<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1998
REGISTRATION NO. 333-63601
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
PRE-EFFECTIVE AMENDMENT NO. 1
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
FIRST SOURCE BANCORP, INC.
(exact name of registrant as specified in its certificate of incorporation)
6036
DELAWARE 22-3566151 (Primary Standard
(state or other (IRS Employer Industrial
jurisdiction of Identification No.) Classification Code
incorporation or Number)
organization)
---------------
1000 WOODBRIDGE CENTER DRIVE
WOODBRIDGE, NEW JERSEY 07095
(732) 726-9700
(Address, including zip code, and telephone number,
including area code, of registrants' principal executive offices)
---------------
JOHN P. MULKERIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1000 WOODBRIDGE CENTER DRIVE
WOODBRIDGE, NEW JERSEY 07095
(732) 726-9700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
JOSEPH G. PASSAIC, JR., ESQUIRE SAMUEL J. MALIZIA, ESQUIRE
PHILIP G. FEIGEN, ESQUIRE MALIZIA, SPIDI, SLOANE & FISCH,
PATTON BOGGS LLP P.C.
2550 M STREET, N.W. ONE FRANKLIN SQUARE
WASHINGTON, D.C. 20037 1301 K STREET, N.W.
(202) 457-6000 SUITE 700 EAST
WASHINGTON, D.C. 20005
(202) 434-4660
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
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<CAPTION>
PROPOSE MAXIMUM PROPOSE MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(1)
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<S> <C> <C> <C> <C>
Common Stock, Par Value $0.01 per
share.......................... 13,625,152 $6.01 $81,819,038 $24,137
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee has
been computed pursuant to Rule 457(f)(1) under the Securities Act of 1933,
as amended, based on the average of the high and low prices for shares of
Common Stock of Pulse Bancorp, Inc. ("Pulse") reported on the Nasdaq Stock
Market on September 10, 1998, and the maximum number of such shares
(3,406,288) that may be exchanged for the securities being registered. The
proposed maximum offering price per share has been determined by dividing
the portion of the proposed maximum aggregate offering price by the number
of shares being registered.
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
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.
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<PAGE>
FIRST SOURCE BANCORP, INC.
CROSS-REFERENCE SHEET BETWEEN ITEMS IN FORM S-4 AND PROSPECTUS
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NO. FORM S-4 CAPTION HEADING IN PROSPECTUS
-------- ---------------- ---------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
Item 1. Forepart of Registration Statement and
Outside Front Cover Page of Cover Page of Registration Statement;
Prospectus............................ Cross Reference Sheet; Outside Front
Cover Page of Prospectus
Item 2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front Cover Page of Prospectus;
Table of Contents; Available
Information; Incorporation of Certain
Documents by Reference
Item 3. Risk Factors; Ratio of Earnings to
Fixed Charges and Other Information... Summary; The Meetings; The Merger
Item 4. Terms of the Transaction.............. Summary; The Merger; Certain Related
Transactions; Description of First
Source Capital Stock; Comparison of
Stockholder Rights
Item 5. Pro Forma Financial Information....... Summary; Unaudited Pro Forma Combined
Selected Financial Data; Unaudited Pro
Forma Condensed Combined Financial
Statements
Item 6. Material Contracts with the Company
Being Acquired........................ Summary; The Merger; Certain Related
Transactions
Item 7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters............. *
Item 8. Interests of Named Experts and
Counsel............................... *
Item 9. Disclosure of Commission Position of
Indemnification for Securities Act
Liabilities........................... *
B. INFORMATION ABOUT THE REGISTRANT
Item Information with Respect to S-3 Available Information; Incorporation
10. Registrants........................... of Certain Documents by Reference;
Summary; The Merger; Unaudited Pro
Forma Combined Selected Financial
Data; Unaudited Pro Forma Condensed
Combined Financial Information
Item Incorporation of Certain Information Incorporation of Certain Documents by
11. by Reference.......................... Reference
Item Information with Respect to S-2 or S-3
12. Registrants........................... *
Item Incorporation of Certain Information
13. by Reference.......................... *
Item Information with Respect to
14. Registrants Other than S-2 or S-3
Registrants........................... *
C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
Item Information with Respect to S-3 Available Information; Incorporation
15. Companies............................. of Certain Documents by Reference;
Summary
Item Information with Respect to S-2 or S-3
16. Companies............................. *
Item Information with Respect to Companies
17. Other than S-2 or S-3 Companies....... *
D. VOTING AND MANAGEMENT INFORMATION
Item Information if Proxies, Consents or
18. Authorizations Are to be Solicited.... Summary; The Meetings; The Merger
Item Information if Proxies, Consents or
19. Authorizations Are Not to be Solicited
in an Exchange Offer.................. *
</TABLE>
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*Omitted because inapplicable or answer is in the negative.
<PAGE>
FIRST SOURCE BANCORP, INC.
