purchase up to 8% of the stock issued in connection with the Conversion.
See "Use of Proceeds." The management of Mystic is set forth under "Management
of the Company." Initially, the Company will neither own nor lease any property,
but will instead use the premises, equipment and furniture of the Bank. At the
present time, the Company does not intend to employ any persons other than
certain officers who are currently officers of the Bank but will utilize the
support staff of the Bank from time to time.
Management believes that the holding company structure will provide the
Company additional flexibility to diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of or mergers
with other financial institutions and financial services related companies.
Presently, there are no current arrangements, understandings or agreements
regarding any such opportunities. However, subsequent to the Conversion, the
Company will be in a position, subject to regulatory limitations and the
Company's financial position, to take advantage of any such acquisition and
expansion opportunities that may arise. The initial activities of the Company
are anticipated to be funded by the proceeds to be retained by the Company,
income thereon and through dividends from the Bank.
The Company's executive office is located at the administrative offices of
the Bank, 60 High Street, Medford, Massachusetts 02155. Its telephone number is
(781) 395-2800.
4
<PAGE>
MEDFORD CO-OPERATIVE BANK
The Bank is a Massachusetts chartered mutual co-operative bank founded in
1886 with three full-service offices and one educational branch office in
Medford, Massachusetts. The Bank's deposits have been federally insured since
1986 and are currently insured by the BIF of the FDIC and the Share Insurance
Fund of the Co-operative Central Bank. The Bank has been a member of the Co-
operative Central Bank since 1932 and a member of the FHLB since 1988. The Bank
is subject to comprehensive examination, supervision and regulation by the
Commissioner and the FDIC. This regulation is intended primarily for the
protection of depositors and borrowers.
The Bank's offices are located at 60 High Street, 430 High Street, 201 Salem
Street and 489 Winthrop Street, Medford, Massachusetts, and its main office
telephone number is (781) 395-2800. The Bank considers its primary market area
to be the Massachusetts communities of Medford, Malden, Everett, Stoneham,
Arlington, Winchester, Somerville, Melrose, Lexington and Bedford, which are
located in eastern Middlesex County, Massachusetts.
The Bank has an active subsidiary, Mystic Securities Corporation, which was
established for the sole purpose of acquiring and holding investment securities.
All securities held by Mystic Securities Corporation are investments which are
permissible for banks to hold under Massachusetts law.
The business of the Bank primarily consists of attracting savings deposits
from the general public and investing such deposits in mortgage loans secured by
one- to four- family residential real estate located in its market area,
commercial loans secured by assets and commercial real estate of businesses
located in its market area and investment securities, including U. S. Government
and Federal Agency securities, equity securities and interest-earning deposits.
The Bank also makes consumer loans, including home equity loans, automobile,
passbook and other consumer loans. The Bank offers both fixed-rate and
adjustable-rate loans and emphasizes the origination of residential real estate
mortgage loans and commercial loans with adjustable interest rates. The Bank
also makes other short-term (one to three year) interest sensitive investments
which allow the Bank to monitor the interest rate, maturities and repricing
intervals of its assets and liabilities.
The Bank's business strategy is to operate as a well-capitalized, profitable
and independent community bank dedicated to financing home ownership and small
business and consumer needs in its market area and providing quality service to
its customers. The Bank has implemented this strategy by: (i) monitoring the
needs of customers and providing quality service; (ii) emphasizing consumer-
oriented banking by originating residential mortgage loans and consumer loans,
and by offering various deposit accounts and other financial services and
products; (iii) recently increasing its emphasis on commercial banking and
lending by originating loans for small businesses and providing greater services
in its commercial and commercial real estate loan department, (iv) maintaining
high asset quality through conservative underwriting standards; and (v)
producing stable earnings.
DIVIDENDS
Payment of dividends on the Common Stock will be subject to determination and
declaration by the board of directors of the Company and the availability of
funds therefor. The Company's board of directors currently anticipates declaring
and paying cash dividends on the Common Stock at an initial annual rate of
approximately $0.20 per share per year (or 2% based on the $10.00 Purchase Price
per share), commencing the first full quarter following consummation of the
Conversion. Pursuant to the Bank's dividend policy, the Board of Directors has
determined that the Bank will not pay dividends in excess of current earnings
for the three years following the Conversion, and will not pay dividends from
borrowed funds or nonrecurring gains. As a condition to the approval of the
Conversion, any change in this policy would require the prior approval of the
Commissioner. Any dividend policy of the Company, however, will also depend upon
the Company's debt and equity structure, earnings and financial condition, need
for capital in connection with possible future acquisitions and other factors,
including economic conditions, regulatory restrictions and tax considerations.
No assurance can be given that dividends will be declared or as to the
5
<PAGE>
amount and frequency of dividends, if declared.
The only funds available to the Company for the payment of dividends will be
cash and cash equivalents held at the holding company level, dividends paid by
the Bank to the Company, and borrowings. The Bank will be prohibited from paying
cash dividends to the Company to the extent that any such payment would reduce
the Bank's capital below required capital levels or would impair the liquidation
account to be established for the benefit of the Bank's Eligible Account Holders
and Supplemental Eligible Account Holders at the time of the Conversion. See
"The Conversion--Effect of Conversion to Stock Form on Depositors and Borrowers
of the Bank--Liquidation Account."
BUSINESS PURPOSES
General. The Bank, as a mutual co-operative bank, does not have stockholders
and has no authority to issue capital stock. By converting to the stock form of
organization, the Bank will be structured in the form used by commercial banks,
most business entities and a growing number of savings institutions. The
Conversion will be important to the future growth and performance of the Bank by
providing a larger capital base on which the Bank may operate, enhancing future
access to capital markets, providing the ability to attract and retain qualified
management through stock-based compensation programs, enhancing the Bank's and
the Company's ability to diversify into other financial services related
activities and enhancing the Bank's and the Company's ability to render services
to the public.
The board of directors and management of the Bank believe that the stock form
of organization is a preferred form (as opposed to the mutual form) of
organization for a financial institution. The Board and management recognize the
decline in the number of mutual thrift institutions from over 12,500 in 1929 to
just over 800 today.
The Bank believes that converting to the stock form of organization will
allow the Bank to more efficiently compete with local community banks and thrift
institutions, most of which are stock owned, and with statewide, regional and
super-regional banks, all of which are stock owned. The Bank believes that by
combining quality service and products with a local ownership, base its
customers and community members who become stockholders will be more inclined to
do business with the Bank.
Additionally, the Bank has, from time to time, experienced the need for
additional liquidity, due in part to the expansion of the commercial and
commercial real estate loan department and the need for funds to originate such
loans. Recently, the Bank has utilized borrowings from the FHLB and has engaged
in selected loan sales as a source of liquidity. The Bank believes that the
capital-raising power of a stock form company would help to meet the need for
additional liquidity.
Furthermore, the Board considers having access to the capital markets an
important option for the Bank. While immediately following the Conversion the
Bank will be well capitalized, the Bank's capital could decrease as a result of
unforeseen circumstances affecting the economic viability of the Bank's market
area. The protection of this additional capital against such an economic
downturn is seen by management as a key benefit of the Conversion.
Finally, because the Bank competes with local, regional and super-regional
banks not only for customers, but also for employees, it believes that the stock
form of organization will better afford the Bank the opportunity to attract and
retain employees and management through various stock benefit plans like the
ESOP.
After the Conversion, the Company will have a substantially increased capital
position. Based on the Company's pro forma capital at June 30, 1997 of $29.2
million and pro forma net income
6
<PAGE>
of $1,063,000 (based on the mid-point of the Current Value Range), the Company
would have a pro forma reported return on stockholders' equity of 3.69%, which
in the opinion of management is not an acceptable long-term return. See "Pro
Forma Data." With the possible difficulty of finding good quality loans to
originate and because the Company intends to control its growth, unacceptable
returns likely will exist for the foreseeable future. Management expects to
manage capital through the payment of regular cash dividends (subject to the
restrictions set forth in the Company's dividend policy), the possible payments
of special dividends, and the implementation of stock repurchases (subject to
the restrictions set forth in the Company's stock repurchase policy), depending
upon capital levels and regulatory and market limitations and subject to the
discretion of the board of directors. Management and the board of directors
recognize their responsibility to stockholders; however, they are also concerned
with continuing to operate a safe, sound and viable community financial
institution.
Convenience and Needs Considerations. Management and the board of directors
believe that the mutual to stock conversion through the Subscription and Direct
Community Offering process is in the best interests of the various communities
that the Bank serves because following the Conversion it is anticipated that a
significant portion of the Common Stock will be owned by local residents
desiring to share in the ownership of a local community financial institution.
Because the Bank will have a higher level of capital after the Conversion, it is
also believed that local stockholders, along with all stockholders, may share in
the Bank's future profitability through possible regular cash dividends or, if
deemed prudent by management and the board of directors, the possibility of
payment of periodic special dividends. See "Dividends." Furthermore, should the
price of the Common Stock increase following the Conversion, recognizing the
chance that the price could decline or remain the same, stockholders will share
in the success of the local institution through capital appreciation.
The Bank has endeavored to be a good corporate and community citizen through
the years. Community investment and involvement have been a large part of the
Bank's history and tradition and a key reason for its success. Programs such as
the first-time homebuyer seminars and loans to provide housing for low and
moderate income borrowers have been a recent emphasis and have helped the Bank
earn the highest possible Community Reinvestment Act ("CRA") performance rating
of "Outstanding."
The Bank looks forward to continuing its community investment by offering
services such as Savings Bonds, the "Save for America" program -- a banking
program for elementary school students, the student-operated branch at Medford
High School -- one of the first such programs in the state, and the "School-
Link" program --after-school program designed to promote interaction between the
students, schools, and students' families, all of which will continue to benefit
the children of the Bank's community.
In an effort to further assure that it meets the lending needs of its
communities, the Bank participates in a CRA bank consortium in cooperation with
six other local banks. The consortium meets on CRA issues to offer more
effective CRA support and improve CRA performance in their communities through
home buying seminars, offering credit counseling programs and programs to help
low-income homeowners with the repair and rehabilitation of their homes and
neighborhoods.
Remaining a good corporate citizen is an essential responsibility of any
community financial institution, and the Bank will continue to pursue new
avenues to assist the communities it serves. However, playing such a role can
also be a very costly proposition for a small institution, which is subject to
increasing competitive pressures and economic uncertainty. The Bank's board of
directors and management feel that in times of rising interest rates or economic
difficulties, the Bank will be in a better position to continue and build its
community support efforts due to the capital cushion provided through funds
received in the Conversion.
Because management will focus its Conversion stock marketing efforts on the
community it serves, the Bank anticipates that a significant portion of the
shares offered will be purchased by local residents and businesses. As a result,
it is hoped that these local stockholders will take an active role in suggesting
additional ways in which the Bank could better support community needs.
7
<PAGE>
USE OF PROCEEDS
An amount equal to 50% of the net proceeds from the sale of the Common Stock
($8.6 million at the midpoint of the Current Valuation Range) will be added to
the general funds of the Bank and used for general corporate purposes, including
the origination of loans, funding the construction and/or acquisition costs of
establishing new branch locations, enhancing the Bank's liquidity ratios and
enhancing future access to capital markets. The balance of the funds will be
retained as the Company's initial capitalization, with a portion of those funds
($1,640,000 at the midpoint of the Current Valuation Range) being loaned to the
ESOP to fund its purchase of Common Stock in the Offerings or, if necessary, to
purchase shares of Common Stock through open-market purchases following
completion of the Offerings. Pursuant to the Bank's Past-Conversion Supervision
Policy, the Company may use the funds it retains to support future expansion of
operations or diversification into other banking-related businesses and for
other business or investment purposes, although management has no current plans
regarding such activities. Subject to applicable limitations, the Company may
also use available funds to repurchase shares of Common Stock and for the
payment of dividends. It is expected that in the interim, all or part of the net
proceeds will be invested in U.S. Government and Agency securities and other
short-term investments and used to reduce FHLB borrowings.
The Bank has structured an array of commercial services administered and run
by the Bank's commercial loan department which are designed to give business
owners borrowing opportunities for modernization, inventory, equipment,
construction, consolidation, real estate, working capital, vehicle purchases and
the refinancing of existing corporate debt. In the past two years, the Bank has
made a major commitment to small business commercial lending. The Bank has
worked to develop a niche of making commercial loans to companies which have
from $500,000 to $15 million in sales and has recently become an approved lender
of the Small Business Administration. The Bank has expanded its commercial
lending department with the addition of two senior officers with considerable
commercial lending expertise and has developed a support staff to run the
commercial loan department. Conversion proceeds are expected to be deployed to
fund the Bank's traditional one- to four-family residential lending, as well as
the expanded commercial lending activities.
Although the Bank opened a new office at 201 Salem Street in December 1995,
which has been successful, especially on the commercial lending front, the
Bank's lending and deposit gathering activities are limited by the fact that it
currently operates from only three full service locations and one student-run
educational branch located at Medford High School. Accordingly, pursuant to its
Post-Conversion Supervision Policy, the Bank is pursuing establishing one or
more other branch locations either de novo, or by purchasing an existing deposit
base and/or location. The Bank has performed feasibility studies of certain
locations, and is considering a plan to establish a new branch at one of these
locations. Although there can be no assurance that the Bank's branching efforts
will be successful, the Bank expects to apply a portion of the Conversion
proceeds to fund the construction and/or acquisition of one or more additional
branch locations. Expansion beyond four offices will facilitate expanded
services and increased loan originations within the Bank's existing underwriting
standards.
The total number of shares of the Common Stock to be issued in the Conversion
cannot be stated with certainty at this time, because it will depend upon the
estimated pro forma market value of the Common Stock at the time of sale. See
"The Conversion -- Stock Pricing and Number of Shares to be Issued." However,
the net proceeds to the Company would be approximately $17,257,000 based upon
the assumptions that (i) 2,050,000 shares of Common Stock are sold at a purchase
price per share of $10.00 for an aggregate of $20,500,000 (the midpoint of the
Current Valuation Range), (ii) the Conversion expenses are $782,780 in the
aggregate and (iii) ESOP and Restricted Stock Plan purchases are $1,640,000 and
$820,000, respectively.
8
<PAGE>
THE ACTUAL NET PROCEEDS MAY BE MORE OR LESS THAN THE ESTIMATED AMOUNT BECAUSE
THE TOTAL PROCEEDS FROM THE SALE OF THE COMMON STOCK MAY BE SIGNIFICANTLY MORE
OR LESS THAN THE MIDPOINT OF THE CURRENT VALUATION RANGE AND BECAUSE ACTUAL
CONVERSION EXPENSES MAY BE MORE OR LESS THAN THOSE CURRENTLY EXPECTED. The
following table indicates the total gross proceeds, estimated Conversion
expenses and estimated net proceeds, assuming the Common Stock is sold at the
minimum, midpoint and maximum of the Current Valuation Range, and at the Super-
Maximum (which is 15% above the maximum of the Current Valuation Range and is
the highest amount of Common Stock that may be sold without further solicitation
of subscribers).
<TABLE>
<CAPTION>
SUPER
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
1,742,500 SHARES 2,050,000 SHARES 2,357,500 SHARES 2,711,125 SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
----------------- ----------------- ----------------- -----------------
(In thousands)
--------------
<S> <C> <C> <C> <C>
Gross proceeds................ $17,425 $20,500 $23,575 $27,111
Estimated conversion expenses (715) (783) (851) (929)
Less: ESOP Stock Purchases (1,394) (1,640) (1,886) (2,169)
Less: Restricted Stock Plan
Purchases................... (697) (820) (943) (1,084)
------- ------- ------- -------
Estimated net proceeds....... $14,619 $17,257 $19,895 $22,929
======= ======= ======= =======
</TABLE>
MARKET FOR COMMON STOCK
The Bank, as a mutual co-operative bank, has never issued capital stock and
consequently there is no established market for the Common Stock at this time.
Accordingly, there can be no assurance that an active public trading market for
the Company's Common Stock will develop or be maintained in the foreseeable
future. However, Trident Securities has agreed to act as a market maker for the
Company's Common Stock following consummation of the Conversion and the Company
has applied to list the Common Stock on the Nasdaq National Market under the
symbol "MYST." In order for its securities to be listed on the Nasdaq National
Market, the Company must meet net tangible assets, pretax income, public float,
minimum price, shareholder and market maker requirements. the Company believes
that it currently meets those requirements, there can be no assurance that the
Company will meet the Nasdaq National Market listing requirements. Accordingly,
purchasers of Common Stock should have a long-term investment intent and
recognize that the absence of an active and liquid trading market may make it
difficult to sell the Common Stock, and may have an adverse effect on the
price.
9
<PAGE>
SHARES TO BE PURCHASED BY MANAGEMENT
PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth, for each director of the Bank, for the
executive officers of the Bank as a group and for all directors and officers as
a group (including their associates) certain information as to the number of
shares of Common Stock which they have advised the Bank that they intend to
purchase. For purposes of the following table, it has been assumed that
2,050,000 shares of Common Stock will be offered at $10.00 per share, the
midpoint of the Current Valuation Range (see "The Conversion--Stock Pricing and
Number of Shares to be Issued") and that sufficient shares will be available to
satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
Total
Shares of Aggregate Purchase
Common Total Price of
Name Stock Percentage Proposed Purchases
- ---- --------- ---------- ------------------
<S> <C> <C> <C>
Julie Bernardin 1,000 0.05% $ 10,000
John A. Hackett 5,000 0.24% 50,000
Richard M. Kazanjian 20,000 0.98% 200,000
John J. McGlynn 9,000 0.44% 90,000
Dennis Raimo 2,000 0.10% 20,000
Lorraine P. Silva 10,000 0.49% 100,000
Robert H. Surabian 60,000 2.92% 600,000
All other executive officers
(4 persons) as a group...... 6,000 0.29% 60,000
------- ---- ----------
Total shares to be purchased
by directors and executive
officers.................... 113,000 5.51% $1,130,000
======= ==== ==========
</TABLE>
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization, including deposits, of the
Bank as of June 30, 1997 and the pro forma capitalization of the Company as of
that date after giving effect to the sale of the Common Stock in the Conversion,
based upon the assumptions that the shares of the Common Stock are sold at the
minimum, midpoint, maximum and super-maximum of the Current Valuation Range, and
that the expenses of the Conversion are as set forth under "Use of Proceeds."
Any change in the Current Valuation Range would require the approval of the
Commissioner. Purchasers will be given the right to change or cancel their
orders in the event that the aggregate purchase price is below $17,425,000 or
more than $27,111,250 (i.e., more than 15% above the maximum of the Current
Valuation Range of $23,575,000.) A MATERIAL CHANGE IN THE NUMBER OF SHARES TO BE
ISSUED IN THE CONVERSION MAY MATERIALLY AFFECT SUCH PRO FORMA CAPITALIZATION.
SEE "USE OF PROCEEDS" AND "THE CONVERSION-- STOCK PRICING AND NUMBER OF SHARES
TO BE ISSUED."
<TABLE>
<CAPTION>
PRO FORMA CAPITALIZATION OF
THE COMPANY BASED ON THE SALE OF
-----------------------------------------------------------------------
CAPITALIZATION OF 1,742,500 2,050,000 2,357,500 SHARES AT
THE BANK AT SHARES SHARES SHARES SUPER-
JUNE 30, AT MINIMUM AT MIDPOINT AT MAXIMUM MAXIMUM
----------------- ---------- ----------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits/(1)/.................... $129,303 $ 129,303 $ 129,303 $ 129,303 $ 129,303
FHLB advances.................... $ 7,532 $ 7,532 $ 7,532 $ 7,532 $ 7,532
-------- ---------- ---------- ---------- ----------
Total deposits and borrowed $136,835 $ 136,835 $ 136,835 $ 136,835 $ 136,835
funds........................... ======== ========== ========== ========== ==========
Stockholders' equity:
Preferred stock, $0.01 par
value; authorized - 1,000,000
shares; assumed outstanding -
none............................ $ -- $ -- $ -- $ -- $ --
Common Stock, $0.01 par
value; authorized -
5,000,000
shares; shares to be
outstanding - as shown in
column heading/(2)/............. -- 17 21 24 27
Additional paid-in capital/(3)/.. -- 16,693 19,696 22,700 26,155
Retained earnings/(5)/........... 11,940 11,940 11,940 11,940 11,940
Less:
Common Stock to be acquired
by ESOP/(4)/.................. -- (1,394) (1,640) (1,886) (2,169)
Common Stock acquired
by Restricted Stock
Plan/(6)/..................... -- (697) (820) (943) (1,084)
-------- ---------- ----------- ---------- ----------
Total stockholders' equity.... $ 11,940 $ 26,559 $ 29,197 $ 31,835 $ 34,869
======== ========== =========== ========== ==========
Total capitalization $148,775 $ 163,394 $ 166,032 $ 168,670 $ 171,704
======== ========== =========== ========== ==========
</TABLE>
_______________________________
(1) Withdrawals from deposit accounts for the purchase of the Common Stock have
not been reflected in these adjustments. Any withdrawals will reduce pro
forma capitalization by the amount of such withdrawals.
(2) The number of shares of Common Stock to be issued in the Conversion will be
determined on the basis of the final appraisal and may be increased or
decreased. See "The Conversion--Stock Pricing and Number of Shares to be
Issued."
(3) Based upon the estimated net proceeds from the sale of Common Stock less
the par value of shares sold. Estimated expenses are $714,884, $782,780,
$850,676 and $928,756, respectively. See "Use of Proceeds."
(4) Assumes that 8% of the Common Stock will be acquired by the ESOP with funds
borrowed by the ESOP from the Company. The Bank intends to make annual
contributions to the ESOP over a ten-year period in an amount at least
equal to the principal and interest requirement (which interest rate shall
be at the prime rate) of the debt. See "Management of the Company --
Certain Benefit Plans and Agreements -- Employee Stock Ownership Plan and
Trust" for additional information.
(5) Includes net unrealized gain on securities available for sale, net of tax
effects. The surplus of the Bank will be substantially restricted after the
Conversion. See "The Conversion-- Effect of Conversion to Stock Form on
Depositors and Borrowers of the Bank - Liquidation Account."
(6) The Company intends to adopt the Restricted Stock Plan and submit such plan
to stockholders at special or annual meeting of stockholders to be held not
earlier than one year after the completion of the Conversion. If the
Restricted Stock Plan is approved by stockholders, the Company intends to
contribute sufficient funds to the trust created under the Restricted Stock
Plan to enable the trust to purchase a number of shares of Common Stock
equal to 4% of the Common Stock sold in the Offerings. The shares are
reflected as a reduction of stockholders' equity. The issuance of
authorized but unissued shares of Common Stock pursuant to the Restricted
Stock Plan in the amount of 4% of the Conversion stock would dilute the
voting interests of existing stockholders by approximately 3.7%. See "Pro
Forma Data" and "Management of the Bank -- Future Stock Benefit Plans --
Restricted Stock Plan."
11
<PAGE>
PRO FORMA DATA
The following table sets forth the actual and, after giving effect to the
Conversion for the period and at the date indicated, pro forma income from
operations, stockholders' equity and other data of the Bank prior to the
Conversion and of the Company following the Conversion. Pro forma income and
related data have been calculated for the year ended June 30, 1997 as if the
Common Stock to be issued in the Conversion had been sold at the beginning of
the respective periods, and the estimated net proceeds had been invested at
5.82% at the beginning of the respective periods. The foregoing yield
approximates the yield on the one-year U.S. Treasury bill at June 30, 1997. The
pro forma after-tax yield is assumed to be 3.43% for the periods, based on the
current effective tax rate of 41%. Historical and pro forma per share amounts
have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock. No effect has been given in the pro
forma stockholders' equity calculations for the assumed earnings on the net
proceeds. The pro forma income and related data set forth below reflect accruals
to be made by the Bank with regard to the ESOP. See "Management of the Bank--
Certain Benefit Plans and Agreements." Both fixed Conversion expenses of
$313,500 and the Conversion expenses of Trident Securities have been subtracted
when figuring net proceeds. Trident Securities' expenses are assumed to equal to
2.4% of the Common Stock sold in the Offerings less shares purchased by the ESOP
(assumed to be 8% of the Common Stock) and by directors and officers of the Bank
(see "Shares to Be Purchased by Management Pursuant to Subscription Rights")
plus an estimated $44,000 in fixed expenses.
THE PRO FORMA NET INCOME AMOUNTS DERIVED FROM THE ASSUMPTIONS SET FORTH
HEREIN SHOULD NOT BE CONSIDERED INDICATIVE OF THE ACTUAL RESULTS OF OPERATIONS
OF THE BANK THAT WOULD HAVE BEEN ATTAINED FOR THE YEAR ENDED JUNE 30, 1997, IF
THE CONVERSION HAD BEEN ACTUALLY CONSUMMATED AT THE BEGINNING OF SUCH PERIOD,
AND THE ASSUMPTIONS REGARDING INVESTMENT YIELDS SHOULD NOT BE CONSIDERED
INDICATIVE OF THE ACTUAL YIELDS EXPECTED TO BE ACHIEVED DURING ANY FUTURE
PERIOD.
THE STOCKHOLDERS' EQUITY AND RELATED DATA PRESENTED HEREIN ARE NOT INTENDED
TO REPRESENT THE FAIR MARKET VALUE OF THE COMMON STOCK, OR THE CURRENT VALUE OF
ASSETS OR LIABILITIES, OR THE AMOUNTS, IF ANY, THAT WOULD BE AVAILABLE FOR
DISTRIBUTION TO STOCKHOLDERS IN THE EVENT OF LIQUIDATION. FOR ADDITIONAL
INFORMATION REGARDING THE LIQUIDATION ACCOUNT, SEE "THE CONVERSION--EFFECTS OF
CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK--LIQUIDATION
ACCOUNT." SUCH PRO FORMA DATA MAY BE MATERIALLY AFFECTED BY A CHANGE IN THE
NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION AND BY OTHER FACTORS. SEE "THE
CONVERSION--STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED."
12
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30, 1997(1)
--------------------------------------------------------
MINIMUM MID-POINT MAXIMUM SUPER-MAXIMUM
1,742,500 2,050,000 2,357,500 2,711,125
SHARES SHARES SHARES SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE(2)
----------- ---------- ---------- -------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds (1)....................................... $ 17,425 $ 20,500 $ 23,575 $ 27,111
Less: Total expenses..................................... (715) (783) (851) (929)
---------- ---------- ---------- ----------
Estimated net proceeds(3).............................. 16,710 19,717 22,724 26,182
Less: ESOP Stock Purchases(4)............................ (1,394) (1,640) (1,886) (2,169)
Less: Restricted Stock Plan purchases(5)................. (697) (820) (943) (1,084)
Estimated net cash proceeds....................... $ 14,619 $ 17,257 $ 19,895 $ 22,929
========== ========== ========== ==========
Consolidated net income:
Historical.............................................. $ 741 $ 741 $ 741 $ 741
Pro forma income on net proceeds........................ 502 593 683 787
Pro forma ESOP adjustment(4)(6)......................... (148) (174) (200) (230)
Pro forma Restricted Stock Plan adjustment(5)........... (82) (97) (111) (128)
---------- ---------- ---------- ----------
Pro forma net income.............................. $ 1,013 $ 1,063 $ 1,113 $ 1,170
========== ========== ========== ==========
Per share net income:
Historical.............................................. 0.46 0.39 0.34 0.29
Pro forma income on net proceeds........................ 0.31 0.31 0.31 0.31
Pro forma ESOP adjustment(4)(6)......................... (0.09) (0.09) (0.09) (0.09)
Pro forma Restricted Stock Plan adjustment(5)........... (0.05) (0.05) (0.05) (0.05)
---------- ---------- ---------- ----------
Pro forma net income per share.......................... 0.63 0.56 0.51 0.46
========== ========== ========== ==========
Stockholders' equity:
Historical.............................................. $ 11,940 $ 11,940 $ 11,940 11,940
Estimated net proceeds.................................. 16,710 19,717 22,724 26,182
Less: Common Stock acquired by ESOP(4).................. (1,394) (1,640) (1,886) (2,169)
Less: Common Stock acquired by Restricted Stock
Plan(5).............................................. (697) (820) (943) (1,084)
---------- ---------- ---------- ----------
Pro forma stockholders' equity....................... $ 26,559 $ 29,197 $ 31,835 $ 34,869
========== ========== ========== ==========
Stockholder's equity per share:
Historical.............................................. 6.85 5.82 5.06 4.40
Estimated net proceeds.................................. 9.59 9.62 9.64 9.66
Less: Common Stock acquired by ESOP(4).................. (0.8) (0.8) (0.8) (0.8)
Less: Common Stock acquired by Restricted Stock
Plan(5).............................................. (0.4) (0.4) (0.4) (0.4)
Pro forma Stockholders' equity per share............. 15.24 14.24 13.5 12.86
========== ========== ========== ==========
Pro forma pricing ratios:
Offering price as a percentage of pro forma
stockholders' equity per share.......................... 65.62% 70.22% 74.07% 77.76%
Offering price as a multiple of pro forma net earnings
per share............................................... 15.87x 17.86x 19.61x 21.74x
</TABLE>
_____________
(1) The effect of the liquidation account is not included in these
computations. For additional information concerning the liquidation
account, see "The Conversion--Effect of Conversion to Stock Form on
Depositors and Borrowers of the Bank--Liquidation Account." The amounts
shown do not reflect the federal income tax consequences of the potential
restoration to income of the bad debt reserves for income tax purposes,
which would be required in the event of liquidation.
(2) The Company reserves the right to issue up to a total of 2,711,125 shares
at $10.00 per share, or 15% above the maximum of the Current Valuation
Range. Any increase in the number of shares to be issued which causes the
gross proceeds of the Offerings to exceed $23,575,000 (maximum of the
Current Valuation Range) would be subject to approval of the Commissioner.
Unless otherwise required by the Commissioner, subscribers will not be
given the right to modify their subscriptions unless the aggregate purchase
price of the Common Stock is increased to exceed $27,111,250 (i.e., 15%
above the maximum of the Current Valuation Range.)
(3) Withdrawals from deposit accounts for the purchase of stock have not been
reflected in these adjustments. Management estimates that approximately 20%
of all subscription orders may utilize funds currently on deposit at the
Bank. See "Use of Proceeds."
(4) Assumes 8% of the shares to be sold in the Conversion are purchased by the
ESOP under all circumstances, and that the funds used to purchase such
shares are borrowed from the Company. The approximate amount expected to be
borrowed by the ESOP is reflected in this table as a reduction of capital.
Although repayment of such debt will be secured solely by the shares
purchased by the ESOP, the Bank expects to make discretionary contributions
to the ESOP in an amount at least equal to the principal and interest
payments on the ESOP debt. Pro forma net income has been adjusted to give
effect to such contributions, based upon a fully amortizing debt with a
ten-year term. Since the Company will be providing the ESOP loan, only
principal payments on the ESOP loan are reflected as employee compensation
and benefits expense. The provisions of SOP 93-6 have been applied for
shares to be acquired by the ESOP and for purposes of computing earnings
per share. See "Management of the Bank -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan and Trust."
(5) Assumes a number of issued and outstanding shares of Common Stock equal to
4% of the Common Stock to be sold in the Conversion will be purchased by
the Restricted Stock Plan. The dollar amount of the Common Stock possibly
to be purchased by the Restricted Stock Plan is based on the price per
share in the Conversion and represents unearned compensation and is
reflected as a reduction of capital. Such amount does not reflect possible
increases or decreases in the value of such stock relative to the price per
share in the Conversion. As the Bank accrues compensation expenses to
reflect the vesting of such shares pursuant to the Restricted Stock Plan,
the charge against capital will be
13
<PAGE>
reduced accordingly. In the event the shares issued under the Restricted
Stock Plan consist of shares of Common Stock newly issued at the price per
share in the Conversion, the per share financial condition and results of
operations of the Company would be proportionately reduced and to that
extent the interests of existing stockholders would be diluted by
approximately 4%. See "Management of the Bank -- Certain Benefit Plans and
Agreements" and, regarding possible dilution of proportionate voting rights
and book value and income per share, "Risk Factors -- Possible Dilutive
Effect of Future Stock Benefit Plans. "
(6) The Bank intends to record compensation expense related to the ESOP in
accordance with SOP 93-6. As a result, to the extent the value of the
Common Stock appreciates over time, compensation expense related to the
ESOP will increase. SOP 93-6 also changes the earnings per share and
stockholder's equity per share computations for leveraged ESOPs to include
as outstanding only shares that have been committed to be released to
participants. For purposes of the preceding table, it was assumed that the
number of ESOP shares committed to be released at June 30, 1997 was equal
to the percentage of principal repaid in the ESOP loan during the first
year.
14
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Medford Co-operative Bank
for each of the fiscal years ended June 30, 1997, 1996 and 1995 have been
audited by Wolf & Company, P.C., independent certified public accountants, whose
report thereon appears elsewhere herein. The Consolidated Statements of Income
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------
1997 1996 1995
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans.............................. $ 8,397 $ 7,115 $ 6,323
Interest and dividends on investment securities......... 1,208 1,364 1,358
Other interest.......................................... 294 449 484
Total interest and dividend income.................... 9,899 8,928 8,165
------ ------ ------
INTEREST EXPENSE:
Deposits................................................ 4,700 4,569 3,885
FHLB borrowings......................................... 211 -- --
-------- ------- -------
Total interest expense................................ 4,911 4,569 3,885
-------- ------- -------
Net interest income..................................... 4,988 4,359 4,280
Provision for loan losses............................... 272 100 100
-------- ------- -------
Net interest income, after provision for loan losses.... 4,716 4,259 4,180
-------- ------- -------
OTHER INCOME (CHARGES):
Customer service fees................................... 536 512 410
Loan servicing and other loan fees...................... 56 52 59
Gain on sale of mortgage loans.......................... 8 8 6
Write-down of mortgage loans held for sale.............. -- (41) --
Gain on sale of securities available for sale, net...... 168 4 --
Rental income, net of expenses.......................... 29 44 45
Co-operative Central Bank Share Insurance Fund special 44 44 --
dividend Miscellaneous.................................. 41 35 16
-------- ------- -------
Total other income.................................... 882 658 536
-------- ------- -------
OPERATING EXPENSES:
Salaries and employee benefits.......................... 2,734 2,486 2,113
Occupancy and equipment expenses........................ 412 321 247
Data processing expenses................................ 207 179 175
FDIC insurance expense.................................. 8 7 251
Foreclosed real estate, net............................. -- (5) 77
Other general and administrative expenses............... 969 890 713
-------- ------- -------
Total operating expenses.............................. 4,330 3,878 3,576
-------- ------- -------
Income before income taxes............................... 1,268 1,039 1,140
Provision for income taxes............................... 527 440 480
-------- ------- -------
Net income............................................... $ 741 $ 599 $ 660
======== ======= =======
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The business of the Bank consists of attracting deposits from the general
public and using these funds to originate various types of loans primarily in
eastern Middlesex County, Massachusetts, including mortgage loans secured by
one-to four-family residences, commercial loans secured by general business
assets, commercial real estate loans secured by commercial property, and to
invest in U.S. Government and Federal Agency and other securities. To a lesser
extent, the Bank engages in various forms of consumer and home equity lending.
The Bank's profitability depends primarily on its net interest income, which is
the difference between the interest income it earns on its loans and investment
portfolio and its cost of funds, which consists mainly of interest paid on
deposits and on borrowings from the FHLB. Net interest income is affected by the
relative amounts of interest-earning assets and interest-bearing liabilities and
the interest rates earned or paid on these balances. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
The Bank's profitability is also affected by the level of other (noninterest)
income and operating expenses. Other income consists primarily of service fees,
loan servicing and other loan fees and gains on sales of investment securities.
Operating expenses consist of salaries and benefits, occupancy related expenses,
and other general operating expenses.
The operations of the Bank, and banking institutions in general, are
significantly influenced by general economic conditions and related monetary and
fiscal policies of financial institution's regulatory agencies. Deposit flows
and the cost of funds are influenced by interest rates on competing investments
and general market rates of interest. Lending activities are affected by the
demand for financing real estate and other types of loans, which in turn are
affected by the interest rates at which such financing may be offered and other
factors affecting loan demand and the availability of funds.
BUSINESS STRATEGY
The Bank's business strategy is to operate as a well-capitalized, profitable
and independent community bank dedicated to financing home ownership, small
business and consumer needs in its market area and providing quality service to
its customers. The Bank has implemented this strategy by: (i) monitoring the
needs of customers and providing quality service; (ii) emphasizing consumer-
oriented banking by originating residential mortgage loans and consumer loans,
and by offering various deposit accounts and other financial services and
products; (iii) recently increasing its emphasis on commercial banking and
lending by originating loans for small businesses and providing greater services
in its commercial and commercial real estate loan department; (iv) maintaining
high asset quality through conservative underwriting; and (v) producing stable
earnings.
ASSET/LIABILITY MANAGEMENT
A principal operating objective of the Bank is to produce stable earnings by
achieving a favorable interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Bank's principal interest-
earning assets have longer terms to maturity than its primary source of funds,
i.e., deposit liabilities, increases in general interest rates will generally
result in an increase in the Bank's cost of funds before the yield on its asset
portfolio adjusts upward. The Bank has sought to reduce its exposure to adverse
changes in interest rates by attempting to achieve a closer match between the
periods in which its
16
<PAGE>
interest-bearing liabilities and interest-earning assets can be expected to
reprice through the origination of adjustable-rate mortgages and loans with
shorter terms and the purchase of other shorter term interest-earning assets.
The term "interest rate sensitivity" refers to those assets and liabilities
which mature and reprice periodically in response to fluctuations in market
rates and yields. As noted above, one of the principal goals of the Bank's
asset/liability program is to maintain and match the interest rate sensitivity
characteristics of the asset and liability portfolios.
In order to properly manage interest rate risk, the Bank's board of directors
has established an Asset/Liability Management Committee ("ALCO") made up of
members of management to monitor the difference between the Bank's maturing and
repricing assets and liabilities and to develop and implement strategies to
decrease the "negative gap" between the two. The primary responsibilities of the
committee are to assess the Bank's asset/liability mix, recommend strategies to
the Board that will enhance income while managing the Bank's vulnerability to
changes in interest rates and report to the Board the results of the strategies
used.
Since the early 1980s, the Bank has stressed the origination of adjustable-
rate residential mortgage loans and adjustable-rate home equity loans. The Bank
regularly sells fixed rate loans with terms in excess of 15 years. Since 1995,
the Bank has also emphasized commercial loans with short-term maturities or
repricing intervals as well as commercial real estate mortgages with short-term
repricing intervals. In addition, the Bank has used borrowings from the FHLB to
match-fund the maturity or repricing interval of several larger commercial real
estate mortgages. At June 30, 1997, the Bank's loan portfolio included $58.4
million of adjustable-rate one-to four-family mortgage loans, $16.9 million of
adjustable-rate commercial real estate loans, $3.7 million of adjustable-rate or
short-term commercial loans, and $1.6 million of adjustable-rate home equity
loans. Together, these loans represent 70.4% of the Bank's net loans at June 30,
1997. See "Business-Lending Activities."
In the future, in managing its interest rate sensitivity, the Bank intends to
continue to stress the origination of adjustable-rate mortgages and loans with
shorter maturities and the maintenance of a consistent level of short-term
securities. See "Use of Proceeds."
INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that period. The interest rate sensitivity gap
is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of interest-
bearing liabilities maturing or repricing within that same time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities, and is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income while a
positive gap would result in an increase in net interest income, while
conversely, during a period of falling interest rates, a negative gap would
result in an increase in net interest income and a positive gap would negatively
affect net interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1997 which are expected to
mature or reprice in each of the time periods shown. In the table, investment
securities held to maturity are presented at amortized cost; other interest-
earning assets include marketable equity securities, FHLB stock, due from Co-
operative Central Bank, federal
17
<PAGE>
funds sold and other short-term investments; fixed rate one-to four-family loans
are assumed to have an average life of 12 years; adjustable rate one-to four-
family loans, commercial real estate loans, and commercial loans do not include
any amortization or prepayment amounts. Money market accounts, NOW accounts,
regular and other deposits are allocated in accordance with FDIC guidelines for
interest rate risk management.
<TABLE>
<CAPTION>
At June 30, 1997
OVER OVER SIX OVER ONE OVER
---- -------- -------- ----
THREE THREE MONTHS THROUGH THREE OVER
----- ----- ------
MONTHS THROUGH THROUGH THREE THROUGH SEVEN
------ ------- -------
OR LESS SIX MONTHS ONE YEAR YEARS SEVEN YEARS YEARS TOTAL
------- ---------- -------- ----- ----------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities held to maturity.... $ 5,000 $ 2,000 $ 2,493 $ 8,011 $ -- $ -- $ 17,504
Other interest-earning assets.............. 7,618 -- -- -- -- -- 7,618
Adjustable-rate one-to four-family loans... 4,633 4,759 4,449 12,940 31,668 -- 58,449
Fixed rate one- to four-family loans....... 698 698 1,396 5,583 10,585 12,794 31,754
Commercial real estate loans............... 986 227 2,107 10,264 3,097 1,166 17,847
Commercial loans........................... 2,288 2 -- 486 901 -- 3,677
Home equity loans.......................... 1,564 -- -- -- -- -- 1,564
Consumer loans............................. 12 14 38 482 312 797 1,655
Construction loans......................... 976 -- -- -- -- -- 976
--------- --------- --------- --------- ------- ------- --------
Total interest-earning assets............. 23,775 7,700 10,483 37,766 46,563 14,757 141,044
--------- --------- --------- --------- ------- ------- --------
INTEREST-BEARING LIABILITIES:
Certificates of deposit.................... 24,138 8,528 15,650 10,475 344 -- 59,135
Money market accounts...................... 6,489 -- -- -- -- -- 6,489
NOW accounts............................... 1,498 -- -- 2,996 5,992 7,489 17,975
Regular and other deposits................. 850 850 1,700 6,800 13,600 16,994 40,794
FHLB borrowings........................... 1,006 6 1,113 2,355 2,287 765 7,532
--------- --------- -------- --------- ------- ------- --------
Total interest-bearing liabilities........ 33,981 9,384 18,463 22,626 22,223 25,248 131,925
--------- --------- --------- --------- ------- ------- --------
Interest rate sensitivity gap................ ($10,206) ($1,684) ($7,980) $ 15,140 $24,340 ($10,491) $ 9,119
========= ========= ========= ========= ======= ======= ========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
OVER OVER SIX OVER ONE OVER
---- -------- -------- ----
THREE THREE MONTHS THROUGH THREE OVER
----- ----- ------
MONTHS THROUGH THROUGH THREE THROUGH SEVEN
------ ------- -------
OR LESS SIX MONTHS ONE YEAR YEARS SEVEN YEARS YEARS TOTAL
------- ---------- -------- ----- ----------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative interest rate sensitivity gap....... ($10,206) ($11,890) ($19,870) ($54,730) $19,610 $ 9,119 $ 9,119
======= ======= ======= ======= ======= ========= ========
Cumulative ratio of interest-earning assets
to interest-bearing liabilities............... 70.0% 72.6% 67.9% 94.4% 118.4%
------- ------- ------- ------- -------
Rate of cumulative interest rate sensitivity
gap to total interest-earning assets.......... (42.9)% (37.8)% (47.4)% 5.9% 15.5%
------- ------- ------- ------- -------
Ratio of cumulative interest rate
sensitivity gap to total assets............... (6.80)% (7.90)% (13.30)% (7.90)% 13.1% 6.1% 6.1%
------- ------- ------- ------- ------- --------- --------
</TABLE>
Management believes the current one-year gap of negative 13.3% presents a
risk to the net interest income should a sustained increase occur in the current
level of interest rates. If interest rates increase, the Bank's negative one-
year gap should cause the net interest margin to decrease. A conservative
interest rate risk-gap policy provides a stable net interest income margin.
Accordingly, management emphasizes a structured schedule of investment
securities with greater emphasis on maturities and repricings within one year.
It is possible that the actual interest rate sensitivity of the Bank's assets
and liabilities could vary significantly from the information set forth in the
table due to market and other factors.
Certain shortcomings are inherent in the method of analysis presented above.
Although certain assets and liabilities may have similar maturity or periods of
repricing, they may react in different degrees to changes in the market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while rates on other
types of assets and liabilities may lag behind changes in market interest rates.
Certain assets, such as adjustable-rate mortgages, generally have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In the event of a change in interest rates, prepayments and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Additionally, an interest rate increase may make it more
difficult for borrowers to service their debt, thereby increasing the credit
risk in the Bank's loan portfolio.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following tables set forth certain information to the Bank's average
balance sheet and reflect the average yield on assets and average cost of
liabilities for the periods indicated and the average yields earned and rates
paid for the periods indicated. Such yields and costs are derived by dividing
income or expense by the average monthly balances of assets and liabilities,
respectively, for the periods presented.
19
<PAGE>
assets. In the event of a change in interest rates, prepayments and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Additionally, an interest rate increase may make it more
difficult for borrowers to service their debt, thereby increasing the credit
risk in the Bank's loan portfolio.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following tables set forth certain information relating to the Bank's
average balance sheet and reflect the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid for the periods indicated. Such yields and costs are derived by dividing
income or expense by the average monthly balances of assets and liabilities,
respectively, for the periods presented. Average balances are derived from daily
balances. Loans on nonaccrual status are included in the average balances of
loans shown in the table. Interest earned on loan portfolios is net of reserves
for uncollected interest. The investment securities in the following table are
presented at amortized cost.
20
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD/ AVERAGE EARNED YIELD/ AVERAGE EARNED YIELD/
BALANCE OR PAID RATE BALANCE OR PAID RATE BALANCE OR PAID RATE
------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans, net................... $103,223 $8,397 8.13% $ 86,651 $7,115 8.21% $ 78,398 $6,323 8.07%
Investments........................ 20,686 1,208 5.84% 23,306 1,364 5.85% 26,452 1,358 5.13%
Other earning assets/(1)/.......... 5,896 294 4.99% 8,836 449 5.08% 9,762 484 4.96%
-------- -------- -------- ------- -------- ------
Total interest-earning assets...... 129,805 9,899 7.63% 118,793 8,928 7.52% 114,612 8,165 7.12%
-------- -------- -------- ------- -------- ------
Cash and due from banks................. 2,188 1,627 1,089
Other assets............................ 5,638 5,445 4,904
-------- -------- --------
Total assets....................... $137,631 $125,865 $120,605
======== ======== ========
INTEREST-BEARING LIABILITIES:
Regular and other deposits......... $ 40,419 $1,114 2.76% $ 39,818 $1,121 2.82% $ 44,451 $1,304 2.93%
Now accounts....................... 15,710 281 1.79% 14,681 286 1.95% 14,175 313 2.21%
Money market deposits.............. 6,070 157 2.59% 6,154 157 2.55% 6,557 161 2.46%
Certificates of deposit............ 57,223 3,148 5.50% 52,340 3,005 44,216 2,107
-------- ------ -------- ------ -------- -------
Total interest-bearing
deposits..................... 119,422 4,700 3.94% 112,993 4,569 4.04% 109,399 3,885 3.55%
FHLB borrowings................... 3,289 211 6.42% -- -- -- -- -- --
-------- ------ ---- -------- ------ -------- -------
Total interest-bearing liabilities... 122,711 4,911 4.00% 112,993 4,569 4.04% 109,399 3,885 3.55%
------ ------ -------
Demand deposit accounts.............. 3,056 1,756 721
Other liabilities....................... 277 288 268
-------- -------- -------
Total liabilities.................... 126,044 115,037 110,388
Surplus................................. 11,587 10,828 10,217
-------- -------- -------
Total liabilities and surplus........... $137,631 $125,865 $120,605
======== ======== ========
Net interest income..................... $4,988 $4,359 $4,280
====== ====== ========
Interest rate spread.................... 3.63% 3.48% 3.57%
Net interest margin..................... 3.84% 3.67% 3.73%
Interest-earning........................ 1.06x 1.05x 1.05x
assets/interest-bearing liabilities
</TABLE>
_________________
(1) At June 30, 1997, other earning assets included Bank Investment Fund
Liquidity Fund, FHLB overnight deposits, federal funds sold, the Co-
operative Central Reserve Fund and FHLB Ideal Way Account.
21
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes
in interest income and interest expense of the Bank for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rates (change in
rate multiplied by old volume). Changes in rate-volume (changes in rate
multiplied by the changes in volume) are allocated between changes in rate and
changes in volume.
<TABLE>
<CAPTION>
----------------------------------------------------------
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
1997 VS 1996 1996 VS 1995
INCREASE (DECREASE) INCREASE (DECREASE)
----------------------------------------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
------ -------- ------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans, net........................... $ (69) $1,351 $1,282 $114 $ 678 $792
Investments.......................... (2) (154) (156) 178 (172) 6
Other earning assets................. (8) -- (155) 12 (47) (35)
------ -------- ------- ------ -------- -------
Total....................... (79) 1,050 971 304 459 763
------ -------- ------- ------ -------- -------
INTEREST EXPENSE:
Deposits............................. (119) 250 131 551 133 684
Borrowed funds....................... -- 211 211 -- -- --
------ -------- ------- ------ -------- -------
Total.............................. (119) 461 342 551 133 684
------ -------- ------- ------ -------- -------
Change in net interest income........... $ 40 $ 589 $ 629 ($247) $ 326 $ 79
====== ======== ======= ====== ======== =======
</TABLE>
RESULTS OF OPERATIONS
The Bank's operating results depend primarily upon its net interest income,
which is the difference between the interest income earned on its interest-
bearing assets (loans and investment securities), and the interest expense paid
on its interest-bearing liabilities (deposits and FHLB borrowings). Operating
results are also significantly affected by provisions for loan losses, other
income and operating expenses. Each of these factors is significantly affected
not only by the Bank's policies, but, to varying degrees, by general economic
and competitive conditions and by policies of state and federal regulatory
authorities.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND 1996.
The Bank's total assets increased by $18.3 million or 13.9% to $149.7
million at June 30, 1997 from $131.4 million at June 30, 1996. The Bank's asset
growth reflected the increased emphasis on the origination and retention of
residential mortgage loans, commercial real estate loans and commercial loans
during 1997. Net loans were $114.6 million or 76.6% of total assets at June 30,
1997 as compared to $94.8 million or 72.1% of total assets at June 30, 1996,
representing an increase of $19.8 million or 20.9%. The increase in loans was
funded through FHLB borrowings and increased deposits. Investment securities
held by the Bank increased by $2.8 million or 15.3% to $21.3 million in 1997
from $18.5 million in 1996. Total deposits increased by $9.7 million or 8.1% to
$129.3 million at June 30, 1997 from $119.6 million at June 30, 1996. Deposits
22
<PAGE>
increased due to new accounts established at the Bank's new branch opened in
November 1995 as well as increases in commercial deposits resulting from the
Bank's emphasis on expanding its commercial banking services. Total borrowings
were $7.5 million at June 30, 1997 compared to no borrowings at June 30, 1996.
Total surplus increased by $1.0 million or 9.1% to $11.9 million at June 30,
1997 from $10.9 million at June 30, 1996 as a result of net income of $741,000
and an increase in the net unrealized gain on securities available for sale of
$250,000.
COMPARISON OF THE OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996.
Net Income. The Bank's net income for the year ended June 30, 1997 was
$741,000 as compared to $599,000 for the year ended June 30, 1996. This $142,000
or 23.7% increase in net income during the period was the result of an increase
of $457,000 in net interest income after provision for loan losses and an
increase of $224,000 in other income, partially offset by an increase of
$452,000 in operating expenses. Although operating expenses increased from 1996
to 1997, the increase did not adversely affect net income. The opening of a new
branch in November 1995 resulted in the Bank gathering additional deposits which
were used primarily to increase the Bank's loan portfolio. These changes
resulted in an increase in net interest income of $629,000 which exceeded the
increase in operating expenses of $452,000. The return on average assets for the
year ended June 30, 1997 was 0.54% compared to 0.48% for the year ended June 30,
1996.
Interest Income. Total interest and dividend income increased by $971,000
or 10.9% to $9.9 million for the year ended June 30, 1997 from $8.9 million for
the year ended June 30, 1996. The increase in interest income was a result of a
higher level of loan originations and a greater mix of higher yielding
commercial and commercial real estate loans funded by FHLB borrowings and
increased deposits.
Interest Expense. Interest expense increased by $342,000 or 7.5% to $4.9
million for the year ended June 30, 1997 from $4.6 million for the year ended
June 30, 1996. The reason for the increase in interest expense was the increase
in the overall deposit balances as well as the increase in FHLB borrowings.
Net Interest Income. Net interest income for the year ended June 30, 1997
was $5.0 million as compared to $4.4 million for the year ended June 30, 1996.
The $629,000 or 14.4% increase can be attributed to a combination of the
$971,000 increase in interest and dividend income and the $342,000 increase in
interest expense on deposits and FHLB borrowings. The average yield on interest-
earning assets increased 11 basis points to 7.63% for the year ended June 30,
1997 from 7.52% for the year ended June 30, 1996, while the average cost of
interest-bearing liabilities decreased by 4 basis points to 4.00% for the year
ended June 30, 1997 from 4.04% for the year ended June 30, 1996. As a result,
the net interest spread increased to 3.63% for the year ended June 30, 1997 from
3.48% for the year ended June 30, 1996.
Provision for Loan Losses. The provision for loan losses was $272,000 for
the year ended June 30, 1997 as compared to $100,000 for the year ended June 30,
1996. The provision was increased in part because of the larger number of high-
balance commercial loans. At June 30, 1997, the balance of the allowance for
loan losses was $977,000 or 0.9% of total loans. During the year ended June 30,
1997, $57,000 was charged against the allowance for loan losses while $20,000 in
recoveries was credited to the allowance for loan losses. At June 30, 1996, the
balance of the allowance for loan losses was $742,000 or 0.8% of total loans.
During the year ended June 30, 1996, $138,000 was charged against the allowance
for loan losses while $23,000 in recoveries was credited to the allowance for
loan losses.
Other Income. Non-interest income or other income was $882,000 for the
year ended June 30, 1997 compared to $658,000 for the year ended June 30, 1996.
The $224,000 or 34% increase was primarily the result of a $164,000 increase in
gain on sales of investment securities and a decrease in the writedown of
23
<PAGE>
mortgage loans held for sale of $41,000.
Operating Expenses. Non-interest expense or operating expense increased to
$4.3 million for the year ended June 30, 1997 from $3.9 million for the year
ended June 30, 1996. The increase of $452,000 or 11.7% mainly resulted from an
increase of $248,000 in salaries and employee benefits and an increase of
$91,000 in occupancy and equipment expenses. The Bank's operating expenses
increased in 1997 due to the full effect of the new branch that was opened in
November 1995. In 1997, the Bank incurred a full year's worth of operating
expenses associated with the new branch, whereas in 1996 the branch was open for
only seven months. In 1997, the Bank also continued to expand its commercial
loan and commercial real estate departments by hiring a second loan officer.
Other general and administrative expenses increased by $79,000 over the prior
year. Annual operating expenses are also expected to increase in future periods
due to the increased cost of operating as a stock institution. See "Risk
Factors --Anticipated Low Return on Equity Following Conversion." The Bank may
experience slightly higher deposit insurance premiums due to recent
Congressional action to require all FDIC insured financial institutions to fund
the Financing Corporation ("FICO") bond obligations that financed the resolution
of failed savings institutions. See " Risk Factors - Regulatory Environment" and
"Regulation."
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1996 AND 1995.
The Bank's total assets increased by $6.4 million or 5.1% to $131.4 million
at June 30, 1996, from $125.0 million at June 30, 1995. Net loans were $80.2
million or 64.2% of total assets at June 30, 1995 as compared to $94.8 million
or 72.1% of total assets at June 30, 1996, representing an increase of $14.6
million or 18.1%. The Bank's net loan growth reflects its increased emphasis on
the origination of residential mortgage loans, commercial real estate loans and
commercial loans. Investment securities held by the Bank decreased from $26.5
million in 1995 to $18.5 million in 1996. The proceeds from maturing securities
were in part allocated to fund the increased volume of loan production. Total
deposits increased by $5.8 million or 5.1% from $113.8 million at June 30, 1995
to $119.6 million at June 30, 1996. Total surplus increased by 5.6% to $10.9
million at June 30, 1996 as a result of net income of $599,000 offset by an
increase in the net unrealized loss on securities available for sale of $16,000.
COMPARISON OF THE OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995.
Net Income. The Bank's net income for the year ended June 30, 1996 was
$599,000 as compared to $660,000 for the year ended June 30, 1995. This $61,000
decrease in net income during the period was the result of an increase of
$302,000 of operating expenses, partially offset by an increase of $79,000 in
net interest income after provision for loan losses and an increase of $122,000
in other income. The Bank opened a new branch in November 1995 and expanded its
commercial loan and commercial real estate departments during 1996 resulting in
the increased operating expense. The return on average assets for the year ended
June 30, 1996 was .48% compared to .55% for the year ended June 30, 1995.
Interest Income. Total interest and dividend income increased by $763,000
or 9.3% to $8.9 million for the year ended June 30, 1996 from $8.2 million for
the year ended June 30, 1995. The increase in interest income was in part the
result of loan originations funded by maturing lower yield investment
securities.
Interest Expense. Interest expense increased by $684,000 or 17.6% to $4.6
million for the year ended June 30, 1996 from $3.9 million for the year ended
June 30, 1995. The primary reason for the increase in interest expense was the
increase in the general level of interest rates, driving an increase in the
rollover rates for certificates of deposit, coupled with the increase in the
overall deposit balances.
Net Interest Income. Net interest income for the year ended June 30, 1995
was $4.3 million as compared to $4.4 million for the year ended June 30, 1996,
an increase of 1.8%. The $79,000 increase can
24
<PAGE>
be attributed to a combination of the $763,000 increase in interest and dividend
income and the $684,000 increase in interest expense on deposits. The average
yield on interest-earning assets increased by 40 basis points to 7.52% for the
year ended June 30, 1996 from 7.12% for the year ended June 30, 1995, while the
average cost on interest-bearing liabilities increased by 49 basis points to
4.04% for the year ended June 30, 1996 from 3.55% for the year ended June 30,
1995. As a result, the net interest spread declined from 3.57% for the year
ended June 30, 1995 to 3.48% for the year ended June 30, 1996.
Provision for Loan Losses. The provision for loan losses was $100,000 for
each of the years ended June 30, 1996 and 1995. At June 30, 1996, the balance of
the allowance for loan losses was $742,000 or 0.8% of total loans. During the
year ended June 30, 1996, $138,000 was charged against the allowance for loan
losses while $23,000 in recoveries was credited to the allowance for loan
losses. At June 30, 1995, the balance of the allowance for loan losses was
$757,000 or 0.9% of total loans. During the year ended June 30, 1995, $119,000
was charged against allowance for loan losses while $27,000 in recoveries was
credited to the allowance for loan losses.
Other Income. Other income was $658,000 for the year ended June 30, 1996
as compared to $536,000 for the year ended June 30, 1995. The $122,000 increase
was primarily the result of a $102,000 increase in customer services fees, as
the Bank increased fees charged for certain services while also increasing the
number of deposit accounts on which fees could be charged. The Bank also
received a special dividend of $44,000 from the Co-operative Central Bank during
the year ended June 30, 1996. Offsetting the increases in other income for the
year ended June 30, 1996 was a writedown of $41,000 on mortgage loans held for
sale.
Operating Expenses. Operating expenses increased to $3.9 million for the
year ended June 30, 1996 from $3.6 million for the year ended June 30, 1995. The
increase of $302,000 or 8.4% mainly resulted from an increase of $373,000 in
salaries and employee benefits and an increase of $74,000 in occupancy and
equipment expenses, resulting from the opening of a new branch office in
November 1995 and the expansion of the commercial and commercial real estate
loan department. Other general and administrative expenses increased by $177,000
over the prior year. These increases were offset by a $244,000 decrease in FDIC
insurance expense and an $82,000 decrease in losses from foreclosed real estate.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans, sales and participations of loans, maturities
of investments and interest-bearing deposits, and funds provided from
operations. While scheduled repayments of loans and maturities of investment
securities are predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by the general level of interest rates, economic
conditions, and competition. The Bank uses its liquidity resources primarily to
fund existing and future loan commitments, to fund net deposit outflows, to
invest in other interest-earning assets, to maintain liquidity and to meet
operating expenses.
The Bank is required to maintain adequate levels of liquid assets. This
guideline, which may be varied depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowings. The
Bank has historically maintained a level of liquid assets in excess of
regulatory requirements. The Bank's liquidity ratio at June 30, 1997 was 18.0%.
The Bank began using FHLB borrowings in 1997 to augment its liquidity as its
loan originations increased from 1996. The Bank also sold $5.4 million of
adjustable-rate residential mortgage loans to improve its level of liquid assets
in 1997.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, short-term U.S. Government and Federal Agency obligations, and
corporate bonds. The level of these assets is dependent upon the Bank's
operating, investing, lending and financing activities during any given period.
The primary investing activities of the Bank include origination of loans
and purchase of investment
25
<PAGE>
securities. During the year ended June 30, 1997, loan originations totaled $44.7
million while purchases of investment securities and FHLB stock totaled $16.4
million. These investments were funded primarily from loan repayments of $15.1
million, investment security maturities of $13.9 million, net deposit increases
of $9.7 million, and borrowings of $7.6 million.
Liquidity management is both a daily and long-term function of management.
If the Bank requires funds beyond its ability to generate them internally, the
Bank believes it could borrow additional funds from the FHLB. At June 30, 1997,
the Bank had borrowings of $7.5 million from the FHLB.