Dear First Source Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
First Source Bancorp, Inc. ("First Source") which will be held on Wednesday,
December 16, 1998 at 10:30 a.m., local time, at the Sheraton at Woodbridge
Place, 515 Route 1 South, Iselin, New Jersey (the "Special Meeting"). At this
meeting, you will be asked to consider and vote upon: (i) a proposal to
approve an Agreement and Plan of Merger, dated July 9, 1998 (the "Merger
Agreement"), pursuant to which Pulse Bancorp, Inc. ("Pulse") will be merged
with and into First Source and the stockholders of Pulse will become
stockholders of First Source; (ii) a proposal to approve and adopt the First
Source Bancorp, Inc. 1998 Stock-Based Incentive Plan (the "Incentive Plan");
and (iii) a proposal to approve and adopt an amendment to the First Source
Certificate of Incorporation to change the name of the company to First
Sentinel Bancorp, Inc. (the "Corporate Name Amendment").
Your shares of First Source Common Stock will be unaffected by the merger.
Upon consummation of the merger, Pulse's former stockholders will own
approximately 26.8% of First Source's outstanding common stock, assuming the
merger was completed as of October 30, 1998 at an Exchange Ratio of 3.710.
The proposed merger has been unanimously approved by the Board of Directors
of each company. Your Board of Directors believes that the merger will provide
significant value to First Source's stockholders by extending the markets
served by First Source and allowing First Source to provide a broader array of
services to Pulse's customers. Your Board has determined that the merger is in
the best interests of First Source and its stockholders and unanimously
recommends that you vote FOR approval of the Merger Agreement. The investment
banking firm of Ryan, Beck & Co., Inc. ("Ryan, Beck") has issued a written
opinion to your Board of Directors that, as of the date of such opinion, the
Exchange Ratio (as defined herein) in the merger was fair to First Source and
its stockholders from a financial point of view. The written opinion of Ryan,
Beck is reproduced in full as Annex D to the accompanying Joint Proxy
Statement/Prospectus, and First Source's stockholders are urged to read
carefully such opinion in its entirety.
Consummation of the merger is subject to certain conditions, including the
approval of the Merger Agreement by the holders of a majority of the shares of
each of First Source's and Pulse's common stock and the approval of the merger
by various regulatory agencies.
The Incentive Plan has been unanimously approved by the Board of Directors
of First Source. The Board of Directors has determined that the Incentive Plan
is in the best interest of First Source as it will help attract and retain
qualified personnel in key positions, provide such personnel with a
proprietary interest in First Source as an incentive to contribute to the
success of First Source, continue to promote the attention of management to
other stockholders' concerns and reward employees for outstanding performance.
A copy of the Incentive Plan is attached as Annex E.
The Corporate Name Amendment has been unanimously approved by the Board of
Directors of First Source. The Board of Directors believes it is in the best
interest of the company to change its name to First Sentinel Bancorp, Inc. A
copy of the Corporate Name Amendment is attached as Annex F.
Specific information regarding the Special Meeting is contained in the
enclosed Notice of Special Meeting and Joint Proxy Statement/Prospectus.
Please read these materials carefully.
It is very important that your shares are represented at the Special
Meeting, whether or not you plan to attend in person. A failure to vote FOR
approval of the Merger Agreement or any of the other matters presented will
have the same effect as a vote against the Merger Agreement or such other
matter. Therefore, I urge you to
<PAGE>
execute, date and return the enclosed proxy card in the enclosed postage-paid
envelope as soon as possible to assure that your shares will be voted at the
Special Meeting.
On behalf of the Board of Directors, I thank you for your support and urge
you to vote FOR approval of the Merger Agreement, the Incentive Plan and the
Corporate Name Amendment.
Sincerely,
/s/ John P. Mulkerin
John P. Mulkerin
President and Chief Executive
Officer
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR THE PROPOSALS
TO APPROVE AND ADOPT THE MERGER AGREEMENT,
TO APPROVE AND ADOPT THE INCENTIVE PLAN AND
TO APPROVE AND ADOPT THE CORPORATE NAME AMENDMENT.
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY
AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE.
<PAGE>
FIRST SOURCE BANCORP, INC.
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 16, 1998
----------------
To the Stockholders of First Source Bancorp, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of First
Source Bancorp, Inc. ("First Source") will be held at the Sheraton at
Woodbridge Place, 515 Route 1 South, Iselin, New Jersey, on Wednesday,
December 16, 1998, at 10:30 a.m. local time (the "Special Meeting"), for the
following purposes, all of which are more fully described in the accompanying
Joint Proxy Statement/Prospectus:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of July 9, 1998 (the "Merger Agreement"),
between First Source and Pulse Bancorp, Inc. ("Pulse"), and the
consummation of the transactions contemplated thereby, including the
merger of Pulse with and into First Source and the issuance of First
Source common stock to the holders of Pulse common stock. A copy of the
Merger Agreement is attached as Annex A to this Joint Proxy
Statement/Prospectus.
2. To consider and vote upon a proposal to approve and adopt First Source's
1998 Stock-Based Incentive Plan (the "Incentive Plan").
3. To consider and vote upon a proposal to approve and adopt an amendment to
the First Source Certificate of Incorporation to change the name of the
company to First Sentinel Bancorp, Inc. (the "Corporate Name Amendment").
4. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
The First Source Board of Directors has fixed the close of business on
October 30, 1998 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting and any adjournments
or postponements thereof. Only stockholders of record at the close of business
on such date are entitled to notice of and to vote at the Special Meeting. A
list of First Source stockholders entitled to vote at the Special Meeting will
be available for examination for any purpose germane to the Special Meeting,
during ordinary business hours, at the principal executive offices of First
Source, located at 1000 Woodbridge Center Drive, Woodbridge, New Jersey, for
10 days prior to the Special Meeting.
The common stock, par value $0.01 per share, of First Source is the only
security of First Source whose holders are entitled to vote upon the proposals
to be presented at the Special Meeting.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. EACH
STOCKHOLDER, EVEN THOUGH HE OR SHE NOW PLANS TO ATTEND THE SPECIAL MEETING, IS
REQUESTED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY WITHOUT DELAY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME
PRIOR TO ITS EXERCISE. ANY STOCKHOLDER PRESENT AT THE SPECIAL MEETING OR AT
ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF MAY REVOKE HIS OR HER PROXY AND VOTE
PERSONALLY ON EACH MATTER BROUGHT BEFORE THE SPECIAL MEETING.
BY ORDER OF THE BOARD OF DIRECTORS,
[SIGNATURE]
Christopher P. Martin
Christopher P. Martin
Secretary
November 6, 1998
<PAGE>
[LOGO]
PULSE Bancorp. Inc.
November 6, 1998
Dear Fellow Stockholder:
On behalf of the Board of Directors and management of Pulse Bancorp, Inc.
("Pulse"), I cordially invite you to attend a special meeting of stockholders
to be held at the Holiday Inn, Forsgate Drive, Jamesburg, New Jersey, on
Wednesday, December 16, 1998, at 9:00 a.m. The attached Notice of the Meeting
of the Stockholders and Joint Proxy Statement/Prospectus describe the formal
business to be transacted at the meeting.
At this important meeting, stockholders will be asked to approve a merger
agreement between First Source Bancorp, Inc. ("First Source") and Pulse,
pursuant to which Pulse will merge with and into First Source, with First
Source as the surviving corporation, and First Source will issue shares of its
common stock to stockholders of Pulse. The terms of the merger, including the
method for determining the amount of First Source common stock to be issued as
well as other important information relating to First Source and the combined
company, are contained in the accompanying Joint Proxy Statement/Prospectus.
Please give this document your careful attention.
The Board of Directors of Pulse has carefully reviewed and considered the
terms and conditions of the merger agreement. THE BOARD OF DIRECTORS OF PULSE
HAS CONCLUDED THAT THE MERGER AGREEMENT AND THE PROPOSED MERGER ARE IN THE BEST
INTEREST OF THE STOCKHOLDERS OF PULSE, AND UNANIMOUSLY RECOMMENDS THAT PULSE
STOCKHOLDERS VOTE "FOR" THE MERGER AGREEMENT. THE INVESTMENT BANKING FIRM OF
SANDLER O'NEILL & PARTNERS, L.P. HAS ISSUED A WRITTEN OPINION THAT THE EXCHANGE
RATIO (AS DEFINED HEREIN) IS FAIR FROM A FINANCIAL POINT OF VIEW TO PULSE
STOCKHOLDERS, AND THE OPINION IS ATTACHED AS ANNEX C OF THIS JOINT PROXY
STATEMENT/PROSPECTUS.
I encourage you to attend the meeting in person. Whether or not you do,
please read the Joint Proxy Statement/Prospectus and then complete, sign and
date the proxy card and return it in the enclosed postage-paid envelope. This
will save Pulse additional expense in soliciting proxies and will ensure that
your shares are represented. You may vote in person at the meeting even if you
have previously returned the proxy. However, if you are a stockholder whose
shares are not registered in your own name, you will need additional
documentation from your record holder to vote in person at the meeting.
Thank you for your prompt attention to this important matter.
Sincerely,
/s/ George T. Hornyak, Jr.
George T. Hornyak, Jr.
President and Chief Executive Officer
<PAGE>
PULSE BANCORP, INC.
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 16, 1998
---------------
The special meeting of stockholders (the "Meeting") of Pulse Bancorp, Inc.
(the "Company" or "Pulse"), will be held at the Holiday Inn, Forsgate Drive,
Jamesburg, New Jersey, on December 16, 1998, at 9:00 a.m.