At June 30, 1997, the Bank had $4.4 million in outstanding commitments to
originate loans. The Bank anticipates that it will have sufficient funds
available to meet its current loan origination commitments. Certificates of
deposit which are scheduled to mature in one year or less totaled $48.3 million
at June 30, 1997. Based upon historical experience, management believes that a
significant portion of such deposits will remain with the Bank.
At June 30, 1997, the Bank exceeded all of its regulatory capital
requirements. For further information regarding the Bank's regulatory capital at
June 30, 1997 and on a pro forma basis see "Regulation--Federal Banking
Regulations--Capital Requirements."
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and results of operations in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation. Unlike most industrial
companies, virtually all of the assets and liabilities of the Bank are monetary
in nature. As a result, interest rates have a more significant impact on the
Bank's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In June of 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 is effective for fiscal years beginning after
December 15, 1997. Accounting principles generally require all recognized
revenue, expenses, gains and losses to be included in net income. Various FASB
statements, however, require companies to report certain changes in assets and
liabilities as a separate component of the equity section of the balance sheet
such as unrealized gains and losses on available for sale securities. This such
item, along with net income, is a component of comprehensive income.
It is required under SFAS 130 that all items of comprehensive income are to
be reported in a "financial statement" that is displayed with the same
prominence as other financial statements. Additionally, SFAS 130 requires the
classification of items comprising other comprehensive income by their nature,
and the accumulated balance of other comprehensive income must be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. Management will adopt this new disclosure
requirement beginning in fiscal year 1999.
Also, in June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS 131"). SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997. SFAS 131 establishes standards for
the way that public companies report information about operating segments in
annual financial statements and selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers.
26
<PAGE>
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments.
SFAS 131 also requires companies to report information about the way that
the operating segments were determined, the product and services provided by the
operating segments, differences between the measurements used in reporting
segment information and those used by the company in its general purpose
financial statements, and changes in the measurement of segment amounts from
period to period. Management has not yet determined the impact that adoption of
SFAS 131 will have on its financial statement presentation.
YEAR 2000
The Company and the Bank are aware of the issues associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The "year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the two digit
year value to 00. The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Company and the Bank are utilizing both internal and external resources
to identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be completed
by December 31, 1998, allowing adequate time for testing. To date, confirmations
have been received from the Company's primary processing vendors that plans are
being developed to address processing of transactions in the year 2000.
Management has not yet assessed the year 2000 compliance expense and related
potential affect on the Company's or the Bank's earnings.
BUSINESS
THE COMPANY
Prior to the Conversion, the Company will not transact any material business.
Following the Conversion, in addition to directing, planning and coordinating
the business activities of the Bank, the Company will invest the proceeds of the
Conversion which are retained by it. See "Use of Proceeds." Upon consummation
of the Conversion, the Company will have no significant assets other than the
shares of the Bank's capital stock acquired in the Conversion, the loan
receivable held with respect to its loan to the ESOP and that portion of the net
proceeds of the Conversion retained by it, and will have no significant
liabilities. Cash flow to the Company will be dependent upon investment earnings
from the net proceeds retained by it, payments on the ESOP loan and any
dividends received from the Bank. Initially, the Company will neither own nor
lease any property, but will instead use the premises, equipment and furniture
of the Bank. At the present time, the Company does not intend to employ any
persons other than its officers (who are not anticipated to be separately
compensated by the Company), but will utilize the support staff of the Bank from
time to time. Additional employees will be hired as appropriate to the extent
the Company expands its business in the future. In the future, the Company will
consider using some of the proceeds of the Conversion retained by it to expand
its operations in its existing primary market and other nearby areas by
acquiring other financial institutions which could be merged with the Bank or
operated as separate subsidiaries. Presently, there are no agreements or
understandings for expansion of the Company's operations.
THE BANK
The business of the Bank primarily consists of attracting savings deposits
from the general public and investing such deposits in mortgage loans secured by
single-family residential real estate, commercial real estate,
27
<PAGE>
commercial assets and investment securities, including U.S. Government and
Federal Agency securities, equity securities and interest-earning deposits. The
Bank also makes consumer loans, including home equity loans, automobile,
passbook and other consumer loans. The Bank offers both fixed-rate and
adjustable-rate loans and emphasizes the origination of residential real estate
mortgage loans and commercial loans with adjustable interest rates. The Bank
also makes other short term (one to three years) interest sensitive investments
which allow the Bank to monitor the interest rate risk, maturities and repricing
intervals of its assets and liabilities.
The Bank's principal sources of income are interest and fees on loans and
other investments, and the Bank's principal expenses are interest paid on
deposit accounts and general operating expenses.
MARKET AREA
The Bank's main office and three branch offices are located in Medford,
Middlesex County, Massachusetts. The city of Medford, containing approximately
60,000 residents, is located approximately seven miles from downtown Boston in
the northern suburbs of Boston, bounded by the towns of Malden, Everett,
Somerville, Stoneham, Winchester and Arlington. The City of Medford is easily
accessible from downtown Boston via Interstate 93 and is accessible via other
state roads connecting the communities within the Route 128 corridor surrounding
Boston. As an established metropolitan suburb, Medford consists mostly of
developed single- and multi-family properties within a network of well-
maintained neighborhoods. The city of Medford represents the primary market area
for deposit and loan generation as most of the Bank's depositors and loan
customers live in the areas surrounding the Bank's office locations. The Bank
considers its primary market area to be the communities of Medford, Malden,
Everett, Stoneham, Arlington, Winchester, Somerville, Melrose, Lexington and
Bedford, Massachusetts. The economic base of the Bank's market area is
diversified and includes a number of financial service institutions, industrial
and manufacturing companies, hospitals and other health care facilities and
educational institutions. The major employers in the Medford area are Tufts
University, Lawrence Memorial Hospital, the City of Medford and Meadow Glen
Mall, with approximately 1,600, 1,300, 1,200 and 1,000 employees each,
respectively. Management believes that the housing vacancy rate in Medford is
very low. The majority of the Bank's lending and deposit activity has
historically been in Medford, although the commercial loan department has been
largely responsible for expanded business throughout eastern Middlesex County.
Middlesex County, located in eastern Massachusetts to the north and west of the
city of Boston, is part of the Boston metropolitan area. Based on 1997 Bureau of
Labor Statistics, the median household income for Middlesex County was $49,414.
LENDING ACTIVITIES
The Bank originates loans through its four offices located in Medford,
Massachusetts. The principal lending activities of the Bank are the origination
of conventional mortgage loans for the purpose of purchasing or refinancing
owner-occupied, one- to four-family residential properties in its designated
community reinvestment area, consisting of the Massachusetts communities of
Medford, Malden, Everett, Stoneham, Arlington, Winchester, Somerville, Melrose,
Lexington and Bedford, and the origination of commercial loans secured by
commercial real estate and commercial assets within eastern Middlesex County. To
a lesser extent, the Bank also originates consumer loans including home equity
and passbook loans.
In the past two years, the Bank has made a major commitment to small
business commercial lending. The Bank has expanded its commercial lending
department with the addition of two senior officers with considerable commercial
lending expertise and has developed a support staff to run the commercial loan
department.
The Bank's ten largest loans, outstanding as of June 30, 1997, ranged from
$500,000 to $1.2 million.
28
<PAGE>
Loan Portfolio. The following table presents selected data relating to the
composition of the Bank's loan portfolio by type of loan on the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage loans..... $ 90,203 78.7% $82,459 87.0% $73,458 91.6%
Commercial real estate loans... 17,847 15.6 8,280 8.7 3,909 4.9
Commercial loans............... 3,677 3.2 1,715 1.8 415 0.5
Consumer loans................. 1,655 1.4 1,781 1.9 1,832 2.3
Home equity loans.............. 1,564 1.4 1,176 1.2 1,248 1.6
Construction loans............. 976 0.9 285 0.4 358 0.4
--------- ----- ------- ----- ------- -----
Total loans.................... 115,922 101.2 95,696 101.0 81,220 101.3
Less:
Deferred loan origination...... --
fees.......................... 37 60 0.1 111 0.1
Unadvanced principal........... 340 0.3 134 0.1 135 0.2
Allowance for loan losses...... 977 0.9 742 0.8 757 1.0
--------- ----- ------- ----- ------- -----
Loans, net..................... $114,568 100.0% $94,760 100.0% $80,217 100.0%
========= ===== ======= ===== ======= =====
</TABLE>
One- to Four-Family Residential Real Estate Lending. The primary
emphasis of the Bank's lending activity is the origination of conventional
mortgage loans on one- to four-family residential dwellings located in the
Bank's primary market area. As of June 30, 1997, loans on one- to four-family
residential properties accounted for 78.7% of the Bank's loan portfolio.
The Bank's mortgage loan originations are for terms of up to 30 years,
amortized on a monthly basis with interest and principal due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms as borrowers may refinance or prepay loans
at their option, without penalty. Conventional residential mortgage loans
granted by the Bank customarily contain "due-on-sale" clauses which permit the
Bank to accelerate the indebtedness of the loan upon transfer of ownership of
the mortgaged property.
The Bank makes conventional mortgage loans and uses standard Federal
National Mortgage Association ("FNMA") documents, to allow for the sale of
qualifying loans in the secondary mortgage market. The Bank's lending policies
generally limit the maximum loan-to-value ratio on mortgage loans secured by
owner-occupied properties to 95% of the lesser of the appraised value or
purchase price of the property, with the condition that private mortgage
insurance is required on loans with a loan-to-value ratio in excess of 80%.
Since the early 1980s the Bank has offered adjustable-rate mortgage
loans with terms of up to 30 years. Adjustable-rate loans offered by the Bank
include loans which reprice every one or three years and provide for an interest
rate which is based on the interest rate paid on U.S. Treasury securities of a
corresponding term, plus a margin of up to 250 basis points, or 2.5%.
Additionally, the Bank offers an adjustable-rate loan product with an interest
rate fixed for seven years which then reprices annually for its remaining term
thereafter. The Bank currently offers adjustable-rate loans with initial rates
below those which would prevail under the foregoing computations, based upon the
Bank's determination of market factors and competitive rates for adjustable-rate
loans in its market area. For adjustable-rate loans, borrowers are qualified at
the initial rate.
Historically, the Bank has retained all adjustable-rate mortgages it
originates. However, in
29
<PAGE>
recent years, in order to generate liquidity, the Bank has sold some of these
loans. The Bank's adjustable-rate mortgages include limits on increases or
decreases of the interest rate of the loan. The interest rate may increase or
decrease by 2% per year and 5% over the life of the loan for the Bank's one-year
adjustable rate mortgages and by 3% per adjustment period and 6% over the life
of the loan for the Bank's three-year adjustable rate mortgages. The Bank also
offers an adjustable rate mortgage on which the rate is fixed for the first
seven years; thereafter, the loan converts to a one-year adjustable-rate
mortgage. The retention of adjustable-rate mortgage loans in the Bank's loan
portfolio helps reduce the Bank's exposure to increases in interest rates.
However, there are unquantifiable credit risks resulting from potential
increased costs to the borrower as a result of the repricing of adjustable-rate
mortgage loans. During periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
interest cost to the borrower.
During the year ended June 30, 1997, the Bank originated $24.1 million
in adjustable-rate mortgage loans and $4.3 million in fixed-rate mortgage loans.
Of the fixed-rate loans originated, the Bank sold $2.1 million of fixed-rate
loans with terms of greater than 15 years and retained $2.2 million of fixed-
rate loans, substantially all of which had terms of 15 years or less.
Approximately 6% of all loan originations during fiscal 1997 were refinancings
of loans already in the Bank's loan portfolio. At June 30, 1997, the Bank's loan
portfolio included $58.4 million in adjustable-rate one- to four-family
residential mortgage loans or 51.0% of the Bank's net loan portfolio, and $31.8
million in fixed-rate one- to four-family residential mortgage loans, or 27.7%
of the Bank's net loan portfolio.
The Bank engages in a limited amount of construction lending usually
for the construction of single family residences. Most are
construction/permanent loans to the future occupants, structured to become
permanent loans upon the completion of construction. All construction loans are
secured by first liens on the property. Loan proceeds are disbursed as
construction progresses and inspections warrant. Loans involving construction
financing present a greater risk than loans for the purchase of existing homes,
since collateral values and construction costs can only be estimated at the time
the loan is approved. Due to the small amount of construction loans in the
Bank's portfolio, the risk in this area is limited.
Commercial Real Estate Loans. At June 30, 1997, the Bank's commercial
real estate loan portfolio consisted of 25 loans, totaling $17.8 million, or
15.6% of net loans. The Bank's largest loan is a commercial real estate loan
with an outstanding balance of $1.2 million at June 30, 1997 secured by a
commercial office building in Bedford, Massachusetts. Commercial real estate
loans are administered by the commercial loan department as described below
under "Commercial Loans."
In May 1995, the Bank hired a commercial loan officer with over 20
years of experience in commercial lending in the Boston market area for the
purpose of expanding the commercial lending program of the Bank. In 1996, the
Bank added a second commercial loan officer with over 15 years of experience
with commercial lending in the Bedford/Lexington area. With the help of these
two officers, the Bank is originating commercial real estate loans and
commercial loans to satisfy the working capital and short-term financing needs
of established local businesses.
Commercial real estate lending entails additional risks compared with
one- to four-family residential lending. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject, to a greater extent, to adverse conditions in the real estate market or
the economy. Also, commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers and the payment
experience on such loans is typically dependent on the successful operation of a
real estate project and/or the collateral value of the commercial real estate
securing the loan. See " Risk Factors--Growth of the Bank's Commercial Loan and
Commercial Real Estate Loan Portfolio."
Commercial Loans. In the past two years, the Bank has made a major
commitment to small business commercial lending. The Bank has worked to develop
a niche of making commercial loans to
30
<PAGE>
companies which have from $500,000 to $15 million in sales and has recently
become an approved lender of the Small Business Administration. At June 30,
1997, the Bank's commercial loan portfolio consisted of 78 loans, totaling $3.7
million, or 3.2% of net loans.
Commercial loans are expected to comprise a growing portion of the
Bank's loan portfolio in the future. Unless otherwise structured as a mortgage
on commercial real estate, such loans generally are limited to terms of five
years or less. Substantially all such commercial loans have variable interest
rates tied to the prime rate as reported in the Wall Street Journal. Whenever
possible, the Bank collateralizes these loans with a lien on commercial real
estate, or alternatively, with a lien on business assets and equipment and the
personal guarantees from principals of the borrower.
Commercial business loans are generally considered to involve a higher
degree of risk than residential mortgage loans because the collateral may be in
the form of intangible assets and/or inventory subject to market obsolescence.
Commercial loans may also involve relatively large loan balances to single
borrowers or groups of related borrowers, with the repayment of such loans
typically dependent on the successful operation and income stream of the
borrower. Such risks can be significantly affected by economic conditions. In
addition, commercial business lending generally requires substantially greater
oversight efforts compared to residential real estate lending.
Home Equity Loans. The Bank also originates home equity loans which
are loans secured by available equity based on the appraised value of owner-
occupied one- to four-family residential property. Home equity loans will be
made for up to 75% of the appraised value of the property (less the amount of
the first mortgage). Home equity loans are offered at adjustable rates. The
adjustable interest rate is prime minus 1% for the first year and prime plus 1%
thereafter above the prime rate as reported in the Wall Street Journal and have
terms of ten years or less. At June 30, 1997, the Bank had $1.6 million in home
equity loans with unused credit available to existing borrowers of $1.6 million.
Consumer Loans. The Bank's consumer loans consist of share secured
loans, and other consumer loans, including automobile loans and credit card
loans. At June 30,1997, the consumer loan portfolio totaled $1.7 million or 1.4%
of total loans. Consumer loans are generally offered for terms of up to five
years at fixed interest rates. Consumer loans generally do not exceed $20,000
individually.
The Bank makes share secured loans up to 90% of the amount of the
depositor's savings account balance. The interest rate on the loan is 4% higher
than the rate being paid on the account. The Bank also makes other consumer
loans, which may or may not be secured. The terms of such loans usually depend
on the collateral.
The Bank makes loans for automobiles, both new and used, directly to
the borrowers. The loans are generally limited to 90% of the purchase price or
the retail value listed by the National Automobile Dealers Book. The terms of
the loans are determined by the age and condition of the collateral. Collision
insurance policies are required on all these loans.
The Bank makes unsecured credit card loans up to $5,000 at fixed rates
of interest. At June 30, 1997, the Bank had 686 unsecured credit card loans
totaling $407,000.
Consumer loans are generally originated at higher interest rates than
residential mortgage loans but also tend to have a higher credit risk than
residential loans due to the loan being unsecured or secured by rapidly
depreciable assets. Despite these risks, the Bank's level of consumer loan
delinquencies generally has been low. No assurance can be given, however, that
the Bank's delinquency rate on consumer loans will continue to remain low in the
future, or that the Bank will not incur future losses on these activities.
Loan Commitments. The Bank generally makes loan commitments to
borrowers not exceeding
31
<PAGE>
60 days. At June 30, 1997, the Bank had $4.4 million in loan commitments
outstanding, all for the origination of one- to four-family residential real
estate loans, home equity loans, commercial loans and commercial real estate
loans.
Loan Solicitation and Loan Fees. Loan originations are derived from a
number of sources, including the Bank's existing customers, referrals, realtors,
advertising and "walk-in" customers at the Bank's office. Additionally, the Bank
has two residential loan originators, both of whom actively cover the local
community, working with local real estate brokers and agents to identify and
contact potential new customers.
Upon receipt of a loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment, income and credit standing. For all
mortgage loans, an appraisal of real estate intended to secure the proposed loan
is obtained from an independent appraiser who has been approved by the Bank's
board of directors. Fire and casualty insurance are required on all loans
secured by improved real estate. Insurance on other collateral is required
unless waived by the loan committee. The board of directors of the Bank has the
responsibility and authority for the general supervision over the loan policies
of the Bank. The Board has established written lending policies for the Bank.
All residential and commercial real estate mortgages and commercial business
loans must be ratified by the Bank's board of directors. In addition, certain
designated officers of the Bank have authority to approve loans not exceeding
specified levels, while the board of directors must approve loans in excess of
(a) $300,000 for commercial real estate loans; (b) $100,000 for commercial
loans; (c) loans over the current FNMA limit for residential mortgage loans; and
(d) $20,000 for consumer loans.
Interest rates charged by the Bank on all loans are primarily
determined by competitive loan rates offered in its market area and interest
rate costs of the source of funding for the loan. The Bank generally charges an
origination fee on new mortgage loans. The origination fees, net of direct
origination costs, are deferred and amortized into income over the life of the
loan. At June 30, 1997, the amount of net deferred loan origination fees was
$37,000.
Loan Maturities. The following table sets forth certain information
at June 30, 1997 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity, including scheduled
repayments of principal. Demand loans and loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------------------------------------------
RESIDENTIAL COMMERCIAL
MORTGAGE REAL ESTATE COMMERCIAL CONSUMER TOTAL
LOANS LOANS LOANS LOANS LOANS
------------ ------------ ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Total loans scheduled to mature:
In one year or less............... $ 1,625 $ -- $1,103 $ 57 $ 2,785
After 1 year through 5 years...... 2,405 121 1,888 871 5,285
Beyond five years................. 88,713 17,726 686 727 107,852
------- ------- ------ ------ --------
Total............................... $92,743 $17,847 $3,677 $1,655 $115,922
======= ======= ====== ====== ========
Loan balance by type scheduled
to mature after one year:
Fixed-rate................... $31,621 $ 1,221 $1,032 $1,396 $ 35,270
Adjustable-rate.............. 61,122 16,626 2,645 259 80,652
</TABLE>
32
<PAGE>
For purposes of this schedule, home equity loans and construction loans have
been included in residential mortgage loans.
Originations and Sales of Loans. The Bank is a qualified
seller/servicer for FNMA. Beginning in 1987, the Bank began to sell a portion of
its fixed-rate loans with terms in excess of 15 years to FNMA. All of the Bank's
sales to FNMA have been made with servicing retained on the loans. At June 30,
1997, the Bank was servicing $10.6 million in loans for FNMA. Depending upon
market conditions, the Bank retains a portion of its fixed rate loans from time
to time. In addition, the Bank has also sold loans to other private investors.
At June 30, 1997, the Bank was servicing $5.2 million of such loans.
Originations for the year ended June 30, 1997 have increased due to
the addition of a mortgage loan originator and a second commercial lending
officer. Loan sales were reduced during the same period as the Bank borrowed
from the FHLB to fund loan originations. Historically, the Bank has not
purchased loans. However, the Bank may in the future consider making limited
loan purchases, including purchases of commercial loans and commercial real
estate loans. The Bank has also entered into two participation agreements with
local banks for two of its larger commercial real estate loans. The following
table sets forth information with respect to originations and sales of loans
during the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1997 1996 1995
--------- ----------- --------
(In thousands)
<S> <C> <C> <C>
Beginning balance.......................................... $ 94,760 $80,217 $77,988
-------- ------- -------
Mortgage originations.................................... 28,423 24,712 8,807
Consumer loan originations............................... 959 1,033 1,545
Commercial real estate loan originations................. 10,573 5,357 --
Commercial loan originations............................. 4,771 2,908 445
-------- ------- -------
Total loans originated................................ 44,726 34,010 10,797
-------- ------- -------
Less:
Amortization and payoffs................................. 15,055 16,561 7,812
Provision for loan losses................................ 272 100 100
Transfers to foreclosed real estate...................... -- 83 298
Total loans sold......................................... 8,750 1,598 358
Loan participations sold................................. 841 1,125 --
-------- ------- -------
Ending balance............................................. $114,568 $94,760 $80,217
======== ======= =======
</TABLE>
Non-Performing Assets, Asset Classification and Allowances for Losses.
Management and the Security Committee of the board of directors perform a
monthly review of all delinquent loans and loans are placed on a non-accrual
status when loans are 90 days past due or, in the opinion of management, the
collection of principal and interest are doubtful. One of the primary tools used
to manage and control problem loans is the Bank's "Watch-List," a listing of all
loans or commitments larger than $25,000, that are considered to have
characteristics that could result in loss to the Bank if not properly
supervised. The list is managed by the Senior Lending Officer for Commercial
Loans, Senior Loan Officer for Mortgage Lending, Chief Financial Officer, Chief
Executive Officer, and Mortgage Servicing Officer (the "Watch-List Committee"),
who meet periodically to discuss the status of the loans on the Watch List and
to add or delete loans from the list. The Directors can request that a loan
relationship be placed on Watch-List status.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. When such
property is acquired, it is recorded at the lower of the unpaid principal
balance or its fair value. Any required write-down of the loan to its fair value
is charged to the allowance for loan losses.
33
<PAGE>
The following table sets forth the Bank's problem assets and loans at
the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Loans 30-89 days past due
(not included in non-performing loans).................. $1,708 $1,265 $1,769
====== ====== ======
Loans 30-89 days past due as a percent of net loans........... 1.49% 1.33% 2.21%
Non-performing loans (90 days past due)....................... 365 622 868
Foreclosed real estate........................................ -- -- 104
------ ------ ------
Total non-performing assets............................. $ 365 $ 622 $ 972
====== ====== ======
Non-performing loans as a percent of net loans................. 0.32% 0.66% 1.08%
Non-performing assets as a percent of total assets............. 0.24% 0.47% 0.78%
</TABLE>
During the year ended June 30, 1997, gross interest income of $29,000,
would have been recorded on loans accounted for on a non-accrual basis if the
loans had been current throughout the period. No interest on such loans was
included in income during the respective periods. At June 30, 1997, management
was not aware of any loans not currently classified as non-accrual, 90 days past
due or restructured but which may be so classified in the near future because of
concerns over the borrower's ability to comply with repayment terms.
Federal regulations require each banking institution to classify its
asset quality on a regular basis. In addition, in connection with examinations
of such banking institutions, federal and state examiners have authority to
identify problem assets and, if appropriate, classify them. An asset is
classified substandard if it is determined to be inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. As a general rule, the Bank will classify a loan as substandard
if the Bank can no longer rely on the borrower's income as the primary source
for repayment of the indebtedness and must look to secondary sources such as
guarantors or collateral. An asset is classified as doubtful if full collection
is highly questionable or improbable. An asset is classified as loss if it is
considered uncollectible, even if a partial recovery could be expected in the
future. The regulations also provide for a special mention designation,
described as assets which do not currently expose a banking institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require a banking institution to
establish general allowances for loan losses. If an asset or portion thereof is
classified as a loss, a banking institution must either establish specific
allowances for loan losses in the amount of the portion of the asset classified
as a loss, or charge off such amount. Examiners may disagree with a banking
institution's classifications and amounts reserved. If a banking institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the Regional Director of the FDIC. At June 30, 1997, the Bank
had no assets classified as special mention, doubtful or loss, and $1.4 million
in assets designated as substandard.
In originating loans, the Bank recognizes that credit losses will
occur and that the risk of loss will vary with, among other things, the type of
loan being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. It is management's policy to maintain an adequate
general allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
Further, after properties are acquired following loan defaults, additional
losses may occur with respect to such properties while the Bank is holding them
for sale. The Bank increases its allowances for loan losses and losses on real
estate owned by charging provisions for losses against the Bank's income.
Specific reserves are also recognized against specific assets when management
believes it is warranted.
In the past few years, there has been a greater level of scrutiny by
regulatory authorities of the loan portfolios of financial institutions
undertaken as part of the examination of the institution by federal or state
regulators. Results of recent examinations indicate that these regulators may be
applying more conservative
34
<PAGE>
criteria in evaluating real estate market values, requiring significantly
increased provisions for potential loan losses. While the Bank believes it has
established its existing allowances for loan losses in accordance with GAAP
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase its allowance for loan losses,
thereby negatively affecting the Bank's financial condition and earnings.
Alternately, there can be no assurance that increases in the Bank's allowance
for loan losses will occur.
The FDIC has adopted a policy statement regarding maintenance of an
adequate allowance for loan and lease losses and an effective loan review
system. This policy includes an arithmetic formula for checking the
reasonableness of an institution's allowance for loan loss estimate compared to
the average loss experience of the industry as a whole. Examiners will review an
institution's allowance for loan losses and compare it against the sum of (i)
50% of the portfolio that is classified doubtful; (ii) 15% of the portfolio that
is classified as substandard; and (iii) estimated credit losses for the portions
of the portfolio that have not been classified (including those loans designated
as special mention). This amount is considered neither a "floor" nor a "safe
harbor" of the level of allowance for loan losses an institution should
maintain, but examiners will view a shortfall relative to the amount as an
indication that they should review management's policy on allocating these
allowances to determine whether it is reasonable based on all relevant factors.
The following table analyzes activity in the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1997 1996 1995
--------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Average loans, net $103,223 $86,651 $78,398
======== ======= =======
Period-end total loans $114,568 $94,760 $80,217
======== ======= =======
Allowance for loan losses at beginning of period $ 742 $ 757 $ 749
Provision charged to operations 272 100 100
Recoveries:
Real estate-mortgage:
Residential - 15 10
Commercial - - -
Commercial loans - - -
Consumer and loan equity 20 8 17
Construction - - -
Total recoveries 20 23 27
-------- ------- -------
Loans charged-off:
Real estate-mortgage:
Residential - (100) (107)
Commercial (24) - -
Commercial loans - -- --
Consumer and loan equity (33) (38) (12)
Construction - - -
Loans charged-off (57) (138) (119)
-------- ------- -------
Allowance for loan losses at end of period.......... $ 977 $ 742 $ 757
======== ======= =======
Ratios:
Allowance for loan losses to period end net loans... 0.85% 0.78% 0.94%
Allowance for loan losses to non-performing loans... 267.67% 119.29% 87.21%
Net charge-offs to average loans, net............... 0.04% 0.13% 0.12%
Net charge-offs to allowance for loan losses........ 3.79% 15.50% 12.15%
</TABLE>
35
<PAGE>
The following table sets forth a breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. These
allocations are not necessarily indicative of future losses and do not restrict
the use of the allowance to absorb losses in any other loan category.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------
PERCENT OF PERCENT OF AMOUNT PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS TOTAL LOANS
-------- --------------- ------- ---------------- -------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Residential..................... $542 77.8% $542 86.2% $614 90.5%
Commercial...................... 338 15.4 120 8.7 100 4.8
Commercial loans................ 75 3.2 50 1.8 -- 0.5
Consumer and home equity........ 22 2.8 30 3.1 43 3.8
Construction.................... -- 0.8 -- 0.2 -- 0.4
---- ----- ---- ----- ---- -----
Total allowance for loan losses. $977 100.0% $742 100.0% $757 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
INVESTMENT ACTIVITIES
General. The Bank is required to maintain an amount of liquid assets
appropriate for its level of net savings withdrawals and current borrowings. It
has generally been the Bank's policy to maintain a liquidity portfolio in excess
of regulatory requirements. At June 30, 1997, the Bank's liquidity ratio was
18%. Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives, management's judgment as to the attractiveness of the
yields then available in relation to other opportunities, management's
expectations of the level of yield that will be available in the future and
management's projections as to the short-term demand for funds to be used in the
Bank's loan origination and other activities.
Interest income from investments in various types of liquid assets
provides a significant source of revenue for the Bank. As the New England
economy experienced a severe downturn in the late 1980's, the Bank chose to
invest excess liquidity in its investment portfolio. The Bank invests in U.S.
Treasury and Federal Agency securities, bank certificates of deposits, equity
securities, corporate debt securities and overnight federal funds. The balance
of investment securities maintained by the Bank in excess of regulatory
requirements reflects management's historical objective of maintaining liquidity
at a level that assures the availability of adequate funds, taking into account
anticipated cash flows and available sources of credit, for meeting withdrawal
requests and loan commitments and making other investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The Bank purchases securities through a primary dealer of U.S.
Government obligations or such other securities dealers authorized by the board
of directors and requires that the securities be delivered to a safekeeping
agent before the funds are transferred to the broker or dealer. The Bank
purchases investment securities pursuant to an investment policy established by
the board of directors.
Investment securities are recorded on the books of the Bank in
accordance with GAAP. The Bank does not purchase investment securities for
trading. Effective June 30, 1994, the Bank implemented SFAS No. 115. Available
for sale securities are reported at fair value with unrealized gains or losses
reported as a separate component of net worth, net of tax effects. Held-to-
maturity securities are carried at amortized cost. Substantially all purchases
of investment securities conform to the Bank's interest rate risk policy. The
following table sets forth the Bank's investment securities at the dates
indicated.
36
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------
1997 1996
--------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------- ------- ----------- -------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Securities available for sale:
Marketable equity securities........... $ 3,543 $ 3,819 $ 1,639 $ 1,568
------- ------- ------- -------
Securities held to maturity:
U.S. Government and Federal
Agency obligations..................... 14,976 14,908 16,899 16,767
Other bonds and obligations............ 2,528 2,523 27 27
------- ------- ------- -------
Total................................ 17,504 17,431 16,926 16,794
------- ------- ------- -------
Total....................... $21,047 $21,250 $18,565 $18,362
======= ======= ======= =======
</TABLE>
The following table sets forth the scheduled maturities, carrying
values and average yields for the Bank's debt securities held to maturity at
June 30, 1997.
<TABLE>
<CAPTION>
JUNE 30, 1997
ONE YEAR OR LESS ONE TO FIVE YEARS TOTAL
-----------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
CARRYING VALUE YIELD CARRYING VALUE YIELD CARRYING VALUE YIELD
------------------ --------- ------------------ ---------- ------------------ ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and Federal
Agency obligations.............. $4,990 5.20% $ 9,986 6.10% $14,976 5.80%
Other bonds and obligations...... -- -- 2,528 6.23% 2,528 6.23%
------ ------- -------
Total........................... 4,990 5.20% $12,514 6.12% $17,504 5.85%
====== ======= =======
</TABLE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from principal repayments and interest payments on loans and investments
as well as other sources arising from operations in the production of net
earnings. Loan repayments and interest payments are a relatively stable source
of funds, while deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources, or on a longer term basis for general business purposes.
Deposits. Deposits are attracted principally from within the Bank's primary
market area through the offering of a broad selection of deposit instruments,
including checking accounts, passbook savings, NOW accounts, demand deposits,
money market accounts and certificates of deposit. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate.
37
<PAGE>
The Bank's policies are designed primarily to attract deposits from
local resodents and businesses rather than to solicit deposits from areas
outside its primary market. The Bank does not accept deposits from brokers due
to the volatility and rate sensitivity of such deposits. Interest rates paid,
maturity terms, service fees and withdrawal penalties are established by the
Bank on a periodic basis. Determination of rates and terms are predicated upon
funds acquisition and liquidity requirements, rates paid by competitors, growth
goals and federal regulations.
During the past two years, there has been a significant increase in
demand deposit accounts, resulting from the increase in commercial customers
during this time period.
The following table sets forth the various types of deposit accounts
at the Bank and the balances in these accounts at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ---------- -------- ---------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings deposits................ $ 40,794 31.6% $ 40,019 33.5% $ 40,399 35.4%
NOW accounts.................... 17,975 13.9 15,480 12.9 14,275 12.5
Money market deposits........... 6,489 5.0 6,366 5.3 5,755 5.1
Demand deposits................. 4,910 3.8 4,103 3.4 1,883 1.7
Certificates of deposit......... 59,135 45.7 53,666 44.9 51,513 45.3
-------- ----- -------- ----- -------- -----
Total deposits $129,303 100.0% $119,634 100.0% $113,825 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
For more information on the Bank's deposit accounts, see Note 7 of Notes to
Consolidated Financial Statements.
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity at June 30, 1997.
<TABLE>
<CAPTION>
MATURITY PERIOD CERTIFICATES OF DEPOSIT RATE
----------------- ----------------------- -----
(Dollars in thousands)
<S> <C> <C>
0- 3 months $3,762 5.43%
3-6 months 1,539 5.42
6-12 months 2,394 5.37
1-2 years 1,072 5.87
2-3 years 346 6.00
over 3 years 106 6.25
------
Total....... $9,219 5.50%
======
</TABLE>
Borrowings. Savings deposits historically have been the primary
source of funds for the Bank's lending and investment activities and for its
general business activities. The Bank is authorized, however, to use advances
from the FHLB to supplement its supply of lendable funds and to meet liquidity
requirements. Due to recent lending activity and demand for liquidity, the Bank
has utilized this borrowing power, and has received advances from the FHLB.
Advances from the FHLB are secured by the Bank's stock in the FHLB, the Bank's
deposits at the FHLB and a portion of the Bank's mortgage loans and investment
securities. The Bank had FHLB advances of $7.5 million outstanding at June 30,
1997.
The FHLB functions as a central reserve bank providing credit for
savings institutions and certain other financial institutions. As a member, the
Bank is required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities which are obligations of, or guaranteed by
the United States) provided certain standards related to creditworthiness have
been met.
38
<PAGE>
COMPETITION
The Bank experiences competition both in attracting and retaining
savings deposits and in the making of mortgage, commercial and other loans.
Direct competition for savings deposits primarily comes from larger commercial
banks and other savings institutions located in or near the Bank's primary
market area which often have significantly greater financial and technological
resources than the Bank. Additional significant competition for savings deposits
comes from credit unions, money market funds and brokerage firms.
With regard to lending competition in the local market area, the Bank
experiences the most significant competition from the same institutions
providing deposit services, most of whom have placed an emphasis on real estate
lending as a line of business. In addition , the Bank competes with local and
regional mortgage companies, independent mortgage brokers and credit unions in
originating mortgage and non-mortgage loans.
The primary factors in competing for loans are interest rates and loan
origination fees and the range of services offered by the various financial
institutions.
Competition from other financial institutions operating in the Bank's
local community includes a number of both large and small commercial banks and
savings institutions. As of June 30, 1997, the Bank's market share was
approximately 14.5% of overall financial institution deposits in the City of
Medford. The Bank has experienced growth in deposits in recent years primarily
due to an increased emphasis on marketing products and services. However,
competition remains high in the marketplace.
PROPERTIES
The following table sets forth certain information at June 30, 1997
regarding the Bank's office facilities, which are owned by the Bank, with the
exception of the High School Educational Branch, which is leased at no cost, and
certain other information relating to its property at that date.
<TABLE>
<CAPTION>
YEAR COMPLETED SQUARE FOOTAGE NET BOOK VALUE
------------------ ------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C>
Main Office: 60 High Street
Medford, MA 02155 1931 7,000 $1,180
West Medford Office: 430 High Street
Medford, MA 02155 1970 2,500 $ 45
Salem Street Office: 201 Salem Street
Medford, MA 02155 1995 3,500 $ 947
High School
Educational Branch: 489 Winthrop Street 1986 500 $- 0 -
Medford, MA 02155
</TABLE>
The Bank also owns an office building adjacent to its main office,
located at 66 High Street, Medford, MA 02155, which had a net book value of $1.8
million at June 30, 1997. The Bank uses a portion of the top floor of this
building to house a portion of its administrative and clerical services and
leases the remaining space to third-party tenants.
At June 30, 1997, the net book value of the Bank's computer equipment
and other furniture, fixtures and equipment at its existing offices totaled
$524,000. For more information, see Note 5 of the Notes to Consolidated
Financial Statements.
39
<PAGE>
EMPLOYEES
At June 30, 1997, the Bank had 44 full-time and 22 part-time
employees. None of the Bank's employees is represented by a collective
bargaining agreement. Management of the Bank believes that it enjoys good
relations with its personnel.
LEGAL PROCEEDINGS
Although the Bank, from time to time, is involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Bank, its directors or its officers is a party or to
which any of its property is subject.
40
<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
The board of directors of the Company will initially be comprised of
the existing members of the Bank's board of directors, with Mr. McGlynn serving
as Chairman of the Board. The board of directors of the Company is divided into
three classes, each of which contains approximately one-third of the board of
directors. The directors are elected by the stockholders of the Company for
staggered three year terms, or until their successors are elected and qualified.
One class of directors, consisting of Messrs. McGlynn and Surabian, has a term
of office expiring at the first annual meeting of stockholders following the
Conversion; the second class, consisting of Ms. Silva, Mr. Hackett and Ms.
Bernardin, has a term of office expiring at the second annual meeting of
stockholders; and the third class, consisting of Messrs. Kazanjian and Raimo,
has a term of office expiring at the third annual meeting of stockholders. The
biographical information of each Director is set forth under "Management of the
Bank - Directors." It is currently intended that directors of the Company will
receive no additional fees for their services as Directors of the Company.
However, subsequent to the Conversion, the Boards of the Company and the Bank
intend to study the level and structure of compensation paid to financial
institutions and, upon a review of such study, may revise the amounts of fees
paid to Board members and frequency of Board and Committee meetings. See
"Management of the Bank - Directors' Compensation" for a discussion of fees paid
to the directors of the Bank.
EXECUTIVE OFFICERS OF THE COMPANY
The following individuals are executive officers of the Company and
hold the offices set forth below opposite their names. The biographical
information for each executive officer is set forth under "Management of the
Bank - Directors" and "- Executive Officers who are not Directors."
<TABLE>
<CAPTION>
NAME POSITION(S) HELD WITH THE COMPANY
- ---- ---------------------------------
<S> <C>
Robert H. Surabian President and Chief Executive Officer
Ralph W. Dunham Executive Vice President, Chief Financial Officer and
Treasurer
Lorraine P. Silva Secretary
</TABLE>
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation, retirement or removal by the board of directors. Since
the formation of the Company, none of the executive officers, directors or other
personnel has received remuneration from the Company. It is currently expected
that, unless and until the Company becomes actively involved in business
activities separate from those conducted by the Bank, no separate compensation
will be paid to the directors and employees of the Company. However, directors
of the Company or the Bank who are not employees of the Company or the Bank or
any of their subsidiaries may be entitled to participate in the Stock Option
Plan and Restricted Stock Plan expected to be established by the Company at
least one year following completion of the Conversion. See "Management of the
Bank." The Company will also guarantee certain obligations of the Bank to the
Bank's executive officers, employees and directors, as described below.
Information concerning the principal occupations, employment and compensation of
the directors and the officers of the Company during the last five years is set
forth under "Management of the Bank -- Biographical Information."
41
<PAGE>
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information with respect to the
persons who are directors of the Bank. There are no arrangements or
understandings between the Bank and any person pursuant to which such person has
been elected as a director. The term of each director is three years and terms
are staggered so that only one-third of the directors is elected each year.
Upon completion of the Conversion, each director will continue to serve as a
director of the Bank. Following the Conversion, directors will be elected by
the stockholder rather than by mutual shareholders.
<TABLE>
<CAPTION>
CURRENT
DIRECTOR TERM
DIRECTORS AGE(1) POSITION SINCE EXPIRES
- --------- ------ -------- -------- ------
<S> <C> <C> <C> <C>
Julie Bernardin 54 Director 1994 1998
John A. Hackett 57 Director 1983 1998
Richard M. Kazanjian 61 Director 1984 1999
John J. McGlynn 75 Chairman of Board 1966 1997
of Directors
Dennis M. Raimo 35 Director 1994 1999
Lorraine P. Silva 66 Director 1983 1998
Robert H. Surabian 61 President, Chief Executive 1967 1997
Officer and Director
</TABLE>
__________
(1) At June 30, 1997.
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the directors and
executive officers of the Bank. Unless otherwise indicated, each director and
executive officer has held his current occupation for the last five years.
John J. McGlynn is the Chairman of the board of directors of the Bank.
Mr. McGlynn was elected Chairman of the Board in 1992. Mr. McGlynn is the
retired Commissioner of the Public Employee Retirement Administration for the
Commonwealth of Massachusetts and a former member of the Pension Reserves
Investment Management Board.
Robert H. Surabian is the President and Chief Executive Officer and a
Director of the Bank. He has been the President of the Bank since 1979 and was
named Chief Executive Officer in 1991.
Julie Bernardin is a Principal at J.B. Consulting, Medford,
Massachusetts, which provides management and organizational consulting services,
including career counseling and small business consulting.
John A. Hackett is the President and owner of J.J. Ruddy Insurance
Agency, Inc., Medford, Massachusetts, which he has owned for 35 years.
Richard M. Kazanjian is a Principal of Consolidated Realty Trust,
Medford, MA, a General Partner in Wellington Realty, Medford, MA, and a part-
owner and consultant for Graphic Solutions, Medford, MA.
Dennis M. Raimo is a certified public accountant and is a Partner, the
Treasurer and a Director
42
<PAGE>
of the firm of Della Pelle, Quigley, Raimo & Co., P.C., Medford, Massachusetts.
His firm provides consulting, tax advice, audit and general accounting services
to small and medium-sized businesses.
Lorraine P. Silva is the current Clerk of the Bank. Ms. Silva was
employed by the Bank for 28 years and has been retired since 1988.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Thomas G. Burke, age 50, has been a Senior Vice President and
Commercial Loan Officer of the Bank since 1995. He is responsible for all
commercial lending and supervision of the commercial loan department. Mr. Burke
was employed at Medford Savings Bank from 1990 to 1995, where he was a Vice
President and a Commercial Loan Officer.
Ralph W. Dunham, age 41, has been an Executive Vice President since
1997 and the Chief Financial Officer of the Bank since 1988. As Chief Financial
Officer, he is responsible for the overall financial management of the Bank. Mr.
Dunham is an attorney and a certified public accountant.
Deborah A. McNeill, age 42, is a Senior Vice President since 1996 and
the Treasurer of the Bank since 1993. She has been an employee of the Bank for
23 years. Her present duties include directing and coordinating the operation of
the accounting and operations departments.
Henry T. Sampson, Jr., age 49, has been a Senior Vice President since
1992 and the Chief Residential Loan Officer of the Bank since 1993. Mr. Sampson
is responsible for all non-commercial lending and supervision of the lending
department.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors conducts its business through meetings of the
Board and its committees. Regular meetings of the board of directors are held on
a monthly basis. The board of directors held 12 regular and 7 special meetings
during the fiscal year ended June 30, 1997. No director attended fewer than 75%
of the meetings of the board of directors and committees on which such director
served during this period.
The Board's Security Committee consists of Directors Surabian, Hackett
and McGlynn. This Committee meets weekly and reviews loan applications, loan
collateral, loan commitments, appraisal reports on real estate and interest
rates on loan and deposit accounts. Mr. Surabian serves as Chairperson.
The Board's Finance Committee consists of Directors Silva, Raimo,
Bernardin and Kazanjian. This Committee is responsible for the review of the
annual audit with the Bank's outside auditors and to report on any substantive
issues thereon to the Board. The Committee also reviews internal audits of Bank
operations conducted by an accounting firm which conducts internal audits. The
Committee meets monthly to review internal financial reports and also meets to
provide recommendations to the Board on the Bank's annual budget. Ms. Silva
serves as Chairperson.
The Board's Loan Audit Committee consists of Director Kazanjian. This
Committee is responsible for reviewing loan files and certain loan policies and
procedures. Mr. Kazanjian serves as Chairperson.
The Board's Compensation Committee consists of Directors Hackett,
McGlynn, Raimo and Silva. This Committee provides advice and recommendations to
the Board in areas of employee salaries and
43
<PAGE>
directors' compensation. Mr. Hackett serves as Chairperson.
As part of its recently adopted Post-Conversion Supervision Policy,
the Board has established procedures to monitor management's implementation of
the Bank's Plan of Conversion, including the sound deployment of the Conversion
proceeds. Following the Conversion, the Board will appoint a post-conversion
supervision committee to evaluate the Bank's deployment of conversion proceeds
and monitor activities as a stock company. See "Regulation -- Massachusetts
Banking Laws and Supervision -- Post-Conversion Oversight."
It is expected that after the Conversion, the Bank's full Board will
act as a nominating committee for selecting the management nominees for election
as directors in accordance with the Bank's Bylaws as a stock co-operative bank.
It is also expected that the board of directors of the Company will establish
similar committees that will serve the same functions for the Company and its
board of directors.
DIRECTORS' COMPENSATION
Fee Arrangements. Members of the Bank's board of directors receive
fees of $600 per Board Meeting, and fees ranging from $650 to $885 per month for
each committee attended. The Chairman of the Board also receives a $6,000 annual
retainer. Total directors' fees for fiscal 1997 were $90,300 and total committee
fees were $67,140. It is initially anticipated that directors of the Company
will not receive compensation for their services as such but will participate in
the Option Plan and Restricted Stock Plan expected to be implemented by the
Company.
EXECUTIVE COMPENSATION
Compensation Decisions. Decisions regarding the Company's executive
compensation will be made by the Company's Compensation Committee, exclusive of
those directors employed by the Company. Under this structure, no interlocks
will exist between members of the compensation committee and employees of the
Company.
Cash Compensation. The following table sets forth the cash
compensation paid by the Bank for services rendered in all capacities during the
fiscal year ended June 30, 1997 to the President and Chief Executive Officer of
the Bank and each other executive officer of the Bank whose annual salary and
bonus for such fiscal year was in excess of $100,000 (each, a "Named Executive
Officer").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
- ------------------------------------------------------------------------------------------------------------
LONG-TERM
NAME AND PRINCIPAL FISCAL OTHER ANNUAL INCENTIVE PLAN ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION (2) PAYOUTS (3) COMPENSATION (4)
- ------------------ ------ ------------ ---------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Surabian, 1997 $148,896 $37,500 __ __ $4,700
President and Chief
Executive Officer
Ralph W. Dunham, 1997 93,600 9,400 __ __ 4,700
Chief Financial Officer,
Executive Vice President
and Treasurer
</TABLE>
______________
(1) Under Annual Compensation, the column titled "Salary" includes the Named
Executive Officer's base salary including all payroll deductions for health
insurance under the Bank's health insurance plan and pre-tax contributions
to the Bank's 401(k) Plan. The column titled "Bonus" includes a stipend of
$17,500 to be paid annually for a ten year period by the Bank to the Chief
Executive Officer to cover premiums due on a [term] life insurance policy
owned by the Chief Executive Officer. The Chief Executive Officer pays all
44
<PAGE>
taxes required on these payments which are reported on the IRS Form W-2
issued to the Officer. Directors' fees are not paid to the Chief Executive
Officer who is a member of the Bank's board of directors.
(2) For the fiscal year ended June 30, 1997, there were no: (a) perquisites
with an aggregate value for each Named Executive Officer in excess of the
lesser of $50,000 or 10% of the total of the Officer's salary and bonus for
the year; (b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term incentive
plans prior to settlement or maturation; or (d) preferential discounts on
stock.
(3) During the fiscal year ended June 30, 1997, the Bank did not maintain any
restricted stock, stock option or other long-term incentive compensation
plans.
(4) Includes matching contributions made by the Bank to the 401(k) Plan on each
Named Executive Officer's behalf.
CERTAIN BENEFIT PLANS AND AGREEMENTS
General. Currently, the Bank contributes to tax-qualified savings and
retirement plans for the benefit of its eligible employees. In addition, the
Bank maintains group medical, dental, hospitalization, disability and life
insurance coverages for its personnel. It is anticipated that the Bank will
continue to provide these benefits to eligible employees after the Conversion is
completed.
In connection with the Conversion, the Company has adopted an ESOP for
the benefit of its eligible employees and those of its affiliates, such as the
Bank, which has adopted this plan. The ESOP, described below, will become
effective upon the effective date of the Bank's Conversion.
The Company has also approved employment agreements to be entered into
between the Company and two senior executive officers who also serve the Bank in
the same respective capacities. Similarly, the Bank has also approved employment
agreements for two commercial loan officers. These employment agreements,
described below, will become effective on the effective date of the Bank's
Conversion.
Basis for Awards of Benefits and Compensation. The respective boards
of directors of the Company and the Bank have evaluated and approved the terms
of the employment agreements and other benefits described below. In its review
of the benefits and compensation of the executive officers and the terms of the
employment agreements, the Boards have considered a number of factors, including
among others, the ability, performance, service and experience of these officers
and executives as well as the various legal and regulatory requirements
regarding the levels of compensation which may be paid to employees of a
depository institution.
Retirement Plans. The Bank is a participant in the retirement plans
sponsored by the Cooperative Banks Employees Retirement Association ("CBERA").
Two plans are provided: a defined contribution plan (the "401(k) Plan"), under
which employee contributions are matched by contributions from the Bank, and a
defined benefit retirement plan ("Pension Plan") that is funded solely by
employer contributions made by the Bank. Employees of the Bank are eligible to
participate in these Plans after attaining age 21 and completing one year of
service (defined as a 12-month period commencing on the date of hire during
which the employee has worked at least 1,000 hours).
401(k) Plan. The 401(k) Plan permits eligible employees to save for
retirement by making pre-tax and post-tax contributions to the Plan of up to ten
percent (10%) of the annual salary paid to them by the Bank. Pre-tax
contributions made by participants are eligible to be "matched" by employer
contributions made by the Bank on each participating employee's behalf. Post-
tax contributions are not eligible for Bank matching contributions. Under the
401(k) Plan, the Bank will make a 50% "matching" contribution for each pre-tax
contribution made by a participant up to 5% of the participant's total annual
salary. An employee will always
45
<PAGE>
be 100% vested in any pre-tax or post-tax contributions he makes to the 401(k)
Plan and will become incrementally vested in any matching contributions made on
his behalf at a rate of 20% for each year of service with the Bank, with initial
vesting to begin after two years of service and full vesting to occur after six
years of service or upon earlier disability, death or attainment of normal
retirement age. Distributions may be made at the election of a participant in
either a single lump sum payment or installments, as provided in the Plan.
Pension Plan. The Pension Plan provides a benefit for all eligible
Bank employees, including the Named Executive Officers listed in the Executive
Compensation Table, equal to the sum of: (a) the participant's accrued benefit
under the applicable Prior Plan determined as of December 31, 1988 plus (b) one
percent (1%) of the participant's "Final Average Compensation" (defined to mean
a participant's highest compensation averaged over three years) plus (c) one-
half of one percent (0.5%) of the participant's Final Average Compensation in
excess of covered compensation multiplied by the participant's benefit service
after December 31, 1988. A participant will become incrementally vested in
their accrued benefit under the Pension Plan at a rate of 20% each year
beginning after two years of service with the Bank, with full vesting to occur
after six years of service or earlier termination of employment due to
disability, death or attainment of normal retirement age. The Pension Plan is
funded by the Bank on an actuarial basis and all assets are held in trust by the
trustee.
The following table illustrates the annual benefit payable upon normal
retirement at age 65, in the form of a single life annuity, with no offset for
Social Security benefits, under the Pension Plan at various levels of
compensation and years of service under the Plan:
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------
FINAL AVERAGE COMPENSATION 10 15 20 25
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
$50,000 $ 7,500 $11,250 $15,000 $18,750
75,000 11,250 16,875 22,500 28,125
100,000 15,000 22,500 30,000 37,500
125,000 18,750 28,125 37,500 46,875
150,000(1) 22,500 33,750 45,000 56,250
175,000(1) 26,250 39,375 52,500 65,625
200,000(1) 30,000 45,000 60,000 75,000
</TABLE>
_______________
(1) These are hypothetical benefits based on the Pension Plan's normal
retirement benefit formula. The benefits shown above do not reflect an
offset for Social Security benefits and there are no other offsets. For the
Pension Plan year ended December 31, 1996, the compensation for calculating
benefits could not exceed $150,000. This compensation limitation will be
adjusted for subsequent years pursuant to Internal Revenue Code (the
"Code") provisions.
The following table sets forth the years of credited service
determined as of December 31, 1996, the end of the 1996 plan year, for each
Named Executive Officer listed in the Executive Compensation Table. The accrued
benefit of each Named Executive Officer under the Pension Plan is determined on
the basis of each Officer's "Years of Credited Service," shown below, and his
"Final Average Compensation," as defined above. Each Named Executive Officer's
"Final Average Compensation" will include the amounts listed under the "Salary"
and "Bonus" columns of the Executive Compensation Table.
46
<PAGE>
YEARS OF CREDITED SERVICE
-------------------------
<TABLE>
<CAPTION>
YEARS MONTHS
----- ------
<S> <C> <C>
Mr. Surabian 18 1
Mr. Dunham 8 9
</TABLE>
Employee Stock Ownership Plan and Trust. The Company has established,
and the Bank has adopted, for the benefit of eligible employees, an ESOP and
related trust to become effective upon completion of the Conversion. Employees
of the Bank or the Company who have attained age 21 and have completed one year
of service will be eligible to become participants in the ESOP. The ESOP intends
to purchase eight percent (8%) of the Common Stock issued in the Conversion. As
part of the Conversion and in order to fund the ESOP's purchase of the Common
Stock to be issued in the Conversion, the Bank or the Company expects to
contribute to the ESOP sufficient funds to pay the par value of the Common Stock
to be purchased and the ESOP intends to borrow funds from the Company equal to
the balance of the aggregate purchase price of the Common Stock. Although
contributions to the ESOP will be discretionary, the Company or the Bank intends
to make annual contributions to the ESOP in an aggregate amount at least equal
to the principal and interest requirements on the debt. It is expected that
this loan will be for a term of up to 10 years, will bear interest at the rate
of 8% per annum, and will call for level annual payments of principal and
interest designed to amortize the loan over its term. It is anticipated that
the loan will also permit partial pre-payments. The Company and the Bank may
make additional annual contributions to the ESOP to the maximum extent
deductible for federal income tax purposes.
Shares purchased by the ESOP will initially be pledged as collateral
for the loan, and will be held in a suspense account until released for
allocation among participants in the ESOP as the loan is repaid. The pledged
shares will be released annually from the suspense account in an amount
proportional to the repayment of the ESOP loan for each plan year. The released
shares will be allocated among the accounts of participants on the basis of the
participant's compensation for the year of allocation. Benefits generally become
vested at the rate of 20% per year with vesting to begin after an employee's
completion of three years of service and full vesting to occur after seven years
of service. Participants also become immediately vested upon termination of
employment due to death, retirement at age 65 or older, permanent disability or
upon the occurrence of a change of control. Forfeitures will be reallocated
among remaining participating employees, in the same proportion as
contributions. Vested benefits may be paid in a single sum or installment
payments and are payable upon death, retirement at age 65 or older, disability
or separation from service.
In connection with the establishment of the ESOP, a Committee of the
Company's board of directors will be appointed to administer the ESOP (the "ESOP
Committee"). An unrelated corporate trustee for the ESOP will be appointed prior
to the Conversion and will continue thereafter. The ESOP Committee may instruct
the trustee regarding investment of funds contributed to the ESOP. The ESOP
trustee, subject to its fiduciary duty, must vote all allocated shares held in
the ESOP in accordance with the instructions of the participating employees.
Under the ESOP, unallocated shares will be voted in a manner calculated to most
accurately reflect the instructions it has received from participants regarding
the allocated stock as long as such vote is in accordance with the provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The ESOP may purchase additional shares of Common Stock in the future,
in the open market or otherwise, and may do so either on a leveraged basis with
borrowed funds or with cash dividends, periodic employer contributions or other
cash flow. Whether such purchases will be made and the terms and conditions of
any such purchases will be determined by the ESOP's fiduciaries taking into
account such factors as they consider relevant at the time, including their
judgment as to the attractiveness of the Common Stock as an investment, the
price at which Common Stock may be purchased and, in the case of leveraged
purchases, the
47
<PAGE>
terms and conditions on which borrowed funds are available and the willingness
of the Company or the Bank to offer purchase money financing or guarantee
purchase money financing offered by third parties.
EMPLOYMENT AGREEMENTS
Employment Agreements between the Company and Two Senior Executives.
The board of directors of the Company has authorized the Company to enter into
Employment Agreements with each of Mr. Robert H. Surabian and Mr. Ralph W.
Dunham (the "Senior Executives"), on behalf of both the Company and the Bank, to
become effective upon consummation of the Conversion. These Employment
Agreements establish the respective duties and compensation of the Senior
Executives and are intended to ensure that the Company and the Bank will be able
to maintain a stable and competent senior executive management team after the
Conversion. The continued success of the Company and the Bank depends to a
significant degree on the skills and competence of these Senior Executives.
The Employment Agreements to be entered into between the Company and
Messrs. Surabian and Dunham will each have a three year term. The term of the
Employment Agreement between the Company and Mr. Surabian will be automatically
extended on a daily basis so that the remaining term of this Agreement will
always be three years unless written notice of non-renewal is given by the Board
or the Senior Executive. The Company's Employment Agreement with Mr. Dunham
provides that, commencing on the Agreement's first anniversary date and
continuing each anniversary date thereafter, the Board may, with the Senior
Executive's concurrence, extend the Employment Agreement for an additional year,
so that the remaining term will be three years, after conducting a performance
evaluation of the Senior Executive. Both Employment Agreements provide that
each Senior Executive's base salary will be reviewed annually. It is
anticipated that this review will be performed by non-employee members of the
Board, and each Senior Executive's base salary may be adjusted on the basis of
his job performance and the overall performance of the Company and the Bank.
The base salaries for Messrs. Surabian and Dunham commencing as of July 1, 1997,
were $153,363.00 and $96,408.00, respectively. In addition to the base salary,
the Employment Agreements provide for, among other things, entitlement to
participation in pension, savings, incentive and welfare benefit plans and
eligibility for fringe benefits applicable to executive personnel such as fees
for club and organization memberships deemed appropriate by the Company and the
Senior Executive. The Employment Agreements provide for termination by the
Company at any time for cause as defined in the Employment Agreements.
In the event of the termination of the Senior Executive's employment
with the Company and the Bank for reasons other than for cause, death or
disability, or in the event of the Senior Executive's resignation from the
Company and the Bank for reasons permitted under the Employment Agreements (such
as following a change in control), the Senior Executive would be entitled to a
lump sum cash payment in an amount equal to the present value of the remaining
base salary payments due for the remaining term of the Agreement. However, in
the event a Senior Executive's employment terminates following a change in
control of the Company (as described below), for purpose of computing the lump
sum severance amount payable, the remaining term of each Executive's Employment
Agreement will be deemed to be three years. The Agreements also provide for the
Company (or the Bank, if applicable) to continue the Senior Executive's life,
health and disability insurance coverages for the remaining term of the
Employment Agreement. In addition to the foregoing severance benefits, the
Company's Employment Agreement with Mr. Surabian provides for him to receive all
bonus payments and additional contributions or benefits he would have earned
under any employee benefit plan of the Company or the Bank during the remaining
term of his Employment Agreement as well as the payments that would have been
made under any incentive compensation plan during the remaining term of the
Employment Agreement. If permitted by applicable law, provision will also be
made for the cash out of stock options, appreciation rights or restricted stock
as if Mr. Surabian was fully vested. Reasons specified as grounds for
resignation by the Senior Executives for purposes of the Employment Agreements
include: failure to elect or re-elect the Senior Executive to his offices;
failure to vest in him the functions, duties or authority associated with such
offices; any material breach of contract by the Company or the Bank which is not
cured within 30 days after written notice thereof; and, following a "change in
control" (as defined in the Employment
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Agreements), demotion, loss of title, office or significant authority or
responsibility, any reduction in any element of compensation or benefits, any
adverse change or location of the principal place of employment or working
conditions or resignation for any other reason. In general, for purposes of the
Employment Agreements, the ESOP and any stock benefit plans to be maintained by
the Company or the Bank, a "change in control" will generally be deemed to occur
when a person or group of persons acting in concert acquires beneficial
ownership of 25% or more of any class of equity security of the Company or the
Bank, upon stockholder approval of a merger or consolidation or a change of the
majority of the board of directors of the Company or the Bank, or liquidation or
sale of substantially all the assets of the Company or the Bank. Based on
current compensation and benefit costs, cash payments to be made in the event of
a change of control of the Bank or the Company pursuant to the terms of the
Employment Agreements would be approximately $1,267,000 of which approximately
$876,000 would be payable to Mr. Surabian and $391,000 would be payable to Mr.
Dunham. However, the actual amount to be paid under the Employment Agreements
in the event of a change in control of the Company or the Bank cannot be
estimated at this time because the actual amount is based on the compensation
and benefit costs applicable to these individuals and other factors existing at
the time of the change in control which cannot be determined at this time.
Payments to the Senior Executives under the Company's Employment
Agreements may be paid by either the Bank or the Company and thus will not be
duplicative; the Employment Agreements provide that the Company will guarantee
that all payments to the Senior Executives will be made as provided under the
Employment Agreements. The Senior Executives would be entitled to reimbursement
of certain costs incurred in interpreting or enforcing the Employment
Agreements.
Cash and benefits paid to each Senior Executive under the Employment
Agreements together with payments under other benefit plans following a change
in control of the Company or the Bank may constitute an "excess parachute"
payment under Section 280G of the Code, resulting in the imposition of a 20%
excise tax on the recipient and the denial of the deduction for such excess
amounts to the Company and the Bank. The Company's Employment Agreements
include a provision indemnifying each Senior Executive on an after-tax basis for
any "golden parachute" excise taxes.
Employment Agreements between the Bank and Two Commercial Lending
Officers. The board of directors of the Bank has authorized the Bank to enter
into Employment Agreements with each of Mr. Thomas G. Burke and Mr. John
O'Donnell, who both currently serve the Bank as Commercial Loan Officers ("Loan
Officers"), to become effective upon consummation of the Conversion. The
purpose of these Employment Agreements is to secure the Loan Officers' continued
availability and attention to the Bank's affairs, relieved of distractions
arising from the possibility of a corporate change in control.
Both Agreements have three year terms that may be extended by the
Bank's board of directors, after a performance review of the Loan Officer, for
an additional year. The base salaries for Messrs. Burke and O'Donnell
commencing as of July 1, 1997, were $88,580 and $79,310, respectively. In
addition to the base salary, the Employment Agreements provide for, among other
things, eligibility for participation in the Bank's employee pension, savings,
incentive and welfare benefit plans. The Employment Agreements provide for
termination by the Bank at any time for cause as defined in the Employment
Agreements.
In the event that a Loan Officer's employment with the Bank is
terminated for reasons other than for cause, death or disability or in the event
that the Loan Officer resigns from employment with the Bank following a "change
in control" (as defined above), the Officer would be entitled to a lump sum cash
payment in an amount equal to the present value of the remaining base salary
payments due for the remaining term of the Agreement, as severance pay. In the
event that severance is payable to a Loan Officer due to his termination of
employment following a change in control of the Bank, for purpose of computing
the lump sum severance amount payable, the remaining term of each Officer's
Employment Agreement will be deemed to be three years. The Agreements also
provide for the Bank to continue the Loan Officer's life, health and disability
insurance coverages for the remaining term of the Employment Agreement, as an
additional severance benefit.
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Based on current compensation and benefit costs applicable to the Loan
Officers expected to be covered by the Employment Agreements, cash payments to
be made in the event of a change of control of the Bank would be approximately
$503,000. However, the actual amount to be paid under these Agreements in the
event of a change of control of the Bank or the Company cannot be estimated at
this time because it will be based on the compensation and benefit costs
applicable to the Loan Officers and other factors existing at the time of the
change of control which cannot be determined at this time.
FUTURE STOCK BENEFIT PLANS
In addition to the above-described benefit plans, in the future, but
not in the first year following consummation of the Conversion, the Company and
the Bank are expected to consider implementation of an Option Plan and a
Restricted Stock Plan. The significant terms and conditions of these future
stock benefit programs are described below.
Option Plan. At least one year following the Conversion, the Company
anticipates establishing an Option Plan for the benefit of officers, key
employees and directors of the Company and the Bank. The Option Plan will be
subject to stockholder approval. An amount of Common Stock equal to 10% of the
shares of Common Stock to be issued in the Conversion is expected to be reserved
for issuance under the Option Plan. No determinations have been made by the
board of directors as to the specific terms of the Option Plan or the amount of
awards to be granted thereunder. While the Company does not currently intend
to implement the Option Plan within one year following completion of the
Conversion, FDIC regulations provide that if the Option Plan is implemented
within one year following completion of the Conversion, no individual officer or
employee may receive more than 25% of the options granted, and non-employee
directors may not receive more than 5% individually or more than 30% in the
aggregate of the options granted.
The Company's primary purpose of implementing the Option Plan will be
to attract and retain officers, key employees and directors of outstanding
competence and experience and to provide these individuals with a proprietary
interest in the Company as an incentive to contribute to the success of the
Company and its subsidiaries. Although the terms of the Option Plan have not
yet been determined, it is expected that the Plan will provide for the grant of:
(i) options to purchase the Company's Common Stock intended to qualify as
incentive stock options under Section 422 of the Code ("Incentive Stock
Options") and (ii) options that do not so qualify ("Non-Statutory Stock
Options").
Due to the requirements of Section 422 of the Code, Incentive Stock
Options may only be granted to employees of the Company or the Bank. Non-
Statutory Stock Options may be granted to both employees and non-employee
directors under the Plan. The terms and conditions of options granted to
employees of the Company or the Bank will be determined by a committee of the
Company's board of directors appointed to administer the Option Plan, in its
discretion. The terms of all options granted to non-employee directors will be
made pursuant to the formula contained in the Option Plan document which will be
submitted to the Company's stockholders for approval. It is expected that the
exercise price for any stock option granted under the Plan will in no event be
less than the fair market value of a share of the underlying Common Stock on the
date of grant. Options will generally become exercisable in 20% increments
beginning on the first anniversary of the grant date with full vesting to occur
on the fifth anniversary of such date or upon the earlier disability or death of
the optionee. It is also expected that the Option Plan will provide for the
accelerated vesting of option grants upon a "change in control" of the Company
or the Bank (as such term is defined for purposes of the Employment Agreements).
Unless sooner terminated, the Option Plan expected to be implemented by the
Company will remain in effect for a period of ten years.
Restricted Stock Plan. No earlier than one year following the
Conversion, the Company also intends to establish a Restricted Stock Plan as a
method of providing officers, key employees and directors of the Company and the
Bank with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Company and the Bank. It is
anticipated that the Restricted Stock Plan would cover
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<PAGE>
both eligible officers and employees of the Company and the Bank and non-
employee directors of the Company and the Bank. The Restricted Stock Plan is
subject to stockholder approval.
Subject to stockholder approval, the Company expects to contribute
funds to the Restricted Stock Plan to enable the Restricted Stock Plan's trust
to acquire, in the aggregate, an amount up to 4% of the shares of Common Stock
issued in the Conversion. Shares used to fund the Restricted Stock Plan may be
acquired through open market purchases, if permitted, or from authorized but
unissued shares. No determinations have been made as to the specific terms of
the Restricted Stock Plan or the amount of awards thereunder. Although no
specific award determinations have been made, the Company anticipates that, if
stockholder approval is obtained, it will provide awards to eligible officers,
employees and directors to the extent permitted by applicable regulations.
While the Company does not currently intend to implement the Restricted Stock
Plan within one year following completion of the Conversion, FDIC regulations
provide that if the Restricted Stock Plan is implemented within one year
following completion of the Conversion, no individual employee may receive more
than 25% of the shares of any plan, and that non-employee directors may not
receive more than 5% of the shares individually or 30% in the aggregate for all
directors.
It is expected that the Restricted Stock Plan adopted would be
administered by a Committee of the board of directors (the "Restricted Stock
Plan Committee"). This Committee would determine the terms and conditions of
all awards made to employees of the Company or the Bank participating in the
Restricted Stock Plan. It is anticipated that awards to non-employee directors
under the Restricted Stock Plan and the material terms and conditions thereof,
will be specified in a plan document that will be submitted to the Company's
stockholders for approval. Under the Restricted Stock Plan, awards are expected
to be granted in the form of shares of Common Stock held by the Restricted Stock
Plan. The Board intends to appoint an independent fiduciary to serve as trustee
of the trust to be established pursuant to the Restricted Stock Plan. The
Restricted Stock Plan is expected to provide for the vesting of awards granted
thereunder in the manner specified by the Restricted Stock Plan Committee
generally at a rate of no more than 20% per year. It is also expected that in
the event of an award recipient's death, grants would become 100% vested, and,
in the event of disability, grants would become 100% vested upon the termination
of employment of an officer or employee, or upon termination of service as a
director. It is also expected that the Restricted Stock Plan will provide for
awards to become automatically 100% vested upon a "change in control" of the
Company or the Bank, as described above.
When shares become vested in accordance with the Restricted Stock
Plan, participants will recognize income equal to the fair market value of the
Common Stock at that time. The amount of income recognized by the participants
may be a deductible expense for tax purposes for the Company. When shares
become vested and are actually distributed in accordance with the Restricted
Stock Plan, the participants will also receive amounts equal to any accrued
dividends with respect thereto. Prior to vesting, recipients of grants may
direct the voting of the shares awarded to them. Shares not subject to grants
will be voted by the trustee of the Restricted Stock Plan in proportion to the
directions provided with respect to shares subject to grants. Vested shares will
be distributed to recipients as soon as practicable following the day on which
they are vested.
In the event that additional authorized but unissued shares are
acquired by the Restricted Stock Plan after the Conversion, the interests of
existing stockholders will be diluted. See, " Risk Factors -- Possible Dilutive
Effective of Future Stock Benefit Plans."
CERTAIN TRANSACTIONS
In the ordinary course of business, the Bank makes loans to its
directors and officers and parties related to them.
The Federal Reserve's "Regulation O" generally prohibits loans above
the greater of $25,000 or 5% of the Bank's capital and surplus (up to $500,000)
to directors and officers and their affiliates, unless such loans are
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approved in advance by a disinterested majority of the board of directors. As a
matter of policy, loans to directors of the Bank, as well as other affiliated
persons or entities, currently are made in the ordinary course of business and
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons, do
not involve more than the normal risk of collectability or present other
unfavorable features, and are approved by a disinterested majority of the board
of directors.
In addition to these provisions of federal law, Massachusetts law
requires that loans by a co-operative bank to its officers and directors be made
on non-preferential terms and receive the prior approval of a disinterested
majority of the board of directors. Further, loans by a co-operative bank to its
own officers may not exceed $20,000 for general purposes; $75,000 for
educational purposes; and $275,000 for residential home mortgage purposes. All
loans by a co-operative bank to its officers and directors must be reported
annually to the Commissioner. At June 30, 1997, total loans to directors and
officers of the Bank greater than $60,000 on an individual basis amounted to
approximately $1.67 million.
REGULATION
GENERAL
As a co-operative bank chartered by the Commonwealth of Massachusetts,
the Bank is subject to extensive regulation under state law with respect to many
aspects of its banking activities; this state regulation is administered by the
Commissioner. In addition, as a bank whose deposits are insured by the FDIC
under the BIF, the Bank is subject to deposit insurance assessments by the FDIC,
and the FDIC has examination and supervisory authority over the Bank, with a
broad range of enforcement powers. Finally, the Bank is required to maintain
reserves against deposits according to a schedule established by the Federal
Reserve System. These laws and regulations have been established primarily for
the protection of depositors and the deposit insurance funds, not bank
stockholders.
The following references to the laws and regulations under which the
Bank is regulated are brief summaries thereof, do not purport to be complete and
are qualified in their entirety by reference to such laws and regulations.
MASSACHUSETTS BANKING LAWS AND SUPERVISION
Massachusetts co-operative banks such as the Bank are regulated and
supervised by the Commissioner. The Commissioner is required to regularly
examine each state-chartered bank. The approval of the Commissioner is required
to establish or close branches, to merge with another bank, to form a bank
holding company, to issue stock or to undertake many other activities. Any
Massachusetts bank that does not operate in accordance with the regulations,
policies and directives of the Commissioner is subject to sanctions. The
Commissioner may under certain circumstances suspend or remove directors or
officers of a bank who have violated the law, conducted a bank's business in a
manner which is unsafe, unsound or contrary to the depositors' interests, or
been negligent in the performance of their duties.
All Massachusetts-chartered co-operative banks are required to be
members of the Co-operative Central Bank and are subject to its assessments. The
Co-operative Central Bank maintains the Share Insurance Fund, a private deposit
insurer, which insures all deposits in member banks in excess of FDIC deposit
insurance limits. In addition, the Co-operative Central Bank acts as a source of
liquidity to its members in supplying them with low-cost funds, and purchasing
certain qualifying obligations from them.
Major changes in Massachusetts law in 1982 and 1983 substantially
expanded the powers of co-operative banks, and made their powers virtually
identical to those of state-chartered commercial banks. The
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powers which Massachusetts-chartered co-operative banks can exercise under these
laws are summarized below.
Lending Activities. A Massachusetts chartered co-operative bank may
make a wide variety of mortgage loans. Fixed-rate loans, adjustable-rate loans,
variable-rate loans, participation loans, graduated payment loans, construction
loans, condominium and co-operative loans, second mortgage loans and other types
of loans may be made in accordance with applicable regulations. Mortgage loans
may be made on real estate in Massachusetts or in another New England state if
the bank making the loan has an office there or under certain other
circumstances. In addition, certain mortgage loans may be made on improved real
estate located anywhere in the United States. Commercial loans may be made to
corporations and other commercial enterprises with or without security. With
certain exceptions, such loans may be made without geographic limitation.
Consumer and personal loans may be made with or without security and without
geographic limitation. Loans to individual borrowers generally will be limited
to 20% of the total of the Bank's capital accounts and stockholders' equity.
Investments Authorized. Massachusetts-chartered co-operative banks
have broad investment powers under Massachusetts law, including so-called
"leeway" authority for investments that are not otherwise specifically
authorized. The investment powers authorized under Massachusetts law are
restricted by federal law to permit, in general, only investments of the kinds
that would be permitted for national banks. The Bank has authority to invest in
all of the classes of loans and investments that are permitted by its existing
loan and investment policies.
Payment of Dividends. A co-operative bank may only pay dividends on
its capital stock if such payment would not impair the bank's capital stock and
surplus account. No dividends may be paid to stockholders of a bank if such
dividends would reduce stockholders' equity of the bank below the amount of the
liquidation account required by Massachusetts conversion regulations.
Branches. With the approval of the Commissioner, bank branches may be
established in any city or town in Massachusetts; in addition, co-operative
banks may operate automated teller machines at any of their offices or, with the
Commissioner's approval, anywhere in Massachusetts. Sharing of ATMs or
"networking" is also permitted with the Commissioner's approval. Massachusetts
chartered co-operative banks may also operate ATMs outside of Massachusetts if
permitted to do so by the law of the jurisdiction in which the ATM is located.
Interstate Acquisitions. In 1996, the Massachusetts legislature
passed a new interstate banking statute in anticipation of the June 1, 1997
effective date of the federal interstate banking law. Pursuant to this statute,
an out-of-state bank may (subject to various regulatory approvals and to
reciprocity in its home state) establish and maintain bank branches in
Massachusetts by (i) merging with a Massachusetts bank that has been in
existence for at least three years, (ii) acquiring a branch or branches of a
Massachusetts bank without acquiring the entire bank, or (iii) opening such
branches de novo. Massachusetts banks' ability to exercise similar interstate
banking powers in other states depends upon the laws of the other states. For
example, according to the law of the bordering state of New Hampshire, out-of-
state banks may acquire New Hampshire banks by merger, but may not establish de
novo branches in New Hampshire.
Other Powers. Massachusetts-chartered co-operative banks may also
lease machinery and equipment, act as trustee or custodian for tax qualified
retirement plans, establish trust departments and act as professional trustee or
fiduciary, provide payroll services for their customers, issue or participate
with others in the issuance of mortgage-backed securities and establish mortgage
banking companies and discount securities brokerage operations. Some of these
activities require the prior approval of the Commissioner.
Post-conversion Oversight. The Commissioner will continue to oversee
the Bank following the Conversion on a number of matters specifically relating
to the Conversion. For example, pursuant to its Post-Conversion Supervision
Policy, the Bank has agreed to submit written quarterly progress reports to the
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Division for three years following the Conversion which detail the
implementation of the Bank's conversion business plan's objectives and goals.
See "Management." In addition, the Bank's Dividend Policy and Stock Repurchase
Policy each provides that any modification to that policy requires the
Commissioner's prior notice and consent. See "Dividends."
FEDERAL BANKING REGULATIONS
Capital Requirements. Under FDIC regulations, state-chartered banks
that are not members of the Federal Reserve System ("state non-member banks"),
such as the Bank, are required to comply with minimum leverage capital
requirements. For an institution determined by the FDIC to not be anticipating
or experiencing significant growth and to have well diversified risk, including
no undue interest rate risk exposure, excellent asset quality, high liquidity,
good earnings and to be in general a strong banking organization, rated
composite 1 under the Uniform Financial Institutions Ranking System (the CAMELS
rating system) established by the Federal Financial Institutions Examination
Council, the minimum capital leverage requirement is a ratio of Tier 1 capital
to total assets of 3%. For all other institutions, the minimum leverage capital
ratio is 3% plus an additional "cushion" amount of at least 100 to 200 basis
points. Tier 1 capital is the sum of common stockholders' equity, noncumulative
perpetual preferred stock (including any related surplus) and minority
investments in certain subsidiaries, less most intangible assets.
The FDIC has also adopted risk-based capital guidelines to which the
Bank is subject. The guidelines establish a systematic analytical framework
designed to make regulatory capital requirements sensitive to differences in
risk profiles among banking organizations. The FDIC guidelines require state
non-member banks to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The ratio of such regulatory capital to
regulatory risk-weighted assets is referred to as the Bank's "risk-based capital
ratio." Risk-based capital ratios are determined by allocating assets and
specified off-balance sheet items to four risk-weighted categories ranging from
0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk. Under the FDIC's risk-weighting system,
cash and securities backed by the full faith and credit of the U.S. government
are given a 0% risk weight. Mortgage-backed securities that qualify under the
Secondary Mortgage Enhancement Act, including those issued, or fully guaranteed
as to principal and interest, by the FNMA or the Federal Home Loan Mortgage
Corporation ("FHLMC"), are assigned a 20% risk weight. Single-family first
mortgages not more than 90 days past due with loan-to-value ratios under 80%,
multi-family mortgages (maximum 36 dwelling units) with loan-to-value ratios
under 80% and average annual occupancy rates over 80%, and certain qualifying
loans for the construction of one- to four-family residences pre-sold to home
purchasers, are assigned a risk weight of 50%. Consumer loans and commercial
real estate loans, repossessed assets and assets more than 90 days past due, as
well as all other assets not specifically categorized, are assigned a risk
weight of 100%.
State non-member banks must maintain a minimum ratio of qualifying
total capital to risk-weighted assets of at least 8%, of which at least one-half
must be Tier 1 capital. Qualifying total capital consists of Tier 1 capital plus
Tier 2 or supplementary capital items, which include allowances for loan losses
in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock,
preferred stock with a maturity of over 20 years, and certain other capital
instruments. The includable amount of Tier 2 capital cannot exceed the amount of
the institution's Tier 1 capital. Qualifying total capital is further reduced
by the amount of the bank's investments in banking and finance subsidiaries that
are not consolidated for regulatory capital purposes, reciprocal cross-holdings
of capital securities issued by other banks and certain other deductions.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
required each federal banking agency to revise its risk-based capital standards
for insured institutions to ensure that those standards take adequate account of
interest-rate risk ("IRR"), concentration of credit risk, and the risk of
nontraditional activities, as well as to reflect the actual performance and
expected risk of loss on multi-family residential loans. In August 1995, the
FDIC, along with the other federal banking agencies, adopted a regulation
providing that the agencies will take account of the exposure of a bank's
capital and economic value to the risks of changes
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in interest rates in assessing a bank's capital adequacy. According to the
agencies, applicable considerations include the quality of the bank's interest
rate risk management process, the overall financial condition of the bank, and
the level of other risks at the bank for which capital is needed. Institutions
with significant interest rate risk may be required to hold additional capital.
The agencies also issued a joint policy statement providing guidance on interest
rate risk management, including a discussion of the critical factors affecting
the agencies' evaluation of interest rate risk in connection with capital
adequacy. The agencies have determined not to proceed with a previously issued
proposal to develop a supervisory framework for measuring interest rate risk and
to require an explicit capital component for interest rate risk.
The following table shows the Bank's leverage ratio, its Tier 1 risk-
based capital ratio, and its total risk-based capital ratio, at June 30, 1997.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------------------------------------------------------------------------------------------
HISTORICAL PERCENT OF PRO FORMA PERCENT OF CAPITAL PERCENT OF
CAPITAL ASSETS/(1)/ CAPITAL /(1)/ ASSETS/(1)/ REQUIREMENT ASSETS/(2)/
------------------------------- ------------------------- ---------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Regulatory Tier 1 leverage
capital..................... $11,761 8.1% $19,277 12.14% $4,762 4.00%
Tier 1 risk-based capital.... 11,761 13.3 19,277 12.14 7,216 4.00
Total risk-based capital..... 12,738 14.4 20,251 22.45 7,216 8.00
</TABLE>
____________
(1) Based on the midpoint of the Current Valuation Range.
(2) For purpose of calculating Regulatory Tier 1 leverage capital, assets are
based on adjusted total average assets. In calculating Tier 1 risked-based
capital and total risk-based capital, assets are based on total risk-
weighted assets.
As the preceding table shows, the Bank exceeded the minimum capital
adequacy requirements at the date indicated.
Enforcement. The FDIC has extensive enforcement authority over
insured co-operative banks, including the Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The FDIC has authority under federal law to appoint a conservator or
receiver for an insured bank under certain circumstances. The FDIC is required,
with certain exceptions, to appoint a receiver or conservator for an insured
state bank if that bank was "critically undercapitalized" on average during the
calendar quarter beginning 270 days after the date on which the bank became
"critically undercapitalized." For this purpose, "critically undercapitalized"
means having a ratio of tangible capital to total assets of less than 2%. See
"--Prompt Corrective Action." The FDIC may also appoint a conservator or
receiver for a state bank on the basis of the institution's financial condition
or upon the occurrence of certain events, including: (i) insolvency (whereby the
assets of the bank are less than its liabilities to depositors and others); (ii)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (iii) existence of an unsafe or unsound condition
to transact business; (iv) likelihood that the bank will be unable to meet the
demands of its depositors or to pay its obligations in the normal course of
business; and (v) insufficient capital, or the incurring or likely incurring of
losses that will deplete substantially all of the institution's capital with no
reasonable prospect of replenishment of capital without federal assistance.
Deposit Insurance. The FDIC has adopted a risk-based deposit
insurance assessment system. The FDIC assigns an institution to one of three
capital categories based on the institution's financial information, as of the
reporting period ending seven months before the assessment period, consisting of
(1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and
one of three supervisory subcategories within each capital group. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation
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<PAGE>
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Assessment rates for BIF deposits currently
range from 0 basis points to 27 basis points. The Bank's assessment rate is
currently 0 basis points. The FDIC is authorized to raise the assessment rates
in certain circumstances, including to maintain or achieve the designated
reserve ratio of 1.25%, which requirement the BIF currently meets. The FDIC has
exercised its authority to raise rates in the past and may raise insurance
premiums in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of the Bank. In addition, recent legislation
requires BIF-insured institutions like the Bank to assist in the payment of FICO
bonds.
Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), the
assessment base for the payments on the FICO bonds was expanded to add,
beginning January 1, 1997, the deposits of BIF-insured institutions, such as the
Bank. Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual
rate of assessments for the payments on the FICO bonds for the semi-annual
period beginning on January 1, 1997 was 0.0130% for BIF-assessable deposits and
0.0648% for SAIF-assessable deposits and for the semi-annual period beginning on
July 1, 1997 was 0.0126% for BIF-assessable deposits and 0.0630% for SAIF-
assessable deposits.
Under the Federal Deposit Insurance Act (the "FDI Act"), insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC or the Division. The management of the Bank
does not know of any practice, condition or violation that might lead to
termination of deposit insurance.
Transactions with Affiliates and Insiders of the Bank. Transactions
between an insured bank, such as the Bank, and any of its affiliates is governed
by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is
any company or entity which controls, is controlled by or is under common
control with the bank. Generally, Sections 23A and 23B (i) limit the extent to
which the bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and limit all such transactions with all affiliates to an amount equal
to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms that are consistent with safe and sound banking
practices. In addition, any purchase of assets or services by a bank from an
affiliate must be on terms that are substantially the same, or at least as
favorable, to the institution as those that would be provided to a non-
affiliate. The term "covered transaction" includes the making of loans, purchase
of assets, issuance of guarantees and similar other types of transactions.
Further, most loans by a bank to its affiliate must be supported by collateral
in amounts ranging from 100 to 130 percent of the loan amounts.
Banks are also subject to the restrictions contained in Section 22(h)
of the Federal Reserve Act and the Federal Reserve Board's Regulation O
thereunder on loans to executive officers, directors and principal stockholders.
Under Section 22(h), loans to a director, an executive officer or a greater than
10% stockholder of a bank as well as certain affiliated interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
person and affiliated interests, the loans-to-one-borrower limit applicable to
national banks (generally 15% of the institution's unimpaired capital and
surplus), and all loans to all such persons in the aggregate may not exceed the
institution's unimpaired capital and unimpaired surplus. Regulation O also
prohibits the making of loans in an amount greater than $25,000 or 5% of capital
and surplus but in any event over $500,000, to directors, executive officers and
greater than 10% stockholders of a bank, and their respective affiliate, unless
such loans are approved in advance by a majority of the board of directors of
the bank with any "interested" director not participating in the voting.
Further, Regulation O requires that loans to directors, executive officers and
principal stockholders be made on terms substantially the same as those that are
offered in comparable transactions to other persons. Regulation O also prohibits
a depository institution from
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paying the overdrafts over $1,000 of any of its executive officers or directors
unless they are paid pursuant to written pre-authorized extension of credit or
transfer of funds plans.
State chartered non-member banks are further subject to the
requirements and restrictions of 12 U.S.C. (S) 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Specifically, this
statute (i) prohibits a depository institution from extending credit to or
offering any other service, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution, subject to certain
exceptions, and (ii) also prohibits extensions of credit to executive officers,
directors, and greater than 10% stockholders of a depository institution by any
other institution which has a correspondent banking relationship with the
institution, unless such extension of credit is on substantially the same terms
as those prevailing at the time for comparable transactions with other persons
and does not involve more than the normal risk of repayment or present other
unfavorable features.
Real Estate Lending Policies. Under FDIC regulations which became
effective March 19, 1993, state-chartered nonmember banks must adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interest in real estate or are
made for the purpose of financing permanent improvements to real estate. These
policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements. The real estate lending policies must reflect
consideration of the Interagency Guidelines for Real Estate Lending Policies
(the "Interagency Guidelines") that have been adopted by the federal bank
regulators.
The Interagency Guidelines, among other things, call upon a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multi-family or other nonresidential property, the supervisory limit is 80%;
(iv) for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non owner occupied, one- to four-family property), the limit
is 85%. Although no supervisory loan-to-value limit has been established for
owner-occupied, one to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
Safety and Soundness Standards. Pursuant to the requirements of
FDICIA, as amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, each federal banking agency, including the FDIC, has
adopted guidelines establishing general standards relating to internal controls,
information and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, asset quality, earnings, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal shareholder. In addition,
the FDIC adopted regulations to require a bank that is given notice by the FDIC
that it is not satisfying any of such safety and soundness standards to submit a
compliance plan to the FDIC. If, after being so notified, a bank fails to submit
an acceptable compliance plan or fails in any material respect to implement an
accepted compliance plan, the FDIC may issue an order directing corrective and
other actions of the types to which a significantly undercapitalized institution
is subject under the "prompt corrective action" provisions of FDICIA. If a bank
fails to comply with such an order, the FDIC may seek to enforce such an order
in judicial proceedings and to impose civil monetary penalties.
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Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions. The
FDIC, as well as the other federal banking regulators, adopted regulations
governing the supervisory actions that may be taken against undercapitalized
institutions. The regulations establish five categories, consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The FDIC's regulations
defines the five capital categories as follows: Generally, an institution will
be treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of core capital to risk-weighted assets is at
least 6%, its ratio of core capital to total assets is at least 5%, and it is
not subject to any order or directive by the FDIC to meet a specific capital
level. An institution will be treated as "adequately capitalized" if its ratio
of total capital to risk-weighted assets is at least 8%, its ratio of core
capital to risk-weighted assets is at least 4%, and its ratio of core capital to
total assets is at least 4% (3% if the bank receives the highest rating on the
CAMELS financial institutions rating system) and it is not a well-capitalized
institution. An institution that has total risk-based capital of less than 8%,
Tier 1 risk-based-capital of less than 4% or a leverage ratio that is less than
4% (or less than 3% if the institution is rated a composite "1" under the CAMELS
rating system) would be considered to be "undercapitalized." An institution that
has total risk-based capital of less than 6%, core capital of less than 3% or a
leverage ratio that is less than 3% would be considered to be "significantly
undercapitalized," and an institution that has a tangible capital to assets
ratio equal to or less than 2% would be deemed to be "critically
undercapitalized." At June 30, 1997 and June 30, 1996, the Bank was categorized
as "well capitalized."
The severity of the action authorized or required to be taken under
the prompt corrective action regulations increases as a bank's capital
deteriorates within the three undercapitalized categories. All banks are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
bank would be undercapitalized. The FDIC is required to monitor closely the
condition of an undercapitalized bank and to restrict the growth of its assets.
An undercapitalized bank is required to file a capital restoration plan within
45 days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. The aggregate liability of a parent holding company is limited
to the lesser of: (i) an amount equal to the five percent of the bank's total
assets at the time it became "undercapitalized," and (ii) the amount which is
necessary (or would have been necessary) to bring the bank into compliance with
all capital standards applicable with respect to such bank as of the time it
fails to comply with the plan. If a bank fails to submit an acceptable plan, it
is treated as if it were "significantly undercapitalized." Banks that are
significantly or critically undercapitalized are subject to a wider range of
regulatory requirements and restrictions.
The FDIC has a broad range of grounds under which it may appoint a
receiver or conservator for an insured depositary bank. If one or more grounds
exist for appointing a conservator or receiver for a bank, the FDIC may require
the bank to issue additional debt or stock, sell assets, be acquired by a
depository bank holding company or combine with another depository bank. Under
FDICIA, the FDIC is required to appoint a receiver or a conservator for a
critically undercapitalized bank within 90 days after the bank becomes
critically undercapitalized or to take such other action that would better
achieve the purposes of the prompt corrective action provisions. Such
alternative action can be renewed for successive 90-day periods. However, if the
bank continues to be critically undercapitalized on average during the quarter
that begins 270 days after it first became critically undercapitalized, a
receiver must be appointed, unless the FDIC makes certain findings that the bank
is viable.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"),
as implemented by FDIC regulations, a bank savings association has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a bank, to assess the
bank's record of meeting the credit needs of its
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community and to take such record into account in its evaluation of certain
applications by such bank. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Outstanding" CRA rating in
its most recent examination.
In April 1995, the FDIC and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (a) a lending test, to evaluate the institution's record of making
loans in its service areas; (b) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefitting low or moderate income individuals and
businesses; and (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs, and other offices. Small banks would be
assessed pursuant to a streamlined approach focusing on a lesser range of
information and performance standards. The term "small bank" is defined as
including banks with less than $250 million in assets or an affiliate of a
holding company with banking and thrift assets of less than $1 billion, which
would include the Bank.
HOLDING COMPANY REGULATION
Federal Regulation. Following the consummation of the Conversion, the
Company will be subject to examination, regulation and periodic reporting under
the Bank Holding Company Act (the "BHCA"), as administered by the FRB. The FRB
has adopted capital adequacy guidelines for bank holding companies on a
consolidated basis substantially similar to those of the FDIC for the Bank. On a
pro forma basis after the Conversion, the Company's pro forma total capital and
Tier 1 capital ratios will exceed these minimum capital requirements.
The Company will be required to obtain the prior approval of the FRB
to acquire all, or substantially all, of the assets of any bank or bank holding
company. Prior FRB approval will be required for the Company to acquire direct
or indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company.
The Company will be required to give the FRB prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, will be equal to 10% or more of the Company's consolidated net worth.
The FRB may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe and unsound practice, or would violate any
law, regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the FRB, that has received a composite "1" or "2" rating at its
most recent bank holding company inspection by the FRB, and that is not the
subject of any unresolved supervisory issues.
The status of the Company as a registered bank holding company under
the BHCA does not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
In addition, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of any company engaged in,
non-banking activities. One of the principal exceptions to this prohibition is
for activities found by the FRB to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. Some of the principal
activities that the FRB has determined by regulation to be so closely related to
banking as to be a proper incident thereto are: (i) making or servicing loans;
(ii) performing certain data processing services; (iii) providing discount
brokerage services;
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(iv) acting as fiduciary, investment or financial advisor, (v) leasing personal
or real property; (vi) making investments in corporations or projects designed
primarily to promote community welfare; and (vii) acquiring a savings and loan
association.
Under FIRREA, depository institutions are liable to the FDIC for
losses suffered or anticipated by the FDIC in connection with the default of a
commonly controlled depository institution or any assistance provided by the
FDIC to such an institution in danger of default. This law would have potential
applicability if the Company ever acquired as a separate subsidiary a depository
institution in addition to the Bank. There are no current plans for such an
acquisition.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of the Bank, the
Company, any subsidiary of the Company and related interests of such persons.
Moreover, banks are prohibited from engaging in certain tie-in arrangements
(with the bank's parent holding company or any of the holding company's
subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central
credit facility primarily for member institution. As a member of the FHLB, the
Bank is required to acquire and hold shares of capital stock in the FHLB in an
amount at least equal to 1% of the aggregate unpaid principal of its home
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. The Bank was in compliance with this requirement with an
investment in FHLB stock at June 30, 1997, of $857,800.
The FHLB serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It offers
advances to members in accordance with policies and procedures established by
the FHFB and the board of directors of the FHLB. Long-term advances may only be
made for the purpose of providing funds for residential housing finance.
FEDERAL RESERVE SYSTEM
Pursuant to regulations of the FRB, a bank must maintain average daily
reserves equal to 3% on the first $54 million of net transaction accounts, plus
10% on the remainder. This percentage is subject to adjustment by the FRB.
Because required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's interest-
earning assets. Effective December 19, 1995, the amount above which the 10%
reserve requirement applies will be lowered to $52 million, thereby increasing
reserve requirements for banks with transaction account balances in excess of
that threshold. As of June 30, 1997, the Bank met its reserve requirements.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the
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registration of the Common Stock to be issued pursuant to the Conversion. Upon
completion of the Conversion, the Company's Common Stock will be registered with
the SEC under the Exchange Act. The Company will then be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common
Stock to be issued in the Conversion does not cover the resale of such shares.
Shares of the Common Stock purchased by persons who are not affiliates of the
Company may be resold without registration. Shares purchased by an affiliate of
the Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of: (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
TAXATION
FEDERAL TAXATION
General. The Company and the Bank will file consolidated federal
income tax returns and report their income on the basis of a taxable year ending
June 30 using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions.
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
Recent Tax Legislation Regarding Tax Bad Debt Reserves. Prior to the
enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996
(the "Small Business Act"), for federal income tax purposes, thrift institutions
such as the Bank, which met certain definitional tests primarily relating to
their assets and the nature of their business, were permitted to establish tax
reserves for bad debts and to make annual additions thereto, which additions
could, within specified limitations, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, could be computed
using an amount based on a six-year moving average of the Bank's actual loss
experience (the "Experience Method"), or a percentage equal to 8% of the Bank's
taxable income (the "PTI Method"), computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the
Bank, as a "small bank" (one with assets having an adjusted basis of $500
million or less), is required to use the Experience Method of computing
additions to its bad debt reserve for taxable years beginning with the Bank's
taxable year beginning July 1, 1996. In addition, the Bank is required to
recapture (i.e., take into taxable income) over a six-year period, beginning
with the Bank's taxable year beginning July 1, 1996, the excess of the balance
of its bad debt reserves (other than the supplemental reserve) as of June 30,
1996 over the greater of (a) the balance of its "base year reserve," i.e., its
reserves as of June 30, 1988 or (b) an amount that would have been the balance
of such reserves as of June 30, 1996 had the Bank always computed the additions
to its reserves using the Experience Method. However, such recapture
requirements were suspended for each of the two successive taxable years
beginning July 1, 1996 in which the Bank originates a minimum amount of certain
residential loans during such years that is not less than the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding July 1, 1996. The Small Business Act will result in no tax liability.
Since the Bank has already provided a deferred income tax liability for
financial reporting purposes on its bad debt reserves since
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June 1988, there will be no adverse impact to the Bank's financial condition or
results of operations from the enactment of this legislation.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's base year reserve and then from its
supplemental reserve for losses on loans, and an amount based on the amount
distributed will be included in the Bank's taxable income. Nondividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not constitute nondividend distributions and,
therefore, will not be included in the Bank's income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. The Bank does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserve.
Corporate Alternative Maximum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating losses. AMTI is also adjusted by determining the
tax treatment of certain items in a manner that negates the deferral of income
resulting from the regular tax treatment of those items. Thus, the Bank's AMTI
is increased by an amount equal to 75% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses). In addition, for
taxable years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Bank, whether or not
an Alternative Maximum Tax ("AMT") is paid. The Bank does not expect to be
subject to the AMT. The Bank was not subject to an environmental tax liability
for the year ended June 30, 1996.
Dividends-Received Deduction and Other Matters. The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted. Under President Clinton's fiscal year 1998 budget
proposal, as submitted to Congress on February 6, 1997, the 70% dividends-
received deduction would be reduced to 50% with respect to dividends paid after
enactment of any such legislation.
STATE TAXATION
Prior to July, 1995, the Bank was subject to an annual Massachusetts
excise (income) tax equal to 12.54% of its pre-tax income. In 1995, legislation
was enacted to reduce the Massachusetts bank excise (income) tax rate and to
allow Massachusetts-based financial institutions to apportion income earned in
other states. Further, this legislation expands the applicability of the tax to
non-bank entities and out-of-state financial institutions. The Massachusetts
excise tax rate for co-operative banks is currently 11.32% of federal taxable
income, adjusted for certain items. It is anticipated that this rate will be
gradually reduced over the next few years so that the Bank's tax rate will
become 10.5% by March 31, 2000. Taxable income includes gross income as defined
under the Code, plus interest from bonds, notes and evidences of indebtedness of
any state, including Massachusetts, less deductions, but not the credits,
allowable under the provisions of the Code. No deductions, however, are allowed
for dividends received until July 1, 1999. In addition, carryforwards and
carrybacks of net operating losses are not allowed.
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The Bank's active subsidiary, Mystic Securities Corporation, was
established solely for the purpose of acquiring and holding investments which
are permissible for banks to hold under Massachusetts law. Mystic Securities
Corporation is classified with the Massachusetts Department of Revenue as a
"security corporation " under Massachusetts law, qualifying it to take advantage
of the low 1.32% income tax rate on gross income applicable to companies that
are so classified. The Company also qualifies as a "security corporation" under
Massachusetts law, and will likewise be taxed at the rate of 1.32%.
The Bank has received opinions regarding certain federal and state
income tax issues. See "The Conversion of Conversion to Stock Form on Depositors
and Borrowers of the Bank."
For additional information regarding taxation, see Note 9 of the Notes
to Consolidated Financial Statements.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 6,000,000 shares of capital stock
divided into two classes consisting of 5,000,000 shares of Common Stock and
1,000,000 shares of serial preferred stock, par value $0.01 per share (the
"Preferred Stock"). The Company currently expects to issue 2,050,000 shares of
its Common Stock in the Conversion, subject to adjustment. The Company does not
intend to issue any shares of serial Preferred Stock in the Conversion, nor are
there any present plans to issue Preferred Stock following the Conversion.
Except for shares issued in connection with the Conversion and in connection
with the Option Plan and Restricted Stock Plan, the Company presently does not
have plans to issue Common Stock. Each share of the Company's Common Stock will
have the same relative rights as, and will be identical in all respects with,
each other share of Common Stock. Upon payment of the Purchase Price for the
Common Stock, in accordance with the Plan of Conversion, all such stock will be
duly authorized, fully paid and non-assessable. See "Capitalization." THE
CAPITAL STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL AND WILL
NOT BE INSURED BY THE FDIC.
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COMMON STOCK
Dividends. The Company 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 the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividends" and "Regulation." The holders
of Common Stock of the Company will be entitled to receive and share equally in
such dividends as may be declared by the board of directors of the Company out
of funds legally available therefor. If the Company issues Preferred Stock, the
holders thereof may have a priority over the holders of the Common Stock with
respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company, except to the
extent that outstanding shares of serial Preferred Stock may or may not have
voting rights. They will elect the Company's board of directors and act on such
other matters as are required to be presented to them under Delaware law or the
Company's Certificate of Incorporation or as are otherwise presented to them by
the board of directors. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every other share of
its Common Stock. Each holder of the Common Stock will be entitled to one vote
for each share held of record on all matters submitted to a vote of holders of
its Common Stock. The Company's proposed stock charter provides, however, that
there will not be cumulative voting for the first five years following the
Conversion. Except as discussed in "Certain Restrictions on Acquisition of the
Company and the Bank," each holder of Common Stock will be entitled to one vote
per share and will not have any right to cumulate votes in the election of
directors.
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If the Company issues Preferred Stock, holders of the Preferred Stock
may also possess voting rights. Certain matters require an 80% or two-thirds
shareholder vote. See "Certain Restrictions on Acquisition of the Company and
the Bank."
As a Massachusetts state mutual co-operative bank, corporate powers
and control of the Bank are vested in its board of directors, who elect the
officers of the Bank and who fill any vacancies on the board of directors as it
exists upon Conversion. Currently, depositors of the Bank elect the Bank's board
of directors. Subsequent to Conversion, voting rights will be vested exclusively
in the owners of the shares of capital stock of the Bank, which owner will be
the Company, and voted at the direction of the Company's board of directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.
Liquidation. In the event of any liquidation, dissolution or winding
up of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank --Liquidation Account"), all assets of the Bank available
for distribution. In the event of liquidation, dissolution or winding up of the
Company, 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 the Company available for distribution in cash or in kind after
payment or provision for payment of (i) all debts and liabilities of the Bank
(including all savings accounts and accrued interest thereon); (ii) any accrued
dividend claims; (iii) liquidation preferences upon serial preferred stock which
may be issued in the future; and (iv) any interests in the liquidation account.
If Preferred Stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the event of the liquidation or dissolution of
the Company.
Preemptive Rights; Redemption. Holders of the Common Stock will be
entitled to the payment of dividends when, as and if declared by the board of
directors and paid out of the earnings of the Company, if any, and subject to
federal and state regulatory restrictions. See "--Serial Preferred Stock" for
certain information regarding dividend rights and preferences of serial
Preferred Stock. Holders of the Common Stock will not be entitled to preemptive
rights with respect to additional shares of Common Stock that may be issued. The
Common Stock will not be subject to redemption. Upon receipt by the Company of
the Purchase Price, each share of its Common Stock will be fully paid and non-
assessable.
Except in connection with the Conversion and in connection with the
Option Plan and Restricted Stock Plan, the Company has no present plans,
proposals, arrangements or understandings to issue additional authorized shares
of its Common Stock. In the future, the authorized but unissued and unreserved
shares of the Common Stock will be available for general corporate purposes,
including, but not limited to, possible issuance as stock dividends, in
connection with mergers or acquisitions, under a cash dividend reinvestment or
stock purchase plan, in a public or private offering, or under any employee
stock ownership or option plan. Normally, no stockholder approval would be
required for the issuance of these shares, except as required to approve a
transaction in which additional authorized shares of Common Stock are to be
issued.
Indemnification and Limit on Liability. The Company's Certificate of
Incorporation contains provisions which limit the liability of directors,
officers and employees of the Company and indemnify such individuals. Such
provisions provide that 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, by reason
of the fact that he or she is or was a director or officer of the Company shall
be indemnified and held harmless by the Company to the fullest extent authorized
by the Delaware General Corporate Law (the "DGCL") against all expense,
liability and loss reasonably incurred. Under certain circumstances, the right
to indemnification shall include the right to be paid by the Company the
expenses incurred in defending any such proceeding in advance of its final
disposition. In addition, a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages except for
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liability for any breach of the duty of loyalty, for acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
the law, under Section 174 of the DGCL, or from any transaction from which the
director derived an improper personal benefit.
SERIAL PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. After the Conversion, the board of directors of the
Company will be authorized to issue, subject to Commissioner approval, shares of
serial Preferred Stock in series and to fix the voting powers, designation,
preferences and relative, participation, optional, conversion or other special
rights of the shares of each such series and any qualifications, limitations or
restrictions thereof. Such stock may be issued with such preferences and
designations as the board of directors may from time to time determine. Any
serial preferred stock issued may rank prior to the Common Stock as to dividend
rights, liquidation preferences or both and may have full or limited voting
rights. The board of directors of the Company has no present plans, proposals,
arrangements or understandings to issue serial preferred stock.
OTHER CHARACTERISTICS
See "Dividends" and "Taxation" with respect to restrictions on the
payment of cash dividends; and "The Conversion -- Restrictions on
Transferability by Directors and Officers" relating to certain restrictions on
the transferability of shares purchased by officers and directors; and "Certain
Restrictions on Acquisition of the Company and the Bank" for information
regarding restrictions on acquiring capital stock of the Company.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the conversion of the Bank
from the mutual to the stock form of organization and, in connection therewith,
a new stock charter and bylaws to be adopted by depositors of the Bank. The Plan
also provides for the concurrent formation of a holding company. See "The
Conversion-- General." As described below, certain provisions in the Company's
Certificate of Incorporation and bylaws and in its management remuneration plans
and agreements entered into in connection with the Conversion, together with
provisions of Delaware law, may have anti-takeover effects. In the event that
the holding company form of organization is not utilized, the Bank's stock
charter and bylaws and management remuneration plans and agreements entered into
in connection with the Conversion may have anti-takeover effects as described
below. In addition, regulatory restrictions may make it difficult for persons or
companies to acquire control of either the Company or the Bank.
REGULATORY RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK
Massachusetts Division of Banks Conversion Regulations. Regulations
issued by the Commissioner provide that for a period of three years following
the date of the completion of the Conversion, no person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of more than ten
percent (10%) of any class of any equity security of the Company without prior
written notice to the Company and the prior written approval of the
Commissioner. Where any person, directly or indirectly, acquires beneficial
ownership of more than ten percent (10%) of any class of any equity security of
the Company without prior written notice to the Company and the prior written
approval of the Commissioner, the securities beneficially owned by such person
in excess of ten percent (10%) shall not be voted by any person or counted as
voting shares in connection with any matter submitted to the stockholders for a
vote, and shall not be counted as outstanding for purposes of determining the
affirmative vote necessary to approve any matter submitted to the stockholders
for a vote. The Commissioner may take any further action to enforce these
regulatory
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restrictions as he deems appropriate.
Change in Bank Control Act. In addition to the foregoing
restrictions, the acquisition of more than ten percent (10%) of the Common Stock
outstanding may, in certain circumstances, be subject to the provisions of the
Change in Bank Control Act. The FDIC has also adopted a regulation pursuant to
the Change in Bank Control Act which generally requires persons who at any time
intend to acquire control of an FDIC-insured state-chartered non-member bank,
including a converted co-operative bank such as the Bank, to provide 60 days
prior written notice and certain financial and other information to the FDIC.
The 60-day notice period does not commence until the information is deemed to be
substantially complete. Control for the purpose of this Act exists in situations
in which the acquiring party has voting control of at least twenty-five percent
(25%) of any class of the Bank's voting stock or the power to direct the
management or policies of the Bank. However, under FDIC regulations, control is
presumed to exist where the acquiring party has voting control of at least ten
percent (10%) of any class of the Bank's voting securities if (i) the Bank has a
class of voting securities which is registered under Section 12 of the Exchange
Act or (ii) the acquiring party would be the largest holder of a class of voting
shares of the Bank. The statute and underlying regulations authorize the FDIC to
disapprove a proposed acquisition on certain specified grounds. In some
circumstances, similar filings with the Commissioner may be required under the
Massachusetts Change in Bank Control Act.
FRB Regulations. Prior approval of the FRB would be required for any
acquisition of control of the Bank by any bank holding company under the BHCA
and approval by the Board of Bank Incorporation would be required under
Massachusetts law. Control for purposes of the BHCA would be based on, among
other things, a twenty-five percent (25%) voting stock test or on the ability of
the holding company otherwise to control the election of a majority of the board
of directors of the Bank. As part of such acquisition, the acquiring company
(unless already so registered) would be required to register as a bank holding
company under the BHCA. A bank holding company's business activities are limited
to those activities which the FRB determines to be closely related to banking
and a proper incident thereto. See "Regulation."
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
The following discussion is a general summary of certain provisions of
the Company's Certificate of Incorporation and Bylaws and certain other
statutory and regulatory provisions relating to stock ownership and transfers,
the board of directors and business combinations, that might have a potential
"anti-takeover" effect. A number of provisions of the Company's Certificate of
Incorporation and bylaws deal with matters of corporate governance and certain
rights of stockholders. These provisions might have the effect of discouraging
future takeover attempts which are not approved by the board of directors but
which individual Company stockholders may deem to be in their best interests or
in which stockholders may receive substantial premiums for their shares over
then current market prices. As a result, stockholders who might desire to
participate in such transactions may not have an opportunity to do so. Such
provisions will also render the removal of the current board of directors or
management of the Company more difficult. The following description of certain
of the provisions of the Certificate of Incorporation and bylaws of the Company
is necessarily general and reference should be made in each case to such
Certificate of Incorporation and bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
Limitation on Voting Rights. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of each
share held in excess of the Limit. Any Person so prohibited who directly or
indirectly acquires or holds the beneficial ownership of more than ten percent
(10%) of the issued and outstanding voting stock in violation of Section 2 of
the
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Company's Certificate of Incorporation of any person so prohibited who directly
or indirectly acquires or holds the beneficial owner ship of more than ten
percent (10%) of the issued and outstanding voting stock in violation of Section
2 of the Company's Certificate of Incorporation shall be subject to the
provisions of Sections 3 and 4 of Article V of the Company's Certificate of
Incorporation. Beneficial ownership is determined pursuant to Rule 13d-3 of the
General Rules and Regulations promulgated pursuant to the Exchange Act and
includes shares beneficially owned by such person or any of his affiliates (as
defined in the Certificate of Incorporation), shares which such person or his
affiliates have the right to acquire pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options and otherwise and shares as to which such person and his
affiliates have sole or shared investment or voting power, but shall not include
shares beneficially owned by the ESOP or any similar plan of the Company or the
Bank or any trustee with respect thereto (solely by reason of such trustee's
capacity) be deemed to beneficially own any shares held under any such plan.
Neither does beneficial ownership include shares that are subject to a revocable
proxy and that are not otherwise beneficially owned or deemed by the Company to
be beneficially owned by such person and his affiliates. No director of officer
(or affiliate thereof) of the Company shall, solely by reason or any of all of
such directors or officers acting in their capacities as such, be deemed to
beneficially own any shares beneficially owned by any other director or officer
(or affiliate thereof). The Certificate of Incorporation further provides that
this provision limiting voting rights may only be amended upon (i) the approval
of a majority of the directors of the Company, and (ii) the affirmative vote of
the holders of a majority of the total votes eligible to be cast by the holders
of all outstanding shares of capital stock entitled to vote thereon, and (iii)
if the amendment is proposed by or on behalf of an interested shareholder or a
director who is an Affiliate or Associate (as such terms are defined in the
Company's Certificate of Incorporation) of an interested shareholder, by the
affirmative vote of not less than a majority of the total votes eligible to be
cast by holders of all outstanding shares of capital stock entitled to vote
thereon not beneficially owned by an interested shareholder or an Affiliate or
Associate thereof.
Board of Directors. Subject to the rights of any holders of any
series of Preferred Stock that may be issued by the Corporation pursuant to a
resolution or resolutions of the board of directors providing for such issuance,
the directors of the Corporation are divided into three classes, each class
serving a staggered term, and each class containing as near as may be possible,
one-third of the entire number of the board, with the terms of office of one
class expiring each successive year. In accordance with state law, the size of
the board of directors is determined by the Company's bylaws or by resolution of
the board of directors but shall not be less than seven (7) nor more than
twenty-five (25). The Certificate of Incorporation and the bylaws provide that
any vacancy occurring in the board of directors, including a vacancy created by
newly created directorships resulting in an increase in the number of directors,
shall be filled for the remainder of the unexpired term exclusively by a
majority vote of the directors then in office, whether or not a quorum. The
classified board of directors is intended to provide for continuity of the board
of directors and to make it more difficult and time consuming for a stockholder
group to use its voting power to gain control of the board of directors without
the consent of the incumbent board of directors of the Company. The Certificate
of Incorporation of the Company provides that a director may be removed from the
board of directors prior to the expiration of his term only for cause, upon the
vote of 80% of the total votes eligible to be cast by the holders of all
outstanding shares of capital stock entitled to vote generally in the election
of directors at a meeting of shareholders expressly called for that
purpose.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause, and
replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, the Company's bylaws provide that special meetings of
stockholders of the Company may be called only by the Chairperson of the Board,
the President or by resolution of at least three-fourths of the board of
directors then in office. The Certificate of Incorporation also provides that
any corporate action or consent to any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting of shareholders and prohibits stockholder action by written consent in
lieu of a meeting.
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Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 6,000,000 shares of capital stock, of which 1,000,000 shares shall
be Preferred Stock and 5,000,000 shares shall be Common Stock. The Preferred
Stock and Common Stock are sometimes hereinafter collectively referred to as the
"capital stock."
The board of directors also has sole authority to determine the terms
of any one or more series of Preferred Stock, including voting rights,
conversion rates, whether stock shall be redeemable and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the board of directors has the power, to the extent consistent with its
fiduciary duty, to issue a series of Preferred Stock to persons friendly to
management in order to attempt to block a post-tender offer merger or other
transaction by which a third party seeks control, and thereby assist management
to retain its position. The Company's board of directors currently has no plans
for the issuance of additional shares, other than the issuance of additional
shares pursuant to the terms of the Restricted Stock Plan and upon exercise of
stock options to be issued pursuant to the terms of the Option Plan. Although
the Company currently does not anticipate implementing the Option Plan or the
Restricted Stock Plan before one year following consummation of the Conversion,
if implemented prior to the first anniversary of the Conversion, each of the
plans will be presented to stockholders for approval at a meeting of
stockholders to be held no earlier than six months after completion of the
Conversion.
Stockholder Vote Required to Approve Business Combinations with
Principal. The Certificate of Incorporation requires the approval of the holders
of not less than 80% of the total number of votes eligible to be cast by the
holders of all of the Company's outstanding shares of voting stock, together
with the affirmative vote of at least 50% of the total number of votes eligible
to be cast by the holders of all outstanding shares of the voting stock not
beneficially owned by an Interested Shareholder (as defined below) involved or
any affiliate or associate thereof, voting together as a single class to approve
certain "Business Combinations," as defined therein, and related transactions.
Under Delaware law, absent this provision, Business Combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only a majority of the outstanding shares of Common Stock of the
Company and any other affected class of stock. Under the Certificate of
Incorporation, at least 80% approval of stockholders is required in connection
with any transaction involving an Interested Stockholder except (i) in cases
where the proposed transaction has been approved in advance by a majority of the
disinterested directors then in office; or (ii) all of the conditions specified
in the subsections of the Company's Certificate of Incorporation, Article VIII,
Section 2, subsections (a) through (g) have been met.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the board of directors of the Company, when evaluating any
offer to the Company or to the shareholders of the Company from another party to
(a) purchase for cash, or exchange any securities or property for any
outstanding equity securities of the Company, (b) merge or consolidate the
Company with another corporation, or (c) purchase or otherwise acquire all or
substantially all of the properties and assets of the Company, shall, in
connection with the exercise of its judgment in determining what is in the best
interest of the Company and its shareholders, give due consideration not only to
the price or other consideration being offered, but also to all other relevant
factors including, without limitation, the financial and managerial resources
and future prospects of the other party, the possible effects on the business of
the Company and its subsidiaries and on the employees, customers, suppliers and
creditors of the Company and its subsidiaries, and the effects on the
communities in which the Company's and its subsidiaries' facilities are located.
By having these standards in the Certificate of Incorporation of the Company,
the board of directors may be in a stronger position to oppose such a
transaction if the board of directors concludes that the transaction would not
be in the best interests of the Company, even if the price offered is
significantly greater than the then market price of any equity security of the
Company.
Amendment of Certificate of Incorporation and Bylaws. The Certificate
of Incorporation provides that certain provisions of the Certificate of
Incorporation may not be altered, amended, repealed or rescinded without the
affirmative vote of either (1) not less than a majority of the authorized number
of directors
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then in office and by (2) the affirmative vote of the holders of a majority (or
such greater proportion as may otherwise be required pursuant to any specific
provision of the Certificate of Incorporation) of the total votes eligible to be
cast by the holders of all outstanding shares of capital stock entitled to vote
thereon; provided, however, that if any such change relates to Section 13 of
Article X or Articles V, VI, VII or XI of the Certificate of Incorporation, such
change must be approved either (i) by not less than a majority of the au
thorized number of directors and, if one or more Interested Shareholders (as
defined in Article VIII of the Certificate of Incorporation) exist, by not less
than a majority of the disinterested directors (as defined in Article VIII of
the Certificate of Incorporation), or (ii) by the affirmative vote of the
holders of not less than two-thirds of the total votes eligible to be cast by
the holders of all outstanding shares of capital stock entitled to vote thereon
and, if the change is proposed by or on behalf of an interested shareholder or a
director who is an affiliate or associate (as such terms are defined in Article
VIII of the Certificate of Incorporation) of an interested shareholder, by the
affirmative vote of the holders of not less than a majority of the total votes
eligible to be cast by holders of all outstanding shares of capital stock
entitled to vote thereon not beneficially owned by an interested shareholder or
an affiliate or associate thereof.
Except as may otherwise be provided in the Certificate of
Incorporation, the Company reserves the right at any time, and from time to
time, to amend, alter, change or repeal any provision contained in the
Certificate of Incorporation, and to add or insert any other provisions
authorized by the laws of the State of Delaware at the time in force, in the
manner now or hereafter prescribed by law, and all rights, preferences and
privileges of any nature conferred upon shareholders, directors or any other
persons whomsoever by and pursuant to the Certificate of Incorporation in its
present form or as hereafter amended are granted subject to the rights reserved
in Section 1 of the Company's Certificate of Incorporation.
Furthermore, the Company's Certificate of Incorporation provides that
provisions of the bylaws that contain supermajority voting requirements may not
be altered, amended, repealed or rescinded without a vote of the board or
holders of shares of capital stock entitled to vote thereon that is not less
than the supermajority specified in such provision. Absent these provisions,
the DGCL provides that a corporation's Certificate of Incorporation and bylaws
may be amended by the holders of a majority of the corporation's outstanding
capital stock. The Certificate of Incorporation also provides that the board of
directors is authorized to make, alter, amend, rescind or repeal any of the
Company's bylaws in accordance with the terms thereof, regardless of whether the
bylaw was initially adopted by the stockholders. However, this authorization
neither divests the stockholders of their right, nor limits their power to
adopt, amend, rescind or repeal any bylaw under the DGCL. These provisions
could have the effect of discouraging a tender offer or other takeover attempt
where the ability to make fundamental changes through bylaw amendments is an
important element of the takeover strategy of the acquiror.
Certain Bylaw Provisions. The bylaws of the Company also require that
except in the case of a nominee substituted as a result of the death,
incapacity, withdrawal or other inability to serve of a nominee, the board, or a
committee thereof, shall deliver written nominations to the Secretary at least
sixty (60) days prior to the date of the annual meeting. Provided the board of
directors, or committee thereof, makes such nominations, no nominations for
directors except those made by the board or such committee shall be voted upon
at the annual meeting of stockholders unless other nominations by stockholders
are made in accordance with the provisions of Section 11 of the Company's
bylaws. Nominations of individuals for election to the board of directors at an
annual meeting of stockholders may be made by any stockholder of record of the
corporation entitled to vote for the election of directors at such meeting who
provides timely notice in writing to the Secretary as set forth in Section 11 of
the Company's bylaws. To be timely, a stockholder's notice must be delivered to
or received by the Secretary not later than the following dates: (i) with
respect to an election of directors to be held at an annual meeting of
stockholders, sixty (60) days in advance of such meeting if such meeting is to
be held on a day which is within thirty (30) days preceding the anniversary of
the previous year's annual meeting, or ninety (90) days in advance of such
meeting if such meeting is to be held on or after the anniversary of the
previous year's annual meeting; and (ii) with respect to an election to be held
at an annual meeting of stockholders held at a time other than within the time
periods set forth in the immediately preceding
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clause (i), or at a special meeting of stockholders for the election of
directors, the close of business on the tenth (10th) day following the date on
which notice of such meeting is first given to stockholders.
The notice provision requires a stockholder who desires to raise new
business to provide certain information to the Company concerning the nature of
the new business, the proposing 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 the Company with certain information
concerning the nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its board of directors. Certain
provisions of the employment agreements with officers, the Restricted Stock Plan
and the Option Plan expected to be established may provide for accelerated
benefits to participants in the event of a change in control of the Company or
the Bank or a tender or exchange offer for their stock. See "Management of the
Bank -- Employment Agreements," and "-- Certain Benefit Plans and Agreements."
The Company's board of directors believes that the provisions of the
Certificate of Incorporation, bylaws and management remuneration plans to be
established are in the best interests of the Company and its stockholders. An
unsolicited non-negotiated takeover proposal can seriously disrupt the business
and management of a corporation and cause it great expense. Accordingly, the
board of directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the board of directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interests of all stockholders.
Delaware Corporate Law
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the DGCL ("Section 203"), is
intended to discourage certain takeover practices by impeding the ability of a
hostile acquiror to engage in certain transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(a "DGCL Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became a DGCL Interested Stockholder.