A proxy card and a Joint Proxy Statement/Prospectus for the Meeting are
enclosed. The Meeting is for the purpose of considering and acting upon:
1. The approval of the Agreement and Plan of Merger, dated as of July 9,
1998, by and between First Source Bancorp, Inc. ("First Source") and
Pulse, pursuant to which Pulse will merge with and into First Source,
as more fully described in the accompanying Joint Proxy
Statement/Prospectus; and
such other matters as may properly come before the Meeting or any adjournments
or postponements thereof. The Board of Directors is not aware of any other
business to come before the Meeting. Action may be taken on the foregoing
proposals at the Meeting on the date specified above, or on any date or dates
to which the Meeting may be adjourned or postponed. Stockholders of record at
the close of business on October 30, 1998 are the stockholders entitled to vote
at the Meeting, and any adjournments or postponements thereof.
You are requested to complete and sign the enclosed form of proxy which is
solicited by the Board of Directors and to mail it promptly in the enclosed
envelope. The proxy will not be used if you attend and vote at the Meeting in
person.
BY ORDER OF THE BOARD OF DIRECTORS
[SIGNATURE]
Nancy M. Janosko
Nancy M. Janosko
Secretary
South River, New Jersey
November 6, 1998
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE PULSE THE EXPENSE
OF FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A
SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
<PAGE>
FIRST SOURCE BANCORP, INC.
PULSE BANCORP, INC.
JOINT PROXY STATEMENT
---------------
FIRST SOURCE BANCORP, INC.
PROSPECTUS
---------------
13,625,152 SHARES OF COMMON STOCK
This Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus") is being furnished to stockholders of Pulse Bancorp,
Inc. ("Pulse") in connection with the solicitation of proxies by the Board of
Directors of Pulse for use at a special meeting of stockholders of Pulse
(including any adjournments or postponements thereof) to be held on Wednesday,
December 16, 1998 (the "Pulse Meeting"). At the Pulse Meeting, Pulse's
stockholders will consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of July 9, 1998 (the "Merger
Agreement"), between First Source Bancorp, Inc. ("First Source") and Pulse,
and the consummation of the transactions contemplated thereby. Pursuant to the
Merger Agreement, First Source will acquire Pulse by means of a merger (the
"Merger") of Pulse with and into First Source.
This Joint Proxy Statement/Prospectus is also being furnished to
stockholders of First Source in connection with the solicitation of proxies by
First Source's Board of Directors for use at a special meeting of stockholders
of First Source (including any adjournments or postponements thereof) to be
held on Wednesday, December 16, 1998 (the "First Source Meeting," and together
with the Pulse Meeting, the "Special Meetings"). At the First Source Meeting,
First Source's stockholders will consider and vote upon proposals to: (i)
approve and adopt the Merger Agreement and the consummation of the
transactions contemplated thereby; (ii) approve and adopt the First Source
1998 Stock-Based Incentive Plan (the "Incentive Plan"); and (iii) approve and
adopt an amendment to the First Source Certificate of Incorporation to change
the company's name to First Sentinel Bancorp, Inc. (the "Corporate Name
Amendment").
The Merger Agreement is attached as Annex A hereto and is incorporated
herein by reference. The Incentive Plan is attached as Annex E hereto and is
incorporated herein by reference. The amendment to the First Source
Certificate of Incorporation to change the company's name to First Sentinel
Bancorp, Inc. is attached as Annex F and is incorporated herein by reference.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of First
Source with respect to up to 13,625,152 shares of common stock, par value
$0.01 per share, of First Source ("First Source Common Stock") issuable to
approximately 800 holders of common stock, par value $1.00 per share, of Pulse
("Pulse Common Stock") in the Merger. Upon consummation of the Merger, each
outstanding share of Pulse Common Stock will, with certain exceptions, be
converted into and exchangeable for a number of shares of First Source Common
Stock based upon the exchange ratio as set forth in the Merger Agreement
("Exchange Ratio"). Subject to certain qualifications, the Exchange Ratio will
be as follows: (i) subject to certain provisions of the Merger Agreement, if
the Average Closing Price of First Source Common Stock is equal to or greater
than $11.50, the Exchange Ratio shall be equal to 3.2; (ii) if the Average
Closing Price is $10.00 or greater but less than $11.50, the Exchange Ratio
shall be 3.2; (iii) if the Average Closing Price is greater than $8.50 but
less than $10.00 the Exchange Ratio shall equal $32.00 divided by the Average
Closing Price; or (iv) subject to certain provisions of the Merger Agreement,
if the Average Closing Price is equal to or less than $8.50, the Exchange
Ratio shall be 3.764.
Pulse has the right to terminate the Merger Agreement if the Average Closing
Price of First Source is less than $8.50 per share, unless First Source
provides notice pursuant to the Merger Agreement that it wants to proceed with
the Merger, in which event First Source will exchange $32.00 of First Source
Common Stock for each share of Pulse Common Stock.
First Source has the right to terminate the Merger Agreement if the Average
Closing Price of First Source is greater than $11.50 per share, unless Pulse
provides notice pursuant to the Agreement that it wants to proceed with the
Merger, in which event First Source will exchange $36.80 of First Source
Common Stock for each share of Pulse Common Stock.