The term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements
of Section 203: (i) any business combination if, prior to the date a person
became a DGCL Interested Stockholder, the board of directors approved either the
business combination or the transaction which resulted in the stockholder
becoming a DGCL Interested Stockholder; (ii) any business combination involving
a person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became a DGCL Interested Stockholder, excluding, for
purposes of determining the number of shares outstanding, shares owned by the
Company's directors who are also officers and certain employee stock plans;
(iii) any business combination with a DGCL Interested Stockholder that is
approved by the board of directors and by a two-thirds vote of the outstanding
voting stock not owned by the DGCL Interested Stockholder; and (iv) certain
business combinations that are proposed after
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the corporation had received other acquisition proposals and which are approved
or not opposed by a majority of certain continuing members of the board of
directors. A corporation may exempt itself from the requirement of the statute
by adopting an amendment to its Certificate of Incorporation or Bylaws electing
not to be governed by Section 203 of the DGCL. At the present time, the board of
directors does not intend to propose any such amendment.
Restrictions in the Bank's Amended Charter and Bylaws
Although the board of directors of the Bank is not aware of any effort
that might be made to obtain control of the Bank after the Conversion, the board
of directors believes that it is appropriate to adopt certain provisions
permitted by Massachusetts General Laws to protect the interests of the
converted Bank and its shareholders from any hostile takeover. Such provisions
may, indirectly, inhibit a change in control of the Company, as the Bank's sole
stockholder. See " Risk Factors -- Anti-Takeover Provisions and Voting Control
of Management."
The Bank's stock charter will contain a provision whereby without the
prior approval by a two-thirds vote of the Bank's board of directors, no person
shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10 percent of any class of any equity security of the
Bank. This limitation shall not apply to a transaction in which the Bank forms
a holding company without change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter and appraisal rights or the purchase of shares by underwriters in
connection with a public offering. In the event shares are acquired in
violation of this provision of the Bank's stock charter, all shares
beneficially owned by any person in excess of 10 percent shall be considered
"excess shares" and shall not be counted as shares entitled to vote and shall
not be voted by any person or counted as voting shares in connection with any
matters submitted to the stockholders for a vote.
THE CONVERSION
THE COMMISSIONER HAS GIVEN APPROVAL TO THE PLAN SUBJECT TO THE
SATISFACTION OF CERTAIN CONDITIONS IMPOSED BY THE COMMISSIONER IN HIS APPROVAL.
COMMISSIONER APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN.
GENERAL
The board of directors of the Bank adopted the Plan pursuant to which
the Bank would be converted from a Massachusetts chartered mutual co-operative
bank to a Massachusetts chartered stock co-operative bank. The Conversion will
be accomplished through the simultaneous adoption of a new stock charter and
bylaws to authorize the issuance of capital stock by the Bank to the Company.
Under the Plan, the Company is offering shares of the Common Stock in a
Subscription Offering to the Bank's Eligible Account Holders, the Supplemental
Eligible Account Holders and the Bank's ESOP.
Concurrent with or at any time during the Subscription Offering, the
board of directors of the Company may elect to offer those shares of Common
Stock not subscribed for in the Subscription Offering by the Eligible Account
Holders to the general public, with preference given to persons who are
residents of Medford, Malden, Everett, Stoneham, Arlington, Winchester,
Somerville, Melrose, Lexington and Bedford, Massachusetts in a Direct Community
Offering, and subject to the Company's right to reject orders in the Direct
Community Offering in whole or in part. Subscriptions for Common Stock received
from members of the general public in the Direct Community Offering will be
subject to availability of shares of Common Stock for purchase after
satisfaction of all subscriptions in the Subscription Offering, to the maximum
and minimum purchase limitations set forth in the Plan and to the right of the
Company to reject any such subscriptions, in
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whole or in part.
Applicable conversion regulations require, with certain exceptions,
that all shares offered in the Conversion must be sold in order for the
Conversion to become effective. All Common Stock not sold in the Subscription
Offering is expected to be sold in the Direct Community Offering. Applicable
regulations require that the Direct Community Offering be completed within 45
days after completion of the Subscription Offering period unless such period is
extended by the Company with the approval of the regulatory authorities. If the
Direct Community Offering is determined not to be feasible, an occurrence that
is not currently anticipated, the board of directors of the Company and the Bank
will consult with the regulatory authorities to determine an appropriate
alternative method of selling all unsubscribed shares of Common Stock. The Plan
provides that the Conversion must be completed within 24 months after the date
of the approval of the Plan by the board of directors of the Bank.
At the board of directors' discretion, the Direct Community Offering
may be commenced concurrently with or at any time during the Subscription
Offering. The completion of the Subscription Offering and Direct Community
Offering, however, is subject to market conditions and other factors beyond the
Bank's control. As a final step in the Conversion, shares not subscribed for in
the Subscription Offering and the Direct Community Offering, if any, will be
offered to certain members of the general public in the Syndicated Offering. No
assurance can be given as to the length of time that will be required to
complete the Direct Community Offering or other sale of the Common Stock. If
delays are experienced, significant changes may occur in the estimated pro forma
market value of the Bank upon conversion together with corresponding changes in
the offering price and the net proceeds realized by the Company from the sale of
the Common Stock. If the pro forma market value of the Common Stock falls below
$17,425,000 or rises above $27,111,250, investors in the Offerings will be able
to rescind or amend their orders. Under such circumstances, the Bank would also
incur substantial additional printing, legal and accounting expenses in
completing the Conversion. In the event the Conversion is terminated, the Bank
would be required to charge all conversion expenses against current income.
EFFECT OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK
Voting Rights. Depositors as such will have no voting rights in the
Bank after the Conversion and will therefore not be able to elect directors of
the Bank or vote on other corporate actions. (Currently these rights are
accorded to depositors of the Bank.) After the Conversion, voting rights will be
vested exclusively in the stockholders of the Company. Each holder of the
Company's Common Stock shall be entitled to vote on any matter to be considered
by the stockholders of the Company.
Savings Accounts and Loans. THE BANK'S SAVINGS ACCOUNTS, THE BALANCES
OF THE INDIVIDUAL ACCOUNTS AND THE EXISTING FDIC AND SHARE INSURANCE FUND
INSURANCE COVERAGE WILL NOT BE AFFECTED BY THE CONVERSION. Furthermore, the
Conversion will not affect the loan accounts, the balances of these accounts and
the obligations of the borrowers under their individual contractual arrangements
with the Bank.
Tax Aspects. The Bank has received an opinion of its counsel, Thacher
Proffitt & Wood, that for federal income tax purposes, among other matters: (i)
the Bank's change in form from mutual to stock ownership will constitute a
reorganization under section 368(a)(1)(F) of the Code and neither the Bank nor
the Company will recognize any gain or loss as a result of the Conversion; (ii)
no gain or loss will be recognized by the Bank or the Company upon the purchase
of the Bank's capital stock by the Company or by the Company upon the purchase
of its Common Stock in the Conversion; (iii) no gain or loss will be recognized
by Eligible Account Holders or by Supplemental Eligible Account Holders upon the
issuance to them of deposit accounts in the Bank in its stock form plus their
interests in the liquidation account in exchange for their deposit accounts in
the Bank; (iv) the tax basis of the depositors' deposit accounts in the Bank
immediately after the Conversion will be the same as the basis of their deposit
accounts immediately prior to the Conversion; (v) the tax basis of each Eligible
Account Holder's and each Supplemental Eligible Account Holder's interest in the
liquidation
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account will be zero; (vi) no gain or loss will be recognized by Eligible
Account Holders or by Supplemental Eligible Account Holders upon the
distribution to them of nontransferable subscription rights to purchase shares
of the Common Stock, provided, that the amount to be paid for the Common Stock
is equal to the fair market value of such stock; and (vii) the tax basis to the
shareholders of the Common Stock of the Company purchased in the Conversion
pursuant to the subscription rights will be the amount paid therefore and the
holding period for the shares of Common Stock purchased by such persons will
begin on the date on which their subscription rights are exercised. Such opinion
has been filed as an exhibit to the registration statement on Form S-1 of which
this Prospectus forms a part.
Unlike private rulings, opinions of counsel are not binding on the IRS
and the IRS could disagree with conclusions reached therein. In the event of
such disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
Certain portions of the federal tax opinion are based upon the opinion
of R.P. Financial that subscription rights issued in connection with the
Conversion will have no value. In the opinion of R.P. Financial, which opinion
is not binding on the IRS, the subscription rights do not have any value, based
on the fact that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the unsubscribed
shares of Common Stock. If the subscription rights granted to Eligible Account
Holders or Supplemental Eligible Account Holders are deemed to have an
ascertainable value, such Eligible Account Holders or Supplemental Eligible
Account Holders could be taxed upon the receipt or exercise of the subscription
rights in an amount equal to such value, and the Bank could recognize gain on
such distribution. Eligible Account Holders and Supplemental Eligible Account
Holders are encouraged to consult with their own advisors as to the tax
consequences in the event that such subscription rights are deemed to have an
ascertainable tax value.
The Bank has also received an opinion from its independent auditors
that, with respect to Massachusetts bank and corporate excise taxes, the
conversion will not result in any tax liability with respect to Massachusetts
tax laws. Such opinion has been filed as an exhibit to the registration
statement on Form S-1 of which this Prospectus forms a part.
Liquidation Account. In the unlikely event of a complete liquidation
of the Bank, each holder of a deposit account in the Bank would receive his or
her pro rata share of any assets of the Bank remaining after payment of claims
of all creditors (including the claims of all depositors to the withdrawal value
of their accounts). His or her pro rata share of such remaining assets would be
the same proportion of such assets as the value of his deposit account was to
the total of the value of all deposit accounts in the Bank at the time of
liquidation.
The Plan of Conversion provides that, at the time of Conversion, a
Liquidation Account will be established on the Bank's books for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders who maintain
their deposit accounts in the Bank following the Conversion. The amount of the
Liquidation Account will be equal to the net worth of the Bank as of June 30,
1997. After the Conversion, each Eligible Account Holder and Supplemental
Eligible Account Holder will be entitled, in the event of a complete liquidation
of the Bank, to receive liquidating distributions of any assets remaining after
payment of all claims of creditors (including those of all depositors, to the
extent of deposit balances), but before any distributions are made on the Bank's
capital stock, from the Liquidation Account equal to their adjusted Subaccount
Balances (as defined below).
The initial Subaccount Balances for each Eligible Account Holder and
Supplemental Eligible Account Holder shall be determined by multiplying the
opening balance in the Liquidation Account by a fraction, the numerator of which
is the amount of Qualifying Deposits held by such Eligible Account Holder or
Supplemental Eligible Account Holder on the Eligibility Record Date or the
Supplemental Eligibility Record
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Date, and the denominator of which is the aggregate amount of all Qualifying
Deposits on such dates. For deposit accounts in existence on both dates,
separate Subaccount Balances shall be determined on the basis of the Qualifying
Deposits in such deposit accounts on such dates.
If, however, on the last day of any fiscal year of the Bank commencing
after the Eligibility Record Date or Supplemental Eligibility Record Date, as
the case may be, the deposit balance in any deposit account of an Eligible
Account Holder or Supplemental Eligible Account Holder is less than either: (i)
the amount of Qualifying Deposits of such Eligible Account Holder or
Supplemental Eligible Account Holder on the Eligibility Record Date or
Supplemental Eligibility Record Date, as the case may be, or (ii) the deposit
balance in such deposit account at the close of business on the last day of any
previous fiscal year of the Bank commencing after the Eligibility Record Date or
the Supplemental Eligibility Record Date, then such Eligible Account Holder's or
Supplemental Eligible Account Holder's Subaccount Balance would be reduced in an
amount equal to the reduction in such deposit balance, and such Subaccount
Balance will cease to exist if such deposit account is closed. In addition, no
interest in the Liquidation Account would ever be increased despite any
subsequent increase in the deposit balances of any Eligible Account Holder or
Supplemental Eligible Account Holder. Any assets remaining after the above
liquidation rights of Eligible Account Holders and Supplemental Eligible Account
Holders are satisfied would be distributed to the stockholders of the Company.
A merger, consolidation, sale of bulk assets, or similar combination
or transaction in which the Bank is not the surviving entity would not be
considered to be a "liquidation" requiring a distribution of the Liquidation
Account. In such a transaction, the Liquidation Account would be assumed by the
surviving entity.
The creation and maintenance of the Liquidation Account will not
restrict the use or application of any of the capital accounts of the Bank,
except that the Bank may not declare a dividend to the Company if the effect of
such dividend would be to cause its retained earnings to be reduced below the
aggregate amount then required for the Liquidation Account.
SUBSCRIPTION RIGHTS
All persons entitled to purchase stock in the Subscription Offering
have received nontransferable subscription rights to purchase stock at no cost
to such persons. The amount of stock which these parties may purchase will be
determined, in part, by the total stock to be issued, and the availability of
stock for purchase under the categories set forth in the Plan. If the Direct
Community Offering, as described below, extends beyond 45 days following the
expiration of the Subscription Offering, subscribers will have the opportunity
to increase, decrease or rescind their orders to purchase stock submitted in the
Subscription Offering. Preference categories have been established for the
allocation of stock to the extent that said stock is available. These categories
are as follows:
CATEGORY 1 is reserved for the Bank's Eligible Account Holders (i.e.,
depositors at the Bank on March 31, 1996 with account balances of $50.00 or
more) who, together with associates and/or with persons acting in concert, will
each receive nontransferable subscription rights to purchase up to $600,000 of
Common Stock. See "--Limitations on Purchases of Shares." In the event that
subscriptions for the Common Stock are received from Eligible Account Holders in
excess of the number of shares available for subscription, the Common Stock
available for purchase will be allocated among the subscribing Eligible Account
Holders so as to permit each subscribing Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his or her total
allocation of Common Stock equal to the lesser of 100 shares or the number of
shares subscribed by such Eligible Account Holder. Any shares remaining after
such allocation will be allocated among the subscribing Eligible Account Holders
whose subscriptions remain unsatisfied proportionately, based on the amount of
their respective qualifying deposits as compared to total qualifying deposits of
all Eligible Account Holders whose subscriptions remain unsatisfied. If the
amount so allocated exceeds the amount subscribed for
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by any one or more Eligible Account Holders, the excess shall be
reallocated on the same principle (one or more times as necessary) among those
Eligible Account Holders whose subscriptions are still not fully satisfied until
all available shares have been allocated or all subscriptions are satisfied.
Subscription rights received by officers and directors in this category based on
their increased deposits in the Bank in the one-year period preceding March 31,
1996 are subordinated to the subscription rights of other Eligible Account
Holders.
CATEGORY 2 is reserved for the Bank's Supplemental Eligible Account
Holders as of March 31, 1997 who, together with associates and/or persons acting
in concert, will each receive nontransferable subscription rights to purchase up
to $600,000 of Common Stock. See "--Limitations on Purchases of Shares". In
the event that subscriptions for Common Stock are received from Supplemental
Eligible Account Holders upon exercise of Subscription Rights in excess of the
number of Shares available for subscription, the Common Stock available for
purchase will be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of Shares sufficient to make his
total allocation of Common Stock equal to the lesser of 100 Shares or the number
of Shares subscribed for by such Supplemental Eligible Account Holder. Any
Shares remaining after such allocation will be allocated among the subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Supplemental Eligible Account
Holders whose subscriptions remain unsatisfied. If the amount so allocated
exceeds the amount subscribed for by any one or more Supplemental Eligible
Account Holders, the excess shall be reallocated on the same principle (one or
more times as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied until all available shares have
been allocated or all subscriptions satisfied. Subscription rights received by
officers and directors in this category based on their increased deposits in the
Bank in the one-year period preceding March 31, 1997 are subordinated to the
subscription rights of other Supplemental Eligible Account Holders.
CATEGORY 3 is reserved for the ESOP of the Bank, which shall receive
nontransferable subscription rights to purchase up to 8% of the Common Stock. It
is expected that the Bank's ESOP will subscribe for approximately 188,600
shares, or 8%, of the Common Stock at the maximum of the Current Valuation
Range. If, after the filling of subscriptions of Eligible Account Holders, a
sufficient number of shares are not available to fill the subscriptions by the
ESOP, the subscription by the ESOP shall be filled to the maximum extent
possible. If all the shares of Common Stock offered in the Subscription
Offering are purchased by Eligible Account Holders, then the ESOP will purchase
shares in the open market following consummation of the conversion. The ESOP
shall not be deemed to be an Associate or Affiliate of, or a Person Acting in
Concert with, any director or officer of the Company or the Bank.
Notwithstanding any provision contained herein to the contrary, the Bank may
make scheduled discretionary contributions to the ESOP; provided, that such
contributions do not cause the Bank to fail to meet its regulatory capital
requirements.
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SUBSCRIPTION OFFERING
Expiration Date of Subscription Offering. The Subscription Offering
will expire at 3:30 p.m., Eastern Standard Time, on _______, 1997 unless
extended by the board of directors of the Bank. Such date and time are referred
to herein as the "Expiration Date." The latest possible Expiration Date is
twenty-four months from the date that the Plan of Conversion was approved by the
board of directors of the Bank (June 10, 1997). Subscription rights not
exercised prior to the Expiration Date may be void.
Orders will not be executed by the Bank until all shares of Common
Stock have been subscribed for or sold. If all shares have not been subscribed
for or sold within 45 days of the end of the Subscription Offering, or by
_______, 199_ (unless such period is extended with consent of the Commissioner),
all funds delivered to the Bank pursuant to the Subscription Offering will be
promptly returned to the subscribers with interest at the Bank's passbook rate,
currently 2.60%, and all charges to savings accounts will be rescinded.
Use of Order Forms. Rights to subscribe may be exercised only by
completion of order forms. Any person receiving an order form who desires to
subscribe for shares of stock must do so prior to the Expiration Date by
delivering (by mail or in person) to Mystic a properly executed and completed
order form, together with full payment for all shares for which the subscription
is made. Facsimiles of order forms will not be accepted as properly completed
and executed order forms. All checks or money orders must be made payable to
the order of "Mystic Financial, Inc. " The order form must be received by the
Expiration Date. All subscription rights under the Plan will expire on the
Expiration Date, whether or not the Bank has been able to locate each person
entitled to such subscription rights. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT
BE REVOKED OR MODIFIED WITHOUT THE CONSENT OF THE BANK.
Each subscription right may be exercised only by the person to whom it
is issued and only for his or her own account. THE SUBSCRIPTION RIGHTS UNDER THE
PLAN ARE NONTRANSFERABLE. Each person subscribing for shares is required to
represent to the Bank that he or she is purchasing such shares for his or her
own account and that he or she has no agreement or understanding with any other
person for the sale or transfer of such shares.
In the event order forms: (i) are not delivered and are returned to
Mystic by the United States Postal Service or the Bank and/or the Company is
unable to locate the addressee, or (ii) are not returned or are received after
the Expiration Date, or (iii) are defectively filled out or executed, or (iv)
are not accompanied by the full required payment for the shares subscribed for
(including instances where a savings account or certificate balance from which
withdrawal is authorized is insufficient to fund the amount of such required
payment), the subscription rights for the person to whom such rights have been
granted will lapse as though such person failed to return the completed order
form within the time period specified. However, Mystic may waive any
irregularity on any order form or require the submission of corrected order
forms or the remittance of full payment for subscribed shares by such date as
Mystic may specify. The interpretation by Mystic of the terms and conditions of
the Plan and of the order form will be final.
Payment for Shares. Payment for all subscribed shares computed on the
basis of the Purchase Price will be required to accompany all completed order
forms for subscriptions to be valid. Payment for subscribed shares may be made
(i) in cash, if delivered in person, (ii) by check, bank draft or money order,
or (iii) by authorization of withdrawal from deposit accounts maintained with
the Bank. Wire transfers as payment for shares ordered for purchase will not be
permitted or accepted as proper payment. Appropriate means by which withdrawals
from deposit accounts may be authorized are provided in the order forms. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be used by a subscriber for any purpose other than to purchase stock for
which subscription has been made while the Plan remains in effect. In the case
of payments authorized to be made through withdrawal from deposit accounts, all
sums authorized for withdrawal will continue to earn interest at the contract
rate until the date of consummation of the sale. In the case of payments made in
cash or by check or money order, such funds will be placed in a segregated
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savings account established for each subscriber specifically for this purpose
(each federally insured up to the applicable $100,000 limit and insured by the
Share Insurance Fund of the Co-operative Central Bank for amounts in excess of
$100,000), and interest will be paid at the passbook rate then offered from the
date payment is received until the Conversion is completed or terminated.
Interest penalties for early withdrawal applicable to certificate accounts will
not apply to withdrawals authorized for the purchase of shares; however, if a
partial withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the passbook rate subsequent to the withdrawal. An
executed order form, once received by Mystic, may not be modified, amended or
rescinded without the consent of Mystic, unless the Conversion is not completed
within 45 days of the termination of the Subscription Offering.
The ESOP may subscribe for shares by submitting its order form for the
purchase of the shares during the Subscription Offering and by making payment
for the shares on the date of the closing. The ESOP will obtain a loan for the
purchase of shares from the Company.
Shares Purchased. Subscribers will be notified of the number of
shares for which their subscriptions have been accepted by mail promptly on
completion of the sale of all the Common Stock. Certificates representing shares
of Common Stock will be delivered to subscribers promptly thereafter.
DIRECT COMMUNITY OFFERING
Concurrently with or at any time during or after the Subscription
Offering, the board of directors of the Company may elect to offer shares of the
Common Stock in a Direct Community Offering to the extent such shares remain
available after satisfaction of all orders received in the Subscription
Offering. The Company intends to give preference to orders received in the
Direct Community Offering from natural persons who reside in the Bank's local
community, which is defined as the communities of Medford, Malden, Everett,
Stoneham, Arlington, Winchester, Somerville, Melrose, Lexington and Bedford,
Massachusetts. THE DIRECT COMMUNITY OFFERING MAY EXPIRE AS EARLY AS 3:30 P.M.,
EASTERN STANDARD TIME ON ________________, 199___, UNLESS EXTENDED UNTIL NOT
LATER THAN _______, 199_. THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE
DIRECT COMMUNITY OFFERING IS SUBJECT TO THE RIGHT OF THE COMPANY TO ACCEPT OR
REJECT SUCH PURCHASES IN WHOLE OR IN PART. THE COMPANY PRESENTLY INTENDS TO
TERMINATE THE DIRECT COMMUNITY OFFERING AS SOON AS IT HAS RECEIVED ORDERS FOR AT
LEAST THE MINIMUM NUMBER OF SHARES OFFERED.
Purchasers in the Direct Community Offering, together with their
associates and groups acting in concert, are each eligible to purchase up to
$600,000 of Common Stock.
If all of the Common Stock is subscribed for in the Subscription
Offering, no Common Stock will be available for purchase in the Direct Community
Offering, and all funds submitted pursuant to the Direct Community Offering will
be promptly refunded. In the event an insufficient number of shares are
available to fill orders in the Direct Community Offering, the available shares
will be allocated on a pro rata basis determined by the amount of the respective
orders, provided however, that orders received in the Direct Community Offering
shall first be filled up to a maximum of 2% of the shares being offered. If the
Direct Community Offering extends beyond 45 days following the expiration of the
Subscription Offering, subscribers will have the right to increase, decrease or
rescind subscriptions for shares previously submitted.
Except as noted below, cash and checks received in the Direct
Community Offering will be placed in segregated savings accounts (each federally
insured up to the applicable $100,000 limit and insured by the Share Insurance
Fund of the Co-operative Central Bank for amounts in excess of $100,000)
established specifically for this purpose. Interest will be paid on orders made
by check or in cash at the passbook rate then offered, from the date the payment
is received by the Bank until the consummation of the Conversion. In the event
that the Conversion is not consummated for any reason, all funds submitted
pursuant to the Direct
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Community Offering will be promptly refunded with interest as described above.
SYNDICATED OFFERING
As a final step in the Conversion, the Plan of Conversion provides
that, if necessary, all shares of Common Stock not purchased in the Direct
Community Offering, if any, will be offered for sale in the Syndicated Offering
to the general public and/or through a syndicate of registered broker-dealers to
be formed and managed by Trident Securities acting as agent to assist the Bank
in the sale of the Common Stock. The Bank has the right to reject orders, in
whole or in part, in their sole discretion in the Syndicated Offering. Neither
Trident Securities nor any registered broker-dealer shall have any obligation to
take or purchase any shares of the Common Stock in the Syndicated Offering.
Common Stock sold in the Syndicated Offering will be sold at the
Purchase Price and hence will be sold at the same price as all other shares in
the Offerings. See "--Stock Pricing and Number of Shares to be Issued."
No person together with any associate or group of persons acting in
concert will be permitted to subscribe in the Syndicated Offering for more than
$600,000 in the Offering. Selected dealers will receive a fee of up to 45% of
the amount of Common Stock sold by the selected dealers in the Syndicated
Offering payable by the Company. Such fee will be at a stated rate (at a
particular sales level) and will be negotiated on a case-by-case basis.
Selected dealers may only solicit indications of interest from their
customers to place orders for shares. Such selected dealers shall subsequently
contact their customers who indicated an interest and seek their confirmation as
to their intent to purchase. Those indicating an intent to purchase shall
execute order forms and forward them to their selected dealer or authorize the
selected dealer to execute such forms. The selected dealer will acknowledge
receipt of the order to its customer in writing on the following business day
and will debit such customer's account on the fifth business day after the
customer has confirmed his intent to purchase ("debit date") and on or before
Noon of the next business day following the debit date will send order forms and
funds to the Bank for deposit in a segregated account. Purchasers' funds are not
required to be in their accounts with selected dealers until the debit date.
The Syndicated Offering may terminate on ___________________, 199___
and will terminate no later than _______, 199_, unless extended by the Bank with
the approval of the Commissioner and the FDIC. See "--Stock Pricing and Number
of Shares to be Issued" for a discussion of rights of subscribers, if any, in
the event an extension is granted.
PLAN OF DISTRIBUTION AND FINANCIAL ADVISORY ARRANGEMENTS
The Bank has retained Trident Securities to consult with and advise
the Bank and, to assist the Bank, on a best efforts basis, in the distribution
of shares in the Offerings. Trident Securities is a broker-dealer registered
with the SEC and a member of the National Association of Securities Dealers,
Inc. ("NASD"). Trident Securities will assist the Company in the Offerings as
follows: (i) it will act as marketing advisor with respect to the Offerings and
will represent the Company as placement agent on a best efforts basis in the
sale of the Common Stock in the Direct Community Offering and Syndicated
Offering; (ii) members of its staff will conduct training sessions for
directors, officers and employees of the Bank regarding the Offerings process;
and (iii) it will provide assistance in the establishment and supervision of the
Stock Information Center, including training staff to properly record and
tabulate orders for the purchase of Common Stock and to appropriately respond to
customer inquiries. Trident Securities has agreed to act as a market maker for
the Company's Common Stock following consummation of the Conversion.
For rendering its services, Trident Securities will receive a
management fee of .40% and a
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commission equal to 2% of the aggregate value of Common Stock sold in the
Offerings, excluding shares purchased by the ESOP, directors and officers and
their associates.
If the Offering is extended beyond the Expiration Date, Trident
Securities may make sales to the general public and/or assemble and manage a
syndicate of selected dealers to assist the Bank in the sale of the Common Stock
during a Syndicated Offering. See "--Syndicated Offering." Under the federal
securities laws, Trident Securities and the selected dealers may be deemed to be
underwriters.
The Bank has agreed to reimburse Trident Securities for its reasonable
out-of-pocket expenses, including but not limited to travel, communications,
legal fees and postage (up to an aggregate of $44,000) and to indemnify Trident
Securities against certain claims or liabilities, including certain liabilities
under the Securities Act of 1933, as amended. Total underwriting fees to Trident
Securities are expected to be between $401,624, $469,520, $537,416 and $615,496
at the minimum, midpoint, maximum and the super maximum, respectively, of the
Current Valuation Range. See "Pro Forma Data" for the assumptions used to
determine these estimates.
Sales of Common Stock will be made primarily by registered
representatives affiliated with Trident Securities or by the broker-dealers
managed by Trident Securities. In addition, subject to applicable law, executive
officers of the Bank may participate in the solicitation of offers to purchase
Common Stock. Other employees of the Bank may participate in the Offerings in
clerical capacities, providing administrative support in effecting sales
transactions or answering questions of a mechanical nature. Questions relating
to the proper execution or nature of the investment, will be directed to
registered representatives. Such other employees have been instructed not to
solicit offers to purchase Common Stock or provide advice regarding the purchase
of Common Stock. Subject to applicable state law, the Bank will rely on Rule
3a4-1 under the Exchange Act, and sales of Common Stock will be conducted with
the requirements of Rule 3a4-1, so as to permit officers and current full and
part-time Bank employees to participate in the sale of Common Stock. No officer,
director or employee of the Bank will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.
The Common Stock will be offered principally by the distribution of
this Prospectus and through the efforts of management of the Bank. A conspicuous
legend that the Common Stock is not a federally-insured or guaranteed deposit
account appears on the Common Stock certificate and on all offering documents
used in connection with the Offerings. Any person purchasing the Common Stock
from the Bank's office will be required to sign an acknowledgment that the
Common Stock is not a federally-insured or guaranteed instrument and that the
purchaser has received a Prospectus and understands the investment risks
involved.
In addition, certain executive officers of the Bank will participate
in the Offerings and may contact potential offerees. It is expected that the
President and Chief Executive Officer of the Bank and members of the Bank's
board of directors will contact certain depositors as well as others to discuss
the Offerings. None of the Bank's employees or directors who participate in the
Offerings will receive any special compensation or other remuneration for such
activities.
None of the Bank's personnel participating in the Offerings are
registered or licensed as a broker or dealer or an agent of a broker or dealer.
The Bank's personnel will assist in the above described sales activities
pursuant to an exemption from registration as a broker or dealer provided by
Rule 3a4-1 promulgated under the Exchange Act, which generally provides that an
"associated person of an issuer" of securities shall not be deemed a broker
solely by reason of participation in the sale of securities of such issuer if
the associated person meets certain conditions. Such conditions include, but are
not limited to, that the associated person participating in the sale of an
issuer's securities not be compensated in connection therewith at the time of
participation, that such person not be associated with a broker or dealer and
that such person observe certain limitations on his participation in the sale of
securities. For purposes of this exemption, "associated person of
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an issuer" is defined to include any person who is a director, officer or
employee of the issuer or a company that controls, is controlled by or is under
common control with the issuer.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
R.P. Financial, which is experienced in the evaluation and appraisal
of business entities, including banking institutions involved in the conversion
process, has been retained by the Bank to prepare an appraisal of the estimated
pro forma market value of the Common Stock. R.P. Financial will receive a fee
not to exceed $20,000 for its appraisal, plus reasonable selected travel
expenses. The Bank has agreed to indemnify R.P. Financial, and R.P. Financial's
directors, officers and other employees, to the maximum extent permitted by law
and hold R.P. Financial harmless from any losses, actions, claims, damages,
expenses or liabilities related to or arising out of any acts or decisions made
by R.P. Financial in good faith and believed to be in the best interest of the
Bank.
The appraisal contains an analysis of a number of factors including,
but not limited to, the Bank's financial condition and operating trends, the
competitive environment within which the Bank operates, operating trends of
certain banking institutions and savings and loan holding companies, relevant
economic conditions, both nationally and in Massachusetts, which affect the
operations of banking institutions and stock market values of certain
institutions. In addition, R.P. Financial has advised the Bank that it has
considered and will consider the effect of the additional capital raised by the
sale of the Common Stock on the estimated pro forma market value of such shares.
R.P. Financial has determined that as of August 15, 1997 and updated
as of _______________, 1997, the estimated pro forma market value of the Common
Stock was $20,500,000. The Bank has determined to offer the shares of the
Common Stock at a purchase price of $10.00 per share and, by dividing the price
per share into the estimated aggregate value, initially plans to offer up to
2,357,500 shares at the maximum of the Current Valuation Range. R.P. Financial
has established a Current Valuation Range of $17,425,000 to $23,575,000 for this
offering to allow for fluctuations in the aggregate value of the stock due to
changes in the market and other factors from the time of commencement of the
Subscription Offering until completion of the Direct Community Offering.
Should it be determined at the close of the offering that the
aggregate pro forma market value of the Common Stock is higher or lower than
$20,500,000 but is nonetheless within the Current Valuation Range of $17,425,000
to $23,575,000, the Bank will make an appropriate adjustment by raising or
lowering by 15.0% the total number of shares being offered (within a range from
1,742,500 shares to 2,357,500 shares). Unless permitted by the Bank or otherwise
required by the Commissioner, no resolicitation of subscribers and other
purchasers will be made because of any such change in the number of shares to be
issued unless the aggregate purchase price of the Common Stock is below the low
end of the Current Valuation Range or is more than $27,111,250 or 2,711,125
shares (the Super-Maximum of the Current Valuation Range), in which case
subscribers and other purchasers will be offered the opportunity to change or
withdraw their orders. THE ESTABLISHMENT OF ANY NEW PRICE RANGE MAY BE EFFECTED
WITHOUT A RESOLICITATION OF VOTES FROM THE BANK'S DEPOSITORS TO APPROVE THE
CONVERSION.
The appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the Common
Stock. In preparing the valuation, R.P. Financial has relied upon and assumed
the accuracy and completeness of financial and statistical information provided
by the Bank. R.P. Financial did not independently verify the financial
statements and other information provided by the Bank, nor did R.P. Financial
value independently the assets and liabilities of the Bank. The valuation
considers the Bank only as a going concern and should not be considered as an
indication of the liquidation value of the Bank. Moreover, because such
valuation is necessarily based upon estimates and projections of a number of
matters, all of which are subject to change from time to time, no assurance can
be given that persons purchasing the Common Stock will thereafter be able to
sell such shares at prices within the Current Valuation Range.
80
<PAGE>
LIMITATIONS ON PURCHASES OF SHARES
The Plan provides for certain additional limitations to be placed upon
the purchase of shares by eligible subscribers and others in the Conversion.
Each subscriber must subscribe for a minimum of 25 shares; provided, that if the
Purchase Price of 25 shares exceeds $500, the minimum number of shares will be
reduced accordingly. Additionally, no person by himself or herself or with an
associate or a group of persons acting in concert shall purchase shares of
Common Stock with an aggregate Purchase Price of more than $600,000, except for
the ESOP of the Bank, which intends to purchase 8% of the total shares offered
in the Conversion. Officers and directors and their associates may not purchase,
in the aggregate, more than 30% of the shares offered pursuant to the
Conversion. For purposes of the Plan, the directors are not deemed to be acting
in concert solely by reason of their membership on the Bank's board of
directors.
The term "officer" is defined in the Plan to mean the president, vice
presidents, clerk and the treasurer of the Bank.
The term "acting in concert" is defined in the Plan of Conversion to
mean: persons seeking to combine or pool their voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. When persons act together for such purpose, their group is deemed to
have acquired their stock. The term "associate" of a person is defined in the
Plan of Conversion to mean: (i) any corporation or organization (other than the
Bank or a majority-owned subsidiary of the Bank) of which such person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity (excluding tax-qualified
employee plans); and (iii) any relative or spouse of such person, or any
relative of such spouse, who either has the same home as such person or who is a
director or officer of the Bank or any of its parents or subsidiaries. The
Company and the Bank may presume that certain persons are acting in concert
based upon, among other things, joint account relationships and the fact that
such persons have filed joint Schedules 13D with the SEC with respect to other
companies.
The Common Stock will be freely transferable, except for shares
purchased by officers and directors of the Bank. (For restrictions on stock
purchased by officers and directors, see "--Restrictions on Transferability by
Directors and Officers," below.)
The Bank will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for Common Stock pursuant to the Plan reside. However, no such person will be
offered or receive any stock under the Plan who resides in a foreign country or
in a state of the United States with respect to which all of the following
apply: (a) a small number of persons otherwise eligible to subscribe for shares
under the Plan reside in such country or state; (b) the granting of subscription
rights or offer or sale of shares of stock of the Company to such persons would
require the Company, under the securities laws of such state, to register as a
broker or dealer or to register or otherwise qualify its securities for sale in
such state; and (c) such registration or qualification would be impracticable
for reasons of cost or otherwise.
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS
Shares purchased by directors or officers of the Bank shall be subject
to the restriction that said shares shall not be sold for a period of one year
after completion of the Conversion, except in the event of the death of the
stockholder or in any exchange of such shares in connection with a merger or
acquisition of the Company approved by the Commissioner. Accordingly, shares of
stock issued by the Company to directors and officers shall bear a legend giving
appropriate notice of the restriction imposed upon it, and, in addition, the
Company will give appropriate instructions to the transfer agent for the
Company's stock with respect to the applicable restriction for transfer of any
restricted stock. Any shares issued to directors and officers as a stock
81
<PAGE>
dividend, stock split or otherwise with respect to restricted stock shall be
subject to the same restrictions.
Shares purchased by an affiliate of the Company will be subject to the
resale restrictions of Rule 144 under the Securities Act. If the Company meets
the current public information requirements of Rule 144 under the Securities
Act, each affiliate of the Company who complies with the other conditions of
Rule 144 (including those that require the affiliate's sale to be aggregated
with those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of: (i) 1% of the outstanding shares of the Company or (ii)
the average weekly volume of trading in such shares during the preceding four
calendar weeks. Provision may be made in the future by the Company to permit
affiliates to have their shares registered for sale under the Securities Act
under certain circumstances.
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Bank will be final; however, such interpretations have no binding effect on the
Commissioner. The Plan provides that, if deemed necessary or desirable by the
board of directors, the Plan may be substantively amended by a two-thirds vote
of the board of directors as a result of comments from regulatory authorities or
otherwise, prior to the vote of the Bank's depositors and at any time thereafter
with the concurrence of the Commissioner, except that in the event the
regulations under which the Plan was adopted are liberalized subsequent to
approval of the Plan by the Commissioner, the board of directors may amend the
Plan to conform to the regulations without further approval of the depositors,
to the extent permitted by law.
CONDITIONS AND TERMINATION
Completion of the Conversion requires the sale of all shares of the
Common Stock within 24 months following approval of the Plan by the mutual
depositors of the Bank. If this condition is not satisfied, the Plan will be
terminated and the Bank will continue its business in the mutual form of
organization. The Plan may be terminated by the board of directors at any time
with the approval of the Commissioner.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for the Bank by Thacher
Proffitt & Wood, Washington, D.C. Thacher Proffitt & Wood has consented to the
reference herein to their opinion. Foley, Hoag & Eliot, LLP, Boston,
Massachusetts has passed upon certain legal matters for Trident Securities.
EXPERTS
The consolidated financial statements of Medford Co-operative Bank and
its subsidiaries as of June 30, 1997 and 1996 and for each of the years in the
three-year period ended June 30, 1997, have been included herein and elsewhere
in the Prospectus in reliance upon the report of Wolf & Company, P.C.,
independent certified public accountants appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
R.P. Financial has consented to the publication herein of the summary
of its letters to Medford Co-operative Bank, setting forth its opinion as to the
estimated pro forma market value of the Common Stock and the value of
subscription rights in the Subscription Offering and to the use of its name and
the statements with respect to R.P. Financial appearing herein.
82
<PAGE>
ADDITIONAL INFORMATION
The Bank has filed with the Commissioner an Application for
Conversion. This document omits certain information contained in such
application. The Application for Conversion and the exhibits and financial
statements that are part thereof may be inspected at the offices of the
Massachusetts Division of Banks, 100 Cambridge Street, Boston, Massachusetts
02202.
The Company has filed with the SEC a Registration Statement on Form S-
1 (File No. 333-34447) under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC. Such information may be inspected at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Copies may be obtained at prescribed rates
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC at 75 Park Place,
Fourteenth Floor, New York, New York 10007 and Room 3190, John C. Kluczynski
Building, 230 South Dearborn Street, Chicago, Illinois 60604. Copies of such
material can be obtained by mail from the SEC at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Such information is also available on the SEC's Electronic Data
Gathering Analysis and Retrieval ("EDGAR") System. In addition, the SEC
maintains a Worldwide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including the Company. The address for the SEC's Worldwide
Website is "http://www.sec.gov. " The statements contained in this Prospectus
as to the contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, a brief description thereof and are
not necessarily complete; each such statement is qualified by reference to such
contract or document.
In connection with the Conversion, the Company will register its
Common Stock with the SEC under Section 12(g) of the Exchange Act, and, upon
such registration, the Company and the holders of its stock will become subject
to the proxy solicitation rules, reporting requirements and restrictions on
stock purchases and sales by directors, officers and greater than 10%
shareholders, the annual and periodic reporting and certain other requirements
of the Exchange Act. Where required by the Exchange Act, such reports will
contain financial information that has been examined and reported upon, with an
opinion expressed by, an independent public or certified public accountant.
Under the Plan of Conversion, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion.
83
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 1997 and 1996 F-2
Consolidated Statements of Income for each of the years
in the three-year period ended June 30, 1997 F-3
Consolidated Statements of Changes in Surplus for
each of the years in the three-year period ended
June 30, 1997 F-4
Consolidated Statements of Cash Flows for
each of the years in the three-year period ended
June 30, 1997 F-5
Notes to Consolidated Financial Statements F-7
_______________
The financial statements for Mystic Financial, Inc. have been omitted because
Mystic Financial, Inc. has not yet issued any stock, has no liabilities, and has
not conducted any business other than of an organizational nature.
All schedules have been omitted either because they are not required, not
applicable, or are included in the notes to consolidated financial statements.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Medford Co-operative Bank
We have audited the consolidated balance sheets of Medford Co-operative Bank and
subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of income, changes in surplus and cash flows for each of the years in
the three-year period ended June 30, 1997. These consolidated financial
statements are the responsibility of the Bank'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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medford Co-operative
Bank and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997 in conformity with generally accepted accounting principles.
WOLF & COMPANY, P.C.
Boston, Massachusetts
July 29, 1997
F-1
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
------------------------
1997 1996
----------- -----------
(In Thousands)
<S> <C> <C>
Cash and due from banks $ 3,953 $ 5,032
Federal funds sold 2,075 1,683
Short-term investments 197 2,056
----------- -----------
Total cash and cash equivalents 6,225 8,771
Certificates of deposit - 1,000
Securities available for sale, at fair value (Note 2) 3,819 1,568
Securities held to maturity, at amortized cost (Note 2) 17,504 16,926
Federal Home Loan Bank stock, at cost 858 788
Loans, net of allowance for loan losses of $977 and
$742, respectively (Note 3) 114,568 94,760
Mortgage loans held for sale, net 210 1,132
Banking premises and equipment, net (Note 5) 2,697 2,538
Real estate held for investment, net (Note 6) 1,840 1,894
Accrued interest receivable 870 822
Due from Co-operative Central Bank 669 669
Other assets (Note 9) 393 498
----------- -----------
$149,653 $131,366
=========== ===========
LIABILITIES AND SURPLUS
Deposits (Note 7) $129,303 $119,634
Federal Home Loan Bank borrowings (Note 8) 7,532 -
Mortgagors' escrow accounts 386 338
Accrued interest payable 249 195
Accrued expenses and other liabilities 243 250
----------- -----------
Total liabilities 137,713 120,417
----------- -----------
Commitments and contingencies (Notes 10 and 15)
Surplus (Notes 11 and 15) 11,761 11,020
Net unrealized gain (loss) on securities available
for sale, net of tax effects (Notes 2 and 9) 179 (71)
----------- -----------
Total surplus 11,940 10,949
----------- -----------
$149,653 131,366
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1997 1996 1995
---------- --------- ----------
(In Thousands)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $8,397 $7,115 $6,323
Interest and dividends on investment securities 1,208 1,364 1,358
Other interest 294 449 484
---------- --------- ----------
Total interest and dividend income 9,899 8,928 8,165
---------- --------- ----------
Interest expense:
Deposits 4,700 4,569 3,885
Federal Home Loan Bank borrowings 211 - -
---------- --------- ----------
Total interest expense 4,911 4,569 3,885
---------- --------- ----------
Net interest income 4,988 4,359 4,280
Provision for loan losses (Note 3) 272 100 100
---------- --------- ----------
Net interest income, after provision for loan losses 4,716 4,259 4,180
---------- --------- ----------
Other income (charges):
Customer service fees 536 512 410
Loan servicing and other loan fees 56 52 59
Gain on sales of mortgage loans 8 8 6
Writedown of mortgage loans held for sale - (41) -
Gain on sales of securities available for sale, net (Note 2) 168 4 -
Rental income, net of expenses (Note 6) 29 44 45
Co-operative Central Bank Share Insurance Fund
special dividend 44 44 -
Miscellaneous 41 35 16
---------- --------- ----------
Total other income 882 658 536
---------- --------- ----------
Operating expenses:
Salaries and employee benefits (Note 13) 2,734 2,486 2,113
Occupancy and equipment expenses (Note 5) 412 321 247
Data processing expenses 207 179 175
FDIC insurance expense 8 7 251
Foreclosed real estate, net (Note 4) - (5) 77
Other general and administrative expenses 969 890 713
---------- --------- ----------
Total operating expenses 4,330 3,878 3,576
---------- --------- ----------
Income before income taxes 1,268 1,039 1,140
Provision for income taxes (Note 9) 527 440 480
---------- --------- ----------
Net income $ 741 $ 599 $ 660
========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized
Gain (loss)
on Securities
Available Total
Surplus For Sale Surplus
------------- ------------- ---------
(In Thousands)
<S> <C> <C> <C>
Balance at June 30, 1994 $ 9,761 $(78) $ 9,683
Net income 660 - 660
Decrease in net unrealized loss on
securities available for sale - 23 23
---------- --------- ---------
Balance at June 30, 1995 10,421 (55) 10,366
Net income 599 - 599
Increase in net unrealized loss on
securities available for sale - (16) (16)
---------- --------- ---------
Balance at June 30, 1996 11,020 (71) 10,949
Net income 741 - 741
Change in net unrealized gain (loss) on
securities available for sale,
net of tax effects - 250 250
---------- --------- ---------
Balance at June 30, 1997 $11,761 $179 $11,940
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
1997 1996 1995
---------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 741 $ 599 $ 660
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 272 100 100
Net amortization (accretion) of investment securities (4) 8 63
Amortization of deferred loan fees (14) (28) (18)
(Gain) loss on sale of loans 18 - (1)
Net (gain) loss on sales of foreclosed real estate - (7) 30
Provision for losses on foreclosed real estate - - 26
Gain on sales of securities available for sale (168) (4) -
Depreciation expense 266 213 186
Deferred income tax provision (benefit) (87) 18 8
Mortgage loans originated for sale (2,467) (2,772) (358)
Principal balance of mortgage loans sold 3,389 1,598 358
Writedown of mortgage loans held for sale - 41 -
(Increase) decrease in accrued interest receivable (48) 26 (55)
(Increase) decrease in other assets 95 46 (24)
Increase in accrued interest payable 54 2 38
Increase (decrease) in accrued expenses and
other liabilities (7) 34 (20)
---------- -------- -------
Net cash provided (used) by operating
activities 2,040 (126) 993
---------- --------- -------
Cash flows from investing activities:
Net (increase) decrease in certificates of deposit 1,000 (150) 1,650
Proceeds from maturities of securities held to maturity 12,916 16,017 8,014
Purchase of securities held to maturity (13,490) (7,899) (7,976)
Purchase of securities available for sale (2,834) (137) (18)
Proceeds from sales of securities available for sale 1,098 20 -
Purchase of Federal Home Loan Bank stock (70) - -
Loans originated, net of payments received (25,427) (14,697) (2,704)
Proceeds from sales of loans 5,343 - 95
Proceeds from sales of foreclosed real estate - 194 408
Purchases of banking premises and equipment (369) (932) (371)
Additions to real estate held for investment (2) - (2)
Refund of construction costs on real estate held
for investment paid in prior years - - 31
---------- -------- -------
Net cash used by investing activities (21,835) (7,584) (873)
---------- -------- -------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------
1997 1996 1995
------------- ------------ ---------
(In Thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits 9,669 5,810 3,159
Proceeds from borrowings 7,550 - -
Repayment of borrowings (18) - -
Net increase (decrease) in mortgagors' escrow
accounts 48 (29) 42
------------- ------------- --------
Net cash provided by financing
activities 17,249 5,781 3,201
------------- ------------- --------
Net change in cash and cash equivalents (2,546) (1,929) 3,321
Cash and cash equivalents at beginning of year 8,771 10,700 7,379
------------- ------------- --------
Cash and cash equivalents at end of year $ 6,225 $ 8,771 $10,700
============= ============= ========
Supplemental information:
Interest paid $ 4,857 $ 4,566 $ 3,847
Income taxes paid 693 375 485
Transfer from loans to foreclosed real estate - 83 298
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
l. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND BUSINESS
The consolidated financial statements include the accounts of Medford
Co-operative Bank and its wholly-owned subsidiaries, Mystic Securities
Corp., which was organized during 1997, and engages in the purchase and
sale of investment securities and Mystic Investment Inc. which is
inactive. All significant intercompany accounts have been eliminated in
consolidation.
The Bank provides a variety of financial services to individuals and
small businesses through its four offices in Medford, Massachusetts. Its
primary deposit products are checking, savings and term certificate
accounts, and its primary lending products are residential and
commercial mortgage loans, commercial and consumer loans.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the balance sheet date 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 the valuation reserve
for deferred tax assets.
RECLASSIFICATIONS
Certain amounts have been reclassified in the 1996 and 1995
consolidated financial statements to conform to the 1997 presentation.
CASH EQUIVALENTS
Cash equivalents include amounts due from banks, federal funds sold and
short-term investments with original maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments are carried at cost, which approximates fair
value, and consist of money market funds and interest-bearing deposits
in the Bank Investment Fund-Liquidity Fund.
F-7
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CERTIFICATES OF DEPOSIT
Certificates of deposit mature within one year and are carried at cost,
which approximates fair value.
INVESTMENT SECURITIES
Investments in debt securities that management has the positive intent
and ability to hold to maturity are classified as "held to maturity" and
carried at amortized cost. Investments classified as "available for
sale" are carried at fair value, with unrealized gains and losses
reported as a separate component of surplus, net of tax effects where
applicable.
Purchase premiums and discounts are amortized to earnings by a method
which approximates the interest method over the terms of the
investments. Gains and losses on the sale of securities are recorded on
the trade date using the specific identification method.
LOANS
The Bank grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio consists of mortgage loans in
the Greater Boston area. The ability of the Bank's debtors to honor
their contracts is dependent upon the local real estate market and
economy in this area.
Loans, as reported, have been reduced by amounts due to borrowers on
incomplete loans, net deferred loan fees and the allowance for loan
losses.
Interest on loans is not accrued on loans which are identified as
impaired or loans which are ninety days or more past due. Interest
income previously accrued on such loans is reversed against current
period interest income. Interest income on all non-accrual loans is
recognized only to the extent of interest payments received.
Net deferred loan fees are amortized as an adjustment of the related
loan yields using the interest method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses charged to earnings and is maintained at a level considered
adequate to provide for reasonably foreseeable loan losses.
F-8
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONCLUDED)
The provision and the level of the allowance are evaluated on a regular
basis by management and are based upon management's periodic review of
the collectibility of the loans in light of known and inherent risks in
the nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions.
The allowance is an estimate and ultimate losses may vary from current
estimates and future additions to the allowance may be necessary. As
adjustments become necessary, they are reported in earnings for the
periods in which they become known. Loan losses are charged against the
allowance when management believes the collectibility of the loan
balance is unlikely. Subsequent recoveries, if any, are credited to the
allowance.
Effective July 1, 1995, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118. Under SFAS No. 114, 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. Impairment is measured on a
loan by loan basis by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent. All of the Bank's loans which have been
identified as impaired have been measured by the fair value of existing
collateral.
SFAS No. 114 is not applicable to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, and
loans that are measured at fair value. Accordingly, the Bank has not
applied SFAS No. 114 to its consumer loans which are collectively
evaluated for impairment.
SFAS No. 114 also limits the classification of loans as in-substance
foreclosures to situations where the creditor actually receives physical
possession of the debtor's assets. The adoption of SFAS No. 114 had no
effect on the Bank's assessment of the overall adequacy of the allowance
for loan losses. The restatement of previously issued financial
statements to conform with SFAS No. 114 is expressly prohibited.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or market.
F-9
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FORECLOSED REAL ESTATE
Foreclosed real estate is held for sale and carried at the lower of cost
or fair value less estimated costs to sell. Troubled loans are
transferred to foreclosed real estate upon completion of formal
foreclosure proceedings.
Real estate properties acquired through foreclosure are initially
recorded at fair value at the date of foreclosure. Costs relating to the
development and improvement of property are capitalized, whereas costs
relating to holding property are expensed.
Valuations are periodically performed by management, and an allowance
for losses is established through a charge to earnings if the carrying
value of a property exceeds its fair value less estimated costs to sell.
BANKING PREMISES AND EQUIPMENT AND REAL ESTATE HELD FOR INVESTMENT
Land is carried at cost. Buildings, equipment and improvements are
stated at cost, less accumulated depreciation, computed on the straight-
line method over the estimated useful lives of the assets.
It is general practice to charge the cost of maintenance and repairs to
earnings when incurred; major expenditures for improvements are
capitalized and depreciated.
PENSION PLAN
It is the Bank's policy to fund pension plan costs in the year of
accrual.
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 rates are enacted, deferred tax assets and liabilities
are adjusted accordingly through the provision for income taxes. The
Bank's 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.
F-10
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." The accounting and reporting
standards of this Statement are based on a financial components approach
that focuses on control, whereby after a transfer of financial assets,
an entity recognizes only financial and servicing assets it controls and
liabilities it has incurred. Liabilities incurred will be initially
recognized at fair value, if practicable. Financial assets are
derecognized when control has been surrendered, and liabilities are
derecognized when extinguished. The determination of whether control
over a financial asset has been surrendered is based on meeting specific
criteria as defined in the Statement.
The Bank adopted the Statement on January 1, 1997 for transfers and
servicing of financial assets and extinguishments of liabilities. In
December 1996, the FASB voted to defer for one year the provisions of
the Statement that relate to secured borrowings and collateral.
Effective July 1, 1996, the Bank prospectively adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights" whereby rights to service
mortgage loans for others are capitalized as separate assets, whether
acquired through purchase or origination, if such loans are sold or
securitized with servicing rights retained. Accordingly, the total cost
of the mortgage loan is allocated to the related servicing right and to
the loan based on the relative fair values if it is practicable to
estimate those fair values. The Bank estimates fair value based on the
present value of estimated expected future cash flows using prepayment
speeds and discount rates commensurate with the risks involved, and
servicing costs determined on an incremental cost basis. Prior to the
adoption of SFAS No. 122, the capitalization of originated mortgage
servicing rights was not allowed under generally accepted accounting
principles. Capitalized mortgage servicing rights are amortized to
servicing revenue in proportion to, and over the period of, estimated
net servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. The adoption of SFAS
No. 122 had no material effect on the Bank's consolidated financial
statements.
F-11
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
with gross unrealized gains and losses is as follows:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Available for Sale
-------------------
Marketable equity securities:
Co-operative Bank
Investment Fund One $ 1,500 $ - $ (78) $ 1,422
Other equity securities 2,043 403 (49) 2,397
------- ---------- ----- -------
Total $ 3,543 $ 403 $(127) $ 3,819
======= ========== ===== =======
Held to Maturity
----------------
U.S. Government and
federal agency obligations $14,976 $ 13 $ (81) $14,908
Other bonds 2,528 - (5) 2,523
------- ---------- ----- -------
Total $17,504 $ 13 $ (86) $17,431
======= ========== ===== =======
</TABLE>
F-12
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ----------- ----------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Available for Sale
------------------
Marketable equity securities:
Co-operative Bank
Investment Fund One $ 1,500 $ - $ (89) $ 1,411
Other equity securities 139 20 (2) 157
------- ---------- --------- -------
Total $ 1,639 $ 20 $ (91) $ 1,568
======= ========== ========= =======
Held to Maturity
----------------
U.S. Government and
federal agency obligations $16,899 $ 21 $ (153) $16,767
Other bonds 27 - - 27
------- ---------- --------- -------
Total $16,926 $ 21 $ (153) $16,794
======= ========== ========= =======
</TABLE>
F-13
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT SECURITIES (CONCLUDED)
The amortized cost and estimated fair value of debt securities held to
maturity by contractual maturity is as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
---------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 5,002 $ 4,973 $ 8,003 $ 8,021
Over 1 year to 5 years 12,502 12,458 8,923 8,773
------- ------- ------- -------
Total $17,504 $17,431 $16,926 $16,794
======= ======= ======= =======
</TABLE>
During the years ended June 30, 1997 and 1996, proceeds from sales of
securities available for sale amounted to $1,098,000 and $20,000,
respectively. Gross realized gains amounted to $172,000 and $4,000,
respectively. Gross realized losses for 1997 were $4,000. There were no
sales of securities during the year ended June 30, 1995.
F-14
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LOANS
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1997 1996
-------- -------
(In Thousands)
<S> <C>
Mortgage loans on real estate:
Residential $ 90,203 $82,459
Commercial 17,847 8,280
Construction 976 285
Home equity lines of credit 1,564 1,176
-------- -------
110,590 92,200
Less: Due to borrowers on incomplete loans (340) (134)
Net deferred loan fees (37) (60)
-------- -------
110,213 92,006
-------- -------
Other loans:
Personal 1,203 1,271
Commercial 2,672 1,333
Commercial lines of credit 1,005 382
Share secured 244 252
Home improvement 208 258
-------- -------
5,332 3,496
-------- -------
Total loans 115,545 95,502
Less allowance for loan losses (977) (742)
-------- -------
Loans, net $114,568 $94,760
======== =======
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 742 $ 757 $ 749
Provision for loan losses 272 100 100
Recoveries 20 23 27
Charge-offs (57) (138) (119)
----- ----- -----
Balance at end of year $ 977 $ 742 $ 757
===== ===== =====
</TABLE>
F-15
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LOANS (CONCLUDED)
At June 30, 1997, the recorded investment in impaired loans (see Note 1)
totaled $365,000 with no valuation allowance. At June 30, 1996, the
recorded investment in impaired loans totaled $622,000 with no valuation
allowance. No additional funds are committed to be advanced in
connection with impaired loans.
For the years ended June 30, 1997 and 1996, the average recorded
investment in impaired loans amounted to $589,000 and $867,000,
respectively. The Bank recognized $31,000 and $51,000, respectively, of
interest income on impaired loans, during the period that they were
impaired, on a cash basis.
At June 30, 1997 and 1996, non-accrual loans amounted to $365,000 and
$622,000, respectively. Accordingly, $26,000 and $11,000 of accrued
interest receivable applicable to these loans was not recognized at June
30, 1997 and 1996, respectively.
On a fee basis, the Bank services loans it has originated and sold to
others. At June 30, 1997 and 1996, such loans amounted to approximately
$15,842,000 and $9,440,000, respectively. As of June 30, 1997 and 1996,
the Bank has no capitalized mortgage servicing rights. All loans
serviced for others were sold without recourse provisions.
4. FORECLOSED REAL ESTATE
There was no foreclosed real estate at June 30, 1997 and 1996.
An analysis of the allowance for losses on foreclosed real estate is as
follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1997 1996 1995
----------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ - $ 16 $ -
Provision for losses on foreclosed real estate - - 26
Charge-offs - (16) (10)
----------- ---------- ---------
Balance at end of year $ - $ - $ 16
=========== ========== =========
</TABLE>
F-16
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FORECLOSED REAL ESTATE (CONCLUDED)
Net (gains) losses applicable to foreclosed real estate include the
following:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Net (gain) loss on sales of foreclosed real estate $ - $ (7) $ 30
Provision for losses on foreclosed real estate - - 26
Operating expenses, net of rental income - 2 21
-------- -------- --------
$ - $ (5) $ 77
======== ======== ========
</TABLE>
5. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises
and equipment and their estimated useful lives follows:
<TABLE>
<CAPTION>
June 30, Estimated
-------------------
1997 1996 Useful Lives
-------- -------- ------------
(In Thousands)
<S> <C> <C> <C>
Banking premises:
Land $ 242 $ 242
Buildings and improvements 2,434 2,583 10 - 40 years
Equipment 1,498 1,495 3 - 10 years
-------- --------
4,174 4,320
Less accumulated depreciation (1,477) (1,782)
-------- --------
$ 2,697 $ 2,538
======== ========
</TABLE>
Depreciation expense for the years ended June 30, 1997, 1996 and 1995
amounted to $210,000, $157,000 and $129,000, respectively.
F-17
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment represents property adjacent to the
Bank's main office which is primarily leased as commercial retail and
office space. The Bank occupies a portion of the building for its own
activities. A summary of the cost and accumulated depreciation and
estimated useful life is as follows:
<TABLE>
<CAPTION>
June 30, Estimated
-------------------------
1997 1996 Useful Life
------ ------ ----------------
(In Thousands)
<S> <C> <C> <C>
Land $ 34 $ 34
Building 2,226 2,224 40 years
-------- ----------
2,260 2,258
Less accumulated depreciation (420) (364)
-------- ----------
$ 1,840 $ 1,894
======== ==========
</TABLE>
Depreciation expense for the years ended June 30, 1997, 1996 and 1995
amounted to $56,000, $56,000 and $57,000, respectively.
The following is a schedule of minimum future rental income on
noncancelable leases:
<TABLE>
<CAPTION>
Year Ending
June 30, (In Thousands)
---------------
<S> <C>
1998 $ 104
1999 95
2000 24
-----------
$ 223
===========
</TABLE>
The provisions of the lease agreements provide that the tenants are
responsible for utilities and certain repairs. Certain of the leases
also contain provisions that the tenants are responsible for a
percentage of real estate taxes and certain other costs.
Rental income for the years ended June 30, 1997, 1996 and 1995
amounted to approximately $135,000, $148,000 and $149,000,
respectively.
F-18
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEPOSITS
A summary of deposit balances by type is as follows:
<TABLE>
<CAPTION>
June 30,
------------------------
1997 1996
------------- --------
(In Thousands)
<S> <C> <C>
NOW accounts $ 17,975 $ 15,480
Demand deposits 4,910 4,103
Regular and other deposits 40,794 40,019
Money market deposits 6,489 6,366
--------- ---------
Total non-certificate accounts 70,168 65,968
--------- ---------
Term certificates less than $100,000 49,916 46,207
Term certificates of $100,000 or more 9,219 7,459
--------- ---------
Total certificate accounts 59,135 53,666
--------- ---------
Total deposits $129,303 $119,634
========= =========
</TABLE>
A summary of certificate accounts by maturity, is as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
--------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Within 1 year $48,316 5.46% $37,283 5.31%
Over 1 year to 3 years 10,475 5.89 15,836 5.61
Over 3 years to 5 years 344 6.15 547 6.62
------- -------
$59,135 5.54% $53,666 5.41%
======= =======
</TABLE>
F-19
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FEDERAL HOME LOAN BANK BORROWINGS
Federal Home Loan Bank borrowings at June 30, 1997 consist of the
following:
<TABLE>
<CAPTION>
Interest
Maturity Rate Amount
------------------------------- ---- ------
(In Thousands)
<S> <C> <C>
July 2, 1997 5.58% $1,000
April 16, 1998 6.22 1,100
December 6, 1999 5.99 1,200
May 5, 2000 6.69 1,100
December 4, 2001 6.12 1,200
March 25, 2002 6.90 950
Amortizing advance, due on
August 14, 2006, requiring
monthly payments of $7,793
including interest 6.97 982
---- --------
$ 7,532
========
</TABLE>
The following is a summary of maturities of borrowings at June 30, 1997:
<TABLE>
<CAPTION>
Year Ending
June 30, (In Thousands)
---------------
<S> <C>
1998 $ 2,125
1999 27
2000 2,328
2001 31
2002 2,183
Thereafter 838
--------
$ 7,532
========
</TABLE>
F-20
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEDERAL HOME LOAN BANK BORROWINGS (CONCLUDED)
The Bank also has an available line of credit of $2,515,000 with the
Federal Home Loan Bank of Boston ("FHLB") at an interest rate that
adjusts daily. Borrowings under the line are limited to 2% of the Bank's
total assets. All borrowings from the Federal Home Loan Bank of Boston
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 U.S.
government and federal agency securities.
9. INCOME TAXES
Allocation of federal and state income taxes between current and
deferred portions is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Current tax provision:
Federal $ 444 $ 300 $ 330
State 170 122 142
--------- ------- --------
Total current 614 422 472
--------- ------- --------
Deferred tax provision (benefit):
Federal (65) 4 5
State (22) 14 3
- --------- --------- ------- --------
Total deferred (87) 18 8
--------- ------- --------
Total provision $ 527 $ 440 $ 480
========= ======= ========
</TABLE>
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------
1996 1995 1997
------ ------ ------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 7.7 8.6 8.4
Other, net (0.1) (0.2) (0.3)
------ ------ ------
Effective tax rates 41.6% 42.4% 42.1%
====== ====== ======
</TABLE>
F-21
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES (CONTINUED)
The components of the net deferred tax asset included in other assets
are as follows:
<TABLE>
<CAPTION>
June 30,
---------------------
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Deferred tax asset:
Federal $ 350 $ 286
State 121 99
-------- --------
471 385
Valuation reserve on asset (24) (24)
-------- --------
447 361
-------- --------
Deferred tax liability:
Federal (111) (20)
State (12) (7)
-------- --------
(123) (27)
-------- --------
Net deferred tax asset $ 324 $ 334
======== ========
</TABLE>
The tax effects of each type of income and expense item that give rise
to deferred taxes are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------
1997 1996
-------- -------
(In Thousands)
<S> <C> <C>
Allowance for loan losses $ 409 $ 302
Net unrealized gain on securities available
for sale (97) -
-------- -------
Other 36 56
-------- -------
348 358
Valuation reserve (24) (24)
-------- -------
Net deferred tax asset $ 324 $ 334
======== =======
</TABLE>
F-22
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES (CONCLUDED)
A summary of the change in the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------
1997 1996 1995
----- ----- -----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 334 $ 352 $ 360
Deferred tax (provision) benefit 87 (18) (8)
Deferred tax on unrealized gain on securities
available for sale (97) - -
----- ----- -----
Balance at end of year $ 324 $ 334 $ 352
===== ===== =====
</TABLE>
The change in the valuation reserve is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------
1997 1996 1995
----- ----- -----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 24 $ 33 $ 30
Unrecognized current year tax benefits - - 3
Recognition of prior years' benefits - (9) -
----- ----- -----
Balance at end of year $ 24 $ 24 $ 33
===== ===== =====
</TABLE>
The federal income tax reserve for loan losses at the Bank's base year
amounted to approximately $2,665,000. If any portion of the reserve is
used for purposes other than to absorb the losses for which established,
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 the Bank intends to use the reserve only to absorb loan losses,
a deferred income tax liability of approximately $1,090,000 has not been
provided.
F-23
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
Loan commitments
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and advance funds under lines of credit and credit card
loans. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in
the accompanying consolidated financial statements.
The Bank's exposure to credit loss is represented by the contractual
amount of these instruments. The Bank uses the same credit policies in
making commitments as it does for on-balance-sheet instruments. A
summary of financial instruments outstanding whose contract amounts
represent credit risk is as follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1997 1996
---------- -----------
(In Thousands)
<S> <C> <C>
Commitments to grant mortgage loans $2,146 $2,449
Commitments to grant commercial loans 2,267 470
Unadvanced funds on home equity lines of credit 1,649 1,157
Unadvanced funds on credit card loans 1,260 1,266
Unadvanced funds on commercial lines of credit 2,031 618
</TABLE>
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 and credit card loans may expire without being
drawn upon; therefore, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The commitments for mortgage
loans and home equity lines of credit are collateralized by real
estate. Commercial loans and lines of credit are secured by various
assets of the borrowers. Credit card loans are generally unsecured.
F-24
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONCLUDED)
Contingencies
Various legal claims arise from time to time in the normal course of
business which, in the opinion of management, will have no material
effect on the Bank's consolidated financial position or results of
operations.
11. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Bank is 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 the Bank's consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined) to
average assets (as defined). Management believes, as of June 30, 1997,
that the Bank meets all capital adequacy requirements to which it is
subject.
F-25
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONCLUDED)
As of June 30, 1997 and 1996, the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based, Tier I risk-based and Tier
I leverage ratios as set forth in the following table. There are no
conditions or events that management believes have changed the Bank's
category. The Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Total Capital
(to Risk Weighted Assets) $12,738 14.4% $7,073 8.0% $8,842 10.0%
Tier I Capital
(to Risk Weighted Assets) 11,761 13.3 3,537 4.0 5,305 6.0
Tier I Capital
(to Average Assets) 11,761 8.1 5,820 - 4.0 - 7,274 5.0
7,274 5.0
As of June 30, 1996:
Total Capital
(to Risk Weighted Assets) 11,691 16.4 5,688 8.0 7,110 10.0
Tier I Capital
(to Risk Weighted Assets) 10,949 15.4 2,844 4.0 4,266 6.0
Tier I Capital
(to Average Assets) 10,949 8.5 5,146 - 4.0 - 6,433 5.0
6,433 5.0
</TABLE>
F-26
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RELATED PARTY TRANSACTIONS
At June 30, 1997 and 1996, total loans to directors and officers of the
Bank greater than $60,000 on an individual basis amounted to
approximately $1,667,000 and $1,521,000, respectively. During the years
ended June 30, 1997 and 1996, total principal additions were $198,000
and $207,000, respectively, and total principal payments were $52,000
and $41,000, respectively.
13. PENSION PLAN
The Bank provides pension benefits for its employees through membership
in Plan C of the Defined Benefit Plan of the Co-operative Banks
Employees Retirement Association. The plan is a multi-employer plan
where the contributions by each bank are not restricted to provide
benefits to the employees of the contributing bank. Each employee
reaching the age of 21 and having completed 1,000 hours of service in
one consecutive twelve-month period beginning with such employee's date
of employment automatically becomes a participant in the retirement
plan. A participant in the plan is not vested until they have performed
two years of service, at which time they become 20% vested. Participants
become 100% vested when credited with six years of service.
Total pension expense for the years ended June 30, 1997, 1996 and 1995
amounted to approximately $104,000, $107,000 and $127,000,
respectively.
In addition to the defined benefit plan, the Bank has a savings and
retirement plan which qualifies under Section 401(k) of the Internal
Revenue Code. Each employee reaching the age of 21 and having completed
1,000 hours of service in one consecutive twelve-month period beginning
with such employee's date of employment automatically becomes a
participant in the savings and retirement plan. The plan provides for
voluntary contributions by participating employees ranging from one
percent to ten percent of their compensation, subject to certain
limitations. The Bank matches 50% of an employee's voluntary
contribution up to ten percent of the employee's compensation.
Total expense under the Section 401(k) plan for the years ended June
30, 1997, 1996 and 1995 amounted to approximately $58,000, $49,000 and
$46,000, respectively.
F-27
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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 No. 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 the Bank.
The following methods and assumptions were used by the Bank in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash, federal
-------------------------
funds sold and short-term investments approximate fair values.
Certificates of deposit: The carrying amounts of certificates of
-----------------------
deposit approximate their fair values.
Investment securities: Fair values for investment securities,
---------------------
excluding Federal Home Loan Bank stock, are based on quoted
market prices. The carrying value of Federal Home Loan Bank
stock approximates fair value based on the redemption provisions
of the Federal Home Loan Bank.
Loans receivable: For variable-rate loans that reprice
----------------
frequently and with no significant change in credit risk, fair
values are based on carrying values. Fair values for loans held
for sale are based on quoted market prices. Fair values for all
other 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. Fair
values for non-performing loans are estimated using underlying
collateral values.
Deposit liabilities: Fair values for interest and non-interest
-------------------
checking, passbook savings, and certain types of money market
accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts).
Fair values for term 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.
F-28
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
Federal Home Loan Bank borrowings: Fair values for borrowings
---------------------------------
are estimated using discounted cash flow analysis based on the Bank's
current incremental borrowing rates for similar types of borrowing
arrangements.
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 and are not
material.
The estimated fair values, and related carrying amounts, of the Bank's financial
instruments are as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1997 1996
----------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 6,225 $ 6,225 $ 8,771 $ 8,771
Certificates of deposit - - 1,000 1,000
Securities available for sale 3,819 3,819 1,568 1,568
Securities held to maturity 17,504 17,431 16,926 16,794
Federal Home Loan Bank stock 858 858 788 788
Loans, net 114,568 114,898 94,760 93,530
Mortgage loans held for sale, net 210 210 1,132 1,132
Accrued interest receivable 870 870 822 822
Financial liabilities:
Deposits 129,303 129,516 119,634 119,814
Federal Home Loan Bank borrowings 7,532 7,534 - -
Accrued interest payable 249 249 195 195
</TABLE>
F-29
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
15. CONVERSION TO STOCK FORM OF OWNERSHIP
On June 11, 1997, the Board of Directors of the Bank adopted a plan of
conversion pursuant to which the Bank will convert from a state chartered
mutual co-operative bank to a state chartered stock co-operative bank, all
of the outstanding common stock of which will be acquired by Mystic
Financial, Inc., (the "Company"), a holding company formed expressly for
such purpose, in exchange for a portion of the net conversion proceeds. All
of the stock to be issued in the conversion is being offered to eligible
account holders in a subscription offering pursuant to subscription rights
in order of priority as set forth in the plan of conversion. The Bank plans
to establish an Employee Stock Ownership Plan ("ESOP") for the benefit of
eligible employees, to become effective upon the conversion. The ESOP
intends to purchase up to 8% of the common stock issued in the conversion
from the proceeds of a loan from the Company. The Bank expects to make
annual contributions adequate to fund the repayment of any indebtedness of
the ESOP.
Effective upon the conversion, the Company intends to enter into employment
agreements with two senior executives and the Bank intends to enter into
employment agreements with two commercial loan officers. The agreements
will include, among other things, provisions for minimum annual
compensation and certain lump-sum severance payments in the event of a
"change in control."
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the Conversion. If the Conversion is not completed, all
costs incurred will be charged to expense. At June 30, 1997, no significant
cost had been incurred.
The Plan provides for the establishment, upon the completion of the
conversion, of a special "liquidation account" for the benefit of account
holders in an amount equal to the retained earnings of the Bank as of the
date of its latest balance sheet contained in the final prospectus used in
connection with the conversion. Each account holder, if he were to continue
to maintain his deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the conversion, to an interest in
the liquidation account prior to any payment to the stockholders of the
Bank. Upon completion of the conversion, the Bank's retained earnings will
be substantially restricted with respect to payment of dividends to
stockholders due to the liquidation account.
The Bank may not declare or pay dividends on its stock if such declaration
and payment would violate statutory or regulatory requirements.
F-30
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL OR ENTITY HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERINGS MADE HEREBY, AND, IF GIVEN OR UP TO
MADE, ANY SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
2,357,500 SHARES OF HAVING BEEN AUTHORIZED BY MYSTIC FINANCIAL, INC. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE MYSTIC SECURITIES OFFERED HEREBY, OR ANY OTHER SECURITIES, TO
ANY PERSON IN ANY FINANCIAL, INC. JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE (Proposed Holding PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED TO DO SO, OR TO ANY Company for
Medford PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
Co-operative Bank) JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE COMMON STOCK IN THE AFFAIRS OF MYSTIC FINANCIAL, INC. SINCE
ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE
HEREOF.
_____________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... iii
SUMMARY OVERVIEW.......................................................... x
SELECTED FINANCIAL AND OTHER DATA......................................... xiii
RISK FACTORS.............................................................. 1
MYSTIC FINANCIAL, INC..................................................... 4
MEDFORD CO-OPERATIVE BANK................................................. 5
DIVIDENDS................................................................. 5
BUSINESS PURPOSES......................................................... 6
USE OF PROCEEDS........................................................... 8
MARKET FOR COMMON STOCK................................................... 9
SHARES TO BE PURCHASED BY MANAGEMENT
PURSUANT TO SUBSCRIPTION RIGHTS.......................................... 10
CAPITALIZATION............................................................ 11
PRO FORMA DATA............................................................ 12
CONSOLIDATED STATEMENTS OF INCOME......................................... 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 16
BUSINESS.................................................................. 26
MANAGEMENT OF THE COMPANY................................................. 41
MANAGEMENT OF THE BANK.................................................... 42
REGULATION................................................................ 52
TAXATION.................................................................. 61
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY............................... 63
CERTAIN RESTRICTIONS ON ACQUISITION OF THE
COMPANY AND THE BANK..................................................... 65
THE CONVERSION............................................................ 71
LEGAL AND TAX OPINIONS.................................................... 82
EXPERTS................................................................... 82
ADDITIONAL INFORMATION.................................................... 83
CONSOLIDATED FINANCIAL STATEMENTS......................................... F-1
</TABLE>
UP TO
2,357,500 SHARES OF
COMMON STOCK
==========================
MYSTIC
FINANCIAL, INC.
(Proposed Holding
Company for Medford
Co-operative Bank)
==========================
___________________
PROSPECTUS
___________________
TRIDENT SECURITIES, INC.
__________, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<TABLE>
<CAPTION>
<S> <C>
Massachusetts Commissioner of Banks registration fee(2)........... 5,000
SEC registration fee(2)........................................... 8,215
NASD filing fee(2)................................................ 1,600
NASDAQ National Market Listing Fee(2)............................. 18,500
Printing, postage and mailing..................................... 45,000
Legal fees and expenses........................................... 150,000
Accounting fees and expenses...................................... 35,000
Appraiser's fees and expenses (including business plan)........... 25,000
Marketing fees, selling commissions, and
underwriter's expenses (including counsel fees)(3)............... 469,280
Conversion agent fees and expenses................................ 6,500
Certificate printing.............................................. 2,000
Blue Sky fees and expenses (including fees of counsel)............ 8,000
Miscellaneous..................................................... 20,000
--------
TOTAL............................................................. $794,095
========
</TABLE>
____________
(1) All expenses are estimated except where otherwise indicated.
(2) Based upon the registration of 2,711,125 shares at $10.00 per share.
(3) Based upon the sale of midpoint shares of Conversion Stock at $10.00 per
share.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL"), inter alia,
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of another corporation or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Similar indemnity is authorized for such person against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of any such threatened, pending or completed action or
suit if such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and provided
further that (unless a court of competent jurisdiction otherwise provides) such
person shall not have been adjudged liable to the corporation. Any such
indemnification may be made only as authorized in each specific case upon a
determination by the stockholders or disinterested
<PAGE>
directors or by independent legal counsel in a written opinion that
indemnification is proper because the indemnitee has met the applicable standard
of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him, and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
Article IX of the Certificate of Incorporation of Mystic Financial, Inc.
(the "Company") provides that a director shall not be personally liable to the
Company or its stockholders for damages for breach of his fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is expressly prohibited by the DGCL. Article X, Section 1 of the
Company's Certificate of Incorporation requires the Company, among other things,
to indemnify to the fullest extent permitted by the DGCL, any person who is or
was or has agreed to become a director or officer of the Company, who was or is
made a party to, or is threatened to be made a party to, or has become a witness
in, any threatened, pending or completed action, suit or proceeding, including
actions or suits by or in the right of the Company, by reason of such agreement
or service or the fact that such person is, was or has agreed to serve as a
director, officer, employee or agent of another corporation or organization at
the request of the Company.
Article X, Section 11 also empowers the Company to purchase and maintain
insurance to protect itself and its directors and officers, and those who were
or have agreed to become directors or officers, against any liability,
regardless of whether or not the Company would have the power to indemnify those
persons against such liability under the law or the provisions set forth in the
Certificate of Incorporation. The Company is also authorized by its Certificate
of Incorporation to enter into individual indemnification contracts with
directors and officers. Medford Co-operative Bank currently maintains and the
Company expects to purchase directors' and officers' liability insurance
consistent with the provisions of the Certificate of Incorporation as soon as
practicable.
The Company expects to enter into employment agreements with certain
executive officers, which agreements are expected to require that the Company
will obtain a directors' and officers' liability policy for the benefit of such
officers or that the Company will indemnify such officers to the fullest extent
provided by law.
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(A) LIST OF EXHIBITS. (Filed herewith unless otherwise noted)
1.1 Engagement Letter dated May 15, 1997 between Medford Co-operative Bank
and Trident Securities, Inc.*
1.2 Draft Form of Agency Agreement between Medford Co-operative Bank and
Trident Securities, Inc .
2.1 Amended Plan of Conversion for Medford Co-operative Bank (including
the Stock Charter and Bylaws of Medford Co-operative Bank)
3.1 Certificate of Incorporation of Mystic Financial, Inc.*
3.2 Bylaws of Mystic Financial, Inc.*
4.1 Draft Stock Certificate of Mystic Financial, Inc.*
5.1 Form of Opinion of Thacher Proffitt & Wood Regarding Legality of
Shares to be Issued*
8.1 Form of Opinion of Thacher Proffitt & Wood Regarding Federal
Taxation*
8.2 Form of Opinion of Wolf & Company, P.C. regarding State Taxation
10.1 Employee Stock Ownership Plan of Mystic Financial, Inc.*
10.2 Form of Employment Agreement between Medford Co-operative Bank and
Robert H. Surabian*
10.3 Form of Employment Agreement between Medford Co-operative Bank and
Ralph W. Dunham*
10.4 Form of Employment Agreement between Medford Co-operative Bank and
John O'Donnell*
10.5 Form of Employment Agreement between Medford Co-operative Bank
and Thomas G. Burke*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Thacher Proffitt & Wood (included in Exhibits 5.1 and
8.1)*
23.3 Consent and Subscription Rights Opinion of R.P. Financial, Inc.*
24.1 Powers of Attorney (Included in Signature Page of this
Registration Statement)
27.1 Financial Data Schedule
99.1 Appraisal Report of R.P. Financial, Inc.*
99.2 Draft Marketing Materials in Connection with the Offerings
*Included with Registration Statement on Form S-1 as filed with
the Commission on August 27, 1997
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
<PAGE>
ITEM 17. UNDERTAKINGS.
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 of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. 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 Commission 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;
(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;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the Offering.
The undersigned Registrant hereby undertakes to furnish stock certificates
to or in accordance with the instructions of the respective purchasers of the
Common Stock, so as to make delivery to each purchaser promptly following the
closing under the Plan of Conversion.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by
<PAGE>
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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Medford, Commonwealth of
Massachusetts on October 14, 1997.
MYSTIC FINANCIAL, INC.
/s/ Robert H. Surabian
--------------------------------------------
By: Robert H. Surabian
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert H. Surabian, as their true and lawful
attorney-in-fact in any and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities to sign the Form S-1 Registration Statement and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the U.S. Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or either one of his or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, and
any rules and regulations promulgated thereunder, this Registration Statement,
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ------ -----
<S> <C> <C>
/s/Robert H. Surabian President, Chief Executive October 14, 1997
- -------------------------
Robert H. Surabian Officer and Director
/s/John J. McGlynn Director and Chairman October 14, 1997
- -------------------------
John J. McGlynn of the Board
/s/Ralph W. Dunham Chief Financial Officer, October 14, 1997
- -------------------------
Ralph W. Dunham Executive Vice President and
Treasurer
/s/Lorraine P. Silva Secretary October 14, 1997
- -------------------------
Lorraine P. Silva
/s/Julie Bernardin Director October 14, 1997
- -------------------------
Julie Bernardin
/s/John A. Hackett Director October 14, 1997
- -------------------------
John A. Hackett
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Richard M. Kazanjian Director October 14, 1997
- -------------------------
Richard M. Kazanjian
/s/Dennis Raimo Director October 14, 1997
- -------------------------
Dennis Raimo
</TABLE>
<PAGE>
EXHIBIT INDEX
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(A) LIST OF EXHIBITS. (Filed herewith unless otherwise noted)
1.1 Engagement Letter dated May 15, 1997 between Medford Co-operative Bank
and Trident Securities, Inc.*
1.2 Draft Form of Agency Agreement between Medford Co-operative Bank and
Trident
Securities, Inc.
2.1 Amended Plan of Conversion for Medford Co-operative Bank (including
the Stock
Charter and Bylaws of Medford Co-operative Bank)
3.1 Certificate of Incorporation of Mystic Financial, Inc.*
3.2 Bylaws of Mystic Financial, Inc.*
4.1 Draft Stock Certificate of Mystic Financial, Inc.*
5.1 Form of Opinion of Thacher Proffitt & Wood Regarding Legality of
Shares to be Issued*
8.1 Form of Opinion of Thacher Proffitt & Wood Regarding Federal
Taxation*
8.2 Form of Opinion of Wolf & Company, P.C. regarding State Taxation
10.1 Employee Stock Ownership Plan of Mystic Financial, Inc.*
10.2 Form of Employment Agreement between Medford Co-operative Bank and
Robert H. Surabian*
10.3 Form of Employment Agreement between Medford Co-operative Bank and
Ralph W. Dunham*
10.4 Form of Employment Agreement between Medford Co-operative Bank and
John O'Donnell*
10.5 Form of Employment Agreement between Medford Co-operative Bank
and Thomas G. Burke*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Thacher Proffitt & Wood (included in Exhibits 5.1 and
8.1)*
23.3 Consent and Subscription Rights Opinion of R.P. Financial, Inc.*
24.1 Powers of Attorney (Included in Signature Page of this
Registration Statement)
27.1 Financial Data Schedule
99.1 Appraisal Report of R.P. Financial, Inc.*
99.2 Draft Marketing Materials in Connection with the Offerings
*Included with Registration Statement on Form S-1 as filed with
the Commission on August 27, 1997
<PAGE>
MYSTIC FINANCIAL, INC.
1,742,500 TO 2,711,125 SHARES
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
$10.00 PER SHARE
SALES AGENCY AGREEMENT
----------------------
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
Mystic Financial, Inc., a corporation organized under the laws of the State
of Delaware (the "Company"), and Medford Co-operative Bank, a Massachusetts
chartered mutual co-operative bank (the "Bank") hereby confirm, as of [date],
their agreement with Trident Securities, Inc. ("Trident"), a broker-dealer
registered with the Securities and Exchange Commission ("Commission") and a
member of the National Association of Securities Dealers, Inc. ("NASD"), as
follows:
Introductory. The Company has been formed for the purpose of becoming the
------------
holding company for the Bank, which intends to convert from mutual to stock form
(together with the Offerings, as defined below, and the issuance of shares of
stock of the Bank to the Company, the "Conversion") pursuant to a plan of
conversion, as amended, adopted by the Board of Directors of the Bank on June
11, 1997 and August 13, 1997 (the "Plan"). In accordance with the Plan, the
Company is offering shares of its common stock, par value $0.01 per share (the
"Shares" or the "Common Stock"), pursuant to nontransferable subscription rights
in a subscription offering (the "Subscription Offering") to certain depositors
of the Bank and to the Bank's tax-qualified employee stock ownership plan (the
"ESOP"). Concurrently with the Subscription Offering, shares of the Common Stock
not sold in the Subscription Offering are being offered to natural persons
residing in Medford, Malden, Everett, Stoneham, Arlington, Winchester,
Somerville, Melrose, Lexington and Bedford (the "Direct Community Offering")
(the Subscription and Direct Community Offerings are sometimes referred to
collectively as the "Subscription and Direct Community Offering"), subject to
the right of the Bank in its absolute discretion, to reject orders in the Direct
Community Offering in whole or in part. It is anticipated that shares of Common
Stock not subscribed for in the Subscription and Direct Community Offering (if
any) will be offered to certain members of the general public on a best efforts
basis by a selling group of broker dealers managed by Trident in a syndicated
offering ("Syndicated Offering") (the Subscription and Direct Community Offering
and the Syndicated Offering are referred to collectively as the "Offerings"). In
the Subscription and Direct Community Offering (and the Syndicated Offering if
applicable), the Company is offering between 1,742,500 and 2,357,500
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 2
Shares (the "Current Valuation Range"), with the possibility of offering up to
2,711,125 Shares without a resolicitation of subscribers pursuant to
Massachusetts General Laws, Chapter 170, Section 26E and 209 C. M. R. 33.00 et
--
seq. (together, the "Conversion Regulations"). With the exception of the ESOP,
- ---
no individual person or other entity, together with associates of and persons
acting in concert with such person or other entity, may subscribe for more than
$600,000 of the Common Stock in the Conversion.
The Company has filed with the Commission a registration statement on Form
S-1 (No. 333-34447), including a prospectus for the registration of the Shares
under the Securities Act of 1933, as amended (the "Securities Act"), and such
amendments thereto, if any, and such amended prospectuses as may have been
required to the date hereof by the Commission in order to declare such
registration statement effective; and will file such additional amendments
thereto and such amended prospectuses and prospectus supplements as may
hereafter be required. Such registration statement (as amended to date, if
applicable, and as from time to time amended or supplemented hereafter) and the
prospectus constituting a part thereof (including in each case all documents
incorporated or deemed to be incorporated by reference therein, if any, and the
information, if any, deemed to be part thereof pursuant to the rules and
regulations of the Commission under the Securities Act, as from time to time
amended or supplemented pursuant to the Securities Act or otherwise (the
"Securities Act Regulations")) are hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively, except that if any revised
prospectus that shall be used by the Company in connection with the Subscription
and Direct Community Offering or the Syndicated Offering differs from the
Prospectus on file with the Commission at the time the Registration Statement
becomes effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 424(b) of the Securities Act Regulations),
the term "Prospectus" shall refer to such revised prospectus from and after the
time it is first provided to Trident for such use.
The Company has been advised by Trident that Trident will use its best
efforts in assisting the Company with the sale of the Shares in the Offerings.
Prior to the execution of this Agreement, the Company has delivered to Trident
the Prospectus dated [date] (as hereinafter defined) and all supplements thereto
to be used in the Offerings. Such Prospectus contains information with respect
to the Company, the Bank and the Shares.
2. Representations and Warranties.
------------------------------
The Company and the Bank jointly and severally represent and warrant to
Trident as follows:
(a) The Registration Statement has been declared effective by the
Commission, no stop order has been issued with respect thereto and no
proceedings therefor have been initiated or, to the knowledge of the
Company and the Bank, threatened by the Commis sion. At the time the
Registration Statement became effective and at all times subsequent thereto
through and including the Closing Date referred to in Section 4 below, the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 3
Registration Statement (as amended or supplemented) complied and will
comply in all material respects with the requirements of the Securities Act
and the Securities Act Regulations and did not and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. At the date of the Prospectus and at all times subsequent
thereto through and including the Closing Date, the Prospectus (as amended
or supplemented) complied and will comply with the Conversion Regulations
and the Prospectus did not and will not include an untrue statement of a
material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. Representations or warranties in this
subsection shall not apply to statements or omissions made in reliance upon
and in conformity with written information furnished to the Company
relating to Trident by or on behalf of Trident expressly for use in the
Prospectus or the Registration Statement.
(b) As of the Closing Date, the Bank will have completed all
conditions precedent to its conversion from the mutual to stock form in
accordance with the Plan, the Conversion Regulations and all other
applicable laws, regulations, decisions and orders. The Plan has been
approved by the Commissioner of Banks of The Commonwealth of Massachusetts
(the "Commissioner") and has been reviewed without objection by the Federal
Deposit Insurance Corporation ("FDIC") and no person has challenged or
sought to obtain judicial review of the action of the Commissioner in
approving the Plan and the Conversion.
(c) The Bank has filed an Application for Conversion including (i)
the Prospectus; (ii) a Notice and Information Statement relating to the
Special Meeting of the Bank's Shareholders (as amended or supplemented, the
"Notice"); and (iii) certain exhibits (together, such Application for
Conversion, Prospectus, Notice and exhibits, as amended or supplemented,
shall sometimes be referred to herein as the "Conversion Application"). By
letter dated ______, the Commissioner has approved the Conversion
Application, such approval remains in full force and effect and no order
has been issued by the Commissioner suspending or revoking such approval
and no proceedings therefor have been initiated or, to the knowledge of the
Company or the Bank, threatened by the Commissioner.
(d) The Commissioner has not, by order or otherwise, prevented or
suspended the use of the Prospectus or any supplemental sales literature
authorized by the Company or the Bank for use in connection with the
Offerings.
(e) As of the Closing Date, the Company will have completed all
conditions precedent to its registration as a bank holding company. The
Company has filed an application (the "Holding Company Application") with
the Board of Governors of the Federal Reserve System (the "Board") for
approval to acquire the Bank and become a bank holding company and has
received written notice from the Board of its approval of the Company's
application.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 4
(f) The Bank is now a Massachusetts chartered co-operative bank of
mutual form of organization and upon the Conversion will be a Massachusetts
chartered co-operative bank of capital stock form of organization, in both
instances duly licensed to conduct its business as described in the
Prospectus, and each of the Bank and the Bank Subsidiary (as defined below)
is in good standing under the laws of The Commonwealth of Massachusetts
and is not required to qualify as a foreign corporation in any
jurisdiction. The Bank is a member in good standing of the Federal Home
Loan Bank of Boston (the "FHLB of Boston") and The Co-operative Central
Bank (the "Central Bank"); the deposit accounts of the Bank are insured by
the Bank Insurance Fund of the FDIC up to the applicable limits; deposits
not insured by the FDIC are insured by the Share Insurance Fund of the
Central Bank; and upon the Conversion, the liquidation account for the
benefit of eligible account holders and supplemental eligible account
holders will be duly established in accordance with the requirements of the
Conversion Regulations. The Bank does not own equity securities of or an
equity interest in any business enterprise, except as described in the
Prospectus.
(g) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware with
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus and to enter into
and perform its obligations under this Agreement; the Company is duly
qualified as a foreign corporation to transact business and is in good
standing in The Commonwealth of Massachusetts and in all other
jurisdictions in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business.
(h) The Company does not directly own any subsidiaries other than the
Bank. The Bank owns one subsidiary, Mystic Securities Corporation (the
"Bank Subsidiary").
(i) Each of the Company, the Bank and the Bank Subsidiary has
obtained all licenses, permits and other governmental authorizations
currently required for the conduct of its business or as required for the
conduct of its business as contemplated by the Conversion Application and
the Holding Company Application; all such licenses, permits and other
governmental authorizations are in full force and effect and each of the
Company, the Bank and the Bank Subsidiary is in all material respects
complying therewith.
(j) Each of the Company, the Bank and the Bank Subsidiary has good,
marketable and insurable title to all assets material to its business and
to those assets described in the Prospectus as owned by it, free and clear
of all material liens, charges, encumbrances or restrictions, except for
liens for taxes not yet due, except as described in the Prospectus and
except as could not in the aggregate have a material adverse effect upon
the operations or financial condition of the Company, the Bank and the
Bank Subsidiary, taken as a whole; all of the leases and subleases material
to the operations or financial condition of
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 5
the Company, the Bank and the Bank Subsidiary, taken as a whole, under
which the Company, the Bank or the Bank Subsidiary holds properties,
including those described in the Prospectus, are in full force and effect
as described therein.
(k) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly
authorized by all necessary actions on the part of each of the Company and
the Bank, and this Agreement is a valid and binding obligation of each of
the Company and the Bank with valid execution and delivery of Trident,
enforceable in accordance with its terms (except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws relating to or affecting the enforcement of
creditors' rights generally or the rights of creditors of financial
institutions, the accounts of which are insured by the FDIC or by general
equity principles, regardless of whether such enforceability is considered
in a proceeding in equity or at law, and except to the extent that the
provisions of Section 7 hereof may be unenforceable as against public
policy).
(l) There is no litigation or governmental proceeding pending or, to
the best knowledge of any of the Company, the Bank or the Bank Subsidiary,
threatened against or involving the Company, the Bank or the Bank
Subsidiary or their assets which individually or in the aggregate would
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), results of operations and business, including the
assets and properties, of the Company, the Bank or the Bank Subsidiary.
(m) The Bank has received the opinion of Thacher Proffitt & Wood with
respect to federal tax consequences of the Conversion to the effect that
the Conversion will constitute a tax-free reorganization under the
Internal Revenue Code of 1986, as amended, and will not be a taxable
transaction for the Bank under the laws of Massachusetts, and the facts
relied upon in such opinion are accurate and complete.
(n) Each of the Company and the Bank has all such corporate power,
authority, authorizations, approvals and orders as may be required to enter
into this Agreement and to carry out the provisions and conditions hereof,
subject to the limitations set forth herein and subject to the satisfaction
of certain conditions imposed by the Commissioner in connection with his
approval of the Conversion Application, and except as may be required under
the securities, or "blue sky, " laws of various jurisdictions, and as of
the Closing Date, the Company will have such approvals and orders to issue
and sell the Shares to be sold by the Company as provided herein, and as
provided in the Plan, subject to the issuance of an amended charter of the
Bank in the form required for Massachusetts chartered capital stock co-
operative banks (the "Stock Charter"), the form of which Stock Charter has
been approved by the Commissioner.
(o) To the best of its knowledge, the Bank is not in violation of any
rule or regulation of Massachusetts or the FDIC that could reasonably be
expected to result in any
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 6
enforcement action against the Bank or its officers or directors that might
have a material adverse effect on the condition (financial or otherwise),
operations, businesses, assets or properties of the Bank.
(p) The financial statements and any related notes or schedules which
are included in the Prospectus and the Registration Statement fairly
present the financial condition, income, retained earnings and cash flows
of the Bank at the respective dates thereof and for the respective periods
covered thereby and comply as to form with the applicable accounting
requirements of the Conversion Regulations and the Securities Act Regula
tions. Such financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout
the periods involved, except as set forth therein, and such financial
statements are consistent with financial statements and other reports filed
by the Bank with supervisory and regulatory authorities except as such
generally accepted accounting principles may otherwise require. The tables
in the Prospectus and Registration Statement accurately present the
information purported to be shown thereby at the respective dates thereof
and for the respective periods therein.
(q) There has been no material change in the condition (financial or
otherwise), results of operations or business, including assets and
properties, of the Company, the Bank or the Bank Subsidiary, since the
latest date as of which such condition is set forth in the Prospectus and
the Registration Statement, except as set forth therein; and the
capitalization, assets, properties and business of the Company, the Bank
and the Bank Subsidiary conform to the descriptions thereof contained in
the Prospectus and the Registration Statement. The Company, the Bank and
the Bank Subsidiary have no material liabilities of any kind, contingent or
otherwise, except as set forth in the Prospectus and the Registration
Statement.
(r) There has been no breach or default (or the occurrence of any
event which, with notice or lapse of time or both, would constitute a
default) under, or creation or imposition of any lien, charge or other
encumbrance upon any of the properties or assets of the Company, the Bank
or the Bank Subsidiary, pursuant to any of the terms, provisions or
conditions of, any agreement, contract, indenture, bond, debenture, note,
instrument or obligation to which the Company, the Bank or the Bank
Subsidiary is a party or by which it or any of its respective assets or
properties may be bound or is subject, or violation of any governmental
license or permit or any enforceable published law, administrative
regulation or order or court order, writ, injunction or decree, which
breach, default, encumbrance or violation would have a material adverse
effect on the condition (financial or otherwise), operations, business,
assets or properties of the Company, the Bank or the Bank Subsidiary; all
agreements which are material to the condition (financial or other wise),
results of operations or business of the Company, the Bank and the Bank
Subsidiary, are in full force and effect, and no party to any such
agreement has instituted or, to the best knowledge of the Company, the Bank
or the Bank Subsidiary, threatened any action or proceeding wherein the
Company, the Bank or the Bank Subsidiary would be
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 7
alleged to be in default thereunder.
(s) The Bank is not in violation of its mutual charter or bylaws. The
execution and delivery hereof and the consummation of the transactions
contemplated hereby by the Bank do not conflict with or result in a breach
of the charter or bylaws of the Bank (in either mutual or stock form) or
constitute a material breach of or default (or an event which, with notice
or lapse of time or both, would constitute a default) under, give rise to
any right of termination, cancellation or acceleration contained in, or
result in the creation or imposition of any lien, charge or other
encumbrance upon any of the properties or assets of the Bank, pursuant to
any of the terms, provisions or conditions of, any material agreement,
contract, indenture, bond, debenture, note, instrument or obligation to
which the Bank is a party or violate any governmental license or permit or
any enforceable published law, administrative regulation or order or court
order, writ, injunction or decree, which breach, default, encumbrance or
violation would have a material adverse effect on the condition (financial
or otherwise), operations or business of the Bank.
(t) The Company is not in violation of its charter or bylaws. The
execution and delivery hereof and the consummation of the transactions
contemplated hereby by the Company do not conflict with or result in a
breach of the charter or bylaws of the Company or constitute a material
breach of or default (or an event which, with notice or lapse of time or
both, would constitute a default) under, give rise to any right of
termination, cancellation or acceleration contained in, or result in the
creation or imposition of any lien, charge or other encumbrance upon any of
the properties or assets of the Com pany, pursuant to any of the terms,
provisions or conditions of, any material agreement, contract, indenture,
bond, debenture, note, instrument or obligation to which the Com pany is a
party or violate any governmental license or permit or any enforceable
published law, administrative regulation or order or court order, writ,
injunction or decree, which breach, default, encumbrance or violation would
have a material adverse effect on the condition (financial or otherwise),
operations or business of the Company.
(u) Subsequent to the respective dates as of which information is
given in the Prospectus and the Registration Statement and prior to the
Closing Date, except as otherwise may be indicated or contemplated therein,
neither the Company none of the Company, the Bank or any Subsidiary will
have issued any securities which will remain issued at the Closing Date or
incurred any liability or obligation, direct or contingent, or borrowed
money, except borrowings in the ordinary course of business, or entered
into any other transaction not in the ordinary course of business and
consistent with prior practices, which is material in light of the business
of the Company, the Bank and the Bank Subsidiary, taken as a whole.
(v) Upon consummation of the Conversion, the authorized, issued and
outstanding equity capital of the Company shall be within the range as set
forth in the Prospectus under the caption "CAPITALIZATION," and no Common
Stock of the Company shall be
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 8
outstanding immediately prior to the Closing Date; the issuance and the
sale of the Shares of the Company have been duly authorized by all
necessary action of the Company, and when issued in accordance with the
terms of the Plan and paid for, shall be validly issued, fully paid and
nonassessable and shall conform to the description thereof contained in the
Prospectus; the issuance of the Shares is not subject to preemptive rights,
except as set forth in the Prospectus; and good title to the Shares will be
transferred by the Company upon issuance thereof against payment therefor,
free and clear of all claims, encumbrances, security interests and liens
against the Company whatsoever. The certificates representing the Shares
will conform in all material respects with the requirements of applicable
laws and regulations.
(w) Upon consummation of the Conversion, the authorized, issued and
outstanding equity capital of the Bank shall be ________shares of common
stock, par value ____ per share (the "Bank Common Stock"); no shares of
Bank Common Stock or Bank preferred stock have been or will be issued prior
to the Closing Date; at the time of the Closing, the Bank Common Stock will
have been duly authorized for issuance by all necessary action of the Bank
and approved by the Commissioner, and when issued in accordance with the
terms of the Plan and paid for, shall be validly issued, fully paid and
nonassessable; the issuance of the Bank Common Stock is not subject to
preemptive rights; and good title to the Bank Common Stock will be
transferred by the Bank upon issuance thereof against payment therefor,
free and clear of all claims, encumbrances, security interests and liens
against the Bank whatsoever. The certificate(s) representing the Bank
Common Stock will conform in all material respects with the requirements of
applicable laws and regulations.
(x) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance of the Shares, except for compliance with certain
conditions imposed in the approval of the Conversion Application and the
Plan by the Commissioner, the declaration of effectiveness of any required
post-effective amendment by the Commission, the issuance of the Stock
Charter by the Commissioner, compliance with any conditions imposed by the
Board in its approval of the Company's Holding Company Application,
compliance with certain conditions imposed in the review of the Plan
without objection by the FDIC and as may be required under the securities
laws of various jurisdictions.
(y) All contracts and other documents required to be filed as
exhibits to the Conversion Application or as required by the Commissioner
or the FDIC have been filed with the Commissioner and/or the FDIC, as the
case may be.
(z) All contracts and other documents required to be filed as
exhibits to the Registration Statement have been filed with the
Commission.
(aa) To the best knowledge of the Bank, Wolf & Company, P.C., who have
audited
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 9
the financial statements of the Bank as of June 30, 1997 and 1996 and for
each of the years in the three-year period ended June 30, 1997 included in
the Prospectus and the Registration Statement, are independent public
accountants within the meaning of the Code of Professional Ethics of the
American Institute of Certified Public Accountants and Title 12 of the Code
of Federal Regulations, Section 335.604(a) of the FDIC's securities
disclosure regulations.
(bb) R.P. Financial (the "Appraiser") which prepared the appraisal, is
independent with respect to the Bank within the meaning of the Conversion
Regulations, and has so advised the Bank.
(cc) For the past five years, the Bank has timely filed all required
federal, state and local franchise tax returns, and the Bank has no
knowledge of any tax deficiency which has been asserted with respect to
such returns by any taxing authorities, and the Bank has paid all taxes
that have become due and, to the best of its knowledge, have made adequate
reserves for similar future tax liabilities, except where any failure to
make such filings, payments and reserves, or the assertion of such a
deficiency, would not have a material adverse effect on the condition of
the Bank.
(dd) To the best knowledge of the Bank, all of the loans represented
as assets of the Bank on the most recent financial statements of the Bank
included in the Prospectus and the Registration Statement meet or are
exempt from all requirements of federal, state or local law pertaining to
lending, including without limitation truth in lending (including the
requirements of Regulation Z and 12 C.F.R. Part 226 and Section 563.99),
real estate settlement procedures, consumer credit protection, equal credit
opportunity and all disclosure laws applicable to such loans, except for
violations which, if asserted, would not have a material adverse effect on
the Bank.
(ee) The records of account holders, depositors and other Shareholders
of the Bank delivered to Trident by the Bank or its agent for use during
the Conversion have been prepared or reviewed by the Bank and, to the best
knowledge of the Bank, are reliable and accurate.
(ff) None of the Company, the Bank or the Bank Subsidiary, or the
employees of the Company, the Bank or the Bank Subsidiary have made any
payment of funds of the Company, the Bank or the Bank Subsidiary prohibited
by law, and no funds of the Company, the Bank or the Bank Subsidiary have
been set aside to be used for any payment prohibited by law.
(gg) To the best knowledge of the Company, the Bank and the Bank
Subsidiary, the Company, the Bank and the Bank Subsidiary are in compliance
with all laws, rules and regulations relating to the discharge, storage,
handling and disposal of hazardous or toxic substances, pollutants or
contaminants and none of the Company, the Bank or the Bank
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 10
Subsidiary believes that the Company, the Bank or the Bank Subsidiary is
subject to liability under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or any similar law,
except for violations which, if asserted, would not have a material adverse
effect on the Company, the Bank and the Bank Subsidiary, taken as a whole.
There are no actions, suits, regulatory investigations or other proceedings
pending or, to the best knowledge of the Company, the Bank and the Bank
Subsidiary, threatened against the Company, the Bank or the Bank
Subsidiary, relating to the discharge, storage, handling and disposal of
hazardous or toxic substances, pollutants or contaminants. To the best
knowledge of the Company, the Bank and the Bank Subsidiary, no disposal,
release or discharge of hazardous or toxic substances, pollutants or
contaminants, including petroleum and gas products, as any of such terms
may be defined under federal, state or local law, has been caused by the
Company, the Bank or the Bank Subsidiary or, to the best knowledge of the
Company, the Bank or the Bank Subsidiary, has occurred on, in or at any of
the facilities or properties of the Company, the Bank or the Bank
Subsidiary, except such disposal, release or discharge which would not have
a material adverse effect on the Company, the Bank or the Bank Subsidiary,
taken as a whole.
(hh) At the Closing Date, the Company and the Bank will have completed
the conditions precedent to, and shall have conducted the Conversion in all
material respects in accordance with, the Plan, the Conversion Regulations,
the Securities Act, the Securities Act Regulations and all other
applicable laws, regulations, published decisions and orders, including all
terms, conditions, requirements and provisions precedent to the Conversion
imposed by the Commissioner, the FDIC and the Board in their approval and
review without objection of the Plan, the Conversion Application and the
Holding Company Application, as applicable.
(ii) The Company has received approval, subject to official notice of
issuance, to have the Common Stock quoted on the National Market of the
Nasdaq Stock Market, Inc. effective at the Closing Date.
Any closing certificate signed by any officer of the Company or the Bank
and delivered to Trident or Trident's counsel that contains a representation or
warranty shall be deemed a representation and warranty of the Company or the
Bank, as applicable, to Trident as to the matters covered thereby.
3. Agency. On the basis of the representations and warranties herein
------
contained, but subject to the terms and conditions herein set forth, the Company
and the Bank hereby agree with Trident as follows:
(a) Assistance with Conversion. The Company and the Bank hereby
--------------------------
employ Trident to assist the Company and the Bank on a best efforts basis
in the offer and sale of the Shares in the Conversion by assisting in:
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 11
(i) training and educating the employees of the Bank regarding
the mechanics and regulatory requirements of the conversion process;
(ii) conducting information meetings for the employees of the
Bank, Shareholders of the Bank and the general public, if desired by
the Bank;
(iii) coordinating the selling efforts in the local communities
of the Bank, if desired by the Bank; and
(iv) keeping records of all subscriptions for the Shares.
(b) Assistance with the Direct Community Offering and the Syndicated
----------------------------------------------------------------
Offering. The Company and the Bank hereby employ Trident to act as their
--------
exclusive agent to utilize its best efforts in managing the sale of the
Shares in the Direct Community Offering and the Syndicated Offering;
provided, however, that the Company and the Bank acknowledge and agree
-------- -------
that Trident may offer to other NASD-registered broker dealers ("Selected
Dealers") the opportunity to solicit subscriptions for the Shares to be
sold in the Syndicated Offering on a best efforts basis pursuant to the
terms and conditions of the Selected Dealers' Agreements between Trident
and each of the Selected Dealers.
(c) Other Matters. Subscriptions shall be submitted in the
-------------
Subscription Offering only during the subscription period by means of Order
Forms as described in the Prospectus, and may be submitted in the Direct
Community Offering and the Syndicated Community Offering by means of Order
Forms or by solicitation of indications of interest from customers of
Selected Dealers residing in those states where the Common Stock is
registered or is exempt from registration. The Company shall notify Trident
promptly after the expiration of the Subscription Offering of the number of
Shares sold in the Subscription Offering and pursuant to Order Forms in the
Direct Community Offering and the Syndicated Offering, and the aggregate
number of Shares remaining that are available to be sold in the Direct
Community Offering or Syndicated Offering, if any. The Company shall advise
Trident as to the allocation of the Shares in the event of an
oversubscription. The Company shall indemnify and hold harmless Trident
against any losses, claims, damages or liabilities resulting from the
failure of the Company (or its agents) to properly record stock orders, to
properly credit subscription rights of Eligible Account Holders or
Supplemental Eligible Account Holders, to properly allocate Shares in the
event of an oversubscription or to otherwise properly deal with or account
for any records of qualifying deposit account holders of the Bank during
the Conversion and Trident shall similarly indemnify and hold harmless the
Company for a similar failure by Trident (or its agents).
(d) Fees and Expenses.
-----------------
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 12
(i) As compensation for Trident's services hereunder, the
Company agrees to pay to Trident a management fee of .40% and a
commission equal to 2.0% of the aggregate dollar amount of the Shares
sold in the Offerings excluding any Shares sold to the ESOP, directors
and executive officers and "associates" of the Bank's directors and
executive officers. All fees and commissions shall be payable to
Trident on the Closing Date, in next day funds.
(ii) In addition to the fees described in (i) above, each of
the Company and the Bank agrees to reimburse Trident for all allocable
out-of-pocket expenses, including travel, communication, legal fees
and postage (up to an aggregate of $44,000) incurred by Trident in
connection with the Conversion. The expenses to be reimbursed
hereunder shall be payable by the Company or the Bank as they are
incurred by Trident and billed on a periodic basis to the Company or
the Bank, and shall be payable regardless of whether the Closing
occurs or this Agreement is terminated in accordance with paragraph
(e) of this Section 3. To the extent not previously paid, full payment
of Trident's expenses shall be made in same day funds at the Closing
and any expenses and fees incurred by Trident or its counsel but not
billed as of the Closing shall subsequently be payable in full upon
receipt of such billings.
(iii) Regardless of whether the Closing occurs or this Agreement
is terminated in accordance with paragraph (e) of this Section 3 and
in addition to the obligations under clauses (i) and (ii) hereof, each
of the Company and the Bank shall pay all expenses incident to the
performance of its obligations in connection with the Conversion
including, but not limited to, all fees and disbursements of its
counsel, the Appraiser and the conversion agent, all expenses incurred
in the preparation, printing, filing and distribution of all documents
relating to the Conversion (including all NASD filing fees), telephone
charges, air freight, rental equipment, supplies, marketing
materials, all fees and expenses of the transfer agent of the Company
and all transfer taxes that may be payable with respect to the sale of
the Common Stock, all fees of the accountants of the Bank, and all
legal and filing fees incurred in connection with the matters referred
to in Section 5(d) hereof. Any expenses to be reimbursed to Trident,
pursuant to this clause (iii) shall be in addition to, and not subject
to the limitations on, the expenses to be reimbursed to Trident
pursuant to clause (ii) above.
(e) Termination. The employment of Trident hereunder shall terminate
-----------
upon the first to occur of the following: (i) the forty-fifth day after the
expiration of the Subscription Offering, as extended, unless the Bank with
the approval of the Commissioner, is permitted to extend such date; (ii)
the Closing; or (iii) the termination of this Agreement pursuant to Section
9 hereof.
4. Closing.
-------
(a) Subject to the terms and conditions set forth herein, the closing
of the purchase
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 13
and sale of the Common Stock (the "Closing") shall take place at the
offices of Thacher Proffitt & Wood, Washington, D.C., at 10:00 a.m.,
Washington, D.C. time, on a business day that shall be agreed upon by the
parties hereto (the "Closing Date"). At the Closing, the Common Stock will
be issued by the Company against payment of the purchase price therefor.
Certificates representing the Common Stock shall be prepared in definitive
form and in such denominations and registered in such names as set forth on
the Order Forms or (in the case of Shares not subscribed for pursuant to
Order Forms) in such names as Trident may request, upon at least two
business days' prior notice to the Company, and will be (i) in the case of
Shares subscribed for pursuant to Order Forms, delivered by the Company or
its agent directly to the purchasers thereof as promptly as practicable
following the Closing, and (ii) in the case of Shares not subscribed for
pursuant to Order Forms, made available for checking and packaging at least
one business day prior to the Closing at a location to be designated by
Trident.
(b) Pursuant to the Conversion Regulations, prior to the commencement
of the Offerings, appropriate arrangements will be made for placing the
funds received in payment for the shares of Common Stock in special
interest-bearing segregated accounts (the "Segregated Accounts") with the
Bank until such shares are sold and paid for at the Closing. If the Closing
does not occur within the time specified in Section 3(e)(i) of this
Agreement, the Bank will promptly refund all funds, including interest, in
the Segregated Accounts to the persons who have the beneficial interests
therein, unless alternative arrangements are agreed to by the parties and
approved by the Commissioner and the FDIC.
5. Covenants of the Company and the Bank. Each of the Company and the
-------------------------------------
Bank covenants and agrees with Trident as follows:
(a) The Company and the Bank will prepare and file such amendments or
supplements to the Registration Statement, the Prospectus, the Conversion
Application and the Notice as may hereafter be required by the Securities
Act Regulations or the Conversion Regulations or as may hereafter be
reasonably requested by Trident. Following completion of the Subscription
and Direct Community Offerings, in the event of a Syndicated Offering, the
Company and the Bank will (i) promptly prepare and file with the Commis
sion a post-effective amendment to the Registration Statement relating to
the results of the Subscription and Direct Community Offering, any
additional information with respect to the proposed plan of distribution
and any revised pricing information or (ii) if no such post-effective
amendment is required, file with, or mail for filing to, the Commission a
prospectus or prospectus supplement containing information relating to the
results of the Subscription and Direct Community Offering and pricing
information pursuant to Rule 424(c) of the Securities Act Regulations, in
either case in a form acceptable to Trident.
(b) The Company and the Bank will notify Trident immediately, and
confirm the notice in writing, (i) of the effectiveness of any post-
effective amendment to the Registra-
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 14
tion Statement, the filing of any supplement to the Prospectus and the
filing of any amendment to, and the receipt of any approval relating to,
the Conversion Application, (ii) of the receipt of any comments from the
Commissioner, the FDIC or the Commission with respect to the Prospectus,
the Conversion Application or the transactions contemplated by this
Agreement or the Plan, (iii) of any request by the Commission, the
Commissioner or the FDIC for any amendment to the Registration Statement or
the Conversion Application or any amendment or supplement to the Prospectus
or for additional information, (iv) of the issuance by the Commissioner of
any order suspending the Offerings or the use of the Prospectus or the
initiation of any proceedings for that purpose, (v) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that
purpose, and (vi) of the receipt of any notice with respect to the
suspension of any qualification of the Common Stock for offering or sale in
any jurisdiction. The Company and the Bank will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
(c) The Company and the Bank will give Trident prompt notice of its
intention to file any amendment to the Conversion Application or
Registration Statement (including any post-effective amendment) or any
amendment or supplement to the Prospectus (including any revised prospectus
that the Company proposes for use in connection with the Syndicated
Offering that differs from the prospectus on file at the Commission at the
time the Registration Statement becomes effective, whether or not such
revised prospectus is required to be filed pursuant to Rule 424(b) of the
Securities Act Regulations), will furnish Trident with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such amendment or
supplement or use any such prospectus to which Trident or counsel for
Trident may reasonably object.
(d) The Company or the Bank has furnished or will furnish to Trident
copies of the Conversion Application, and each amendment thereto (one of
each of which will include all exhibits), the Prospectus and all amendments
and supplements thereto, and the Registration Statement and all amendments
and supplements thereto, in each case as soon as available and in such
quantities as Trident may from time to time reasonably request.
(e) During the period when the Prospectus is required to be
delivered, the Company and the Bank will comply, at their own expense, with
all requirements imposed upon them by the Commissioner, by the FDIC, by the
Conversion Regulations, and by the Securities Act, the Securities Act
Regulations, the Securities Exchange Act of 1934 (the "Exchange Act") and
the rules and regulations of the Commission promulgated thereunder,
including, without limitation, Rule 10b-6 under the Exchange Act, so far as
necessary to permit the continuance of sales or dealing in shares of Common
Stock during such period in accordance with the provisions hereof and the
Prospectus.
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Trident Securities, Inc.
Sales Agency Agreement
Page 15
(f) If during the offering period any event occurs as a result of
which the Prospectus, as then amended or supplemented, would include an
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statement therein,
in light of the circumstances then existing, not misleading, or if during
such period it is necessary to amend or supplement the Conversion
Application or the Prospectus to comply with the Conversion Regulations or
the Securities Act Regulations, the Company promptly will notify Trident
and will prepare and file with the Commissioner, the FDIC and the
Commission and any other authority with jurisdiction, an amendment or
supplement that will correct such statement or omission or effect such
compliance.
(g) The Company and the Bank have taken or will take all necessary
action to qualify or obtain an exemption for the Common Stock for offer and
sale under the securities laws of such jurisdictions as Trident and the
Company may agree upon and to continue such qualifications or exemptions in
effect so long as required for the distribution of the Common Stock
pursuant to the Conversion; provided, however, that the Company shall not
be obligated in connection therewith to execute any general consent to
service of process or to qualify as a foreign corporation to do business
under the laws of any such jurisdiction. The Company shall notify Trident
immediately of the suspension of qualification of the Common Stock or the
threat of such action, in any jurisdiction, of which the Company becomes
aware. The Company shall comply in all material respects with the
undertakings, if any, given by it in connection with the qualification of
the Common Stock for offer and sale under laws of such jurisdictions.
(h) The Company authorizes Trident and any Selected Dealers to act as
agent of the Company in distributing the Prospectus to persons entitled to
subscription rights and other persons having record addresses in the states
or jurisdictions set forth in a survey of the securities or "blue sky" laws
of the various jurisdictions in which the Offerings will be made (the "Blue
Sky Survey").
(i) The Company will make generally available to its security holders
as soon as practicable but no later than sixty (60) days from the close of
the period covered thereby an earnings statement (in compliance with the
provisions of Rule 158 of the Securities Act Regulations) covering a twelve
month period beginning not later than the first day of the Company's fiscal
quarter next following the "effective date" (as defined in said Rule 158)
of the Registration Statement.
(j) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to its stockholders as
soon as practicable after the end of each such fiscal year an annual report
(including consolidated statements of financial condition and consolidated
statements of income, stockholders' equity and cash flows of the Company,
the Bank and the Subsidiaries, certified by independent public accountants)
and, as soon as
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 16
practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective
date of the Registration Statement), consolidated summary financial
information of the Company, the Bank and the Subsidiaries for such quarter
in reasonable detail. In addition, such annual report and quarterly
consolidated summary financial information shall be made public through the
issuance of appropriate press releases at the same time or prior to the
time of the furnishing thereof to stockholders of the Company.
(k) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to Trident (i) as soon
as available, a copy of each report or other document of the Company
furnished generally to stockholders of the Company or furnished to or filed
with the Commission under the 1934 Act or any national securities exchange
or system on which any class of securities of the Company is listed, and
(ii) from time to time, such other public information concerning the
Company as Trident may reasonably request.
(l) The Company and the Bank will conduct the Conversion in all
material respects in accordance with the Plan, the Conversion Regulations
and all other applicable regulations, decisions and orders thereunder,
including all applicable terms, requirements and conditions precedent to
the Conversion imposed upon the Company or the Bank by the Commissioner or
the FDIC.
(m) Each of the Company and the Bank will use the net proceeds
received by it from the sale of the Securities in the manner specified in
the Prospectus under "Use of Proceeds."
(n) The Company will report the use of proceeds of the Offerings
pursuant to the requirements of Rule 463 of the Securities Act Regulations.
(o) The Company will file a registration statement for the Common
Stock under Section 12(g) of the Exchange Act prior to completion of the
Offerings and will request that such registration statement be effective
upon completion of the Conversion. The Company will maintain the
effectiveness of such registration for not less than three years. The
Company will file with the Nasdaq all documents and notices required by
Nasdaq National Market of companies that have issued securities that are
traded in the over-the-counter market and quotations for which are reported
by the Nasdaq National Market.
(p) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by Trident in order for Trident to
ensure compliance with the National Association of Securities Dealers,
Inc.'s ("NASD") "Interpretation Relating to Free-Riding and Withholding."
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 17
(q) The Company and the Bank will comply with the conditions imposed
by the Commissioner in connection with its approval of the Conversion
Application, by the FDIC in connection with its review of the Plan without
objection, and by the Board in connection with its approval of the Holding
Company Application.
(r) The Company and the Bank will comply with, or cause to be
complied with, the conditions to Trident's obligations set forth in Section
6 hereof unless such conditions are waived in writing by Trident and shall
not deliver the Shares until each and every condition set forth in Section
6 hereof has been satisfied, unless such condition is waived in writing by
Trident.