The Average Closing Price is defined as the average closing sales price of
First Source Common Stock on The Nasdaq Stock Market for the 10 consecutive
trading days ending on the fifth business day (the "Valuation Date") prior to
the date on which the later of approval of First Source's stockholders,
Pulse's stockholders, or the date the last required regulatory approval for
the Merger and the other transactions contemplated by the Merger Agreement is
obtained, without regard to any requisite waiting periods in respect thereof.
Under the terms of the Merger Agreement, cash will be paid in lieu of the
issuance of fractional shares of First Source Common Stock.
<PAGE>
This Joint Proxy Statement/Prospectus does not cover any resales of the
First Source Common Stock offered hereby to be received by the stockholders
deemed to be affiliates of First Source or Pulse upon consummation of the
Merger. No person is authorized to make use of this Joint Proxy
Statement/Prospectus in connection with such resales, although such securities
may be traded without the use of this Joint Proxy Statement/Prospectus by
those stockholders of Pulse not deemed to be affiliates of First Source or
Pulse.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE SHARES OF FIRST SOURCE COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
----------------
This Joint Proxy Statement/Prospectus, the accompanying notice and the
accompanying forms of proxy are first being mailed to stockholders of First
Source and Pulse on or about November 6, 1998.
No persons have been authorized to give any information or to make any
representations other than those contained in this Joint Proxy
Statement/Prospectus or incorporated by reference herein in connection with
the solicitation of proxies or the offering of securities made hereby and, if
given or made, such information or representations must not be relied upon as
having been authorized by First Source or Pulse. This Joint Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation
of an offer to buy, any securities, or the solicitation of a proxy, in any
jurisdiction to or from any person to whom it is not lawful to make any such
offer or solicitation in such jurisdiction. Neither the delivery of this Joint
Proxy Statement/Prospectus nor any distribution of securities made hereunder
shall, under any circumstances, create an implication that there has been no
change in the affairs of First Source or Pulse since the date of this Joint
Proxy Statement/Prospectus or that the information herein or the documents or
reports incorporated by reference herein is correct as of any time subsequent
to such date. All information contained in this Joint Proxy
Statement/Prospectus relating to First Source and its subsidiary has been
supplied by First Source and all information contained in this Joint Proxy
Statement/Prospectus relating to Pulse and its subsidiary has been supplied by
Pulse.
THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING INFORMATION
REGARDING THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR FIRST SOURCE
AND PULSE AND THE PRO FORMA INFORMATION REGARDING THE COMBINED COMPANIES. THIS
INFORMATION IS SUBJECT TO NUMEROUS ASSUMPTIONS, RISKS AND UNCERTAINTIES. THE
INFORMATION FOR FUTURE PERIODS IS SUBJECT TO GREATER UNCERTAINTY BECAUSE OF
THE INCREASED LIKELIHOOD OF CHANGES IN THE UNDERLYING FACTORS AND ASSUMPTIONS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING INFORMATION
PRESENTED HEREIN.
THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
FORWARD-LOOKING INFORMATION CONTAINED HEREIN INCLUDE THE FOLLOWING: PRICING
PRESSURES ON LOAN AND DEPOSIT PRODUCTS, ACTIONS OF COMPETITORS, CHANGES IN
ECONOMIC CONDITIONS, THE EXTENT AND TIMING OF ACTIONS OF THE FEDERAL RESERVE
BOARD AS TO INTEREST RATES, CONTINUED CONSUMER DISINTERMEDIATION, CUSTOMERS'
ACCEPTANCE OF PRODUCTS AND SERVICES, THE EXTENT AND TIMING OF LEGISLATIVE AND
REGULATORY ACTIONS AND CHANGES, AND THE ABILITY OF FIRST SOURCE TO REALIZE THE
BENEFITS OF ITS INTEGRATION OF THE OPERATIONS OF PULSE.
THE FORWARD-LOOKING INFORMATION CONTAINED HEREIN SPEAKS ONLY AS OF THE DATE
OF THIS PRESENTATION. THE COMPANIES ASSUME NO DUTY TO UPDATE THE INFORMATION
CONTAINED HEREIN TO REFLECT CHANGING OR UNANTICIPATED EVENTS OR CIRCUMSTANCES.
The date of this Joint Proxy Statement/Prospectus is November 3, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 2
SUMMARY................................................................... 3
MARKET PRICES AND DIVIDEND INFORMATION.................................... 12
SELECTED FINANCIAL DATA................................................... 13
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA...................... 18
UNAUDITED COMPARATIVE PER SHARE DATA AT EXCHANGE RATIO OF 3.764........... 21
UNAUDITED COMPARATIVE PER SHARE DATA AT EXCHANGE RATIO OF 3.2............. 22
THE MEETINGS.............................................................. 23
Pulse Meeting........................................................... 23
First Source Meeting.................................................... 24
THE MERGER................................................................ 27
General................................................................. 27
Exchange Ratio.......................................................... 27
Background of the Merger................................................ 30
Recommendation of the Boards of Directors; Reasons for the Merger....... 31
Opinions of Financial Advisors.......................................... 33
Interests of Certain Persons in the Merger.............................. 42
Employee Matters........................................................ 43
Effective Time.......................................................... 44
Conversion of Shares; Procedures for Exchange of Certificates; Frac-
tional Shares.......................................................... 44
Conditions to the Merger................................................ 45
Regulatory Approvals Required for the Merger............................ 47
Conduct of Business Pending the Merger.................................. 48
Waiver and Amendment; Termination....................................... 50
No Solicitation of Transactions......................................... 51
Resales of First Source Common Stock Received in the Merger............. 51
Stock Exchange Listing.................................................. 52
Anticipated Accounting Treatment........................................ 52
Certain Federal Income Tax Consequences of the Merger................... 52
No Appraisal Rights..................................................... 53
Consolidation of Operations; Projected Cost Savings..................... 54
Merger and Restructuring Charges........................................ 54
CERTAIN RELATED TRANSACTIONS.............................................. 55
Termination Fee......................................................... 55
Subsidiary Bank Merger Agreement........................................ 56
CERTAIN REGULATORY CONSIDERATIONS......................................... 56
DESCRIPTION OF FIRST SOURCE CAPITAL STOCK................................. 63
COMPARISON OF STOCKHOLDER RIGHTS.......................................... 63
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............... 66
FIRST SOURCE BANCORP, INC. 1998 STOCK-BASED INCENTIVE PLAN................ 73
AMENDMENT OF FIRST SOURCE BANCORP, INC. CERTIFICATE OF INCORPORATION...... 88
LEGAL MATTERS............................................................. 88
</TABLE>
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
EXPERTS.................................................................. 88
STOCKHOLDER PROPOSALS.................................................... 89
OTHER MATTERS............................................................ 89
Annex A AGREEMENT AND PLAN OF MERGER....................................
Annex B STOCK OPTION AGREEMENT..........................................
Annex C OPINION OF SANDLER O'NEILL & PARTNERS, L.P. ....................
Annex D OPINION OF RYAN, BECK & CO., INC. ..............................
Annex E FIRST SOURCE BANCORP, INC. 1998 STOCK-BASED INCENTIVE PLAN......
Annex F AMENDMENT TO THE FIRST SOURCE BANCORP, INC. CERTIFICATE OF
INCORPORATION...................................................
</TABLE>
<PAGE>
AVAILABLE INFORMATION
First Source and Pulse are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by First Source and Pulse with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission's Public Reference Room, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, as well as the following Regional
Offices of the Commission: 7 World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison, Suite 1400, Chicago,
Illinois 60661. Copies of such material also can be obtained by mail from the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. If available, such reports and other
information may also be accessed through the Commission's Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR") via electronic means,
including the Commission's web site on the Internet (http://www.sec.gov). In
addition, material filed by First Source and Pulse can be inspected at the
offices of The Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C.
20006.
First Source has filed with the Commission a Registration Statement on Form
S-4 (together with any amendments thereof, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the shares of First Source Common Stock to be issued pursuant to the Merger
Agreement. This Joint Proxy Statement/Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto.
Such additional information may be inspected and copied as set forth above.
Statements contained in this Joint Proxy Statement/Prospectus or in any
document incorporated by reference in this Joint Proxy Statement/Prospectus as
to the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by First Source (File No.
000-23809) and Pulse (File No. 000-18764) are incorporated by reference in
this Joint Proxy Statement/Prospectus:
1. First Source's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997 (the "1997 First Source Form 10-K").
2. First Source's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 1998.
3. First Source's Current Report on Form 8-K, dated July 17, 1998.
4. The description of First Source Common Stock set forth in First
Source's Registration Statement filed on Form 8-A, dated February 13,
1998, and any amendments or updates thereto.
5. Pulse's Annual Report on Form 10-K for the fiscal year ended September
30, 1997 (the "1997 Pulse Form 10-K").
6. Pulse's Quarterly Reports on Form 10-Q for the quarters ended December
31, 1997, March 31, 1998 and June 30, 1998.
7. Pulse's Current Report on Form 8-K dated July 9, 1998.
8. The description of Pulse Common Stock set forth in Pulse's
Registration Statement filed on Form S-4 (File No. 33-23154) dated
November 17, 1989, and any amendments or updates thereto, and on
Form 8-K dated June 4, 1990.
9. The portions of Pulse's Proxy Statement for the Annual Meeting of
Stockholders held on January 22, 1998 that have been incorporated by
reference in the 1997 Pulse Form 10-K.