(s) The Company will promptly prepare and file with the Commissioner,
the Commission, the FDIC, the Board and any other appropriate regulatory
agency such reports or documents as may be required by the Conversion
Regulations, the Securities Act and rules and regulations promulgated
thereunder and other applicable laws and regulations to be filed with such
agencies, including, without limitation, reports with respect to the sale
of the Common Stock and the application of the proceeds thereof.
(t) The Company shall advise Trident, if necessary, as to the
allocation of the Shares ("Allocation Instructions") in the event of an
oversubscription and shall provide Trident final instructions as to the
allocation of the Shares in such event and such information shall be
accurate and reliable. Trident shall be entitled to rely on such Allocation
Instructions and shall have no liability in respect of its reliance
thereon, including without limitation, no liability for or related to any
denial or grant, full or partial, of a subscription unless liability
resulting from such denial or grant is due to Trident's willful disregard
of the Allocation Instructions.
(u) The Company will not sell or issue, contract to sell or otherwise
dispose of, for a period of 180 days after the Closing Time, without
Trident's prior written consent, any shares of Common Stock other than in
connection with the Offerings or in connection with any employee benefit
plan or arrangement described in the Prospectus.
6. Conditions to Trident's Obligations. Except as may be waived in
-----------------------------------
writing by Trident, the obligations of Trident as provided herein shall be
subject to the accuracy, as of the date hereof and at the Closing Date (as if
made at the Closing Date), of the representations and warranties of the Company
and the Bank herein, to the performance by the Company and the Bank of their
respective obligations hereunder and to the following additional conditions:
(a) The Prospectus and all supplemental sales literature shall have
received all required authorizations of the Commissioner for use in final
form. No order suspending the Offerings or authorization for final use of
the Prospectus shall have been issued or proceedings therefor initiated or
threatened by the Commissioner and no order suspending the sale of the
Securities in any jurisdiction shall have been issued.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 18
(b) The Registration Statement shall have been declared effective by
the Commission. No stop order suspending the effectiveness of the
Registration Statement shall have been issued under the Securities Act or
proceedings therefor initiated or threatened by the Commission.
(c) At the Closing Date, the Company and the Bank will have completed
in all material respects the conditions precedent to the Conversion in
accordance with the Plan, the applicable Conversion Regulations and all
other applicable laws, regulations, decisions and orders, including all
terms, conditions, requirements and provisions precedent to the Conversion
imposed upon the Company or the Bank by the Commissioner, the FDIC or any
other regulatory authority other than those that the Commissioner or the
FDIC permit to be completed after the Conversion.
(d) The Plan shall have been reviewed without objection by the FDIC.
The Board shall have approved the Company's Holding Company Application.
Any filings required by the Conversion Regulations or by the Bank Holding
Company Act (and the regulations promulgated thereunder) shall have been
timely made. Any request of the Commissioner, the FDIC, the Commission or
the Board for additional information (to be included in the Conversion
Application, the Prospectus, the Notice, the Registration Statement or the
Holding Company Application or otherwise) shall have been complied with.
The NASD, upon review of the terms of this Agreement, shall not have
objected to Trident's performance of its obligations hereunder or the
terms herein set forth.
(e) At the Closing Date, the Common Stock shall have been approved
for listing on the Nasdaq National Market upon notice of issuance.
(f) Nothing shall have come to the attention of Trident that would
cause Trident to reasonably believe that the Conversion Application, the
Holding Company Application, the Prospectus or the Registration Statement
or any amendment or supplement thereto, contains an untrue statement of
fact that in the opinion of Foley, Hoag & Eliot LLP, counsel for Trident,
is material, or omits to state a fact that in the opinion of such counsel
is material and is required to be stated therein or is necessary to make
the statements therein not misleading.
(g) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Prospectus, there
shall not have occurred any of the events specified in Section 9 hereof
which, in the reasonable judgment of Trident, makes it impractical or
inadvisable to proceed with the offering of the Shares.
(h) Trident shall have received a certificate, dated the Closing
Date, signed by the chief executive officer and the chief financial officer
of each of the Company and the Bank, in form and substance satisfactory to
counsel for Trident, to the effect that at the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 19
effective date thereof and at all times subsequent thereto through and
including the Closing Date, the Registration Statement did not 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 statement
therein not misleading and that at the date thereof and at all times
subsequent thereto through and including the Closing Date, the Prospectus
did not 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 statement therein, in light of the circumstances under which they
were made, not misleading; that since the effective date of the
Registration Statement, no event has occurred that should have been set
forth in an amendment or supplement to the Conversion Application, the
Prospectus, the Notice, the Registration Statement or the Holding Company
Application under applicable law that has not been so set forth, and to the
best of their knowledge, that no order has been issued by the Commissioner,
the FDIC, the Commission or the Board to suspend the offering of the Common
Stock or the approval of the Conversion Application or the Holding Company
Application and, to the best of their knowledge, no action for such
purposes has been instituted or threatened by the Commissioner, the FDIC,
the Commission or the Board; that, to the best of their knowledge, no
person has sought to obtain review of the final actions of the
Commissioner, the FDIC, the Commission or the Board in connection with the
Conversion; and that all of its representations and warranties contained
herein are true and correct as if made at and as of the Closing Date.
(i) Trident shall have received the opinion of Thacher Proffitt &
Wood, special counsel for the Company and the Bank, which opinion shall
address those matters set forth below in subsections (i) through (xvii),
inclusive. Such opinion shall be dated the Closing Date, in form and
substance satisfactory to counsel for Trident, to the following effect:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware. The Company has full corporate power and authority to own
its properties and to conduct its business as described in the
Registration Statement and Prospectus and to enter into and perform
its obligations under this Agreement. The Company is duly qualified as
a foreign corporation to transact business and is in good standing in
the State of Massachusetts and in each other jurisdiction in which the
failure to so qualify would have a material adverse effect upon the
financial condition, results of operations or business of the Company,
the Bank and the Bank Subsidiary, taken as a whole.
(ii) The Bank has been at all times since the date hereof and
prior to the Closing Time duly organized, and is validly existing,
under the laws of the Common wealth of Massachusetts as a co-operative
bank of mutual form, and, at the Closing Time, has become duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts as a co-operative bank of stock form, in
both instances with full corporate power and authority to own, lease
and operate its
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 20
properties and to conduct its business as described in the
Registration Statement and the Prospectus; and the Bank is duly
qualified as a foreign corporation in each jurisdiction in which the
failure to so qualify would have a material adverse effect upon the
financial condition, results of operations or business of the Company,
the Bank and the Bank Subsidiaries, taken as a whole. The Bank is a
member in good standing of the FHLB of Boston and the Central Bank;
the deposit accounts of the Bank are insured by the FDIC up to the
applicable limits; deposits not insured by the FDIC are insured by the
Share Insurance Fund of the Central Bank; and the liquidation account
for the benefit of account holders as of [ ] has
been duly established in accordance with the requirements of the
Conversion Regulations and such account holders who continue to
maintain their deposit accounts in the Bank have a contingent
creditors' interest in their pro rata portion of the liquidation
account which will have a priority superior to that of the holders of
shares of Common Stock in the event of a complete liquidation of the
Bank.
(iii) The Company does not directly own any subsidiaries other
than the Bank, and the Bank's only subsidiary is the Bank Subsidiary.
The Bank Subsidiary has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the Commonwealth
of Massachusetts, has full corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectus and is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in
which the failure to so qualify would have a material adverse effect
upon the financial condition, results of operations or business of the
Company, the Bank and the Bank Subsidiary, taken as a whole; the
activities of the Bank Subsidiary as described in the Prospectus are
permitted to subsidiaries of a bank holding company and of a
Massachusetts-chartered co-operative bank by the rules, regulations,
resolutions and practices of the Board and the Commissioner; all of
the issued and outstanding capital stock of the Bank Subsidiary has
been duly authorized and validly issued, is fully paid and
nonassessable and is owned of record by the Bank free and clear of any
security interest, mortgage, pledge, lien, encumbrance or claim.
(iv) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, (A) have been
duly and validly authorized by all necessary action on the part of each
of the Company and the Bank, and this Agreement constitutes the legal,
valid and binding agreement of each of the Company and the Bank,
enforceable in accordance with its terms, except as rights to indemnity
and contribution hereunder may be limited under applicable law (it
being understood that such counsel may avail itself of customary
exceptions concerning the effect of bankruptcy, insolvency or similar
laws and the availability of equitable remedies), (B) to the best of
such counsel's knowledge, will not conflict with or constitute a breach
of, or default under, and no event has occurred which, with notice or
lapse of time or both, would constitute a default under, or result in
the creation or imposition of any
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 21
lien, charge or encumbrance, that, individually or in the aggregate,
would have a material adverse effect on the financial condition,
results of operations or business of the Company, the Bank and the
Bank Subsidiary, taken as a whole, upon any property or assets of the
Company, the Bank or the Bank Subsidiary pursuant to any contract,
indenture, mortgage, loan agreement, note, lease or other instrument
to which the Company, the Bank or the Bank Subsidiary is a party or by
which any of them may be bound, or to which any of the property or
assets of the Company, the Bank or the Bank Subsidiary is subject, (C)
will not result in any violation of the provisions of the charter or
bylaws of the Company, the Bank or the Bank Subsidiary, and (D) will
not result in any violation of any law or administrative regulation or
any administrative or court decree.
(v) Upon consummation of the Conversion, the authorized,
issued and outstanding capital stock of the Company will be within the
range as set forth in the Prospectus under "Capitalization," and no
shares of Common Stock have been issued and outstanding prior to the
Closing Time. The Shares have been duly and validly authorized for
issuance and sale and, when issued and delivered by the Company
pursuant to the Plan against payment of the consideration therefor,
will be duly and validly issued and fully paid and non-assessable. The
issuance of the Shares is not subject to preemptive or other similar
rights arising by operation of law or, to the best of such counsel's
knowledge and information, otherwise. The terms and conditions of the
Common Stock conform to the description thereof contained in the
Prospectus under the caption "DESCRIPTION OF COMMON STOCK," and, to
the extent that it constitutes matters of law or legal conclusions,
that section of the Prospectus has been reviewed by such counsel and
is correct in all material respects; and the certificates
representing shares of Common Stock are in compliance in all material
respects with all applicable legal requirements.
(vi) Upon consummation of the Conversion, all of the issued and
outstanding capital stock of the Bank will be duly authorized and
validly issued and fully paid and nonassessable, and all such capital
stock will be owned of record by the Company free and clear of any
security interest, mortgage, pledge, lien, encumbrance or legal or
equitable claim.
(vii) The Commissioner has duly approved the Conversion
Application and the Board has duly approved the Holding Company
Application and no action is pending or, to the best of such counsel's
knowledge, threatened respecting the Conversion Application or the
Holding Company Application or the acquisition by the Company of all
of the Bank's issued and outstanding capital stock; the Conversion
Application and the Holding Company Application comply as to form in
all material respects with the Conversion Regulations, the regulations
of the Board and all other applicable requirements of the Commissioner
and the Board, and, to the best of such counsel's knowledge, include
all documents required to be filed as exhibits thereto, and is
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 22
complete in all material respects; the Company is duly authorized to
become a bank holding company and is duly authorized to own all of the
issued and outstanding capital stock of the Bank to be issued pursuant
to the Plan.
(viii) The FDIC has duly reviewed the Plan without objection and
no action is pending or, to the best of such counsel's knowledge,
threatened respecting the FDIC's review thereof; the notice of the
Conversion filed with the FDIC complied as to form in all material
respects with the FDIC's regulations and all other applicable
requirements of the FDIC, and, to the best of such counsel's
knowledge, included all documents required to be filed as exhibits
thereto, and is complete in all material respects.
(ix) The Plan has been duly authorized by the Boards of
Directors of the Company and the Bank and by the mutual Shareholders
of the Bank. The Commissioner's approval of the Plan (and the FDIC's
non-objection thereto) remains in full force and effect; the Bank's
charter has been amended, effective upon consummation of the
Conversion and the filing of such amended charter with the Secretary
of State of the Commonwealth of Massachusetts, to authorize the
issuance of permanent capital stock; to the best of such counsel's
knowledge, the Company and the Bank have conducted the Conversion in
all material respects in accordance with applicable requirements of
the Plan, the Conversion Regulations and all other applicable
regulations, decisions and orders thereunder, including all material
applicable terms, conditions, requirements and conditions precedent to
the Conversion imposed upon the Company or the Bank by the
Commissioner or the FDIC, and no order, to the best of such counsel's
knowledge, has been issued by the Commissioner or the FDIC to suspend
the Offerings and, no action for such purpose has been instituted or,
to the best of such counsel's knowledge threatened by the Commissioner
or the FDIC and, to the best of such counsel's knowledge, no person
has sought to obtain review of the final action of the Commissioner in
approving, or of the FDIC in issuing a notice of non-objection to, the
Plan.
(x) The Prospectus and the Notice have been duly authorized by
the Commissioner for final use pursuant to the Conversion Regulations
and no action has been taken, or is pending or, to the best of such
counsel's knowledge, threatened, by the Commissioner to revoke such
authorization. The Prospectus and the Notice (other than the financial
statements, appraisal and statistical data included therein, as to
which no opinion need be rendered) complied as to form in all material
respects with the requirements of the Conversion Regulations.
(xi) The Registration Statement is effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement has been issued under the Securities Act or
proceedings therefor initiated or, to the best of such counsel's
knowledge, threatened by the Commission. At the time the Registration
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 23
Statement became effective, the Registration Statement (other than the
financial statements, appraisal and statistical data included therein,
as to which no opinion need be rendered) and the Prospectus complied
as to form in all material respects with the requirements of the
Securities Act and the Securities Act Regulations.
(xii) No further approval, authorization, consent or other order
of any public board or body is required in connection with the
execution and delivery of this Agreement, the issuance of the Shares
and the consummation of the Conversion, except as may be required
under the securities or Blue Sky laws of various jurisdictions as to
which no opinion need be rendered.
(xiii) The information in the Prospectus under the caption "THE
CONVERSION," to the extent that it constitutes matters of law or
legal conclusions, has been reviewed by such counsel and is correct in
all material respects. The information in the Prospectus under the
caption "TAXATION," to the extent that it constitutes matters of law
or legal conclusions concerning federal tax matters, has been reviewed
by such counsel and is correct in all material respects; and the
information under the caption "The Conversion -- Effect of the
Conversion to Stock Form on Depositors and Borrowers of the Bank --
Tax Aspects" correctly summarizes the opinion of such counsel
regarding the federal tax effects of the Conversion to the Bank and
the Shareholders of the Bank
(xiv) To the best of such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened against or
affecting the Company, the Bank, or the Bank Subsidiary that are
required, individually or in the aggregate, to be disclosed in the
Registration Statement and Prospectus, other than those disclosed
therein, and all pending legal or governmental proceedings to which
the Company, the Bank or the Bank Subsidiary is a party or to which
any of their property is subject which are not described in the
Registration Statement, including ordinary routine litigation
incidental to the business, are, considered in the aggregate, not
material.
(xv) To the best of such counsel's knowledge, there are no
contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed as exhibits thereto.
(xvi) To the best of such counsel's knowledge and information,
the Company, the Bank and the Bank Subsidiary has obtained all
licenses, permits and other governmental approvals and authorizations
currently required for the conduct of their respective businesses as
described in the Registration Statement and Prospectus, except for
such licenses, permits, approvals or authorizations the failure of
which to have would not result in a material adverse change in the
financial condition, results of operations or the business of the
Company, the Bank and the Bank Subsidiary,
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 24
taken as a whole, and all such licenses, permits and other
governmental authorizations are in full force and effect, and each of
the Company, the Bank and the Bank Subsidiary is in all material
respects complying therewith.
(xvii) Neither the Company, the Bank nor the Bank Subsidiary is
in violation of its charter upon consummation of the Conversion nor,
to the best of such counsel's knowledge, in default (nor has any event
occurred which, with notice or lapse of time or both, would constitute
a default) in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which
the Company, the Bank or any Subsidiary is a party or by which the
Company, the Bank or any Subsidiary or any of their respective
property may be bound in any respect that would have a material
adverse effect upon the financial condition, results of operations or
business of the Company, the Bank and the Subsidiaries, taken as a
whole.
In rendering such opinion, such counsel may rely as to matters of fact on
certificates of responsible officers of the Company and the Bank and
certificates of public officials. Copies of any certificates of officers of the
Company or the Bank on which counsel relies shall be furnished to counsel for
Trident at the time the opinion is delivered. Such opinion may be governed by,
and interpreted in accordance with the Legal Opinion Accord (the "Accord") of
the American Bar Association Section of Business Law (1991) and, as a
consequence, references in such opinion to each such counsel's "knowledge" may
be limited to "actual knowledge" as defined in the Accord (or knowledge based on
certificates).
Such counsel's opinion may be limited to present statutes, regulations and
judicial interpretations and to facts as they exist as of the date of the
opinions; in rendering such opinion, counsel need assume no obligation to
revise or supplement it should present laws be changed by legislative or
regulatory action, judicial decision or otherwise; and such counsel need express
no view, opinion or belief with respect to whether any proposed or pending
legislation, if enacted, or any regulations or any policy statements issued by
any regulatory agency, whether or not promulgated pursuant to any such
legislation, would affect the validity of the execution and delivery by the
Company or the Bank of this Agreement or the issuance of the Shares.
(j) At the Closing Date, Trident shall receive the letter of Thacher
Proffitt & Wood, special counsel for the Company and the Bank, dated the
Closing Date, addressed to Trident, in form and substance reasonably
satisfactory to counsel for Trident and to the effect that: in connection
with the preparation of the Conversion Application (including the
Prospectus and the Notice) and the Registration Statement, such counsel
participated in conferences with directors, officers, employees and other
representatives of the Bank and representatives of the independent public
accountants for the Bank as well as reviewed various documents and other
information deemed relevant and, based on such conferences and review,
nothing has come to such counsel's attention that would lead such counsel
to believe (i) that the Registration Statement, at the time it became
effective
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 25
(including any post-effective amendments), or that the Conversion
Application, at the time it was approved, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (except
as to information in respect to Trident, as to the appraisal and as to
financial statements, notes to financial statements, financial tables and
other financial and statistical data contained therein with respect to
which such counsel need express no comment), or (ii) that the Prospectus or
the Notice, at the date thereof or at Closing Time, included an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading (except as
to information in respect to Trident, as to the appraisal and as to
financial statements, notes to financial statements, financial tables and
other financial and statistical data contained therein with respect to
which such counsel need express no comment). In rendering this letter,
counsel may state that they have not undertaken to verify independently the
information in the Conversion Application, the Prospectus and the Notice or
the Registration Statement and therefore, do not assume any responsibility
for the accuracy or completeness thereof.
(k) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material adverse change in the
condition, financial or otherwise, of the Bank since the last date as of
which such condition is set forth in the Prospectus, except as referred to
therein; (ii) there shall have been no transaction entered into by the Bank
after the latest date as of which the financial condition of the Bank is
set forth in the Prospectus other than transactions referred to or
contemplated therein, transactions in the ordinary course of business, and
transactions which are not material to the Bank; (iii) the Bank shall not
have received from the Commissioner, the FDIC, or any other governmental
authority any direction (oral or written) to make any material change in
the method of conducting their respective businesses with which it has not
complied or which is material to the business of the Bank; (iv) no action,
suit or proceeding, at law or in equity or before or by any federal or
state commission, board or other administrative agency, shall be pending or
threatened against the Company, the Bank or the Bank Subsidiary or
affecting any of their respective assets, wherein an unfavorable decision,
ruling or finding materially and adversely would affect the business,
operations, financial condition or income of the Company, the Bank and the
Bank Subsidiary, taken as a whole; and (v) the Shares shall have been
qualified or registered for offering and sale by the Company or are exempt
from such qualification or registration under the securities or "blue sky"
laws of such jurisdictions as Trident and the Company shall have agreed
upon.
(l) At the Closing Date, Trident shall receive, among other
documents, (i) a copy of the letter of the Commissioner approving the
Conversion Application and authorizing the use of the Prospectus, (ii) a
copy of the letter from The Commonwealth of Massachusetts or the
Commissioner evidencing the good standing of the Bank, (iii) a copy of the
letter from the FDIC raising no objection to the Plan and the Conversion;
(iv) a copy of the letter from the Commonwealth of Massachusetts or the
Commissioner approving the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 26
Bank's Stock Charter; (v) a copy of the letter from the Board approving the
Holding Company Application; and (vi) a copy of a statement from the
Commission declaring the Registration Statement effective.
(m) Trident shall have received such opinion of Foley, Hoag & Eliot
LLP, counsel for Trident, dated the Closing Date, with respect to certain
matters as Trident may reasonably request, and such counsel shall have
received such documents, papers and records as they request for the purpose
of enabling them to pass upon such matters.
(n) Concurrently with the execution of this Agreement, Trident shall
receive a letter from Wolf & Co., P.C., dated the date hereof and addressed
to Trident: (i) such letter confirming that Wolf & Co., P.C. is a firm of
independent public accountants within the meaning of the Securities Act and
the FDIC's securities disclosure regulations and 12 C.F.R. (S) 335.604(a)
and no information concerning its relationship with or interests in the
Bank is required by the Conversion Application, and stating in effect that
in Wolf & Co., P.C.'s opinion the financial statements of the Bank as are
included in the Prospectus comply as to form in all material respects with
the applicable accounting requirements of the Conversion Regulations, the
Securities Act, the Securities Act Regulations and generally accepted
accounting principles; (ii) stating in effect that, on the basis of certain
agreed upon procedures (but not an audit examination in accordance with
generally accepted auditing standards) consisting of a reading of the
latest available unaudited interim financial statements of the Bank
prepared by the Bank, a reading of the minutes of the meetings of the Board
of Directors and Shareholders of the Bank and consultations with officers
of the Bank responsible for financial and accounting matters, nothing came
to their attention which caused them to believe that: (A) such unaudited
financial statements, including Recent Developments, are not in conformity
with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Prospectus; or (B) during the period from the date of the
latest unaudited financial statements included in the Prospectus to a
specified date not more than three business days prior to the date hereof,
there was any material increase in borrowings, and any other form of debt
other than deposits of the Bank (increases in borrowings will not be deemed
to be material if such increase in total borrowings outstanding does not
exceed $[1,000,000]); (C) there was any decrease in retained earnings of
the Bank at the date of such letter as compared with amounts shown in the
latest unaudited statement of condition included in the Prospectus,
including Recent Developments; or (D) there was any decrease in net income
or net interest income of the Bank for the number of full months commencing
immediately after the period covered by the latest unaudited income
statement included in the Prospectus, including Recent Developments, and
ended on the latest month end prior to the date of the Prospectus or such
letter as compared to the corresponding period in the preceding year; and
(iii) stating that, in addition to the audit examination referred to in its
opinion included in the Prospectus and the performance of the procedures
referred to in clause (ii) of this subsection (j), they have compared with
the general accounting records of the Bank, which are subject to the
internal controls of the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 27
Bank, accounting system and other data prepared by the Bank, directly from
such accounting records, to the extent specified in such letter, such
amounts and/or percentages set forth in the Prospectus as Trident may
reasonably request; and they have found such amounts and percentages to be
in agreement therewith (subject to rounding).
(o) At the Closing Date, Trident shall receive a letter from Wolf &
Co., P.C., dated the Closing Date, addressed to Trident, confirming the
statements made by its letter delivered by its pursuant to subsection (l)
of this Section 6, the "specified date" referred to in clause (ii)(B)
thereof to be a date specified in such letter, which shall not be more than
three business days prior to the Closing Date.
(p) Trident shall have received a confirming letter from the
Appraiser, dated the Closing Date, with respect to its estimated pro forma
fair market value appraisal. Such letter shall be of the type described in
the Prospectus to be submitted promptly after completion of the offering of
the Shares.
(q) All necessary approvals and consents to the consummation of the
Conversion shall have been obtained, and the Shares shall have been
qualified or be exempt from qualification under the state securities laws
of the states as shall have been agreed upon by Trident and the Company.
(r) The representations and warranties of each of the Company and the
Bank contained herein shall be true and correct on the date of this
Agreement and on and as of the Closing Date, and each of the Company and
the Bank shall have performed all covenants and agreements contained
herein, to be performed on their part at or prior to the Closing Date.
(s) At any time prior to the Closing Date, (i) there shall not have
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effects of which, in the judgment of Trident,
are so material and adverse as to make it impracticable to market the
Common Stock or to enforce contracts, including subscriptions or orders,
for the sale of the Common Stock, and (ii) trading generally on either the
Nasdaq National Market or the New York Stock Exchange shall not have been
suspended, or minimum or maximum prices for trading shall not have been
fixed, or maximum ranges for prices for securities shall not have been
required, by either of such Exchange or Market or by order of the
Commission or any other governmental authority, and a banking moratorium
shall not have been declared by either or Massachusetts authorities.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident and its counsel.
Any certificates signed by an officer or director of the Company or the Bank
prepared for Trident's reliance and delivered to Trident or to counsel for
Trident pursuant
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 28
to this Agreement shall be deemed a representation and warranty by the Company
or the Bank, as the case may be, to Trident as to the statements made therein.
If any condition to Trident's obligations hereunder to be fulfilled prior to or
at the Closing Date is not so fulfilled, Trident may terminate this Agreement
or, if Trident so elects, may waive in writing such conditions which have not
been fulfilled, or may extend the time of their fulfillment. If Trident
terminates this Agreement as aforesaid, the Company or the Bank shall reimburse
Trident for its accountable expenses as provided in Section 3 hereof.
7. Indemnification and Contribution.
--------------------------------
(a) Each of the Company and the Bank hereby agrees to indemnify and
hold harmless Trident and each person, if any, who controls Trident within
the meaning of Section 15 or Section 20(a) of the Exchange Act of, against
any losses, damages or liabilities, joint or several, to which Trident or
each such controlling person may become subject, under the Securities Act,
the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in the Prospectus or the Registration Statement or any amendment
or supplement thereto, or in any application filed under any state
securities law, or in any other document executed by the Company or the
Bank in connection with, or in contemplation of, the transactions
contemplated by this Agreement or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; each of the
Company and the Bank agrees to reimburse Trident and each such controlling
person in connection with investigating, preparing or defending against any
such loss, claim, damage, liability or action; provided, however, that
neither the Company nor the Bank will be liable in any such case to the
extent that any such loss, claim, damage, liability or expense arises out
of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Prospectus or the Registration
Statement or any amendment or supplement thereto, in any state securities
law application or in any other document executed by the Company or the
Bank in connection with or in contemplation of the transactions
contemplated by this Agreement in reliance upon and in conformity with
written information furnished to the Company or the Bank by or on behalf of
Trident specifically for use therein. In the event the Company or the Bank
advances any amounts alleged to be due under this Section 7(a) to the
indemnified party, and it is determined by a court of competent
jurisdiction that the indemnified party is not entitled to indemnification
hereunder, then the indemnified party shall repay, without interest, any
amounts so advanced to the Company or the Bank. The indemnification
obligations of the Company and the Bank as provided above are in addition
to any liabilities the Company or the Bank may have under other agreements,
under common law or otherwise.
(b) Trident agrees to indemnify and hold harmless the Company and the
Bank, their
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 29
directors, officers and employees, and each person, if any, who controls
the Company or the Bank within the meaning of the Securities Act, against
any losses, claims, damages or liability to which the Company or the Bank,
or any such director, officer, or controlling person may be subject, under
the Securities Act, the Exchange Act, or other federal or state statutory
law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon any untrue or alleged untrue statement of any material
fact contained in the Prospectus or the Registration Statement or any
amendment or supplement thereto, or in any other document executed by the
Company or the Bank in connection with or in contemplation of the
transactions contemplated by this Agreement in any state securities law
application, arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Prospectus
or the Registration Statement, or any amendment or supplement thereto, in
any state securities law application, or in any other document executed by
the Company or the Bank in connection with or in contemplation of the
transactions contemplated by this Agreement in reliance upon and in
conformity with any written information furnished to the Company or the
Bank by Trident specifically for use in the preparation thereof; Trident
will reimburse any legal or other expenses reasonably incurred by the
Company or the Bank or any such director, officer, or controlling person in
connection with investigating, preparing or defending against any such
loss, claim, damage, liability or action. In the event Trident advances any
amounts alleged to be due under this Section 7(b) to an indemnified party
and it is determined by a court of competent jurisdiction that the
indemnified party is not entitled to indemnification hereunder, then the
indemnified party shall repay, without interest, any amounts so advanced to
Trident. The indemnification obligations of Trident as provided above are
in addition to any liabilities Trident may have under other agreements,
under common law or otherwise.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against an indemnifying
party under this Section 7, notify the indemnifying party in writing of the
commencement thereof, but the omission to so notify the indemnifying party
will not relieve an indemnifying party from any liability which it or he
may have to any indemnified party otherwise than under this Section 7,
except to the extent, and only to the extent, that the indemnifying party
establishes that such failure to so notify prejudiced it or his rights in
the defense against such claim. In case any such action is brought against
any indemnified party, and such indemnified party notifies an indemnifying
party of the commencement thereof, the indemnifying party will be entitled
to participate in, and, to the extent that it or he may wish, jointly with
all other indemnifying parties, similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party
shall have
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 30
reasonably concluded, based upon advice of its counsel, that there may be
legal defenses available to it or him and/or other indemnified parties
which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right
to select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified
party or parties. Upon receipt of notice from the indemnifying party to
such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying
party will not be liable to such indemnified party under this Section 7 for
any legal or other expenses subsequently incurred by such indemnified party
in connection with the defense thereof unless:
(i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with
the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the
expenses of more than one separate counsel);
(ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice or
commencement of the action; or
(iii) the indemnifying party has authorized the employment of
counsel at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party in respect of any losses, claims,
damages or liabilities referred to therein, then each indemnifying party,
in lieu of indemnifying such indemnified party, shall, subject to the
limitations hereinafter set forth, contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims, damages or
liabilities:
(i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Bank and Trident
from the offering of the Common Stock; or
(ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above
but also the relative fault of the Company and the Bank and Trident in
connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations.
The respective relative benefits received by the Company and the Bank and
Trident shall be deemed to be represented by the percentage that the fees to be
paid to Trident hereunder bears to the total gross proceeds of the Conversion.
The relative fault of the Company and the Bank
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 31
and Trident shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Company and the Bank, or by
Trident, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid
or payable by a party as a result of the losses, claims, damages and liabilities
referred to above shall be deemed to include, subject to the limitations set
forth in paragraph (d) of this Section 7, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim.
The Company and the Bank and Trident agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
or per capita allocation or by any other method or allocation which does not
take into account the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section 7, no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
8. Survival of Certain Representations and Obligations. All
---------------------------------------------------
representations, warranties and agreements of the Company and the Bank herein
and of Trident, if any or certificates delivered pursuant hereto, and the
agreement of the parties contained in Section 7 hereof, will remain in full
force and effect and will survive the issuance of and payment for the Shares
and/or any termination or consummation of this Agreement, and any legal
representative of Trident, the Company and the Bank and any such controlling
persons shall be entitled to the benefit of the respective agreements,
indemnities, warranties and representations.
9. Termination. Trident shall have the right by giving notice as
-----------
hereinafter specified at any time at or prior to the Closing Date, to terminate
this Agreement if any of the following events shall occur:
(a) there shall have occurred (i) any general suspension of, or
limitation on prices for, trading in securities on the New York Stock
Exchange or in the over-the-counter market, (ii) a declaration of a banking
moratorium or any suspension of payments in respect of banks or savings
associations in the United States, (iii) a commencement of a war, armed
hostilities or other substantial international or national calamity
directly or indirectly involving the United States, (iv) any limitation
(whether or not mandatory) by any governmental authority on, or any other
event which might materially affect, the extension of credit by banks or
other lending institutions, or (v) a material change in United States or
any other currency exchange rates or a suspension of, or limitation on, the
markets therefor;
(b) there shall be threatened, instituted or pending any action,
suit, proceeding or other application before or by any court, regulatory
authority or governmental agency or body or by any other person that, in
the reasonable judgment of Trident might materially
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 32
and adversely affect the financial condition, business, or results of
operations of the Company or the Bank or the value of the Shares;
(c) the Company or the Bank shall have sustained a material loss by
fire, flood, accident or other calamity which is material to the property,
financial condition, business, or results of operations of the Company or
the Bank, whether or not such loss shall have been insured; or
(d) there otherwise shall have been, since the respective dates as of
which information is given in the Prospectus, any material adverse change
in the financial condition, business, or results of operations of the Bank,
whether or not arising in the ordinary course of business, that in the
reasonable judgment of Trident makes it impractical or inadvisable to
proceed with the offering of the Shares.
A termination pursuant to this Section 9 shall be without liability on the
part of Trident to the Company or the Bank or on the part of the Company or the
Bank to Trident (except that the Company and the Bank shall remain responsible
for the expenses to be paid or reimbursed by them pursuant to Sections 3(d) (ii)
and (iii) and the respective obligations of the parties pursuant to Section 7
hereof shall remain in full force and effect).
10. Notices. All notices or communications hereunder shall be in writing
-------
and if sent to Trident shall be mailed, delivered, telecopied or telegraphed and
confirmed to Trident at its address set forth on the first page hereof, to the
attention of Timothy E. Lavelle (with a copy to Foley, Hoag & Eliot LLP, One
Post Office Square, Boston, Massachusetts 02159, Attention: Carol Hempfling
Pratt); or if sent to the Company or the Bank shall be mailed, delivered,
telecopied or telegraphed and confirmed to the Company or the Bank at 60 High
Street, Medford, Massachusetts, Attention: Robert H. Surabian (with a copy to
Thacher Proffitt & Wood, 1500 K Street, N.W., Washington, D.C. 20005, Attention:
Richard A. Schaberg).
11. Parties. This Agreement shall inure to the benefit of, and shall be
-------
binding upon, Trident, the Company and the Bank, and the controlling persons,
officers and directors referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have
any legal or equitable right, remedy or claim under or by virtue of this
Agreement.
12. Applicable Law. This Agreement shall be governed by, and construed in
--------------
accordance with, the laws of The Commonwealth of Massachusetts, except to the
extent that federal law applies.
13. Counterparts. This Agreement may be executed in separate counterparts,
------------
each of which when so executed and delivered shall be an original, but all of
which together shall constitute but one and the same instrument.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 33
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement between the Company and the Bank and Trident in
accordance with its terms.
MYSTIC FINANCIAL, INC.
By:______________________________________
Robert H. Surabian
President and Chief Executive Officer
MEDFORD CO-OPERATIVE BANK
By:______________________________________
Robert H. Surabian
President and Chief Executive Officer
The foregoing Sales Agency
Agreement is hereby confirmed
and accepted as of the date
first above written.
TRIDENT SECURITIES, INC.
By:__________________________________
Timothy E. Lavelle
President
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 34
Exhibit A
Trident Securities, Inc. is a registered selling agent in the jurisdictions
listed below:
Alabama Missouri
Arizona Nebraska
Arkansas Nevada
California New Hampshire
Colorado New Jersey
Connecticut New Mexico
Delaware New York
District of Columbia North Carolina
Florida North Dakota (Trident Securities, Inc. only, no
agents)
Georgia Ohio
Idaho Oklahoma
Illinois Oregon
Indiana Pennsylvania
Iowa Rhode Island
Kansas South Carolina
Kentucky Tennessee
Louisiana Texas
Maine Vermont
Maryland Virginia
Massachusetts Washington
Michigan West Virginia
Minnesota Wisconsin
Mississippi Wyoming
Trident Securities, Inc. is not a registered selling agent in the jurisdictions
listed below:
Alaska
Hawaii
Montana
South Dakota
Utah
<PAGE>
AMENDED APPENDIX I
PLAN OF CONVERSION
FOR
MEDFORD CO-OPERATIVE BANK
1. INTRODUCTION.
This Amended Plan of Conversion (the "Plan") provides for the conversion of
the Medford Co-operative Bank (the "Co-operative Bank" or the "Bank") from a
state-chartered mutual to a state-chartered capital stock institution. The
business purposes of the Conversion are to provide the Co-operative Bank with
equity capital which will enable it to increase its reserves and net worth to
support future lending growth and branching activities and to increase its
ability to render services to the public.
The Board of Directors of the Bank currently contemplates that all of the
stock of the Bank shall be held by a business corporation (the "Holding
Company") organized under the laws of the State of Delaware and that the Holding
Company will issue and sell its capital stock pursuant to this Plan. The use of
the Holding Company, if so utilized, would provide greater organizational
flexibility.
For these reasons, the Board of Directors, on June 11, 1997 and August 13,
1997, unanimously adopted this Plan to convert the Co-operative Bank from a
mutual form of organization to a stock form of organization.
The savings accounts of the Co-operative Bank's savers will not be affected
by the Conversion provided for in this Plan. Each savings account holder in the
converted Bank, prior to conversion, shall receive, without payment, a
withdrawable savings account or accounts in the converted Bank equal in
withdrawable amount to the withdrawable value of such account holder's savings
account or accounts in the Co-operative Bank prior to conversion. All savings
accounts in the Co-operative Bank following the Conversion will continue to be
insured by the Federal Deposit Insurance Corporation (the "FDIC") and the Share
Insurance Fund of the Co-operative Central Bank to the maximum amount permitted
by law. The stock to be issued in the Conversion, however, will not be insured
by the FDIC or any other insurer. The Co-operative Bank, as chartered in the
stock form following the Conversion, will succeed to all of the presently
existing rights, interests, duties and obligations of the Co-operative Bank to
the extent provided by law, including, but not limited to, all of its rights to
and interests in its assets and properties, both real and personal.
This Plan, which has been adopted by the Co-operative Bank's Board of
Directors by a unanimous vote, must also be approved by the affirmative vote of
two-thirds of the Shareholders present and voting at a meeting of the
Shareholders called to consider the Plan. Prior to the submission of this Plan
to the Shareholders for their consideration, the Plan must be approved by the
Commissioner of Banks of the Commonwealth of Massachusetts (the "Commissioner")
and reviewed without objection by the FDIC.
<PAGE>
2. DEFINITIONS.
As used in this Plan, the following terms have the meanings indicated
below:
Acting in Concert. The term "Acting in Concert" is defined to mean: (a)
-----------------
knowing participation in a joint activity or interdependent conscious parallel
action towards a common goal whether or not pursuant to an express agreement; or
(b) a combination or pooling of voting or other interest in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. The
Company and the Co-operative Bank may presume that certain Persons are acting in
concert based upon, among other things, joint account relationships and the fact
that such Persons have filed joint Schedules 13D with the SEC with respect to
other companies. When Persons act together for such a common purpose, their
group is deemed to have acquired their stock.
Actual Purchase Price. The term "Actual Purchase Price" means the per
---------------------
share price at which the Conversion Stock is ultimately sold in accordance with
the terms hereof.
Affiliate. An Affiliate of, or a person "affiliated" with, a specified
---------
person, is a person that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the person specified.
Aggregate Purchase Price. The term "Aggregate Purchase Price" means the
------------------------
total sum paid for all Shares of Conversion Stock.
Associate. The term "Associate," when used to indicate a relationship with
---------
any person, means (a) any corporation or organization (other than the Co-
operative Bank or a majority-owned subsidiary of the Co-operative Bank) of which
such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10 percent or more of any class of equity securities, (b)
any trust or other estate in which such person has a substantial beneficial
interest or as to which such person serves as director or in a similar fiduciary
capacity, and (c) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a director or officer of
the Co-operative Bank or any of its parents or subsidiaries. The Company and
the Co-operative Bank may presume that certain persons are acting in concert
based upon, among other things, joint account relationships and the fact that
such person have filed joint Schedules 13D with the SEC with respect to other
companies.
Bank Personnel. The term "Bank Personnel" means directors, officers and
--------------
employees of the Co-operative Bank.
Broker-Dealer. The term "Broker-Dealer" means any person who engages
-------------
either for all or part of such person's time, directly or indirectly, as agent,
broker or principal, in the business of offering, buying, selling or otherwise
dealing or trading in securities issued by another person.
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<PAGE>
Conversion. The term "Conversion" means the change in the form of the Co-
----------
operative Bank from the mutual form to the capital stock form by the adoption of
an amendment to the Charter of the Co-operative Bank in accordance with the
regulations of the Commissioner.
Conversion Stock or Shares. The terms "Conversion Stock" and "Shares" mean
--------------------------
the stock initially issued by the Co-operative Bank upon Conversion.
Direct Community Offering. The term "Direct Community Offering" means the
-------------------------
offering of Conversion Stock to the Local Community with preference given to
natural persons residing in the Local Community.
Division. The term "Division" means the Division of Banks of the
--------
Commonwealth of Massachusetts.
Eligible Account Holder. The term "Eligible Account Holder" means any
-----------------------
person holding a Qualifying Deposit in the Co-operative Bank as of the
Eligibility Record Date.
Eligibility Record Date. The term "Eligibility Record Date" means March
-----------------------
31, 1996, the record date set by the Co-operative Bank for determining Eligible
Account Holders.
Holding Company. The term "Holding Company" means a corporation to be
---------------
organized under the laws of the State of Delaware, which will own all of the
capital stock of the Bank and which will issue and sell its capital stock
pursuant to this Amended Plan of Conversion.
Independent Appraiser. The term "Independent Appraiser" means the firm
---------------------
employed by the Co-operative Bank to make the estimated pro forma valuation of
the Co-operative Bank which will be used as the basis for determining the price
of the Conversion Stock.
Local Community. The term "Local Community" means the Massachusetts cities
---------------
and towns of Medford, Malden, Everett, Stoneham, Arlington, Winchester,
Somerville, Melrose, Lexington and Bedford.
Officer. The term "Officer" means the president, vice presidents, clerk,
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and the treasurer of the Co-operative Bank.
Person. The term "Person" means an individual, a corporation, a
------
partnership, an association, a joint-stock company, a trust, any unincorporated
organization or similar association, a government or political subdivision or a
group acting in concert.
Plan. The term "Plan" means this Plan of Conversion as adopted by the
----
Board of Directors of the Co-operative Bank and approved by the Commissioner.
Prospectus. The term "Prospectus" means the prospectus by which the Common
----------
Stock of the Holding Company is being offered.
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Purchase Price. The term "Purchase Price" means the price of the
--------------
Conversion Stock, as offered in the Conversion.
Qualifying Deposit. The term "Qualifying Deposit" means deposit accounts
------------------
of all types offered by the Co-operative Bank including, but not limited to, NOW
account deposits, certificates of deposit, demand deposits, money market
deposits and deposits made pursuant to IRA/Keogh Plans. It does not include
repurchase agreements. Deposits of less than $50 will not constitute Qualifying
Deposits.
SEC. The term "SEC" means the Securities and Exchange Commission.
---
Shareholders. The term "Shareholders" means depositors of the Bank.
------------
Special Meeting. The term "Special Meeting" means the meeting of the
---------------
Shareholders of the Co-operative Bank called for the specific purpose of
submitting the Plan to such Shareholders for approval.
Subscription Offering. The term "Subscription Offering" means the offering
---------------------
of Conversion Stock, through nontransferable Subscription Rights issued to
Eligible Account Holders, the Tax Qualified Employee Stock Benefit Plan and
Supplemental Eligible Account Holders.
Supplemental Eligibility Record Date. The term "Supplemental Eligibility
------------------------------------
Record Date" means March 31, 1997, the record date set by the Co-operative Bank
for determining Supplemental Eligible Account Holders.
Supplemental Eligible Account Holder. The term "Supplemental Eligible
------------------------------------
Account Holder" means any person (other than an Eligible Account Holder) holding
a Qualifying Deposit in the Co-operative Bank as of the Supplemental
Eligibility Record Date except officers, directors and their associates.
Syndicated Offering. The term "Syndicated Offering" means the offering of
-------------------
Conversion Stock of Shares not subscribed for in the Subscription Offering, if
any, to certain members of the general public and/or through a syndicate of
registered broker-dealers.
Tax-Qualified Employee Stock Benefit Plan. The term "Tax-Qualified
-----------------------------------------
Employee Stock Benefit Plan" means any defined benefit plan or defined
contribution plan of the Bank, such as an employee stock ownership plan, or
other plan, which, with its related trust, meets the requirements to be
"qualified" under section 401 of the Internal Revenue Code of 1986, as amended.
3. PROCEDURE FOR CONVERSION.
After adoption of the Plan by the Board of Directors of the Co-operative
Bank, the Plan will be submitted, together with all other requisite material in
an application for conversion (the "Application"), to the Commissioner for his
approval and to the FDIC to determine whether it has objections, based on safety
and soundness considerations, to the Conversion. References herein
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<PAGE>
to approval of the Commissioner shall also refer to the issuance of a letter of
"non-objection" from the FDIC. The Co-operative Bank must also apply to the
Internal Revenue Service for a tax ruling or receive an opinion from counsel
which provides that the Conversion would not result in a taxable reorganization
of the Co-operative Bank under the Internal Revenue Code of 1986, as amended.
Following a determination by the Commissioner that the Application is
complete, the Co-operative Bank will publish a form of notice provided or
approved by the Commissioner in newspapers having general circulation in each
community in which an office of the Co-operative Bank is located, or in such
other locations as may be satisfactory to the Commissioner. Such notice shall
also be posted in each office of the Co-operative Bank.
The Commissioner will review the Bank's Application. If the Commissioner
finds the Conversion fair to depositors, that the Co-operative Bank's deposits
will be adequately insured, that other banks will not be adversely affected and
that the public's access to credit within the Co-operative Bank's community will
not be adversely affected, he shall approve the Plan.
After approval of the Conversion by the Commissioner, the Plan will be
submitted to the Shareholders at a Special Meeting called to consider the Plan.
Approval of two-thirds of the Shareholders present and voting at the meeting is
required.
If the Shareholders approve the Plan, and the Commissioner authorizes the
sale of Conversion Stock pursuant to this Plan, the Co-operative Bank will sell
the Conversion Stock as provided herein. Upon such approval, the Conversion
Stock to be issued pursuant to this Plan will be offered to Eligible Account
Holders, Supplemental Eligible Account Holders and the Tax-Qualified Employee
Stock Benefit Plan and as set forth in Section 5 of this Plan. If feasible, any
Conversion Stock remaining after such purchases will then be sold to the general
public through a Direct Community Offering as provided in Section 6 of this
Plan. The sale of all Conversion Stock ordered in the Subscription Offering
will be consummated simultaneously on the date the Direct Community Offering is
completed, or, if there is no Direct Community Offering, as soon as practicable
following expiration of the Subscription Rights provided for in this Plan.
The Board of Directors of the Bank intends to take all necessary steps to
form the Holding Company. The Bank will be a wholly-owned subsidiary of the
Holding Company unless the Holding Company is eliminated in the Conversion.
If the Holding Company is utilized, upon Conversion the Bank will issue its
capital stock to the Holding Company, and the Holding Company will issue and
sell the Common Stock in accordance with this Plan. The Holding Company will
make timely applications for any requisite regulatory approvals, including an
application to register as a bank holding company, and the filing of a
Registration Statement on Form S-1 to register the securities with the SEC.
Upon the issuance of the Common Stock, the Holding Company will purchase
from the Bank all of the capital stock of the Bank to be issued by the Bank in
the Conversion in exchange for the Conversion proceeds that are not permitted to
be retained by the Holding Company. The
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Bank believes that the Conversion proceeds will greatly enhance the Bank's
ability, among other things, (i) to expand its franchise through increased
lending, (ii) to diversify products offered to customers and (iii) to establish
new branch locations.
The Board of Directors of the Bank may determine for any reason at any time
prior to the issuance of the Common Stock not to utilize a holding company form
of organization in the Conversion. If the Board of Directors of the Bank
determines not to complete the Conversion utilizing a holding company form of
organization, the capital stock of the Bank will be issued and sold in
accordance with the Plan. In such case, the Holding Company's Registration
Statement on Form S-1 will be withdrawn from the SEC, the Bank will take steps
necessary to complete the conversion from the mutual to the stock form of
organization, including filing any necessary documents with the FDIC and the
Division, and will issue and sell the Common Stock in accordance with this Plan.
In such event, any subscriptions or orders received for Common Stock of the
Holding Company shall be deemed to be subscriptions or orders for Common Stock
of the Bank, and the Bank shall take such steps as permitted or required by the
FDIC, the Division and the SEC.
4. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK.
An Independent Appraiser shall be employed by the Co-operative Bank to
provide it with an independent valuation of the estimated pro forma market value
of the Co-operative Bank as required by regulations of the Commissioner. The
Directors of the Co-operative Bank shall thoroughly review and analyze the
methodology and fairness of the independent appraisal. The valuation will be
made by a written report to the Co-operative Bank, contain the factors upon
which the valuation was made and conform to procedures adopted by the
Commissioner. The valuation shall contain an estimated range of aggregate
prices for the Conversion Stock, which range shall reflect the anticipated pro
forma market value of the Co-operative Bank. The maximum price shall be no more
than 15 percent above the estimated pro forma market value, and the minimum
price shall be no more than 15 percent below the estimated pro forma market
value. All Shares to be sold in the Conversion shall be sold at a uniform price
per Share. The Independent Appraiser shall evaluate the pro forma market value
of the Co-operative Bank, which value shall be included in the Prospectus (as
described in Section 8 of this Plan) filed with the Commissioner. The
Independent Appraiser shall also present to the Co-operative Bank at the close
of the Subscription Offering a valuation of the pro forma market value of the
Co-operative Bank. The aggregate Purchase Price of the Conversion Stock to be
sold by the Co-operative Bank shall be adjusted to reflect any required changes
in the pro forma market value of the Co-operative Bank. If, as a result of such
adjustment, the aggregate Purchase Price is not within the subscription price
range, the Co-operative Bank shall obtain an amendment to the Commissioner's
approval. If appropriate, the Commissioner will condition his approval by
requiring a resolicitation of depositors and/or order forms.
The price per share for each share of Conversion Stock when multiplied by
the number of shares of Conversion Stock, shall be equivalent to the pro forma
market value of the Co-operative Bank in accordance with the valuation furnished
to the Co-operative Bank by the Independent Appraiser.
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<PAGE>
The total number of shares of Conversion Stock which will be issued in
connection with the Conversion will be determined by the Board of Directors of
the Co-operative Bank immediately prior to the commencement of the Subscription
Offering; provided, that the board of directors of the Co-operative Bank may
elect to increase or decrease the number of shares of Conversion Stock to be
offered in the Subscription and Direct Community Offering depending upon market
and financial conditions at the time of the close of the Direct Community
Offering or in the event the initial estimate of the pro forma market value of
the Co-operative Bank is materially increased or decreased by the Independent
Appraiser.
5. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS, TAX-QUALIFIED EMPLOYEE
STOCK BENEFIT PLAN AND SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS
A. CATEGORY NO. 1: ELIGIBLE ACCOUNT HOLDERS
(a) Each Eligible Account Holder shall receive, as first priority and
without payment, non-transferable Subscription Rights to purchase shares of
Conversion Stock in the amount up to $600,000 worth of Shares offered in the
Conversion.
(b) In the event that subscriptions for Conversion Stock are received from
Eligible Account Holders upon exercise of Subscription Rights pursuant to
paragraph (a) in excess of the number of Shares available for subscription, the
Conversion Stock available for purchase will be allocated among the subscribing
Eligible Account Holders so as to permit each subscribing Eligible Account
Holder, to the extent possible, to purchase a number of Shares sufficient to
make his total allocation of Conversion Stock equal to the lesser of 100 Shares
or the number of Shares subscribed for by such Eligible Account Holder. Any
Shares remaining after such allocation will be allocated among the subscribing
Eligible Account Holders whose subscriptions remain unsatisfied in the
proportion which the amount of each Eligible Account Holder's Qualifying Deposit
bears to the total amount of the Qualifying Deposits of all Eligible Account
Holders whose subscriptions remain unsatisfied. If the amount so allocated
exceeds the amount subscribed for by any one or more Eligible Account Holders,
the excess shall be reallocated on the same principle (one or more times as
necessary) among those Eligible Account Holders whose subscriptions are still
not fully satisfied until all available Shares have been allocated or all
subscriptions are satisfied.
(c) Subscription Rights held by Eligible Account Holders who are also
Directors or Officers of the Co-operative Bank or their Associates, will be
subordinated to those of other Eligible Account Holders to the extent they are
attributable to increased deposits during the one-year period preceding the
Eligibility Record Date.
B. CATEGORY NO. 2: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS
(a) Each Supplemental Eligible Account Holder shall receive, as second
priority and without payment, nontransferable subscription rights to subscribe
for shares of Conversion Stock equal to an amount up to $600,000 worth of Shares
offered in the Conversion.
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<PAGE>
(b) In the event that subscriptions for Conversion Stock are received from
Supplemental Eligible Account Holders upon exercise of Subscription Rights
pursuant to paragraph (a) in excess of the number of Shares available for
subscription, the Conversion Stock available for purchase will be allocated
among the subscribing Supplemental Eligible Account Holders so as to permit each
subscribing Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of Shares sufficient to make his total allocation of
Conversion Stock equal to the lesser of 100 Shares or the number of Shares
subscribed for by such Supplemental Eligible Account Holder. Any Shares
remaining after such allocation will be allocated among the subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied in
the proposition which the amount of each Supplemental Eligible Account Holder's
Qualified Deposit bears to the total of the Qualifying Deposits of all
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied.
If the amount so allocated exceeds the amount subscribed for by any one or more
Supplemental Eligible Account Holders, the excess shall be reallocated (one or
more times as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available Shares have been allocated or all subscriptions satisfied.
C. CATEGORY NO. 3: TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLAN
The Tax-Qualified Employee Stock Benefit Plan of the Bank shall receive,
without payment, as a third priority after the filling of the subscriptions of
Eligible Account Holders, non-transferable Subscription Rights to purchase up to
8% of the shares of Conversion Stock issued in the Conversion. If, after the
filling of subscriptions of Eligible Account Holders and Supplemental Eligible
Account Holders, a sufficient number of shares are not available to fill the
subscriptions by such plan, the subscription by such plan shall be filled to the
maximum extent possible. If all the shares of Common Stock offered in the
Subscription Offering are purchased by Eligible Account Holders and Supplemental
Eligible Account Holders, then the ESOP will purchase shares in the open market
following consummation of the Conversion. A Tax-Qualified Employee Stock
Benefit Plan shall not be deemed to be an Associate or Affiliate of, or a Person
Acting in Concert with, any Director of Officer of the Holding Company or the
Bank. Notwithstanding any provision contained herein to the contrary, the Bank
may make scheduled discretionary contributions to a Tax-Qualified Employee Stock
Benefit Plan; provided, that such contributions do not cause the Bank to fail to
meet its regulatory capital requirements.
6. DIRECT COMMUNITY OFFERING.
If feasible, Conversion Stock which remains unsubscribed after the exercise
of Subscription Rights pursuant to the Subscription Offering (Section 5) shall
be offered for sale to the Local Community through a Direct Community Offering.
The Direct Community Offering, if any, may commence simultaneously with the
Subscription Offering or may commence during or after the commencement of the
Subscription Offering, as the Board so determines. The right to subscribe for
shares of Conversion Stock in the Direct Community Offering is subject to the
right of the Bank to accept or reject such subscriptions in whole or in part.
Stock being sold in the Direct Community Offering will be offered and sold in a
manner that will achieve the widest distribution of the Conversion Stock. In
making the Direct Community Offering, the Co-operative Bank will
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<PAGE>
give preference to natural persons residing in the Local Community. Orders
accepted in the Direct Community Offering shall be filled up to a maximum of 2%
per order of the Conversion Stock and thereafter remaining shares shall be
allocated on an equal number of shares basis per order until all orders have
been filled.
If any Conversion Stock remains unsold after the close of the Subscription
and Direct Community Offerings, the Co-operative Bank may use the services of
broker-dealers to sell such unsold shares in a Syndicated Offering.
7. LIMITATIONS ON PURCHASES.
With the exception of the Tax-Qualified Employee Stock Benefit Plan, which
is expected to subscribe for 8% of the shares of Common Stock issued in the
Conversion, the Plan of Conversion provides for the following purchase
limitations: no Person, either alone or together with Associates of or Persons
Acting In Concert with such Person, may purchase more than $600,000 of Common
Stock issued in the Conversion. THIS MAXIMUM PURCHASE LIMITATION MAY BE
INCREASED CONSISTENT WITH FDIC AND DIVISION REGULATIONS IN THE SOLE DISCRETION
OF THE HOLDING COMPANY AND THE BANK SUBJECT TO ANY REQUIRED REGULATORY APPROVAL.
A minimum of 25 Shares must be purchased by each person purchasing Conversion
Stock to the extent Shares are available, provided, however, that such minimum
number of Shares will be reduced if the price per Share times such minimum
number of Shares exceeds $500.
The maximum number of Shares which may be purchased in the Subscription and
Direct Community Offering in the conversion by Directors and Officers of the Co-
operative Officers of the Co-operative Bank and their Associates, in the
aggregate shall not exceed 30 percent (30%) of the total number of Shares. Each
Director and Officer will be subject to the same purchase limitations as other
Eligible Account Holders and Supplemental Eligible Account Holders.
8. MANNER OF EXERCISING RIGHTS; ORDER FORMS.
Upon authorization of the sale of Conversion Stock by the Commissioner:
(a) Promptly after the Commissioner has approved the Prospectus referred
to in paragraph (b) of this Section 8, order forms approved by the Commissioner
for the exercise of the Subscription Rights provided for in this Plan will be
sent to all such persons at their last known address appearing in the records of
the Co-operative Bank.
(b) Each order form will be preceded or accompanied by a Prospectus which
must be approved by the Commissioner. Such Prospectus shall describe the Co-
operative Bank and the Conversion Stock being offered and will contain all the
information required by the Commissioner and all applicable laws and regulations
as necessary to enable the recipients of the order forms to make informed
investment decisions regarding the purchase of Conversion Stock. The Co-
operative Bank may, in lieu of mailing a Prospectus to each Eligible Account
Holder and Supplemental Eligible Account Holder, mail a notice and information
statement to each such
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<PAGE>
person with a request form to be returned to the Co-operative Bank by a
reasonable date certain to request subscription materials.
(c) The order forms will contain or will be accompanied by, among other
things, the following:
(i) An explanation of the rights and privileges granted under this
Plan to each class of persons granted Subscription Rights pursuant to Section 5
of this Plan with respect to the purchase of Conversion Stock;
(ii) A specified time by which order forms must be received by the
Co-operative Bank for purposes of exercising the Subscription Rights of Eligible
Account Holders and Supplemental Eligible Account Holders under this Plan, as
provided in Section 10 of this Plan;
(iii) A statement that the Aggregate Purchase Price at which the
Conversion Stock will ultimately be purchased in the Conversion has not been
determined as of the date of mailing of the order form, but that such price will
be within the range of prices which will be stated in the order form;
(iv) The amount which must be returned with the order form to
subscribe for Conversion Stock. Such amount will be equal to the Purchase Price
multiplied by the number of Shares subscribed for in accordance with the terms
of this Plan;
(v) Instructions concerning how to indicate on such order form the
extent to which the recipient elects to exercise Subscription Rights under this
Plan, the name or names in which the Shares subscribed for are to be registered,
the address to which certificates representing such Shares are to be sent and
the alternative methods of payment for Conversion Stock which will be permitted;
(vi) Specifically designated blank spaces for dating and signing the
order form;
(vii) An acknowledgment that the recipient of the order form has
received, prior to signing the order form, the Prospectus referred to in
paragraph (b) of this Section 8;
(viii) A statement that the Subscription Rights provided for in this
Plan are nontransferable, will be void after the specified time referred to in
paragraph (c)(ii) above and can be exercised only by delivery of the order form,
properly completed and executed, to the Co-operative Bank, together with the
full required payment (in the manner specified in Section 9 of this Plan) for
the number of Shares subscribed for prior to such specified time; and
(ix) Provision for certification to be executed by the recipient of
the order form to the effect that, as to any Shares which the recipient elects
to purchase, such recipient is purchasing such Shares for his own account only
and has no present agreement or understanding regarding any subsequent sale or
transfer of such Shares.
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<PAGE>
9. PAYMENT FOR CONVERSION STOCK.
(a) Full payment for all Shares subscribed for must be received by the Co-
operative Bank, together with properly completed and executed order forms
therefor, prior to the expiration time, which will be specified on the order
forms, unless such date is extended by the Co-operative Bank. Faxes of order
forms will not be accepted as properly completed and executed order forms.
(b) If it is determined that the Aggregate Purchase Price should be
greater than the amount stated in the order forms, upon compliance with such
requirements as may be imposed by the Commissioner (which may include
resolicitation of votes for approval of this Plan by Shareholders of the Co-
operative Bank) each person who subscribed for Shares will be permitted to
withdraw his Subscription and have his payment for Shares returned to him in
whole or in part, with interest, or to make payment to the Co-operative Bank of
the additional amount necessary to pay for the Shares subscribed for by him at
the Actual Purchase Price in the manner and within the time prescribed by the
Co-operative Bank.
(c) If the Aggregate Purchase Price is outside the range of prices
established by the Independent Appraiser referred to in Section 4 of this Plan
and set forth in the Prospectus referred to in Section 8 of this Plan, the Co-
operative Bank will apply for an amendment to the Commissioner's approval of
this Plan and comply with such requirements as the Commissioner may then
establish.