All documents and reports filed by First Source or Pulse pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Joint Proxy Statement/Prospectus and prior to the date of the Special Meetings
shall be deemed to be incorporated by reference in this Joint Proxy
Statement/Prospectus and to be a part hereof from the dates of filing of such
documents or reports. Any statement contained in a document or report
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Joint Proxy
Statement/Prospectus to the extent that a statement contained herein, or in
any other subsequently filed document or report which also is deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS
IS DELIVERED, ON WRITTEN OR ORAL REQUEST, IN THE CASE OF DOCUMENTS RELATING TO
FIRST SOURCE, TO FIRST SOURCE BANCORP, INC., 1000 WOODBRIDGE CENTER DRIVE,
WOODBRIDGE, NEW JERSEY 07095, ATTENTION: CHRISTOPHER MARTIN, CORPORATE
SECRETARY, TELEPHONE NUMBER (732) 726-9700, AND IN THE CASE OF DOCUMENTS
RELATING TO PULSE, TO PULSE BANCORP, INC., 6 JACKSON STREET, P.O. BOX 193,
SOUTH RIVER, NEW JERSEY 08882, ATTENTION: NANCY M. JANOSKO, SECRETARY,
TELEPHONE NUMBER (732) 257-2400. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, REQUESTS SHOULD BE RECEIVED BY DECEMBER 1, 1998.
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus. As this summary is necessarily incomplete,
reference is made to, and this summary is qualified in its entirety by, the
more detailed information contained or incorporated by reference in this Joint
Proxy Statement/Prospectus and the Annexes hereto. First Source and Pulse
stockholders are urged to read this Joint Proxy Statement/Prospectus and the
Annexes hereto in their entirety. Certain capitalized terms which are used but
not defined in this summary are defined elsewhere in this Joint Proxy
Statement/Prospectus.
PARTIES TO THE MERGER
Pulse. Pulse Bancorp, Inc. ("Pulse") is the holding company for Pulse Savings
Bank ("Pulse Bank"). Pulse is incorporated under the laws of the State of New
Jersey. At June 30, 1998, Pulse had total assets, deposits and stockholders'
equity of approximately $544.1 million, $434.6 million, and $45.9 million,
respectively.
The principal activity of Pulse is its oversight of Pulse Bank. Pulse Bank is
a New Jersey-chartered savings bank. Pulse Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") under the Savings Association
Insurance Fund ("SAIF").
Pulse Bank conducts its business through five offices located in South River,
South Amboy, Monroe Township, East Brunswick, and Lawrenceville, New Jersey. An
additional branch office is expected to open in Monroe Township in early 1999.
Pulse Bank's executive offices are located at 6 Jackson Street, South River,
New Jersey 08882, and its telephone number is (732) 257-2400.
The principal business of Pulse Bank is the acceptance of deposits from the
general public and the origination of mortgage loans obtained for the purpose
of constructing, financing or refinancing one-to four-family dwellings and
other improved residential and commercial real estate. In addition, Pulse Bank
purchases investment and mortgage-backed securities. Its income is derived
largely from interest income on interest-earning assets such as loans,
mortgage-backed securities and investments. Its principal expenses are interest
paid on deposits, borrowings and operating expenses.
For additional information regarding Pulse, reference is made to the 1997
Pulse 10-K and to Pulse's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, which are incorporated herein by reference. See "AVAILABLE
INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
First Source. First Source is a Delaware Corporation, incorporated in 1997,
which acquired all of the stock of First Savings Bank, SLA ("First Savings")
upon First Savings' conversion and reorganization from a mutual holding company
ownership format to a stock holding company format. The conversion and
reorganization was completed in April 1998 (the "1998 Conversion and
Reorganization").
First Savings is a New Jersey-chartered capital stock savings and loan
association headquartered in Woodbridge, New Jersey. First Savings has operated
in its present market area since 1901. Until 1992, First Savings operated in
the mutual form of organization. In July 1992, First Savings reorganized to
become a federally-chartered mutual holding company, First Savings Bancshares,
MHC (the "Mutual Holding Company"), and simultaneously formed a newly-chartered
New Jersey stock savings association, First Savings Bank, SLA, as a majority-
owned subsidiary of the Mutual Holding Company (the "1992 MHC Reorganization").
The Mutual Holding Company transferred substantially all of its assets (except
$1.0 million in cash) and all its liabilities to the newly organized
association in exchange for 1,660,000 shares of First Savings Common Stock.
Concurrently with the 1992 MHC Reorganization, First Savings sold one million
shares of its common stock to the general public at $10 per share, resulting in
net proceeds of $9.2 million. Upon completion
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<PAGE>
of the 1992 MHC Reorganization, 62.4% of the First Savings Common Stock
outstanding was held by the Mutual Holding Company. Subsequently, First Savings
completed a Secondary Stock Offering of 600,000 shares of common stock at
$13.00 per share on July 11, 1995, which resulted in a decrease in the Mutual
Holding Company's ownership interest from 62.4% to 52.5%. By October 31, 1997,
the Mutual Holding Company's ownership interest had decreased to 51.6% due to
the exercise of stock options. In connection with the 1998 Conversion and
Reorganization, First Savings became the wholly-owned subsidiary of First
Source, and the Mutual Holding Company was dissolved.
First Savings' deposits are insured by the FDIC under the SAIF. First Savings
has been a member of the Federal Home Loan Bank System ("FHLB") since 1945.