(d) Payment for Shares ordered for purchase by Eligible Account Holders
and Supplemental Eligible Account Holders will be permitted to be made in any of
the following manners:
(i) In cash, if delivered in person;
(ii) By check, bank draft or money order, provided that checks will
only be accepted subject to collection;
(iii) By appropriate authorization of withdrawal from any savings
account, NOW account, certificate of deposit or money market deposit in the Co-
operative Bank. The order forms will contain appropriate means by which
authorization of such withdrawals may be made. For purposes of determining the
withdrawable balance of such accounts, such withdrawals will be deemed to have
been made upon receipt of appropriate authorization therefor, but interest at
the rates applicable to the accounts from which the withdrawals have been deemed
to have been made will be paid by the Co-operative Bank on the amounts deemed to
have been withdrawn until the date on which the Conversion is consummated, at
which date the authorized withdrawal will actually be made. Such withdrawals
may be made upon receipt of order forms authorizing such withdrawals, but
interest will be paid by the Co-operative Bank on the amounts withdrawn as if
such amounts had remained in the accounts from which they were withdrawn until
the date upon which the sales of Conversion Stock pursuant to exercise of
Subscription Rights are actually consummated. Interest will be paid by the Co-
operative Bank at not less than the rate per annum being paid by the Co-
operative Bank on its passbook accounts at the time the Subscription Offering
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<PAGE>
commences, on payments for Conversion Stock received in the Subscription
Offering in cash or by check or negotiable order of withdrawal from the date
payment is received until consummation or termination of the Conversion. The Co-
operative Bank shall be entitled to invest all amounts paid for subscriptions in
the Subscription Offering for its own account until completion or termination of
the Conversion.
(iv) Wire transfers as payment for Shares ordered for purchase will
not be permitted or accepted as proper payment.
(e) Payments for the purchase of Conversion Stock in the Subscription
Offering will be permitted through authorization of withdrawals from certificate
accounts at the Co-operative Bank without early withdrawal penalties. If the
remaining balances of the certificate accounts after such withdrawals are less
than the minimum qualifying balances under applicable regulations, the
certificates evidencing the accounts will be canceled upon consummation of the
Conversion, and the remaining balances will thereafter earn interest at the rate
provided for in the certificates in the event of cancellation.
10. EXPIRATION OF PURCHASE RIGHTS; UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS;
INSUFFICIENT PAYMENT.
(a) All Subscription Rights provided for in this Plan, including, without
limitation the Subscription Rights of all persons whose order forms are returned
by the United States Post Office as undeliverable, will expire at 3:30 p.m.
Massachusetts time, on a specified date which shall be not less than the
twentieth day following the date on which order forms are first sent to Eligible
Account Holders, provided that the Co-operative Bank shall have the power to
extend such expiration time in its discretion.
(b) In those cases in which the Co-operative Bank is unable to locate
particular persons granted Subscription Rights under this Plan, and cases in
which order forms (1) are returned as undeliverable by the United States Post
Office, (2) are not received back by the Co-operative Bank or are received by
the Co-operative Bank after the expiration date specified thereon, (3) are
defectively filled out or executed or (4) are not accompanied by the full
required payment for the Conversion Stock subscribed for (including cases in
which deposit accounts from which withdrawals are authorized are insufficient to
cover the amount of the required payment), the Subscription Rights of the person
to whom such rights have been granted will lapse as though such person failed to
return the completed order form within the time period specified thereon.
(c) The Co-operative Bank may, but will not be obligated to, waive any
irregularity on any order forms or require the submission of corrected order
forms or the remittance of full payment for Shares subscribed for by such date
as it may specify, and all interpretations by the Co-operative Bank of terms and
conditions of this Plan and of the order forms will be final.
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<PAGE>
11. PERSONS IN NONQUALIFIED STATES OR IN FOREIGN COUNTRIES.
Subject to the following sentence, the Holding Company will make reasonable
efforts to comply with the securities laws of all states of the United States in
which Eligible Account Holders and Supplemental Eligible Account Holders
entitled to subscribe for Conversion Stock pursuant to this Plan reside.
However, no such person will be offered any Subscription Rights or sold any
Conversion Stock under this Plan who resides in a foreign country or who resides
in a state of the United States with respect to which the Co-operative Bank
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise. No payments will be made in
lieu of the granting of Subscription Rights to such persons.
12. VOTING RIGHTS AFTER CONVERSION.
Following Conversion, voting rights with respect to the Co-operative Bank
will be held and exercised exclusively by the holders of the capital stock of
the Co-operative Bank; the Holding Company shall own all of the issued and
outstanding stock of the Co-operative Bank.
13. ESTABLISHMENT OF A LIQUIDATION ACCOUNT.
(a) For purposes of granting a priority claim to the assets of the Co-
operative Bank in the event of a complete liquidation thereof to Eligible
Account Holders and Supplemental Eligible Account Holders who continue to
maintain deposit accounts at the Co-operative Bank, the Co-operative Bank will,
at the time of Conversion, establish a "Liquidation Account" in an amount equal
to the net worth of the Co-operative Bank set forth in its latest statement of
financial condition contained in its final Prospectus. The function of the
Liquidation Account is to establish a priority on liquidation and, except as
provided for in this Section 13, shall not operate to restrict the use or
application of any of the net worth accounts of the Co-operative Bank.
(b) Each Eligible Account Holder and Supplemental Eligible Account Holder
will have a separate inchoate interest in the Liquidation Account for each
deposit account making up a Qualifying Deposit. Such inchoate interests are
referred to herein as "Subaccount Balances." For deposit accounts in existence
on the Eligibility Record Date and the Supplemental Eligibility Record Date,
separate Subaccount Balances shall be determined on the basis of the Qualifying
Deposits in such deposit accounts on each such date.
(c) Each initial Subaccount Balance in the Liquidation Account shall be an
amount determined by multiplying the amount in the Liquidation Account by a
fraction the numerator of which is the closing balance in the Eligible Account
Holder's and Supplemental Eligible Account Holder's account and the denominator
of which is the total amount of all Qualifying Deposits of Eligible Account
Holders and Supplemental Account Holders on the corresponding record date. Each
initial Subaccount Balance in the Liquidation Account shall never be increased,
but will be subject to downward adjustment as follows. If the balance in the
deposit account to which a Subaccount Balance relates, at the close of business
on any annual closing date of the Co-operative Bank subsequent to the
corresponding record date, is less than the lesser of the deposit balance in
such account at the close of business on any other annual closing date
subsequent to the Eligibility
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<PAGE>
Record Date or Supplemental Eligibility Record Date, or the amount of the
Qualifying Deposit as of the Eligibility Record Date or Supplemental Eligible
Record Date, the Subaccount Balance for such deposit account shall be adjusted
by reducing such Subaccount Balance in an amount proportionate to the reduction
in such account balance. If any account is closed, its related Subaccount
Balance shall be reduced to zero upon such closing.
(d) In event of a complete liquidation of the converted Co-operative Bank
(and only in such event), each Eligible Account Holder and Supplemental Eligible
Account Holder shall receive from the Liquidation Account a liquidation
distribution equal to the current amount in each of his Subaccount Balances,
before any liquidation distribution may be made to any holders of the conversion
stock of the converted Co-operative Bank. No merger, consolidation, purchase of
bulk assets with assumption of accounts and other liabilities, or similar
transaction, in which the converted Co-operative Bank is not the surviving
institution, will be deemed to be a complete liquidation for this purpose, and,
in any such transaction, the Liquidation Account shall be assumed by the
surviving institution.
14. TRANSFER OF DEPOSIT ACCOUNT.
Each deposit account in the Co-operative Bank at the time of the Conversion
will constitute, without payment or further action by the account holder, a
deposit account in the converted Bank equivalent in withdrawable amount to the
withdrawable value, and subject to the same terms and conditions (except as to
voting and liquidation rights) as such deposit account in the Co-operative Bank
at the time of the Conversion.
15. RESTRICTION ON TRANSFER OF CONVERSION STOCK OF OFFICERS AND DIRECTORS.
(a) All capital stock purchased by Officers or Directors of the Co-
operative Bank on original issue pursuant to this Plan (by subscription or
otherwise) will be subject to the restriction that no such Shares shall be sold
for a period of one year following the date of purchase of such Shares, except
in the event of the death or substantial disability (as determined by the
Commissioner) of the Officer or Director to whom such Shares were initially sold
under the terms of this Plan or upon the written approval of the Commissioner.
(b) With respect to all Conversion Stock subject to restriction on
subsequent disposition pursuant to the above paragraph, each of the following
provisions shall apply:
(i) Each certificate representing such Shares shall bear the following
legend prominently stamped on its face giving notice of such restriction on
transfer:
The shares represented by this certificate may not be sold by the
registered holder hereof for a period of not less than one year from
the date of issuance hereof, except in the event of the death of the
registered holder or substantial disability (as determined by the
Commissioner) of the Officer or Director to whom such Shares
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were initially sold under the terms of this Plan or upon the written
approval of the Commissioner.
(ii) Instructions will be given to the transfer agent for the
converted Co-operative Bank and the Holding Company not to recognize or effect
any transfer of any certificates representing such Shares, or any change of
record ownership thereof in violation of such restriction on transfer;
(iii) Any capital stock of the Holding Company issued in respect of a
stock dividend, stock split or otherwise in respect of ownership of outstanding
Shares subject to restrictions on transfer hereunder will be subject to the same
restrictions as are applicable to the Conversion Stock in respect of which such
Shares are issued.
16. RESTRICTION ON STOCK PURCHASES BY OFFICERS AND DIRECTORS OF THE CONVERTED
BANK.
For a period of three years following the Conversion, no Officer or
Director of the converted Co-operative Bank or any of their Associates shall,
without the prior written approval of the Commissioner, purchase capital stock
of the Co-operative Bank or the Holding Company from the Co-operative Bank or
the Holding Company.
17. AMENDMENT AND TERMINATION OF THE PLAN.
This Plan may be substantively amended by the Board of Directors of the Co-
operative Bank in its sole discretion as a result of comments from regulatory
authorities or otherwise, at any time prior to the date material is sent to the
Shareholders in connection with the meeting called to consider this Plan, and at
any time thereafter with the concurrence of the Commissioner. This Conversion
may be terminated by the Directors of the Co-operative Bank at any time prior to
the meeting of the Shareholders called to consider this Plan and at any time
thereafter with the concurrence of the Commissioner.
18. TIME PERIOD FOR COMPLETION OF CONVERSION.
The Conversion of the Co-operative Bank shall be completed within 24 months
from the date this Plan is approved by the Board of Directors of the Co-
operative Bank.
19. EXPENSES OF CONVERSION.
The Co-operative Bank shall use its best efforts to assure that the
expenses incurred in connection with the Conversion shall be reasonable.
20. REGISTRATION UNDER SECURITIES EXCHANGE ACT OF 1934.
The Holding Company shall register its Conversion Stock under the
Massachusetts General Laws and Section 12(g) of the Securities Exchange Act of
1934, as amended, concurrently with
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or promptly following the Conversion, provided that either or both such
registrations are required under applicable law.
21. MARKET.
The Holding Company shall use its best efforts to encourage and assist two
or more market makers to establish and maintain a market for its Conversion
Stock promptly following Conversion. The Converted Bank shall also use its best
efforts to cause its Conversion Stock to be quoted on the Nasdaq Stock Market or
such other national exchange.
22. CONVERSION STOCK NOT INSURED.
The Conversion Stock will not be covered by deposit insurance.
23. NO LOANS TO PURCHASE CAPITAL STOCK.
The Co-operative Bank shall not loan funds or otherwise extend credit to
any person to purchase the capital stock of the Holding Company in connection
with the Conversion.
24. RESTRICTIONS ON ACQUISITION OF BANK.
Present Massachusetts regulations provide that for a period of three years
following completion of the Conversion, no Person, or group of Persons Acting In
Concert) shall directly, or indirectly, offer to purchase or actually acquire
the beneficial ownership of more than 10% of any class of equity security of the
Bank without the prior approval of the Commissioner. However, approval is not
required for purchases directly from the Bank or the underwriters or selling
group acting on its behalf with a view towards public resale, or for purchases
not exceeding one percent per annum of the shares outstanding, or for the
acquisition of securities by one or more Tax-Qualified Employee Stock Benefit
Plans of the Bank, provided that the plan or plans do not have beneficial
ownership in the aggregate of more than 25% of any class of equity security of
the Bank. Civil penalties may be imposed by the Commissioner for willful
violation or assistance of any violation. Where any person directly or
indirectly, acquires beneficial ownership of more than ten percent of any class
of equity security of the Bank within such three-year period without the prior
approval of the Commissioner, stock of the Bank beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matter submitted to the stockholders for a vote.
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25. STOCK CHARTER AND BYLAWS.
As part of the Conversion, an amended Stock Charter and Bylaws will be
adopted to authorize the Bank to operate as a Massachusetts-chartered stock co-
operative bank. By approving the Plan, the Shareholders of the Bank will
thereby approve the amended Stock Charter and Bylaws. Prior to completion of
the Conversion, the proposed Stock Charter and Bylaws may be amended in
accordance with the provisions and limitations for amending the Plan under
Section 17 herein. The effective date of the adoption of the Stock Charter and
Bylaws shall be the date of the issuance of the Conversion Stock, which shall be
the date of consummation of the Conversion.
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PROPOSED CHARTER
<PAGE>
EXHIBIT A
CHARTER
FOR
MEDFORD CO-OPERATIVE BANK
SECTION 1. CORPORATE TITLE. The full corporate title of the Bank is
"Medford Co-operative Bank."
SECTION 2. OFFICE. The main office of the Bank shall be located in the City
of Medford, County of Middlesex, Commonwealth of Massachusetts, or such other
location as of the Board of Directors may lawfully designate, and pursuant to
the requirements of Chapter 167C, Section 2 of the Massachusetts General Laws.
SECTION 3. POWERS. The Bank is a capital stock co-operative chartered under
Chapter 170 of the Massachusetts General Laws and has and may exercise all the
express, implied and incidental powers conferred thereby and by all acts
amendatory thereof and supplemental thereto.
SECTION 4. DURATION. The duration of the Bank is perpetual.
SECTION 5. CAPITAL STOCK. The total number of shares of all classes of the
capital stock which the Bank has authority to issue is 4,000,000 of which
3,000,000 shall be common stock, par value $0.10 per share, and 1,000,000 shall
be serial preferred stock. The shares may be issued by the Bank from time to
time as approved by its Board of Directors, subject to applicable law, without
the approval of its stockholders except as otherwise provided in this Section 5.
The consideration for the issuance of the shares shall be paid in full before
their issuance and shall not be less than the stated value per share and
otherwise shall comply with all requirements set forth in Chapter 172, Section
24 Subsection C of the Massachusetts General Laws. Neither promissory notes nor
future services shall constitute payment or part payment for the issuance of
shares of the Bank. The consideration for the shares shall be cash, tangible or
intangible property, labor or services actually performed for the Bank or any
combination of the foregoing. In the absence of actual fraud in the transaction,
the value of such property, labor or services, as determined by the Board of
Directors of the Bank, shall be conclusive. Upon payment of such consideration
such shares shall be deemed to be fully paid and nonassessable. In the case of a
stock dividend, that part of the surplus of the Bank which is transferred to
stated capital upon the issuance of the shares as a stock dividend shall be
deemed to be the consideration for their issuance.
A description of the different classes and series of the Bank's capital
stock and a statement of the designations, and the relative rights, preferences
and limitations of the shares of each class of and series of capital stock are
as follows:
A. COMMON STOCK. Except as provided in this Section 5 (or in any
supplementary sections hereto) the holders of the common stock shall exclusively
possess all voting power. Each holder of shares of common stock shall be
entitled to one vote for each share held by such holder.
<PAGE>
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and of sinking fund or retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends; but only when and as
declared by the Board of Directors.
Subject to Section 6 of this Charter in the event of any liquidation,
dissolution or winding up of the Bank, after there shall have been paid to or
set aside for the holders of any class having preference over the common stock
in the event of liquidation, dissolution or winding up the full preferential
amounts which they are respectively entitled, the holders of the common stock,
and of any class or series of stock entitled to participate therewith in whole
or in part, as to distribution of assets, shall be entitled after payment or
provision for payment of all debts and liabilities of the Bank, to receive the
remaining assets of the Bank available for distribution, in cash or in kind, in
proportion to their holdings.
Each share of common stock have the same relative rights as and be
identical in all respects with all the other shares of common stock.
B. SERIAL PREFERRED STOCK. Subject to the approval of the provisions of
any series of preferred stock by the Commissioner of Banks of the Commonwealth
of Massachusetts (the "Commissioner"), if required by law, the Board of
Directors of the Bank is authorized by resolution or resolutions from time to
time adopted, to provide for the issuance of serial preferred stock in series
and to fix and state the voting powers, designations, preferences and relative
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof, including,
but not limited to, determination of any of the following:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rates or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from which
date or dates, the payment date or dates for dividends, and the participating or
other special rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so, the
price or prices at which, and the terms and conditions on which, such shares may
be redeemed;
(e) The amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
Bank;
(f) Whether shares of such series shall be entitled to the benefit of a
sinking or retirement fund to be applied to the purchase or redemption of such
shares, and if so entitled, the amount of such fund and the manner of its
application, including the price or prices at which such shares may be redeemed
or purchased through the application of such fund;
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(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or of any other series of
the same or any other class or classes of stock of the Bank and, if so
convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such conversion
or exchange may be made, and any other terms and conditions of such conversion
or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are converted shall have the
status of authorized but unissued shares of serial preferred stock and whether
such shares may be reissued as shares of the same or any other series of serial
preferred stock. Any such resolution shall become effective when the Bank files
with the Secretary of State of the Commonwealth of Massachusetts a certificate
of establishment of preferred stock, signed under the penalties of perjury of
the president or any vice president and by the clerk, assistant clerk, secretary
or assistant secretary of the Bank, setting forth a copy of the resolution of
the Board of Directors.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
SECTION 6. PREEMPTIVE RIGHTS. Holders of the capital stock of the Bank
shall not be entitled to preemptive rights with respect to shares of the Bank
which may be issued.
SECTION 7. LIQUIDATION ACCOUNT. The Bank shall establish and maintain a
liquidation account for the benefit of its deposit account holders as of March
31, 1996 ("Eligible Account Holders") and its deposit account holders as of
March 31, 1997 ("Supplemental Eligible Account Holders"). In the event of a
complete liquidation of the Bank it shall comply with such rules and regulations
of the Commissioner with respect to the amount and the priorities on liquidation
of each of the Bank's Eligible Account Holders's and Supplemental Eligible
Account Holder's inchoate interests in the liquidation account to the extent it
is still existence; provided, however, that an Eligible Account Holder's and
Supplemental Eligible Account Holder's inchoate interest in the liquidation
account shall not entitle such Eligible Account Holder or Supplemental Eligible
Account Holder to any voting rights at meetings of the Bank's stockholders.
SECTION 8. CERTAIN PROVISIONS APPLICABLE FOR THREE YEARS.
Notwithstanding anything contained in the Bank's charter or bylaws to the
contrary, for a period of three years from the date of consummation of the
conversion of the Bank from mutual to stock form, the following provisions shall
apply.
A. BENEFICIAL OWNERSHIP LIMITATION. Without the prior approval by a
two-thirds vote of the Bank's Board of Directors, no person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10
percent of any class of any equity security of the Bank. This limitation shall
not apply to a transaction in which the Bank forms a holding company without
change in the respective beneficial ownership interests of its stockholders
other than pursuant to the exercise of any dissenter and appraisal rights or the
purchase of shares by underwriters in connection with a public offering.
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<PAGE>
In the event shares are acquired in violation of this Section 8, all shares
beneficially owned by any person in excess of 10 percent shall be considered
"excess shares" and shall not be counted as shares entitled to vote and shall
not be voted by any person or counted as voting shares in connection with any
matters submitted to the stockholders for a vote.
For purposes of this Section 8, the following definitions apply:
(1) The term "person" includes an individual, a group acting in concert,
a corporation, a partnership, an association, a joint stock company, a trust, an
unincorporated organization or similar company, a syndicate or any other group
formed for the purpose of acquiring, holding or disposing of the equity
securities of the Bank.
(2) The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or invitation
for tenders of, a security or interest in a security for value.
(3) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
(4) The term "acting in concert" means (a) knowing participation in a
joint activity or conscious parallel action towards a common goal whether or not
pursuant to an express agreement, or (b) a combination or pooling of voting or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangements,
whether written or otherwise.
(B) CALL FOR SPECIAL MEETINGS. Special meeting of stockholders relating to
changes in control of the Bank or amendments to its charter shall be called only
by the Chairperson of the Board upon direction of a majority of the Board of
Directors.
SECTION 9. CERTAIN REQUIREMENTS FOR BUSINESS COMBINATIONS. In addition to
any affirmative vote required by law or this Charter, the vote of stockholders
of the Bank required to approve any Business Combination (as defined below)
shall be as set forth in this Section 9.
A. None of the following Business Combinations shall be consummated
without the affirmative vote of the holders of at least eighty percent (80%) of
the shares entitled to vote thereon ("Voting Stock"):
1. any merger or consolidation of the Bank with or into (i) any
Interested Shareholder or (ii) any other corporation or entity (whether or not
itself an Interested Shareholder) which is, or after each merger or
consolidation would be, an Affiliate of an Interested Shareholder;
2. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Shareholder or any Affiliate of any Interested Shareholder of assets
of the Bank having an aggregate Fair Market Value of $100,000 or more;
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<PAGE>
3. the issuance or transfer by the Bank (in one transaction or a
series of transactions) of any securities of the Bank to any Interested
Shareholder or any Affiliate of any Interested Shareholder in exchange for
cash, securities or other property (or a combination thereof) having an
aggregate Fair Market Value of $100,000 or more, other than the issuance of
securities upon the conversion of any class or series of stock or securities
convertible into stock of the Bank which were not acquired by such Interested
Shareholder or such Affiliate from the Bank;
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Bank proposed by or on behalf of an Interested Shareholder or
any Affiliate of any Interested Shareholder; or
5. any reclassification of securities (including any reverse stock
split), or any recapitalization of Bank, or any merger or consolidation of the
Bank or any other transaction (whether or not with or into or otherwise
involving an Interested Shareholder) which in any such case (i) has the effect,
directly or indirectly of increasing the proportionate share of the outstanding
shares of any class or series of stock of the Bank which is directly or
indirectly beneficially owned by any Interested Shareholder or any Affiliate of
any Interested Shareholder or (ii) would have the effect of increasing such
proportionate share upon conversion of any class or series of stock or
securities convertible into stock of the Bank.
B. The provisions of paragraph A hereof shall not be applicable to any
Business Combination in respect of which the conditions specified in either of
the following subparagraphs 1 and 2 are met. Any such Business Combination shall
require the affirmative vote of only the holders of a majority of the Voting
Stock.
1. Such Business Combination shall have been approved by a majority
of the Disinterested Directors, or
2. All of the following conditions relating to minimum price and
consideration for stock shall have been met:
(a) Common Stock. The aggregate amount of the cash and the Fair
------------
Market Value as of the "Consummation Date" of any consideration other than cash
to be received by holders of the common stock of the Bank in such Business
Combination shall be at least equal to the higher of the followng:
(i) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid in order to
acquire any shares of such common stock beneficially owned by the Interested
Shareholder which were acquired beneficially by such Interested Shareholder
within the two-year period immediately prior to the Announcement Date or in the
transaction in which it became an Interested Shareholder, whichever is higher;
or
(ii) the Fair Market Value per share of such common stock on the
Announcement Date or the Determination Date, whichever is higher; or
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(b) Other Stock. The aggregate amount of the cash and the Fair Market
-----------
Value as of the Consummation Date of any consideration other than cash to be
received per share by holders of shares of any class or series of outstanding
Voting Stock other than common stock shall be at least equal to the highest of
the following (it being intended that the requirements of this subparagraph (b)
shall be required to be met with respect to every class and series of such
Voting Stock, whether or not the Interested Shareholder beneficially owns any
shares of a particular class or series of such Voting Stock):
(i) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid in order to
acquire any shares of such class or series of Voting Stock beneficially owned by
the Interested Shareholder which were acquired beneficially by such Interest
Shareholder within the two-year period immediately prior to the Announcement
Date or in the transaction in which it became an Interested Shareholder,
whichever is higher;
(ii) the highest preferential amount per share to which the
holders of shares of such class or series of Voting Stock are entitled in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Bank; or
(iii) the Fair Market Value per share of such class or series of
Voting Stock on the Announcement date or the determination Date, whichever is
higher; and
(c) Form of Consideration. The consideration to be received by
---------------------
holders of a particular class or series of outstanding Voting Stock shall be in
cash or in the same form as was previously paid in order to acquire beneficially
shares of such class or series of Voting Stock that are beneficially owned by
the Interested Shareholder and, if the Interested Shareholder beneficially owns
shares of any class or series of Voting Stock that were acquired with varying
forms of consideration, the form of consideration to be received by the holders
of such class or series of Voting Stock shall be either cash or the form used to
acquire beneficially the largest number of shares of such class or series of
Voting Stock beneficially acquired by it prior to the Announcement Date; and
(d) Prohibited Conduct. After the Determination Date, and prior to
------------------
the Consummation Date:
(i) except as approved by a majority of the Disinterested
Directors, there shall have been no failure to declare and pay at regular dates
therefor the full amount of any dividends (whether or not cumulative), payable
on any class or series having a preference over the common stock of the Bank as
to dividends, or upon liquidation;
(ii) there shall have been no reduction in the annual rate of
dividends paid on the common stock of the Bank (except as necessary to reflect
any division of the common stock) except as approved by a majority of the
Disinterested Directors; and there shall have been an increase in such annual
rate of dividends as necessary to prevent any such reduction in the event of any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect of reducing the
number of outstanding shares of the common stock, unless the failure so to
increase such annual rate was approved by a majority of the Disinterested
Directors;
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(iii) an Interested Shareholder shall not have become the
beneficial owner of any additional shares of Voting Stock except as part of the
transaction in which it became an Interested Shareholder; and
(iv) after an Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the benefit,
directly or indirectly (except proportionately as a shareholder), of any loans,
advances, guarantees, pledges or other financial assistance or tax credits or
other tax advantages provided by the corporation, whether in anticipation of or
in connection with such Business Combination or otherwise; and
(e) Informational Requirements. A proxy or information statement
--------------------------
describing the proposed Business Combination and complying with the then current
regulatory requirements shall be mailed to holders of voting Stock at least 30
days prior to the shareholder vote on such Business Combination (whether or not
such proxy or information statement is required to be mailed pursuant to such
Act or subsequent provisions).
C. For the purpose of this Section 9:
1. The term "Business Combination" shall mean any transaction that
is referred to in any one or more subsections 1 through 5 paragraph A hereof.
2. A "person" shall mean any individual, firm, corporation or other
entity.
3. "Interested Shareholder" shall mean any person (other than the
Bank) who or which:
a. is the beneficial owner, directly or indirectly, of more
than 10 percent of the combined voting power of the then outstanding shares of
Voting Stock;
b. is an Affiliate of the Bank and at any time within the
two-year period prior immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 10 percent or more of the combined
voting power of the then outstanding shares of Voting Stock; or
c. is an assignee of or has otherwise succeeded to the
bencficial ownership of any shares of Voting Stock that were at any time within
the two-year period immediately prior to the date in question beneficially owned
by any Interested Shareholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not involving
a public offering within the meaning of the Securities Act of 1933.
4. A person shall be a "Beneficial Owner" of any Voting Stock:
a. which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly;
b. which such person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable immediately or only
after the passage of time) pursuant
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to any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise, or (ii)
the right to vote or direct the vote pursuant to any agreement, arrangement or
understanding; or
c. which is beneficially owned, directly or indirectly, by any other
person with which such person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of any shares of Voting Stock.
5. For the purposes of determining whether a person is an Interested
Shareholder pursuant subparagraph 3 of this paragraph C, the number of shares of
Voting Stock deemed to be outstanding shall include shares deemed owned through
application of subparagraph 4 of this paragraph C.
6. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934.
7. "Subsidiary" means any corporation more than fifty percent (50%) of
whose outstanding stock having ordinary voting power in the election of
directors is owned, directly or indirectly, by the corporation or by a
Subsidiary thereof or by the corporation and one or more Subsidiaries thereof;
provided, however, that for the purposes of the definition of Interested
Shareholder set forth in subparagraph 3 of this paragraph C, the term
"Subsidiary" shall mean only a corporation of which a majority of each class of
equity security is owned, directly or indirectly, by the Bank.
8. "Disinterested Director" means any member of the Board of Directors of
the Bank who is unaffiliated with, and not a nominee of, the Interested
Shareholder and was a member of the Board prior to the time that the Interested
Shareholder became an Interested Shareholder, and any successor of a
Disinterested Director who is unaffiliated with, and not a nominee of, the
Interested Shareholder and who is recommender to succeed a Disinterested
Director by a majority of Disinterested Directors then on the Board of
Directors.
9. "Fair Market Value" means:
a. in the case of stock, the highest closing sale price during the
30-day period immediately preceding the date in question of a share of such
stock on the Composite Tape for New York Stock Exchange Listed Stocks, or, if
such stock is not quoted on the Composite Tape on the New York Stock Exchange,
or, if such stock is not listed on such Exchange, on the principal United States
securities exchange registered under the Securities Exchange Act of 1934 on
which such stock is listed, or, if such stock is not listed on any such
exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which such stock is listed, or, if such
stock is not listed on any such exchange, of a share of such stock. Such price
shall be the higher of (1) the closing sales price or bid quotation with respect
to a share of such stock during the 30-day period preceding the date in question
on the National Association of Securities Dealers, Inc. Automated Quotations
System or any system then in use, or if no such quotation are
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<PAGE>
available, the fair market value on the date in question of a share of such
stock as determined by a majority of the Disinterested Directors in good faith;
and (2) in the case of stock of any class or series which is not traded on any
United States registered securities exchange nor in the over-the-counter market
or in the case of property other than cash or stock, the fair market value of
such property on the date in question as determined by a majority of the
Disinterested Directors in good faith.
10. In the event of any Business Combination in which the
corporation survives, the phrase "any consideration other than cash" as used in
subparagraph 2.a. of paragraph B hereof shall include the shares of common stock
and/or the shares of any class or series of outstanding Voting Stock other than
common stock of the corporation retained by the holders of such shares.
11. "Announcement Date" means the date of first public announcement
of the proposed Business Combination.
12. "Consummation Date" means the date of consummation of a
Business Combination.
13. "Determination Date" means the date on which the Interested
Shareholder became an Interested Shareholder.
D. A majority of the Disinterested Directors of the Corporation shall
have the power and duty to determine, on the basis of information known to them
after reasonable inquiry, all facts necessary to determine compliance with this
Section 9, including, without limitation, (i) whether a person is an Interested
Shareholder, (ii) the number of shares of Voting Stock beneficially owned by a
person, (iii) whether a person is an Affiliate or Associate of another person,
(iv) whether the requirements of paragraph B hereof have been met with respect
to any Business Combination, and (v) whether the assets which are the subject of
any Business Combination have, or the consideration to be received for the
issuance or transfer of securities by the corporation or any subsidiary in any
Business Combination has, an aggregate Fair Market Value of $100,000 or more.
The good faith determination of a majority of the Disinterested Directors on
such matters shall be conclusive and binding for all purposes of this Section 9.
E. Nothing contained in this Section 9 shall be construed to relieve any
Interested Shareholder from any fiduciary obligation imposed by law.
F. This Section 9 may be amended only by the vote of holders of two-
thirds of the Voting Stock, unless the amendment is approved by a majority of
the Disinterested Directors, in which event it may be amended by the vote of
holders of a majority of the Voting Stock.
SECTION 10. STANDARDS FOR BOARD OF DIRECTORS EVALUATION OF OFFERS. The
Board of Directors of the Bank, when evaluating any offer of another person (as
defined in Section 9 hereof) to (i) make a tender or exchange offer for any
equity security of the Bank, (ii) merge or consolidate the Bank with another
institution, or (iii) purchase or otherwise acquire all or substantially all of
the properties and assets of the Bank, shall, in connection with the exercise of
its judgment in determining what is in the best interests of the Bank and its
stockholders, give due consideration to
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<PAGE>
all relevant factors, including without limitation the social and economic
effects of acceptance of such offer on (a) its depositors, borrowers and
employees and on the communities in which the Bank operates or is located and
(b) the ability of the bank to fulfill the objectives of a Massachusetts-charted
co-operative bank under applicable statues and regulations.
SECTION 11. DIRECTORS. The Bank shall be under the direction of a Board of
Directors. The number of directors, as stated in the Bank's Bylaws, shall not be
less than seven or more than 25.
The Board of Directors or the stockholders may adopt, alter, amend or
repeal the Bylaws of the Bank. Such action by the Board of Directors shall
require the affirmative vote of at least two-thirds of the directors then in
office at a duly constituted meeting of the Board of Directors called expressly
for such purpose. Such action by the stockholders shall require the affirmative
vote of at least two-thirds of the total votes eligible to be cast by
stockholders at a duly constituted meeting of stockholders called expressly for
such purpose.
SECTION 12. AMENDMENT OF CHARTER. No amendment, addition, alteration,
change or repeal of this Charter shall be made, unless such is first proposed by
the Board of Directors of the Bank and thereafter approved by the stockholders
by a majority of the total votes eligible to be cast at a legal meeting. Any
amendment, addition, alteration, change or repeal so acted upon shall be
effective on the date it is filed with the Secretary of State of the
Commonwealth of Massachusetts or on such other date as the Secretary of State
may specify.
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<PAGE>
================================================================================
BYLAWS
OF
FALMOUTH BANCORP, INC.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ARTICLE I
OFFICES................................ 1
-------
Section I Registered Office........................................... 1
Section II Additional Offices.......................................... 1
ARTICLE II
STOCKHOLDERS.............................. 1
------------
Section I Place of Meetings........................................... 1
Section II Annual Meetings............................................. 1
Section III Special Meetings............................................ 1
Section IV Notice of Meetings.......................................... 1
Section V Waiver of Notice............................................ 2
Section VI Fixing of Record Date....................................... 2
Section VII Quorum...................................................... 2
Section VIII Conduct of Meetings......................................... 2
Section IX Voting; Proxies............................................. 3
Section X Inspectors of Election...................................... 3
Section XI Procedure for Nominations................................... 3
Section XII Substitution of Nominees.................................... 4
Section XIII New Business................................................ 4
ARTICLE III
CAPITAL STOCK............................. 5
-------------
Section I Certificates of Stock....................................... 5
Section II Transfer Agent and Registrar................................ 6
Section III Registration and Transfer of Shares......................... 6
Section IV Lost, Destroyed and Mutilated Certificates.................. 6
Section V Holder of Record............................................ 6
ARTICLE IV
BOARD OF DIRECTORS........................... 6
------------------
Section I Responsibilities; Number of Directors....................... 6
Section II Qualifications.............................................. 7
Section III Regular and Annual Meetings................................. 7
Section IV Special Meetings............................................ 7
Section V Notice of Meetings; Waiver of Notice........................ 7
Section VI Conduct of Meetings......................................... 7
Section VII Quorum and Voting Requirements.............................. 7
Section VIII Informal Action by Directors................................ 8
Section IX Resignation................................................. 8
Section X Vacancies................................................... 8
Section XI Compensation................................................ 8
Section XII Amendments Concerning the Board............................. 8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE V
COMMITTEES............................... 8
----------
Section I Standing Committees......................................... 8
Section II Nominating Committee........................................ 9
Section III Other Committees............................................ 9
ARTICLE VI
OFFICERS
--------................................ 9
Section I Number...................................................... 9
Section II Term of Office and Removal.................................. 9
Section III President and Chief Executive Officer....................... 9
Section IV Vice Presidents............................................. 10
Section V Treasurer................................................... 10
Section VI Secretary................................................... 10
Section VII Other Officers and Employees................................ 10
Section VIII Compensation of Officers and Others......................... 10
ARTICLE VII
DIVIDENDS............................... 10
---------
ARTICLE VIII
AMENDMENTS............................... 11
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</TABLE>
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<PAGE>
BYLAWS
OF
FALMOUTH BANCORP, INC.
ARTICLE I
OFFICES
-------
SECTION I REGISTERED OFFICE. The registered office of Falmouth
Bancorp, Inc. (the "Corporation") in the State of Delaware shall be in the City
of Wilmington, County of New Castle.
SECTION II ADDITIONAL OFFICES. The Corporation may also have offices
and places of business at such other places, within or without the State of
Delaware, as the Board of Directors (the "Board") may from time to time
designate or the business of the Corporation may require.
ARTICLE II
STOCKHOLDERS
------------
SECTION I PLACE OF MEETINGS. Meetings of stockholders of the
Corporation shall be held at such place, within or without the State of
Delaware, as may be fixed by the Board and designated in the notice of meeting.
If no place is so fixed, they shall be held at the principal administrative
office of the Corporation.
SECTION II ANNUAL MEETINGS. The annual meeting of stockholders of
the Corporation for the election of directors and the transaction of any other
business which may properly come before such meeting shall be held each year on
the third Tuesday in January at 5:00 p.m., unless a different hour or place is
designated by the Board.
SECTION III SPECIAL MEETINGS. Special meetings of stockholders, for
any purpose, may be called at any time only by the Chairman of the Board, the
President and Chief Executive Officer or by resolution of at least three-fourths
of the directors then in office. Special meetings shall be held on the date and
at the time and place as may be designated by the Board. At a special meeting,
no business shall be transacted and no corporate action shall be taken other
than that stated in the notice of meeting.
SECTION IV NOTICE OF MEETINGS. Except as otherwise required by law,
written notice stating the place, date and hour of any meeting of stockholders
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered to each stockholder of record entitled to
vote at such meeting, either personally or by mail not less than ten (10) nor
more than sixty (60) days before the date of such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the U.S. mail, with
postage thereon prepaid, addressed to the stockholder at his or her address as
it appears on the stock transfer books or records of the Corporation as of the
record date prescribed in Section 6 of this Article II, or at such other address
as the stockholder shall have furnished in writing to the Secretary. Notice of
any special meeting shall indicate that the notice is being issued by or at the
direction of the person or persons calling such meeting. When any meeting of
stockholders, either annual or special, is adjourned to another time or place,
no notice
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<PAGE>
of the adjourned meeting need be given, other than an announcement at the
meeting at which such adjournment is taken giving the time and place to which
the meeting is adjourned; provided, however, that if the adjournment is for more
than thirty (30) days, or if after adjournment, the Board fixes a new record
date for the adjourned meeting, notice of the adjourned meeting shall be given
to each stockholder of record entitled to vote at the meeting.
SECTION V WAIVER OF NOTICE. Notice of any annual or special
meeting need not be given to any stockholder who submits a signed waiver of
notice of any meeting, in person or by proxy or by his or her duly authorized
attorney-in-fact, whether before or after the meeting. The attendance of any
stockholder at a meeting, in person or by proxy, shall constitute a waiver of
notice by such stockholder, except where a stockholder attends a meeting for the
express purpose of objecting at the beginning of the meeting to the transaction
of any business because the meeting is not lawfully called or convened.
SECTION VI FIXING OF RECORD DATE. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or stockholders entitled to receive payment of any
dividend or other distribution or the allotment of any rights, or in order to
make a determination of stockholders for any other proper purpose, the Board
shall fix a date as the record date for any such determination of stockholders,
which date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board. Such date in any case shall be not more
than sixty (60) days and, in the case of a meeting of stockholders, not less
than ten (10) days prior to the date on which the particular action requiring
such determination of stockholders is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this Section 6, such determination shall, unless otherwise provided
by the Board, also apply to any adjournment thereof. If no record date is fixed,
(a) the record date for determining stockholders entitled to notice of or vote
at a meeting of stockholders shall be at the close of business on the day next
preceding the day on which the notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held, and (b) the record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
SECTION VII QUORUM. The holders of record of a majority of the total
number of votes eligible to be cast in the election generally by the holders of
the outstanding shares of the capital stock of the Corporation entitled to vote
thereat, represented in person or by proxy, shall constitute a quorum for the
transaction of business at a meeting of stockholders, except as otherwise
provided by law, these Bylaws or the Certificate of Incorporation. If less than
a majority of such total number of votes are represented at a meeting, a
majority of the number of votes so represented may adjourn the meeting from time
to time without further notice, provided, that if such adjournment is for more
than thirty days, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting. At such adjourned meeting
at which a quorum is present, any business may be transacted that might have
been transacted at the meeting as originally called. When a quorum is once
present to organize a meeting of stockholders, such quorum is not broken by the
subsequent withdrawal of any stockholders.
SECTION VIII CONDUCT OF MEETINGS. The President shall serve as
chairman at all meetings of the stockholders. If the President is absent or
otherwise unable to serve, the ranking Vice-President shall serve as chairman at
any meeting of stockholders held in such absence. If both the President and the
ranking Vice-President are absent or otherwise unable to serve, such other
person as shall be appointed by the Board of Directors shall serve as chairman
at any meeting of stockholders held in such absence. The Secretary or, in his or
her absence, such other person as the chairman of the meeting shall appoint,
shall serve as secretary of the meeting. The chairman of the meeting shall
conduct all meetings of the stockholders in accordance with the best interests
of the Corporation and shall have the authority and discretion to establish
reasonable procedural rules for the conduct of such meetings, including such
regulation of the manner of voting and the conduct of discussion as he or she
shall deem appropriate.
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<PAGE>
SECTION IX VOTING; PROXIES. Each stockholder entitled to vote at
any meeting may vote either in person or by proxy. Unless otherwise specified in
the Certificate of Incorporation or in a resolution, or resolutions, of the
Board providing for the issuance of preferred stock, each stockholder entitled
to vote shall be entitled to one vote for each share of capital stock registered
in his or her name on the transfer books or records of the Corporation.
Each stockholder entitled to vote may authorize another person or persons to act
for him or her by proxy. All proxies shall be in writing, signed by the
stockholder or by his or her duly authorized attorney-in-fact, and shall be
filed with the Secretary before being voted. No proxy shall be valid after three
(3) years from the date of its execution unless otherwise provided in the proxy.
The attendance at any meeting by a stockholder who shall have previously given a
proxy applicable thereto shall not, as such, have the effect of revoking the
proxy. The Corporation may treat any duly executed proxy as not revoked and in
full force and effect until it receives a duly executed instrument revoking it,
or a duly executed proxy bearing a later date. If ownership of a share of voting
stock of the Corporation stands in the name of two or more persons, in the
absence of written directions to the Corporation to the contrary, any one or
more of such stockholders may cast all votes to which such ownership is
entitled. If an attempt is made to cast conflicting votes by the several persons
in whose names shares of stock stand, the vote or votes to which those persons
are entitled shall be cast as directed by a majority if those holding such stock
and present at such meeting. If such conflicting votes are evenly split on any
particular matter, each faction may vote the securities in question
proportionally, or any person voting the shares, or a beneficiary, if any, may
apply to the Court of Chancery or such other court as may have jurisdiction to
appoint an additional person to act with the persons so voting the shares, which
shall then be voted as determined by a majority of such persons and the person
appointed by the Court. Except for the election of directors or as otherwise
provided by law, the Certificate of Incorporation or these Bylaws, at all
meetings of stockholders, all matters shall be determined by a vote of the
holders of a majority of the number of votes eligible to be cast by the holders
of the outstanding shares of capital stock of the Corporation present and
entitled to vote thereat. Directors shall, except as otherwise required by law,
these Bylaws or the Certificate of Incorporation, be elected by a plurality of
the votes cast by each class of shares entitled to vote at a meeting of
stockholders, present and entitled to vote in the election.
SECTION X INSPECTORS OF ELECTION. In advance of any meeting of
stockholders, the Board shall appoint one or more persons, other than officers,
directors or nominees for office, as inspectors of election to act at such
meeting or any adjournment thereof. Such appointment shall not be altered at the
meeting. If inspectors of election are not so appointed, the chairman of the
meeting shall make such appointment at the meeting. If any person appointed as
inspector fails to appear or fails or refuses to act at the meeting, the vacancy
so created may be filled by appointment by the Board in advance of the meeting
or at the meeting by the chairman of the meeting. The duties of the inspectors
of election shall include determining the number of shares outstanding and the
voting power of each, the shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, receiving votes, ballots or
consents, hearing and deciding all challenges and questions arising in
connection with the right to vote, counting and tabulating all votes, ballots or
consents, determining the results, and doing such acts as are proper to the
conduct of the election or the vote with fairness to all stockholders. Any
report or certificate made by them shall be prima facie evidence of the facts
stated and of the vote as certified by them. Each inspector shall be entitled to
a reasonable compensation or his or her services, to be paid by the Corporation.
SECTION XI PROCEDURE FOR NOMINATIONS. Subject to the provisions
hereof, the Board of Directors shall act as a Nominating Committee to select
nominees for election as directors. Except in the case of a nominee substituted
as a result of the death, incapacity, withdrawal or other inability to serve of
a nominee, the Nominating Committee shall deliver written nominations to the
Secretary at least twenty (20) days prior to the date of the annual meeting.
Provided the Nominating Committee makes such nominations, no nominations for
directors except those made by the Nominating Committee shall be voted upon at
the annual meeting of stockholders unless other nominations by stockholders are
made in accordance with the provisions of this Section 11. Nominations of
individuals for election to the Board at a meeting of stockholders may be made
by any stockholder of record of the Corporation entitled to vote for the
election of directors at such meeting who
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<PAGE>
provides timely notice in writing to the Secretary as set forth in this Section
11. To be timely, a stockholder's notice must be delivered to or received by the
Secretary not later than the following dates: (i) with respect to an election of
directors to be held at an annual meeting of stockholders, sixty (60) days in
advance of such meeting if such meeting is to be held on a day which is within
thirty (30) days preceding the anniversary of the previous year's annual
meeting, or ninety (90) days in advance of such meeting if such meeting is to be
held on or after the anniversary of the previous year's annual meeting; and (ii)
with respect to an election to be held at an annual meeting of stockholders held
at a time other than within the time periods set forth in the immediately
preceding clause (i), or at a special meeting of stockholders for the election
of directors, the close of business on the tenth (10th) day following the date
on which notice of such meeting is first given to stockholders. For purposes of
this Section 11, notice shall be deemed to first be given to stockholders when
disclosure of such date of the meeting of stockholders is first made in a press
release reported to Dow Jones News Services, Associated Press or comparable
national news service, or in a document publicly filed by the Corporation with
the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of
the Securities Exchange Act of 1934, as amended. Such stockholder's notice shall
set forth (a) as to each person whom the stockholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) such person's written consent to serve as a director, if
elected, and (iv) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission (whether
or not the Corporation is then subject to such rules); and (b) as to the
stockholder giving the notice (i) the name and address of such stockholder, (ii)
the class and number of shares of the Corporation which are owned of record by
such stockholder and the dates upon which he or she acquired such shares, (iii)
a description of all arrangements or understandings between the stockholder and
nominee and any other person or persons (naming such person or persons) pursuant
to which the nominations are to be made by the stockholder, and (iv) the
identification of any person employed, retained, or to be compensated by the
stockholder submitting the nomination or by the person nominated, or any person
acting on his or her behalf to make solicitations or recommendations to
stockholders for the purpose of assisting in the election of such director, and
a brief description of the terms of such employment, retainer or arrangement for
compensation. At the request of the Board, any person nominated by the Board for
election as a director shall furnish to the Secretary that information required
to be set forth in a stockholder's notice of nomination which pertains to the
nominee together with the required written consent. No person shall be elected
as a director of the Corporation unless nominated in accordance with the
procedures set forth in this Section 11.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not properly brought before the
meeting in accordance with the provisions hereof and, if he should so
determine, he shall declare to the meeting that such nomination was not
properly brought before the meeting and shall not be considered.
SECTION XII SUBSTITUTION OF NOMINEES. In the event that a person is
validly designated as a nominee in accordance with Section 11 of this Article II
and shall thereafter become unwilling or unable to stand for election to the
Board, the Nominating Committee may designate a substitute nominee upon
delivery, not fewer than five (5) days prior to the date of the meeting for the
election of such nominee, of a written notice to the Secretary setting forth
such information regarding such substitute nominee as would have been required
to be delivered to the Secretary pursuant to Section 11 of this Article II had
such substitute nominee been initially proposed as a nominee. Such notice shall
include a signed consent to serve as a director of the Corporation, if elected,
of each such substituted nominee.
SECTION XIII NEW BUSINESS. Any new business to be taken up at the
annual meeting at the request of the Chairman of the Board, the President and
Chief Executive Officer or by resolution of at least three-fourths of the
directors then in office shall be stated in writing and filed with the Secretary
at least fifteen (15) days before the date of the annual meeting, and all
business so stated, proposed and filed shall be con-
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<PAGE>
sidered at the annual meeting, but, except as provided in this Section 13, no
other proposal shall be acted upon at the annual meeting. Any proposal offered
by any stockholder may be made at the annual meeting and the same may be
discussed and considered, but unless properly brought before the meeting such
proposal shall not be acted upon at the meeting. For a proposal to be properly
brought before an annual meeting by a stockholder, the stockholder must be a
stockholder of record and have given timely notice thereof in writing to the
Secretary. To be timely, a stockholder's notice must be delivered to or received
by the Secretary not later than the following dates: (i) with respect to an
annual meeting of stockholders, sixty (60) days in advance of such meeting if
such meeting is to be held on a day which is within thirty (30) days preceding
the anniversary of the previous year's annual meeting, or ninety (90) days in
advance of such meeting if such meeting is to be held on or after the
anniversary of the previous year's annual meeting; and (ii) with respect to an
annual meeting of stockholders held at a time other than within the time periods
set forth in the immediately preceding clause (i), the close of business on the
tenth (10th) day following the date on which notice of such meeting is first
given to stockholders. For purposes of this Section 13, notice shall be deemed
to first be given to stockholders when disclosure of such date of the meeting of
stockholders is first made in a press release reported to Dow Jones News
Services, Associated Press or comparable national news service, or in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as
amended. A stockholder's notice to the Secretary shall set forth as to the
matter the stockholder purposes to bring before the annual meeting (a) a brief
description of the proposal desired to be brought before the annual meeting; (b)
the name and address of the stockholder proposing such business; (c) the class
and number of shares of the Corporation which are owned of record by the
stockholder and the dates upon which he or she acquired such shares; (d) the
identification of any person employed, retained, or to be compensated by the
stockholder submitting the proposal, or any person acting on his or her behalf,
to make solicitations or recommendations to stockholders for the purpose of
assisting in the passage of such proposal, and a brief description of the terms
of such employment, retainer or arrangement for compensation; and (e) such other
information regarding such proposal as would be required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and Exchange
Commission or required to be delivered to the Corporation pursuant to the proxy
rules of the Securities and Exchange Commission (whether or not the Corporation
is then subject to such rules). This provision shall not prevent the
consideration and approval or disapproval at an annual meeting of reports of
officers, directors and committees of the Board or the management of the
Corporation, but in connection with such reports, no new business shall be acted
upon at such annual meeting unless stated and filed as herein provided. This
provision shall not constitute a waiver of any right of the Corporation under
the proxy rules of the Securities and Exchange Commission or any other rule or
regulation to omit a stockholder's proposal from the Corporation's proxy
materials.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that any new business was not properly brought before the
meeting in accordance with the provisions hereof and, if he should so determine,
he shall declare to the meeting that such new business was not properly brought
before the meeting and shall not be considered.
ARTICLE III
CAPITAL STOCK
-------------
SECTION I CERTIFICATES OF STOCK. Certificates representing shares
of stock shall be in such form as shall be determined by the Board. Each
certificate shall state that the Corporation will furnish to any stockholder
upon request and without charge a statement of the powers, designations,
preferences and relative, participating, optional or other special rights of the
shares of each class or series of stock and the qualifications or restrictions
of such preferences and/or rights, or shall set forth such statement on the
certificate itself. The certificates shall be numbered in the order of their
issue and entered in the books of the Corporation or its
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<PAGE>
transfer agent or agents as they are issued. Each certificate shall state the
registered holder's name and the number and class of shares, and shall be
signed by the Chairman of the Board or the President and Chief Executive
Officer, and the Secretary or any Assistant Secretary, and may, but need not,
bear the seal of the Corporation or a facsimile thereof. Any or all of the
signatures on the certificates may be facsimiles. In case any officer who shall
have signed any such certificate shall cease to be such officer of the
Corporation, whether because of death, resignation or otherwise, before such
certificate shall have been delivered by the Corporation, such certificate may
nevertheless be adopted by the Corporation and be issued and delivered as though
the persons or persons who signed such certificate or certificates had not
ceased to be such officer or officers of the Corporation.
SECTION II TRANSFER AGENT AND REGISTRAR. The Board shall have the
power to appoint one or more Transfer Agents and Registrars for the transfer and
registration of certificates of stock of any class, and may require that stock
certificates be countersigned and registered by one or more of such Transfer
Agents and Registrars.
SECTION III REGISTRATION AND TRANSFER OF SHARES. Subject to the
provisions of the Certificate of Incorporation of the Corporation, the name of
each person owning a share of the capital stock of the Corporation shall be
entered on the books of the Corporation together with the number of shares held
by him or her, the numbers of the certificates covering such shares and the
dates of issue of such certificates. Subject to the provisions of the
Certificate of Incorporation of the Corporation, the shares of stock of the
Corporation shall be transferable on the books of the Corporation by the holders
thereof in person, or by their duly authorized attorneys or legal
representatives, on surrender and cancellation of certificates for a like number
of shares, accompanied by an assignment or power of transfer endorsed thereon or
attached thereto, duly executed, with such guarantee or proof of the
authenticity of the signature as the Corporation or its agents may reasonably
require and with proper evidence of payment of any applicable transfer taxes.
Subject to the provisions of the Certificate of Incorporation of the
Corporation, a record shall be made of each transfer.
SECTION IV LOST, DESTROYED AND MUTILATED CERTIFICATES. The holder
of any shares of stock of the Corporation shall immediately notify the
Corporation of any loss, theft, destruction or mutilation of the certificates
therefor. The Corporation may issue, or caused to be issued, a new certificate
of stock in the place of any certificate theretofore issued by it alleged to
have been lost, stolen or destroyed upon evidence satisfactory to the
Corporation of the loss, theft or destruction of the certificate, and in the
case of mutilation, the surrender of the mutilated certificate. The Corporation
may, in its discretion, require the owner of the lost, stolen or destroyed
certificate, or his or her legal representatives, to give the Corporation a bond
sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft, destruction or mutilation of any such
certificate and the issuance of such new certificate, or may refer such owner to
such remedy or remedies as he or she may have under the laws of the State of
Delaware.
SECTION V HOLDER OF RECORD. Subject to the provisions of the
Certificate of Incorporation of the Corporation, the Corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder thereof in fact and shall not be bound to recognize any equitable or
other claim to or interest in such shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise expressly provided by law.
ARTICLE IV
BOARD OF DIRECTORS
------------------
SECTION I RESPONSIBILITIES; NUMBER OF DIRECTORS. The business and
affairs of the Corporation shall be under the direction of the Board. The Board
shall consists of not less than seven (7) nor more than twenty-five (25)
directors. Within the foregoing limits, the number of directors shall be
determined
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only by resolution of the Board. A minimum of three (3) directors shall be
persons other than officers or employees of the Corporation or its subsidiaries
and shall not have a relationship which, in the opinion of the Board (exclusive
of such persons), could interfere with the exercise of independent judgement in
carrying out the responsibilities of a director. No more than two directors
shall be officers or employees of the Corporation or its subsidiaries.
SECTION II QUALIFICATIONS. Each director shall be at least eighteen
(18) years of age.
SECTION III REGULAR AND ANNUAL MEETINGS. An annual meeting of the
Board for the election of officers shall be held, without notice other than
these Bylaws, immediately after, and at the same place as, the annual meeting of
the stockholders, or, with notice, at such other time or place as the Board may
fix by resolution. The Board may provide, by resolution, the time and place,
within or without the State of Delaware, for the holding of regular meetings of
the Board without notice other than such resolution.
SECTION IV SPECIAL MEETINGS. Special meetings of the Board may be
called for any purpose at any time by or at the request of the Chairman of the
Board or the President and Chief Executive Officer. Special meetings of the
Board shall also be called by the Secretary upon the written request, stating
the purpose or purposes of the meeting, of at least a majority of the directors
then in office. The persons authorized to call special meetings of the Board
shall give notice of such meetings in the manner prescribed by these Bylaws and
may fix any place, within or without the Corporation's regular business area, as
the place for holding any special meeting of the Board called by such persons.
No business shall be conducted at a special meeting other than that specified in
the notice of meeting.
SECTION V NOTICE OF MEETINGS; WAIVER OF NOTICE. Except as otherwise
provided in Section 4 of this Article IV, at least twenty-four (24) hours notice
of meetings shall be given to each director if given in person, by same-day
courier or by telephone, telegraph, telex, facsimile or other electronic
transmission and at least five (5) days notice of meetings shall be given if
given in writing and delivered by courier (other than same-day) or by postage
prepaid mail. The purpose of any special meeting shall be stated in the notice.
Such notice shall be deemed given when sent or given to any mail or courier
service (other than same-day) or company providing electronic transmission
service. Any director may waive notice of any meeting by submitting a signed
waiver of notice with the Secretary, whether before or after the meeting. The
attendance of a director at a meeting shall constitute a waiver of notice of
such meeting, except where a director attends a meeting for the express purpose
of objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened.
SECTION VI CONDUCT OF MEETINGS. Meetings of the Board shall be
presided over by the President, and in the absence or incapacity of the
President, the presiding officer shall be the ranking Vice-President. In the
absence or disability of both the President and the ranking Vice-President, a
majority of the entire Board shall designate a director who shall preside
over meetings of the Board. The Secretary or, in his absence, a person appointed
by the President (or other presiding person), shall act as secretary of the
meeting. The President (or other person presiding) shall conduct all meetings of
the Board in accordance with the best interests of the Corporation and shall
have the authority and discretion to establish reasonable procedural rules for
the conduct of Board meetings. At the discretion of the President, any one or
more directors may participate in a meeting of the Board or a committee of the
Board by means of a conference telephone or similar communications equipment
allowing all persons participating in the meeting to hear each other at the same
time. Participation by such means shall constitute presence in person at any
such meeting.
SECTION VII QUORUM AND VOTING REQUIREMENTS. A quorum at any meeting
of the Board shall consist of not less than a majority of the directors then in
office or such greater number as shall be required by law, these Bylaws or the
Certificate of Incorporation, but not less than one-third (1/3) of the total
number.
-7-
<PAGE>
If less than a required quorum is present, the majority of those directors
present shall adjourn the meeting to another time and place without further
notice. At such adjourned meeting at which a quorum shall be represented, any
business may be transacted that might have been transacted at the meeting as
originally notice. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, a majority vote of the directors present at a
meeting, if a quorum is present, shall constitute an act of the Board.
SECTION VIII INFORMAL ACTION BY DIRECTORS. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board of
Directors or such committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors or such committee.
SECTION IX RESIGNATION. Any director may resign at any time by
sending a written notice of such resignation to the principal office of the
Corporation addressed to the Chairman of the Board or the President and Chief
Executive Officer. Unless otherwise specified therein, such resignation shall
take effect upon receipt thereof.
SECTION X VACANCIES. To the extent not inconsistent with the
Certificate of Incorporation and subject to the limitations prescribed by law
and the rights of holders of Preferred Stock, vacancies in the office of
director, including vacancies created by newly created directorships resulting
from an increase in the number of directors, shall be filled only by a vote of a
majority of the directors then holding office, whether or not a quorum, at any
regular or special meeting of the Board called for that purpose. Subject to the
rights of holders of Preferred Stock, no person shall be so elected a director
unless nominated by the Nominating Committee. Subject to the rights of holders
of Preferred Stock, any director so elected shall serve for the remainder of the
full term of the class of directors in which the new directorship was created or
the vacancy occurred and until his or her successor shall be elected and
qualified.
SECTION XI COMPENSATION. From time to time, as the Board deems
necessary, the Board shall fix the compensation of directors and officers of the
Corporation in such one or more forms as the Board may determine.
SECTION XII AMENDMENTS CONCERNING THE BOARD. The number of directors
and other restrictions and qualifications for directors of the Corporation as
set forth in these Bylaws may be altered only by a vote, in addition to any vote
required by law, of two-thirds of the entire Board or by the affirmative vote of
the holders of record of not less than eighty precent (80%) of the total votes
eligible to be cast by holders of all outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors at a meeting
of the stockholders called for that purpose.
ARTICLE V
COMMITTEES
----------
SECTION I STANDING COMMITTEES. At each annual meeting of the Board,
upon recommendation by the Chairman of the Board, the directors shall designate
from their own number, by resolution, the following committees:
(a) Executive Committee
(b) Audit Committee
-8-
<PAGE>
(c) Compensation Committee
(d) Nominating Committee
which shall be standing committees of the Board. The Chairman of the Board shall
appoint a director to fill any vacancy on any committee of the Board. The
members of the committees shall serve at the pleasure of the Board.
SECTION II NOMINATING COMMITTEE. The Board of Directors shall act
as the Nominating Committee for selecting nominees for election as directors.
Notwithstanding the foregoing, no director shall serve on the Nominating
Committee in any capacity in any year during which such director's term as a
director is scheduled to expire. The Nominating Committee shall review
qualifications of and interview candidates for the Board and shall make
nominations for election of board members in accordance with the provisions of
these Bylaws in relation to those suggestions to the Board. The Chairman of the
Board shall designate one member of the Committee to serve as chairman of the
Nominating Committee. A quorum shall consist of at least a majority of the
members of the Committee.
SECTION III OTHER COMMITTEES. The Board may by resolution authorize
such other committees as from time to time it may deem necessary or appropriate
for the conduct of the business of the Corporation. The members of each
committee so authorized shall be appointed by the Board from members of the
Board and/or employees of the Corporation. Each such committee shall exercise
such powers as may be assigned by the Board to the extent not inconsistent with
law, these Bylaws, the Certificate of Incorporation, or resolutions of the
Board.
ARTICLE VI
OFFICERS
--------
SECTION I NUMBER. The Board shall, at each annual meeting, elect
a Chairman of the Board, a President and Chief Executive Officer, a Secretary
and may elect a Vice Chairman, one or more Vice Presidents and such other
officers as the Board from time to time may deem necessary or the business of
the Corporation may require. Any number of offices may be held by the same
person except that no person may simultaneously hold the offices of President
and Chief Executive Officer and Secretary.
The election of all officers shall be by a majority of the directors
then in office. If such election is not held at the meeting held annually for
the election of officers, such officers may be so elected at any subsequent
regular meeting or at a special meeting called for that purpose, in the same
manner above provided. Each person elected shall have such authority, bear such
title and perform such duties as provided in these Bylaws and as the Board may
prescribe from time to time. All officers elected or appointed by the Board
shall assume their duties immediately upon their election and shall hold office
at the pleasure of the Board. Whenever a vacancy occurs among the officers, it
may be filled at any regular or special meeting called for that purpose, in the
same manner as above provided.
SECTION II TERM OF OFFICE AND REMOVAL. Each officer shall serve
until his or her successor is elected and duly qualified, the office is
abolished, or he or she is removed. Except for the Chairman of the Board, the
President and Chief Executive Officer, any officer may be removed at any regular
meeting of the Board with or without cause by an affirmative vote of a majority
of the directors then in office. The Board may remove the Chairman of the Board
or the President and Chief Executive Officer at any time, with or without cause,
only by the unanimous vote of the non-officer directors then holding office at
any regular or special meeting of the Board called for that purpose.
-9-
<PAGE>
SECTION III PRESIDENT AND CHIEF EXECUTIVE OFFICER. The President
shall be the Chief Executive Officer of the Corporation and shall, subject to
the direction of the Board, oversee all major activities of the Corporation and
its subsidiaries and be responsible for assuring that the policy decisions of
the Board are implemented as formulated. The President and Chief Executive
Officer shall be responsible, in consultation with such Officers and members of
the Board as he deems appropriate, for planning the growth of the Corporation.
The President and Chief Executive Officer shall be responsible for stockholder
relations and relations with investment bankers or other similar financial
institutions, and shall be empowered to designate officers of the Corporation
and its subsidiaries to assist in such activities. The President and Chief
Executive Officer shall be principally responsible for exploring and reporting
to the Board all opportunities for mergers, acquisitions and new business. The
President and Chief Executive Officer, under authority given to him, shall have
the authority to sign instruments in the name of the Corporation. The President
and Chief Executive Officer shall have general supervision and direction of all
of the Corporation's officers and personnel, subject to and consistent with
policies enunciated by the Board. Unless otherwise provided by the Board, the
President and Chief Executive Officer shall preside as Chairman, when present,
at all meetings of stockholders and of the Board. The President and Chief
Executive Officer shall have such other powers as may be assigned to him by the
Board or its committees.
SECTION IV VICE PRESIDENTS. Vice Presidents may be appointed by
the Board of Directors to perform such duties as may be prescribed by these
Bylaws, the Board or the President and Chief Executive Officer as permitted by
the Board.
SECTION V TREASURER. The Treasurer shall be the chief accounting
officer of the Corporation and shall be responsible for the maintenance of
adequate systems and records. The Treasurer shall also keep a record of all
assets, liabilities, receipts, disbursements, and other financial transactions,
and shall see that all expenditures are made in accordance with procedures duly
established from time to time by the Board. The Treasurer shall make such
reports as may be required by the Board or as are required by law.
SECTION VI SECRETARY. The Secretary shall attend all meetings of
the Board and of the stockholders, and shall record, or cause to be recorded,
all votes and minutes of all proceedings of the Board and of the stockholders in
a book or books to be kept for that purpose. The Secretary shall perform such
executive and administrative duties as may be assigned by the Board, the
Chairman of the Board or the President and Chief Executive Officer. The
Secretary shall have charge of the seal of the Corporation, shall submit such
reports and statements as may be required by law or by the Board, shall conduct
all correspondence relating to the Board and its proceedings and shall have such
other powers and duties as are generally incident to the office of Secretary and
as may be assigned to him or her by the Board, the Chairman of the Board or the
President and Chief Executive Officer.
SECTION VII OTHER OFFICERS AND EMPLOYEES. Other officers and
employees appointed by the Board shall have such authority and shall perform
such duties as may be assigned to them, from time to time, by the Board or the
President and Chief Executive Officer.
SECTION VIII COMPENSATION OF OFFICERS AND OTHERS. The compensation
of all officers and employees shall be fixed from time to time by the Board, or
by any committee or officer authorized by the Board to do so, upon the
recommendation and report by the Compensation Committee. The compensation of
agents shall be fixed by the Board, or by any committee or officer authorized by
the Board to do so, upon the recommendation and report of the Compensation
Committee.
-10-
<PAGE>
ARTICLE VII
DIVIDENDS
---------
The Board shall have the power, subject to the provisions of law and
the requirements of the Certificate of Incorporation, to declare and pay
dividends out of surplus (or, if no surplus exists, out of net profits of the
Corporation, for the fiscal year in which the dividend is declared and/or the
preceding fiscal year, except where there is an impairment of capital stock), to
pay such dividends to the stockholders in cash, in property, or in shares of the
capital stock of the Corporation, and to fix the date or dates for the payment
of such dividends.
ARTICLE VIII
AMENDMENTS
----------
These Bylaws, except as provided by applicable law or the Certificate
of Incorporation, or as otherwise set forth in these Bylaws, may be amended or
repealed at any regular meeting of the entire Board by the vote of two-thirds of
the Board; provided, however, that (a) a notice specifying the change or
amendment shall have been given at a previous regular meeting and entered in the
minutes of the Board; (b) a written statement describing the change or amendment
shall be made in the notice mailed to the directors of the meeting at which the
change or amendment shall be acted upon; and (c) any Bylaw made by the Board may
be altered, amended, rescinded, or repealed by the holders of shares of capital
stock entitled to vote thereon at any annual meeting or at any special meeting
called for that purpose in accordance with the percentage requirements set forth
in the Certificate of Incorporation and/or these Bylaws. Notwithstanding the
foregoing, any provision of these Bylaws that contains supermajority voting
requirement shall only be altered, amended, rescinded, or repealed by a vote of
the Board or holders of capital stock entitled to vote thereon that is not less
than the supermajority specified in such provision.
-11-
<PAGE>
September 23, 1997
Medford Co-operative Bank
60 High Street
Medford, MA 02155
Dear Sirs:
You have requested our opinion regarding Massachusetts income tax consequences
of the proposed conversion of Medford Co-operative Bank (the "Bank") from a
state-chartered mutual institution to a state chartered stock institution (the
"Conversion"), the sale of all of the outstanding capital stock of the Bank to
Mystic Financial Inc. (the "Holding Company"), a business corporation organized
under the laws of the State of Delaware, and the sale by the Holding Company of
up to 2,357,500 shares of its common stock, par value of $.01 per share (the
"Common Stock") to the Bank's Eligible Account Holders, Supplemental Eligible
------------
Account Holders, Tax Qualified Employee Stock Benefit Plan, and to certain
other parties, pursuant to the Plan of Conversion for Medford Co-operative Bank
adopted by the Board of Directors of the Bank on June 11, 1997 (the "Plan").
These and related transactions are described in the Plan, as submitted to the
Commissioner, the SEC and the FDIC in connection with the Conversion. We are
rendering this opinion pursuant to Section 3 of the Plan. All capitalized terms
used but not defined in this letter shall have the meanings set forth in the
Plan.
In connection with the opinions expressed below, we have relied upon originals
or copies certified or otherwise identified to our satisfaction, of the Plan and
of such corporate records of the Bank and the Holding Company as we have deemed
appropriate. We have also relied, without independent verification, upon the
July 24, 1997 letter of the Bank and the Holding Company to Thacher Proffitt &
Wood containing certain representations. We have assumed that the Bank, the
Holding Company and other parties will act in accordance with the Plan, and that
the representation made by the Bank and the Holding Company in the foregoing
letter are true. In addition, we have made such investigations of law as we have
deemed appropriate to form a basis for the opinions expressed below.
<PAGE>
Page Two
The Bank has received a federal tax opinion from Thacher Proffitt & Wood that,
for federal income tax purposes, under current law:
1. The Bank's change in form from mutual to stock ownership will constitute a
reorganization under section 368(a)(1)(F) of the Internal Revenue Code of
1986, and neither the Bank nor the Holding Company will recognize gain or
loss as a result of the Conversion.
2. No gain or loss will be recognized by the Bank or the Holding Company upon
the purchase of the Bank's capital stock by the Holding Company in the
Conversion, or by the Holding Company upon the sale of shares of Common
Stock pursuant to the Plan.
3. No gain or loss will be recognized by Eligible Account Holders or
Supplemental Eligible Account Holders upon the issuance to them of deposit
accounts in, and interests in the liquidation account of, the Bank in its
stock form in exchange for their deposit accounts in the Bank in its mutual
form.
4. The tax basis of the depositors' deposit accounts in the Bank in its stock
form immediately after the Conversion will be the same as the basis of
their deposit accounts in the Bank in its mutual form immediately prior to
the Conversion.
5. The tax basis of each Eligible Account Holder's and each Supplemental
Eligible Account Holder's interest in the liquidation account of the Bank
will be zero.
6. No gain or loss will be recognized by Eligible Account Holders or by
Supplemental Eligible Account Holders upon the distribution to them of
nontransferable subscription rights to purchase shares of the Common Stock,
provided that the amount to be paid for the Common Stock pursuant to such
subscription rights is equal to the fair market value of such stock.
7. The tax basis to the stockholders of the shares of Common Stock purchased
in the Conversion pursuant to the subscription rights will be the amount
paid therefor, and the holding period for such shares of Common Stock will
begin on the date on which such subscription rights are exercised.
<PAGE>
Page Three
In rendering opinion 6, above, and its opinion regarding the tax basis of shares
of Common Stock in 7, above, Thacher Proffitt & Wood have relied, without
independent verification, on the opinion of R.P. Financial, Inc. that the
nontransferable subscription rights have no value.
Bank Excise Tax
Bank is a state-chartered co-operative bank subject to Massachusetts Bank excise
tax under MGL chapter 63, sections 1, 2 and 7. Holding company will be a
Delaware chartered corporation subject to Massachusetts excise tax under MGL
chapter 63, section 1, 2 and 7 or the excise imposed under MGL chapter 63,
section 38B(b) if Holding Company is classified as a security corporation
pursuant to that section.
MGL c. 63 (S)2 provides that "[e]very financial institution engaged in business
in the commonwealth shall pay, on account of each taxable year, a tax measured
by its net income, as defined in Section two A..." MGL c. 63, (S)1 defines net
income for the purposes of Section 2 as "gross income other than ninety-five
percent of dividends received in any taxable year beginning on or after January
first, nineteen hundred and ninety-nine from or an account of the ownership of
any class of stock if the financial institution owns fifteen percent or more of
the voting stock of the institution paying the dividend, less the deductions,
but not credits, allowable under the provisions of the Internal Revenue Code, as
amended and in effect for the taxable year." M.G.L. c. 63, (S)1 provides gross
income is income as defined under the provisions of the Internal Revenue Code,
as amended and in effect for the taxable year, plus the interest from bonds,
notes, and evidences of indebtedness of any state, including this commonwealth.
MGL c 63 (S)1 provides the term "financial institution" includes any bank,
banking association, trust company, federal or state savings and loan
association, whether of issue or not, existing by authority of the United
States, or any state, or a foreign country or any law of Massachusetts. Such
financial institutions are subject to the tax rates at MGL c. 63, (S) 2A for
their first taxable year beginning on or after January 1, 1995 that they are
subject to Massachusetts tax. The term "financial institution" also includes a
bank holding company and any subsidiary corporation or corporate trust which
participates with it in the filing of a consolidated federal tax return and
certain corporations subject to supervision by the Massachusetts division of
banks or any corporation in substantial competition with financial institutions
that derives more than 50% of its gross income, excluding non-recurring,
extraordinary items, from loan origination, lending or a credit card activities.
<PAGE>
Page Four
Accordingly, based upon the facts and representation stated herein, it is the
opinion of Wolf & Company, P.C. regarding the Massachusetts excise tax effect of
the planned reorganization that:
1. Provided that the Conversion qualities as a tax-free reorganization within
the meaning of section 368(a)(1)(F) of the code, the Conversion will also
qualify as a tax-free reorganization for Massachusetts excise tax
purposes (Massachusetts Letter Rulings 84-11, 83-53 and 83-61).
2. No gain or loss shall be recognized by the Bank or the Holding Company on
the receipt by the Bank of money from the Holding Company in exchange for
shares of the Bank's capital stock or by the Holding Company upon receipt
of money from the sale of its Common Stock (Massachusetts Letter Ruling 87-
11, Section 1032(a) of the Code).
3. The basis of the assets of the Bank shall be the same as the basis of such
assets in the hands of the Bank immediately prior to the Conversion
(Massachusetts Letter Ruling 84-11, Section 362(b) of the Code).
4. The holding period of the assets of the Bank shall include the period
during which the Bank held the assets immediately prior to the Conversion
(Section 1223(2) of the Code and Massachusetts Letter Ruling 84-11).
5. No gain or loss will be recognized by the Eligible Account Holders and the
Supplemental Eligible Account Holders of the Bank on the constructive
issuance to them of withdrawable deposit accounts in the Bank plus
interests in the liquidation account of the Bank after the Conversion in
exchange for their deposit accounts in the Bank or to the other depositors
on the issuance to them of withdrawable deposit accounts (Massachusetts
Letter Ruling 84-11 and Section 354(a) of the Code).
<PAGE>
Page Five
6. Provided that the amount to be paid for such stock pursuant to the
subscription rights is equal to the fair market value of the stock, no gain
or loss will be recognized by Eligible Account Holders and Supplemental
Eligible Account Holders upon the distribution to them of the
nontransferable subscription rights to purchase shares of stock in the
Holding Company (Section 356(a) and Massachusetts Letter Ruling 84-11).
Gain realized, if any, by the Eligible Account Holders and Supplemental
Eligible Account on the distribution to them of nontransferable
subscription rights to purchase shares of Common Stock will be recognized
but only in an amount not in excess of the fair market value of such
subscription rights (Section 356(a) and Massachusetts Letter Ruling 84-11).
Eligible Account Holders and Supplemental Account Holders will not realize
any taxable income as a result of the exercise by them of the
nontransferable subscription rights (Massachusetts Letter Ruling 84-11).
7. The basis of the deposit accounts in the Bank after the Conversion to be
received by the Eligible Account Holders, Supplemental Eligible
Account Holders and other depositors of the Bank will be same as the basis
of their deposit accounts in the Bank surrendered in exchange therefor
(Section 358(a)(1) of the Code and Massachusetts Letter Rulings 84-11 and
83-61). The basis of the interests in the liquidation account of the Bank
to be received by the Eligible Account Holders of the Bank shall be zero
(Massachusetts Letter Rulings 84-11 and 83-61). The basis of the Holding
Company Common Stock to its stockholders will be the purchase price thereof
plus the fair market value, if any, of nontransferable subscription rights
(Section 1012 of the Code and Massachusetts Letter Rulings 84-11 and 83-
61). Accordingly, assuming the nontransferable subscription rights have no
value, the basis of the Common Stock to the Eligible Account Holders and
Supplemental Eligible Account Holders will be the amount paid therefor. The
holding period of the Common Stock purchased pursuant to the exercise of
subscription rights shall commence on the date on which the right to
acquire such stock was exercised (Section 1223(6) of the Code and
Massachusetts Letter Ruling 84-11 and 83-61).
8. Under MGL Chapter 63, Sections 1,2 and 7, after the Conversion, the Bank
will be treated as the same Bank as if the Conversion had not occurred
(Massachusetts Letter Ruling 84-11). Accordingly:
a) the part of the current taxable year of the Bank before the Conversion
and the part of the current taxable year of the Bank after the
Conversion will constitute a single taxable year of the Bank;
<PAGE>
Page Six
b) the Bank will succeed to and take into account the net operating
income of the Bank as of the date of the Conversion;
c) for the current taxable year, the Bank may claim as a credit any
estimated tax under MGL Chapter 63, Sections 2 paid by the Bank prior
to the Conversion.
9. The lending of money from the Holding Company to the ESOP plan will not
prevent Holding Company from qualifying as a Massachusetts Security
Corporation provided that Holding Company does not conduct any other
activities deemed impermissible under MGL Chapter 63, Section 38B, and the
various regulations, announcements and letter rulings issued by the DOR.
Our opinion under paragraph (6) above is predicated on the representation that
no person shall receive any payment, whether in money or property, in lieu of
the issuance of subscription rights. Our opinion under paragraphs (6) and (7)
above assumes that the subscription rights to purchase shares of Common Stock
received by Eligible Account Holders and Supplemental Eligible Account Holders
have a fair market value of zero. We understand that you have received a letter
from R.P. Financial, Inc. that the subscription rights do not have any value. We
express no view regarding the valuation of the subscription rights.
If the subscription rights are subsequently found to have a fair market value,
income may be recognized by various recipients of the subscription rights (in
certain cases, whether or not the, rights are exercised) and Holding Company
and/or the Bank may be taxable on the distribution of the subscription
rights.
Our opinion assumes that the Conversion qualifies under Code Section 368(a) as a
tax free reorganization. We understand that the federal tax opinion is being
rendered by Thacher Proffitt & Wood.
We express no view regarding whether the Conversion qualifies as a tax free
reorganization under the Code.
We consent to the inclusion of this opinion as an exhibit to the Application for
Conversion and Form S-1 Registration Statement of Mystic Financial, Inc. and the
references to and summary of this opinion in such Application for Conversion and
Form S-1 Registration Statement.
<PAGE>
Page Seven
CONCLUSION
- ----------
THE OPINIONS CONTAINED HEREIN ARE RENDERED ONLY WITH RESPECT TO THE SPECIFIC
MATTERS DISCUSSED HEREIN AND WE EXPRESS NO OPINION WITH RESPECT TO ANY OTHER
LEGAL, FEDERAL, STATE, OR LOCAL TAX ASPECT OF THESE TRANSACTIONS. THIS OPINION
IS NOT BINDING UPON ANY TAX AUTHORITY INCLUDING THE MASSACHUSETTS DEPARTMENT OF
REVENUE OR ANY COURT AND NO ASSURANCE CAN BE GIVEN THAT A POSITION CONTRARY TO
THAT EXPRESSED HEREIN WILL NOT BE ASSERTED BY A TAX AUTHORITY.
IN RENDERING OUR OPINIONS WE ARE RELYING UPON THE RELEVENT PROVISIONS OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED, MASSACHUSETTS GENERAL LAWS AND THE
REGULATIONS, JUDICIAL AND ADMINISTRATIVE INTERPRETATIONS THEREOF, ALL AS OF THE
DATE OF THIS LETTER.
HOWEVER, ALL OF THE FOREGOING AUTHORITIES ARE SUBJECT TO CHANGE OR MODIFICATION
WHICH CAN BE RETROACTIVE IN EFFECT AND, THEREFORE, COULD ALSO AFFECT OUR
OPINIONS. WE UNDERTAKE NO RESPONSIBILITY TO UPDATE OUR OPINIONS FOR ANY
SUBSEQUENT CHANGE OR MODIFICATION.
Very truly yours ,
Wolf & Company, P.C.
<PAGE>
[LETTERHEAD OF WOLF COMPANY, P.C.]
================================================================================
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form S-1 and Prospectus
of Mystic Financial, Inc. (proposed holding company for Medford Co-operative
Bank) of our report dated July 29, 1997, on the consolidated balance sheets of
Medford Co-operative Bank as of June 30, 1997 and 1996, and the related
consolidated statements of income, changes in surplus and cash flows for each of
the years in the three-years period ended June 30, 1997 and to the use of our
name and the statements with respect to us, as appearing under the heading
"Experts" in the Prospectus.
/s/ Wolf & Company, P.C.
Wolf & Company, P.C.
Boston, Massachusetts
October 15, 1997
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 3,953
<INT-BEARING-DEPOSITS> 197
<FED-FUNDS-SOLD> 2,075
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,819
<INVESTMENTS-CARRYING> 17,504
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<LOANS> 115,545
<ALLOWANCE> 977
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0
0
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<INTEREST-INCOME-NET> 4,988
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<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.84
<LOANS-NON> 365
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 742
<CHARGE-OFFS> 57
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 977
<ALLOWANCE-DOMESTIC> 977
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
MEDFORD CO-OPERATIVE BANK
Medford, Massachusetts
Proposed Marketing Materials
<PAGE>
Marketing Materials for
Medford Co-operative Bank
Table of Contents
-----------------
I. Press Release
A. Explanation
B. Schedule
C. Distribution List
D. Examples
II. Question and Answer Brochure
A. Explanation
B. Method of Distribution
C. Example
III. Officer and Director Brochure
A. Explanation
B. Method of Distribution
C. Example
IV. IRA Mailing
A. Explanation
B. Method of Distribution
C. Example
V. Counter Cards, Lobby Posters and a Tombstone Announcement
A. Explanation
B. Quantity
C. Examples (Enclosed)
VI. Community Meetings Materials
A. Explanation
B. Quantity - Method of Distribution
C. Letters to Prospects
D. Examples (Enclosed)
<PAGE>
VII. Cover Letters for Initial Mailings
A. Explanation
B. Examples
<PAGE>
I. Press Releases
A. Explanation
In an effort to assure that all customers, community members and other
interested investors receive prompt accurate information in a simultaneous
manner, Trident advises the Bank to forward press releases to national and
regional publications, newspapers, radio stations, etc. at various points
during the conversion process.
Only press releases approved by Conversion Counsel will be forwarded for
publication in any manner.
B. Press Releases
1. Approval of Conversion by the Commissioner of the Massachusetts
Division of Banks
2. Close of Stock Offering
C. Distribution Lists (see attached)
D. Examples (see attached)
<PAGE>
C. National Media Distribution List
-----------------------------------
American Banker
- ---------------
One State Street Plaza
New York, New York 10004
Michael Weinstein
Business Wire
- -------------
212 South Tryon
Suite 1460
Charlotte, North Carolina 28281
Wall Street Journal
- -------------------
World Financial Center
200 Liberty
New York, New York 10004
SNL Securities
- --------------
Post Office Box 2124
Charlottesville, Virginia 22902
Barrons
- -------
Dow Jones & Company
Barron's Statistical Information
200 Burnett Road
Chicopee, Massachusetts 01020
Investors Business Daily
- ------------------------
12655 Beatrice Street
Post Office Box 661750
Los Angeles, California 90066
<PAGE>
Local Media Distribution
------------------------
The Bank should provide a supplemental distribution list which includes all
local newspapers that it considers to be within its market area.
(Forthcoming)
<PAGE>
Press Release
FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
Robert H. Surabian, President
Telephone: (617) 395-2800
MEDFORD CO-OPERATIVE BANK
-------------------------
STOCK SALE APPROVED
-------------------
Mr. Robert H. Surabian, President of Medford Co-operative Bank ("the
Bank"), Medford, Massachusetts, announced today that the Bank has received
approval from the Commissioner of the Massachusetts Division of Banks to convert
from a Massachusetts chartered mutual co-operative bank to a Massachusetts
chartered stock co-operative bank (the "Conversion").
Under the Plan of Conversion, the Bank will issue all of its capital
stock to Mystic Financial, Inc. (the "Company"), the proposed holding company
for the Bank, and the Company will offer an estimated 2,050,000 shares of its
common stock at $10.00 per share. Certain of the Bank's past and present
depositors who held qualifying deposits in the Bank as of certain specified
dates will have the first opportunity to purchase stock through a subscription
offering that closes on ________ __, 1997. A prospectus describing the stock
offering will be mailed to certain depositors of the Bank on or about ________
__, 1997. Shares that are not subscribed for during the Subscription Offering,
if any, will be offered to natural persons residing in the communities of
Medford, Malden, Everett, Stoneham, Arlington, Winchester, Somerville, Melrose,
Lexington and Bedford, Massachusetts in a Direct Community Offering. A minimum
of 25 Shares must be purchased by each person purchasing Conversion Stock to the
extent Shares are available, provided, however, that such minimum number of
Shares will be reduced if the price per Share times such minimum number of
Shares exceeds $500.
<PAGE>
It is anticipated that shares not subscribed for in the Subscription Offering
and Direct Community Offering, if any, will be offered to certain members of the
general public in a Syndicated Community Offering. The offerings are being
managed by Trident Securities, Inc. of Raleigh, North Carolina. The Bank's
savings accounts, the balances of the individual accounts and existing insurance
coverage from both the FDIC and the Share Insurance Fund of the Co-operative
Central Bank will not be affected by the Conversion. Furthermore, the Conversion
will not affect the loan accounts, the balances of these accounts and the
obligations of the borrowers under their individual contractual arrangement with
the Bank.
Medford Co-operative Bank is located in Medford, Massachusetts. The
Bank was founded in 1886. At June 30, 1997, the Bank had total assets of $149.7
million and total capital of $11.9 million. Customers or interested members of
the community with questions concerning the stock offering should call the Stock
Information Center at (617) ________, or visit the Bank Stock Information
Center.
<PAGE>
Press Release FOR IMMEDIATE RELEASE
---------------------
Contact: Robert H. Surabian,
President
Telephone: (617) 395-2800
MEDFORD CO-OPERATIVE BANK
-------------------------
COMPLETES INITIAL STOCK OFFERING
--------------------------------
Medford, Massachusetts - Mr. Robert H. Surabian, President of Medford
Co-operative Bank ("the Bank"), based in Medford, Massachusetts, announced today
that the Bank has completed its conversion from a Massachusetts chartered mutual
co-operative bank to a Massachusetts chartered stock co-operative bank. Under
the Plan of Conversion, the Bank will issue all of its capital stock to Mystic
Financial, Inc. (the "Company"), the proposed holding company for the Bank, and
the Company will offer an estimated 2,050,000 shares of its common stock at
$10.00 per share. The Conversion will not affect the loan accounts, the balances
of these accounts and the obligations of the borrowers under their individual
contractual arrangement with the Bank
Orders from depositors of the Bank as of March 31, 1996 and March 31,
1997 were completely filled and orders from non-customers residing in Medford,
Malden, Everett, Stoneham, Arlington, Winchester, Somerville, Melrose, Lexington
and Bedford counties were pro-rated. Trading is anticipated to commence on the
NASDAQ/NMS under the trading symbol "MYST" on the morning of ________ __, ____.
The net proceeds of the offering are to be used for general corporate
purposes permitted by applicable law and regulations, including primarily the
origination of residential real estate loans and other investments. In addition,
such general corporate purposes include, without limitation, enhancing
<PAGE>
the Bank's capital position, funding, in part, the construction and acquisition
of one or more branch locations, increasing lending activity as well as access
to capital markets for future capital needs. Pending such use of the net
proceeds of the offering investments will be made in short-term investment
securities such as U. S. government and government agency securities and
interest bearing deposits in order to, among other things, decrease the Bank's
interest rate sensitivity.
On October 28, 1997, the Bank's Plan of Conversion was approved by the
Bank's depositor shareholders at a Special Meeting of Members.
Mr. Surabian indicated that the Officers and Board of Directors of the
Bank want to express their thanks for the response by customers and the
community to the stock offering and that the Bank looks forward to serving the
needs of its customers as a stock institution.
Trident Securities, Inc., Raleigh, North Carolina managed the
Subscription and Community Offerings for the Bank.
<PAGE>
Press Release FOR IMMEDIATE RELEASE
---------------------
Contact: Robert H. Surabian,
President
Telephone: (617) 395-2800
MEDFORD CO-OPERATIVE BANK
-------------------------
ANTICIPATES COMPLETION OF INITIAL STOCK OFFERING
------------------------------------------------
Medford, Massachusetts - Mr. Robert H. Surabian, President of Medford
Co-operative Bank ("the Bank"), based in Medford, Massachusetts, announced today
that the Bank expects to complete its conversion from a Massachusetts chartered
mutual co-operative bank to a Massachusetts chartered stock co-operative bank on
________ __, 1997. Under the Plan of Conversion, the Bank will issue all of its
capital stock to Mystic Financial, Inc. (the "Company"), the proposed holding
company for the Bank, and the Company will offer an estimated 2,050,000 shares
of its common stock at $10.00 per share. Trading is anticipated to commence on
the NASDAQ/NMS under the trading symbol "MYST" on the morning of ________ __,
1997.
Trident Securities, Inc., Raleigh, North Carolina managed the
Subscription and Community Offerings for the Bank.
<PAGE>
II. Question and Answer Brochure
A. Explanation
The Question and Answer brochure is an essential marketing piece in any
conversion. It serves to answer some of the most commonly asked questions
in "plain, everyday language." Although most of the answers are taken
verbatim from the Prospectus, it assists the individual in finding answers
to simple questions.
Conversion Counsel approves the language for each Question and Answer.
Trident and the Bank will be responsible for any introductory or concluding
remarks, design, layout, color and paper stock. This will be coordinated
through Trident in conjunction with the financial printer.
B. Method of Distribution
There are four primary methods of distribution of the Question and Answer
brochure. However, regardless of the method, the brochure is always
accompanied by A prospectus.
1. A Question and Answer brochure is sent out in the initial mailing to
all members of the Bank.
2. Question and Answer brochures are available in the Bank's office.
3. Question and Answer brochures are distributed in information packets
at Community meetings.
4. Question and Answer brochures are sent out in a standard information
packet to all interested investors who phone the Stock Information
Center requesting information.
C. Example
<PAGE>
Medford Co-operative Bank
Medford, Massachusetts
Questions and Answers Regarding the Subscription and Community Offering
MUTUAL TO STOCK CONVERSION
--------------------------
Medford Co-operative Bank's Board of Directors has unanimously voted to convert
the Bank from its present mutual form to a stock form. Complete details on the
conversion, including reasons for conversion, are contained in the Prospectus.
We ask you to please read them.
This brochure is provided to answer basic questions you might have about the
conversion. Remember, the conversion will not affect the rate on any of your
savings accounts, deposit certificates or loans.
1. Q. What is a "Conversion"?
A. Conversion is a change in the legal form of organization from a mutual
to a stock institution. The Bank currently operates as a Massachusetts
chartered mutual co-operative bank with no public stockholders.
Through the conversion, the Bank will issue all of its capital stock
to Mystic Financial, Inc., the proposed holding company for the Bank.
Mystic will offer common stock to the depositors of the Bank and to
the community, as described below, and will be a publicly-owned
company.
2. Q. Why is Medford Co-operative Bank converting?
A. The stock form of ownership is used by most business corporations and
an increasing number of savings institutions. The Bank has reached an
important point in its development with its decision to convert to the
stock form of ownership. It is expected that the substantial capital
raised by issuing stock will achieve the following:
* The Bank, as a mutual co-operative bank, does not have
stockholders and has no authority to issue capital stock. By
converting to the stock form of organization, the Bank will be
structured in the form used by commercial banks, most business
entities and a growing number of savings institutions. The
Conversion will be important to the future growth and performance
of the Bank by providing a larger capital base on which the Bank
may operate, enhancing future access to capital markets,
providing the ability to attract and retain qualified management
through stock-based compensation programs, enhancing the Bank's
and the Company's ability to diversify into other financial
services related activities and enhancing the Bank's and the
Company's ability to render services to the public.
The board of directors and management of the Bank believe that
the stock form of organization is a preferred form (as opposed to
the mutual form) of organization for a
<PAGE>
financial institution. The Board and management recognize the
decline in the number of mutual thrift institutions from over
12,500 in 1929 to just over 800 today.
The Bank believes that converting to the stock form of
organization will allow the Bank to more efficiently compete with
local community banks and thrift institutions, most of which are
stock owned, and with statewide, regional and super-regional
banks, all of which are stock owned. The Bank believes that by
combining quality service and products with a local ownership,
base its customers and community members who become stockholders
will be more inclined to do business with the Bank.
Additionally, the Bank has, from time to time, experienced the
need for additional liquidity, due in part to the expansion of
the commercial and commercial real estate loan department and the
need for funds to originate such loans. Recently, the Bank has
utilized borrowings from the FHLB and has engaged in selected
loan sales as a source of liquidity. The Bank believes that the
capital-raising power of a stock form company would help to meet
the need for additional liquidity.
Furthermore, because the Bank competes with local, regional and
super-regional banks not only for customers, but also for
employees, it believes that the stock form of organization will
better afford the Bank the opportunity to attract and retain
employees and management through various stock benefit plans like
the ESOP.
Finally, the Board considers having access to the capital markets
an important option for the Bank. While immediately following the
Conversion the Bank will be well capitalized, the Bank's capital
could decrease as a result of unforeseen circumstances affecting
the economic viability of the Bank's market area. The protection
of this additional capital against such an economic downturn is
seen by management as a key benefit of the Conversion.
Finally, because the Bank competes with local, regional and
super-regional banks not only for customers, but also for
employees, it believes that the stock form of organization will
better afford the Bank the opportunity to attract and retain
employees and management through various stock benefit plans like
the ESOP.
* Those Conversion proceeds will be added to the general funds of
the Bank and used for general corporate purposes, including the
origination of loans, funding the construction and/or the
acquisition costs of establishing new branch locations, enhancing
the Bank's liquidity ratios and enhancing future access to
capital markets. The balance of the funds will be retained as the
Company's initial capitalization, with a portion of those funds
being loaned to the ESOP to fund its purchase of Common Stock in
the Offerings or, if necessary, to purchase shares of Common
Stock through open-market purchases following completion of the
Offerings. The Company may use the funds it retains to support
future expansion of operations or diversification into other
banking-related businesses and for other business or investment
purposes, although management has no current plans regarding such
activities. Subject to applicable limitations, the Company may
also use available funds to repurchase shares of Common Stock and
for the payment of dividends. It is expected that in the interim,
all or part of the net proceeds will be invested in U.S.
Government and Agency securities and other short-term investments
and to reduce borrowings from the FHLB. See "Use of Proceeds."
<PAGE>
3. Q. Will the Conversion have any effect on savings accounts, certificates
of deposit or loans with the Bank?
A. No. The Conversion will not change the amount, interest rate or
withdrawal rights of savings and checking accounts or certificates of
deposit. The rights and obligations of borrowers under their loan
agreements will not be affected.
However, upon conversion, deposit account holders will no longer have
voting rights in Medford Co-operative Bank. All of the capital stock
of the Bank will be owned by Mystic Financial, Inc., the proposed
holding company for the Bank. Deposit account holders who subscribe
for stock in the subscription offering will have voting rights in
Mystic.
4. Q. Will the Conversion cause any changes in personnel or management?
A. No. The Conversion will not cause any changes in personnel or
management. The normal day-to-day operations will continue as before.
5. Q. Did the Board of Directors of the Bank and Members of the Bank approve
the conversion?
<PAGE>
A. Yes. The Board of Directors unanimously approved the Plan of
Conversion on June 11, 1997. The members of Medford Co-operative Bank
approved the conversion at a Special Meeting of Members on October 28,
1997.
THE SUBSCRIPTION AND COMMUNITY OFFERING
---------------------------------------
6. Q. Who is entitled to buy the Bank common stock?
A. The shares of common stock are being offered in a Subscription
Offering pursuant to subscription rights in the following order of
priority: (i) the Bank's qualifying deposit account holders as of
March 31, 1996 with a $50 minimum deposit as of that date ("Eligible
Account Holders"); (ii) the Bank's qualifying deposit account holders
as of March 31, 1997 with a $50 minimum deposit as of that date, who
are not Eligible Account Holders ("Supplemental Eligible Account
Holders"); and (iii) the Bank's tax-qualified employee stock ownership
plan (as defined in the Plan of Conversion); Concurrently with the
Subscription Offering, shares not subscribed for in the Subscription
Offering may be offered to natural persons residing in the communities
of Medford, Malden, Everett, Stoneham, Arlington, Winchester,
Somerville, Melrose, Lexington and Bedford, Massachusetts through a
Direct Community Offering subject to the Bank's right to reject orders
in the Direct Community Offering in whole or in part. It is
anticipated that shares not subscribed for in the Subscription
Offering and Direct Community Offering, if any, will be offered to
certain members of the general public in a Syndicated Offering.
7. Q. How do I subscribe for shares of stock?
A. Eligible customers wishing to exercise their subscription rights must
complete a Stock Order Form and return it along with full payment or
appropriate instructions authorizing a withdrawal from a deposit
account at the Bank for shares to the Bank on or prior to the close of
the Subscription Offering which is 3:30 P.M., Eastern standard time on
______, 1997. Members of the public residing in the communities of
Medford, Malden, Everett, Stoneham, Arlington, Winchester, Somerville,
Melrose, Lexington and Bedford, Massachusetts who wish to order stock
directly from the Bank in the Direct Community Offering should return
their Stock Order Form and accompanying payment to the Bank prior to
3:30 P.M. Eastern standard time on _______, 1997. Other members of the
general public should contact the Stock Information Center for
additional information.
8. Q. How can I pay for my subscription?
<PAGE>
A. First, you may pay for your stock by cash, check, bank draft,
negotiable order of withdrawal or money order. These funds will earn
interest at the Bank's passbook rate from the day we receive them
until the completion or termination of the conversion. As of the date
hereof, the passbook rate is ____%. Stock orders with cash must be
delivered by hand to the Bank's office.
Second, you may authorize us to withdraw funds from your Bank savings
account or certificate of deposit at the Bank without early withdrawal
penalty. These funds will continue to earn interest at the rate in
effect for your account until completion of the offering at which time
your funds will be withdrawn for your purchase. Funds remaining in
this account (if any) will continue at the contractual rate unless the
withdrawal reduces the account balance below the applicable minimum in
which case you will receive interest at the passbook rate. A hold will
be placed on your account for the amount you specify for stock
payment. You will not have access to these funds from the day we
receive your order until the completion or termination of the
conversion.
If you want to use Individual Retirement Account deposits to purchase
stock, call our Stock Information Center at (617) _______ for
assistance. There will be no early withdrawal or IRS penalties
incurred by these transactions.
9. Q. When must I place my order for shares of stock?
A. To exercise subscription rights in the Subscription Offering, a Stock
Order Form must be received by the Bank with full payment for all
shares subscribed for not later than 3:30 P.M., Eastern standard time
on _______, 1997.
Persons residing in the communities of Medford, Malden, Everett,
Stoneham, Arlington, Winchester, Somerville, Melrose, Lexington and
Bedford, Massachusetts desiring to order shares through the Direct
Community Offering may order shares before the close of the Community
Offering, which may commence at any time on or after the commencement
of the Subscription Offering.
10. Q. How many shares of stock are being offered?
A. The Company is offering an estimated 2,050,000 shares of common stock
at a price of $10.00 per share. The number of shares may be decreased
to as low as 1,742,500 or increased to as much as 2,711,125 in
response to the independent appraiser's final determination of the pro
forma market value of the Bank at closing.
11. Q. What is the minimum and maximum number of shares that I can purchase
during the offering period?
<PAGE>
A. The Bank will issue all of its capital stock to Mystic Financial, Inc.
(the "Company"), the proposed holding company for the Bank, and the
Company will offer an estimated 2,050,000 shares of its common stock
at $10.00 per share. No Stock Order form will be accepted for less
than 25 shares. No person may purchase more than an aggregate of
$600,000 of common stock in the conversion.
12. Q. How was it determined that between 1,742,500 shares and 2,711,125
shares of stock would be issued at $10.00 per share?
A. The price range was determined through an appraisal of the Bank by RP
Financial, an independent appraisal firm specializing in the thrift
industry.
13. Q. Must I pay a commission on the stock for which I subscribe?
A. You will not pay a commission on stock purchased in the Subscription
Offering or the Community Offering. Conversion expenses including
commissions will be deducted from the proceeds of the offering upon
completion of the Conversion.
14. Q. Will I receive interest on funds I submit for stock purchases?
A. Yes. The Bank will pay its current passbook rate from the date funds
are received (with a completed Stock Order Form) during the
Subscription and Community Offerings until completion of the
Conversion. That rate, as of the date hereof, is ___%.
15. Q. If I have misplaced my Stock Order Form what should I do?
A. The Bank will mail you another order form or you may obtain one from
the Bank office. If you need assistance in obtaining or completing a
Stock Order Form, a Bank employee will be happy to help you.
16. Q. Will there be any dividends paid on the stock?
A. Payment of dividends on the Common Stock will be subject to
determination and declaration by the Board of Directors of Mystic and
the availability of funds therefor. Mystic currently intends to pay
cash dividends on the Common Stock at an initial annual rate of
approximately 2% of the aggregate purchase price, commencing during
the year ending __________ __, ____. Payment of dividends, however,
will depend upon the Company's debt and equity structure, earnings,
regulatory capital requirements and other factors, including economic
conditions, regulatory restrictions and tax considerations noted
herein. Therefore, no assurance can be given that dividends will be
declared or as to the amount and frequency of dividends, if declared.
<PAGE>
17. Q. How much stock do the directors and officers of Medford intend to
purchase through the Subscription Offering?
A. Directors and officers intend to purchase $1,130,000 (5.51% at the
midpoint of the offering) of the stock to be offered in the
conversion. The purchase price paid by directors and officers will be
the same as that paid by customers and the general public.
18. Q. Are the subscription rights transferable to another party?
A. No. Pursuant to state regulations, subscription rights granted to
eligible account holders and other members may be exercised only by
the person(s) to whom they are granted. Any person found to be
transferring subscription rights will be subject to forfeiture of such
rights.
19. Q. I closed my account several months ago. Someone told me that I am
still eligible to buy stock. Is that true?
A. If you were an account holder on the Eligibility Record Date, March
31, 1996, or the Supplemental Eligibility Record Date, March 31, 1997,
you are entitled to purchase stock without regard to whether you
continue to hold your Bank account.
20. Q. May I obtain a loan from the Bank using stock as collateral to
pay for my shares?
A. No. State regulations do not allow the Bank to make loans for this
purpose, but other financial institutions could make a loan for this
purpose.
21. Q. Will the FDIC (Federal Deposit Insurance Corporation) insure the
shares of stock?
A. No. The shares are not and may not be insured by the FDIC.
22. Q. Will there be a market for the stock following the Conversion?
A. The Company has applied to list its common stock on the NASDAQ/NMS
under the symbol "MYST". However, there is no assurance that the stock
will qualify for quotation on that system or that quotations will
continue to be available on that system. Due to the small number of
shares of stock being offered in the Conversion, it is unlikely that
an active trading market will develop and be maintained.
23. Q. Can I purchase stock using funds in an IRA account?
<PAGE>
A. Yes. Contact the Stock Information Center for the necessary forms.
However, it takes several days to process the necessary IRA forms and
therefore it is necessary that your response be received by ________,
1997 to accommodate your interest.
<PAGE>
This information is neither an offer to sell nor a solicitation of an offer to
buy securities. The offer is made only by the Prospectus. A prospectus can be
obtained at the Bank office or by calling the Stock Information Center. There
shall be no sale of stock in any state in which any offer, solicitation of an
offer or sale of stock would be unlawful.
FOR YOUR CONVENIENCE
In order to assist you during the stock offering period, we have
established a Stock Information Center to answer your questions. Please call
collect:
(617) ________
The stock is not insured by the FDIC, the SIF or any other government
agency.
<PAGE>
III. Officer and Director Brochure
A. Explanation
An Officer and Director Brochure merely highlights in brochure form the
stock commitments shown in the Prospectus.
B. Method of Distribution
There are four primary methods of distribution of Officer and Director
Brochures. However, regardless of the method, they are always accompanied
by A prospectus.
1. An Officer and Director Brochure is sent out in the initial
mailing to all members of the Bank.
2. Officer and Director Brochures will be available in the Bank's office.
3. Officer and Director Brochures are distributed in information packets
at Community meetings.
4. Officer and Director Brochures are sent out in a standard information
packet to all interested investors who phone the Stock Information
Center requesting information.
<PAGE>
OFFICER AND DIRECTOR PURCHASE COMMITMENTS
<TABLE>
<CAPTION>
Total
Shares of Aggregate Purchase
Conversion Total Price of
Name Stock Percentage Proposed Purchases
---- ----- ---------- ------------------
<S> <C> <C> <C>
Julie Bernardin 1,000 0.50% $ 10,000
John A. Hackett 5,000 0.24% 50,000
Richard M. Kazanjian 20,000 0.98% 200,000
John J. McGlynn 9,000 0.44% 90,000
Dennis Raimo 2,000 0.10% 20,000
Lorraine P. Silva 10,000 0.49% 100,000
Robert H. Surabian 60,000 2.92% 600,000
All other executive officers
(4 persons) as a group 6,000 0.29% 60,000
------- ---- ----------
Total 113,000 5.51% 1,130,000
======= ==== ==========
</TABLE>
The table above sets forth certain information as to the intended purchases of
the members of the Bank's Board of Directors and executive officers, including
their associates, and by all executive officers and directors and their
associates as a group. The table assumes that 2,050,000 shares will be offered
at $10.00 per share and that sufficient shares will be available to satisfy the
directors' and officers' intent.
This information is neither an offer to sell nor a solicitation of an offer to
buy securities. The offer is made only by the Prospectus.
The stock will not be insured by the FDIC, the SIF or any governmental agency.
<PAGE>
IV. IRA Mailing
A. Explanation
A special IRA mailing is proposed to be sent to all IRA customers of the
Bank in order to alert the customers that funds held in an IRA can be used
to purchase stock. Since this transaction is not as simple as designating
funds from a certificate of deposit like a normal stock purchase, this
letter informs the customer that this process is slightly more detailed and
involves a personal visit to the Bank.
B. Quantity
One IRA letter will be mailed to each IRA customer of the Bank.
<PAGE>
(Bank Letterhead)
___________, 1997
Dear Retirement Account Participant:
As you know Medford Co-operative Bank of Medford, Massachusetts is in the
process of converting from a Massachusetts chartered mutual co-operative bank to
a Massachusetts chartered stock co-operative bank (the "Conversion"). Under the
Plan of Conversion, the Bank will issue all of its capital stock to Mystic
Financial, Inc. (the "Company"), the proposed holding company for the Bank, and
the Company will offer an estimated 2,050,000 shares of its common stock at
$10.00 per share. This does not constitute an offer to sell, or the solicitation
of an offer to buy, shares of Mystic common stock offered in the conversion.
Such offers are made only by means of the Prospectus. There shall be no sale of
stock in any state in which any offer, solicitation of an offer or sale of stock
would be unlawful. The shares of Mystic common stock offered in the conversion
are not deposits and are not insured by the FDIC, the SIF or any other
government agency. The Company is providing current and certain former
depositors and borrowers an opportunity to purchase stock through a Subscription
Offering. Mystic is offering an estimated __________ shares of common stock at
$10.00 per share.
As the holder of a Retirement Account at the Bank you have an opportunity to
become a shareholder of Mystic. If you desire to purchase stock using funds
being held in your Retirement Account, we can assist you in self-directing those
funds which are currently held in certificates of deposit. This process can be
done without an early withdrawal penalty or without a negative tax consequence
to your retirement account. The stock that you purchase would be held in a self-
directed retirement plan.
If you are interested in receiving more information on self-directing your
IRA, please contact our Stock Information Center at (617) _______. This
transaction cannot be done through the mail and will require that you visit the
Bank office. Furthermore, it takes several days to process the necessary IRA
forms and regulations concerning retirement accounts require that your response
be received by _________, 1997 to accommodate your interest.
Sincerely,
Robert H. Surabian
President
<PAGE>
V. Counter Cards, Lobby Posters and the Tombstone Announcement
A. Explanation
Counter cards, lobby posters and the tombstone announcement serve three
purposes: (1) As a notice to the Bnak's customers and members of the local
community that the stock sale is underway; (2) to remind the customers of
the end of the Subscription Offering; and (3) to invite members of the
community to an informational meeting, if applicable. Trident has learned
in the past that many people need reminding of the deadline for subscribing
and therefore we suggest the use of these simple reminders.
B. Quantity
Approximately 3 - 4 counter cards will be used at the Bank's offices, at
teller windows and on customer service representatives' desks. These
counter cards will be exact duplicates of the lobby poster and will be no
larger than 8-1/2" x 11".
Approximately 1 - 2 lobby posters will be used at the office of the Bank.
These posters will be approximately 2' x 3'.
Tombstone announcements may be used for placement in local newspapers. The
advertisements will run no more than twice each in the local newspaper. The
ads will be no larger than 8-1/2" x 11".
C. Examples enclosed
<PAGE>
POSTER
Medford Co-operative Bank
STOCK OFFERING MATERIALS
AVAILABLE HERE
Customer Priority Rights for the Stock Offering
Expire on _______, 1997
<PAGE>
- --------------------------------------------------------------------------------
This announcement is neither an offer to sell nor a solicitation of
an offer to buy these securities. The offer is made only by the Prospectus.
These shares have not been approved or disapproved by the Securities and
Exchange Commission, the Massachusetts Division of Banks, or Federal
Deposit Insurance Corporation, nor has such Commission, Division or
Corporation passed upon the accuracy or adequacy of the Prospectus.
Any representation to the contrary is unlawful.
New Issue _________, 1997
__________ Shares
These shares are being offered pursuant
to a Plan of Conversion whereby
MEDFORD CO-OPERATIVE BANK
of Medford, Massachusetts will
convert from a Massachusetts mutual co-operative bank
to a Massachusetts stock co-operative bank
Common Stock
---------------
Price $10.00 Per Share
---------------
Copies of the Prospectus may be obtained in any State in
which this announcement is circulated from such of the
undersigned or other brokers and dealers as may legally
offer these securities in such state.
TRIDENT SECURITIES, INC.
For a copy of the Prospectus call (617) ________.
- --------------------------------------------------------------------------------
<PAGE>
VI. Community Meeting Materials
A. Explanation
In order to educate the public about the stock offering, Trident suggests
holding Community meetings in various locations. In an effort to target a
group of interested investors, Trident requests that each Director of the
Bank submit a list of acquaintances that he or she would like to invite to
a Community meeting.
B. Method of Distribution of Invitations and Prospect Letters
Each Director submits his list of prospects.
Invitations are sent to each Director's prospects through the mail. All
invitations are preceded by a prospectus and all attendees are given a
prospectus at the meeting. Letters will be sent to prospects to thank them
for their attendance and to remind them of closing dates.
C. Examples enclosed
<PAGE>
* Sent to prospects who are customers *
Date
&salutation& &firstname& &lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
Recently you may have read in the newspaper that Medford Co-operative
Bank ("the Bank") will convert from a Massachusetts chartered mutual
co-operative bank to a Massachusetts chartered stock co-operative bank (the
"Conversion"). Under the Plan of Conversion, the Bank will issue all of its
capital stock to Mystic Financial, Inc. (the "Company"), the proposed holding
company for the Bank, and the Company will offer an estimated 2,050,000 shares
of its common stock at $10.00 per share. This is the most significant event in
the history of the Bank in that it allows customers, community members,
employees and directors the opportunity to share in the Bank's future by
becoming charter stockholders of the Company.
As a customer of the Bank, you should have received a packet of
information regarding the conversion, including a prospectus. This does not
constitute an offer to sell, or the solicitation of an offer to buy, shares of
common stock offered in the conversion. Such offers are made only by means of
the Prospectus. There shall be no sale of stock in any state in which any offer,
solicitation of an offer or sale of stock would be unlawful. The shares of the
Company common stock offered in the conversion are not deposits and are not
insured by the FDIC, the SIF or any other government agency. In addition, we are
holding several presentations for friends of the officers and directors to
discuss the stock offering in more detail. You will receive an invitation in the
near future.
Please feel free to call me or the Bank's Stock Information Center
at (617) _______ if you have any questions. I look forward to seeing you at one
of our informational presentations.
Sincerely,
Robert H. Surabian
President
<PAGE>
* Sent to prospects who are not customers *
Date
&salutation& &firstname& &lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
Recently you may have read in the newspaper that Medford Co-operative
Bank ("the Bank") will be converting from a Massachusetts chartered mutual
co-operative bank to a Massachusetts chartered stock co-operative bank (the
"Conversion"). Under the Plan of Conversion, the Bank will issue all of its
capital stock to Mystic Financial, Inc. (the "Company"), the proposed holding
company for the Bank, and the Company will offer an estimated 2,050,000 shares
of its common stock at $10.00 per share. This is the most significant event in
the history of the Bank in that it allows customers, community members,
employees and directors the opportunity to share in the Bank's future by
becoming charter stockholders of the Company.
_________ has asked that you be sent a prospectus and stock order form
which will allow you to become a charter stockholder, should you desire. In
addition, we are holding several presentations for friends of the officers and
directors to discuss the stock offering in more detail. You will receive an
invitation in the near future.
Please feel free to call me or the Bank's Stock Information Center
at (617) _______ if you have any questions. I look forward to seeing you at one
of our informational presentations.
Sincerely,
Robert H. Surabian
President
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Mystic common stock offered in the conversion. Such offers are
made only by means of the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
<PAGE>
* Sent to individuals requesting information *
Date
&salutation& &firstname& &lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
Enclosed you will find the offering materials relating to the mutual to
stock conversion (the "Conversion") of Medford Co-operative Bank ("the Bank").
Under the Plan of Conversion, the Bank will issue all of its capital stock to
Mystic Financial, Inc. (the "Company"), the proposed holding company for the
Bank, and the Company will offer an estimated 2,050,000 shares of its common
stock at $10.00 per share.
In connection with the conversion, the Company is offering an estimated
2,050,000 shares of its common stock at a price of $10.00 per share. Please
review the enclosed Prospectus so that you may make an informed investment
decision based on your individual financial situation. If you wish to purchase
stock, the enclosed order form should be completed and returned to the Bank no
later than 3:30 P.M. Eastern time, on ________, 1997.
If you have any questions concerning the conversion, please feel free
to call the Bank Stock Information Center at (617) _________.
Sincerely,
Robert H. Surabian
President
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Mystic common stock offered in the conversion. Such offers are
made only by means of the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
<PAGE>
The Directors and Officers
of
Medford Co-operative Bank
cordially invite you to attend a brief
presentation regarding the stock offering
Please join us at the
Place
Address
Date
at 6:00 p.m.
for hors d'oeuvres
R.S.V.P.
(617) ________ (Collect)
<PAGE>
* Sent to those attending a community meeting *
Date
&salutation& &firstname& &lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
Thank you for attending our informational presentation relating to
Medford Co-operative Bank's ("the Bank") conversion to a stock bank. The
information presented at the meeting and the Prospectus you recently received
should assist you in making an informed investment decision.
Obviously, we are excited about this stock offering and the opportunity
to share in the future of the Bank. This conversion is the most important event
in our history and it gives the Bank the strength and corporate flexibility to
compete in the future.
We will contact you in the near future to get an indication of your
interest in our offering. In the meantime, if your investment decision is made,
feel free to return your order form at your convenience, but not later than
________, 1997. If you have any questions, please call the Stock Information
Center at (617) ________.
Sincerely,
Robert H. Surabian
President
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Mystic common stock offered in the conversion. Such offers are
made only by means of the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
<PAGE>
* Sent to those not attending a community meeting *
Date
&salutation& &firstname& &lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
I am sorry you were unable to attend our recent presentation regarding
Medford Co-operative Bank's ("the Bank") mutual to stock conversion. The Board
of Directors and management team of the Bank are committed to contributing to
long term shareholder value and as a group we are personally investing
approximately $1,130,000 of our own funds. We are enthusiastic about the stock
offering and the opportunity to share in the future of the Bank.
We have established a Stock Information Center to assist you with any
questions regarding the stock offering. Should you require any assistance
between now and ________, 1997, I encourage you to either stop by our Stock
Information Center or call (617) _______.
I hope you will join me as a charter stockholder in Medford
Co-operative Bank.
Sincerely,
Robert H. Surabian
President
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Mystic common stock offered in the conversion. Such offers are
made only by means of the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
<PAGE>
* Final Reminder Letter *
Date
&salutation&firstname&lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
Just a quick note to remind you that the deadline for purchasing stock
in Mystic Financial, Inc. is quickly approaching. I hope you will join me in
becoming a charter stockholder in one of Massachusetts' newest publicly owned
financial institutions.
The deadline for becoming a charter stockholder is _______, 1997. If
you have any questions, I hope you will call our Stock Information Center at
(617) _______.
Once again, I look forward to having you join me as a charter
stockholder in Mystic Financial, Inc.
Sincerely,
Robert H. Surabian
President
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Mystic common stock offered in the conversion. Such offers are
made only by means of the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
<PAGE>
VII. Cover Letters for Initial Meeting
A. Explanation
These cover letters are used as an introduction for the Offering
materials mailed to potential investors.
B. Examples
<PAGE>
(Blue Sky Letter)
(Bank Letterhead)
____________, 1997
Dear Valued Customer:
Medford Co-operative Bank ("the Bank") is pleased to announce that we
have received regulatory approval to convert to a Massachusetts chartered stock
co-operative bank (the "Conversion"). Under the Plan of Conversion, the Bank
will issue all of its capital stock to Mystic Financial, Inc. (the "Company"),
the proposed holding company for the Bank, and the Company will offer an
estimated 2,050,000 shares of its common stock at $10.00 per share. This stock
conversion is the most significant event in the history of the Bank in that it
allows customers, community members, directors and employees an opportunity to
own stock in the Company.
For over 111 years, the Bank has successfully operated as a mutual
bank. We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on the Bank
deposits, or the terms or conditions of any loans to existing borrowers under
their individual contract arrangements with the Bank. Indeed, we expect the
Conversion to enhance our ability to meet a wider range of your financial needs.
Let us also assure you that the Conversion will not result in any
changes in the management, personnel or the Board of Directors of the Bank.
Unfortunately, the securities laws of the state in which you reside
prohibit the Bank from making an offer, solicitation of an offer or sale of
common stock without prior registration. As a result of the small number of Bank
depositors in your state, the Bank has deemed that the costs and requirements of
filing are not justifiable. Therefore, we regret that we are unable to offer
common stock to you.
We look forward to continuing to provide quality financial services to
you in the future. If you have any questions, please call the Stock Information
Center collect at (617) _______.
Sincerely,
Robert H. Surabian
President
Enclosures
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Mystic common stock offered in the conversion. Such offers are
made only by means of the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
<PAGE>
(Mailing to Interested Investors)
(Bank Letterhead)
____________, 1997
Dear Interested Investor:
Medford Co-operative Bank ("the Bank") is pleased to announce that we
have received regulatory approval to convert to a Massachusetts chartered stock
co-operative bank (the "Conversion"). Under the Plan of Conversion, the Bank
will issue all of its capital stock to Mystic Financial, Inc. (the "Company"),
the proposed holding company for the Bank, and the Company will offer an
estimated 2,050,000 shares of its common stock at $10.00 per share. This stock
conversion is the most significant event in the history of the Bank in that it
allows customers, community members, directors and employees an opportunity to
own stock in the Company.
For over __ years, the Bank has successfully operated as a mutual bank.
We want to assure you that the Conversion will not affect the terms, balances,
interest rates or existing FDIC insurance coverage on the Bank deposits, or the
terms or conditions of any loans to existing borrowers under their individual
contract arrangements with the Bank. Indeed, we expect the Conversion to enhance
our ability to meet a wider range of your financial needs.
Let us also assure you that the Conversion will not result in any
changes in the management, personnel or the Board of Directors of the Bank.
Enclosed is a prospectus which fully describes the Bank, its
management, board and financial strength. Please review it carefully before you
make an investment decision. If you decide to invest, please return to the Bank
a properly completed stock order form together with full payment for shares at
your earliest convenience but not later than 3:30 P.M. Eastern Time on _____,
1997. For your convenience we have established a Stock Information Center. If
you have any questions, please call the Stock Information Center collect at
(617) _______.
We look forward to continuing to provide quality financial services to
you in the future.
Sincerely,
Robert H. Surabian
President
Enclosures
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Mystic common stock offered in the conversion. Such offers are
made only by means of the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
<PAGE>
(Mailing to Friends and Members)
(Bank Letterhead)
____________, 1997
Dear Valued Customer:
Medford Co-operative Bank ("the Bank") is pleased to announce that we
have received regulatory approval to convert to a Massachusetts chartered stock
co-operative bank (the "Conversion"). Under the Plan of Conversion, the Bank
will issue all of its capital stock to Mystic Financial, Inc. (the "Company"),
the proposed holding company for the Bank, and the Company will offer an
estimated 2,050,000 shares of its common stock at $10.00 per share. This stock
conversion is the most significant event in the history of the Bank in that it
allows customers, community members, directors and employees an opportunity to
own stock in the Company.
For over __ years, the Bank has successfully operated as a mutual bank.
We want to assure you that the Conversion will not affect the terms, balances,
interest rates or existing FDIC insurance coverage on the Bank deposits, or the
terms or conditions of any loans to existing borrowers under their individual
contract arrangements with the Bank. Indeed, we expect the Conversion to enhance
our ability to meet a wider range of your financial needs.
Let us also assure you that the Conversion will not result in any
changes in the management, personnel or the Board of Directors of the Bank.
Our records indicate that you were a depositor of the Bank either on
March 31, 1996 or March 31, 1997. Therefore, in accordance with the Bank's Plan
of Conversion, you are entitled to subscribe for Common Stock in Mystic's
Subscription Offering.
If you decide to exercise your subscription rights to purchase shares,
you must return the properly completed stock order form together with full
payment for the subscribed shares so that it is received at the Bank not later
than 3:30 P.M. Eastern Time on ______, 1997.
Enclosed is a prospectus which fully describes the Bank, its
management, board and financial strength. Please review it carefully before you
invest. For your convenience we have established a Stock Information Center. If
you have any questions, please call the Stock Information Center collect at
(617) _______.
We look forward to continuing to provide quality financial services to
you in the future.
Sincerely,
Robert H. Surabian
President
Enclosures
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Mystic common stock offered in the conversion. Such offers are
made only by means of the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