First Savings is a community-oriented institution that offers traditional
deposit and loan products. It operates 17 full service offices in its market
area of Middlesex, Monmouth and Union Counties in New Jersey. First Savings'
principal business has been, and continues to be, attracting retail deposits
from the general public and investing those deposits, together with funds
generated from operations and borrowings, primarily in single-family
residential mortgage loans, real estate construction loans, commercial real
estate loans and home equity loans and lines of credit. First Savings also
invests in U.S. Government and federal agency securities and other marketable
securities. First Savings' revenues are derived principally from interest on
its mortgage loan and mortgage-backed securities portfolios, and interest and
dividends on its investment securities.
At June 30, 1998, First Source had assets of $1.2 billion, deposits of $807.6
million and stockholders' equity of $259.3 million. The principal executive
offices of First Source are located at 1000 Woodbridge Center Drive,
Woodbridge, New Jersey 07095 and its telephone number is (732) 726-9700.
For more information about First Source, reference is made to the 1997 First
Source Form 10-K and to First Source's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 which are incorporated herein by reference. See
"AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
THE MEETINGS
Pulse. The Pulse Meeting will be held at 9:00 a.m. on Wednesday, December 16,
1998 at the Holiday Inn, Forsgate Drive, Jamesburg, New Jersey. The purpose of
the Pulse Meeting is to consider and vote upon (i) a proposal to approve the
Merger Agreement and the consummation of the transactions contemplated thereby,
and (ii) such other matters as may properly be brought before the meeting and
any adjournments or postponements thereof.
Only holders of record of Pulse Common Stock at the close of business on
October 30, 1998 (the "Pulse Record Date") will be entitled to vote at the
Pulse Meeting. The affirmative vote of a majority of the outstanding shares of
Pulse Common Stock entitled to vote on such date is required to approve the
Merger Agreement. As of the Pulse Record Date, there were 3,205,800 shares of
Pulse Common Stock outstanding and entitled to be voted at the Pulse Meeting.
The directors and executive officers of Pulse and their affiliates
beneficially owned, as of October 30, 1998, 639,641 shares, including
outstanding options to purchase Pulse Common Stock held by such individuals, or
approximately 19.0% of the outstanding shares, of Pulse Common Stock entitled
to vote at the Pulse Meeting and all such persons have indicated a present
intent to vote their shares in favor of the Merger. As of the Pulse Record
Date, First Source and its subsidiary, including the directors and executive
officers of First Source, beneficially owned 200 shares of Pulse Common Stock.
See "THE MEETINGS--Pulse Meeting--General."
First Source. The First Source Meeting will be held at 10:30 a.m. on
Wednesday, December 16, 1998 at the Sheraton at Woodbridge Place, 515 Route 1
South, Iselin, New Jersey. The purpose of the First Source
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<PAGE>
Meeting is to consider and vote upon: (i) a proposal to approve the Merger
Agreement and the consummation of the transactions contemplated thereby; (ii) a
proposal to approve and adopt the First Source Incentive Plan; (iii) a proposal
to approve and adopt the Corporate Name Amendment; and (iv) such other matters
as may properly be brought before the meeting and any adjournments or
postponements thereof.
Only holders of record of First Source Common Stock at the close of business
on October 30, 1998 (the "First Source Record Date") will be entitled to vote
at the First Source Meeting. The affirmative vote of the holders of a majority
of the outstanding shares of First Source Common Stock entitled to vote on such
date is required to approve the Merger Agreement, the Incentive Plan and the
Corporate Name Amendment. As of the First Source Record Date, there were
31,838,866 shares of First Source Common Stock outstanding.
The directors and executive officers of First Source and their affiliates
beneficially owned, as of October 30, 1998, 3,468,147 shares, or approximately
10.9% of the outstanding shares of First Source Common Stock and all such
persons have indicated a present intent to vote their shares in favor of the
Merger. As of the First Source Record Date, Pulse, including the directors and
executive officers of Pulse, beneficially owned approximately 14,229 shares of
First Source Common Stock. See "THE MEETINGS--First Source Meeting--General."
RECOMMENDATIONS OF BOARDS OF DIRECTORS
Pulse. The Pulse Board of Directors (the "Pulse Board") has unanimously
approved the Merger Agreement and has determined that the Merger is fair to,
and in the best interests of, Pulse and its stockholders. The Pulse Board
therefore unanimously recommends that Pulse's stockholders vote FOR approval of
the Merger Agreement. See "THE MEETINGS--Pulse Meeting--Recommendation of the
Board of Directors" and "THE MERGER--Background of the Merger" and "--
Recommendation of the Boards of Directors; Reasons for the Merger."
First Source. The First Source Board of Directors (the "First Source Board")
has unanimously approved the Merger Agreement and has determined that the
Merger is fair to, and in the best interests of, First Source and its
stockholders. The First Source Board recommends unanimously that First Source's
stockholders vote FOR approval of the Merger Agreement. See "THE MEETINGS--
First Source Meeting--Recommendation of the Board of Directors" and "THE
MERGER--Background of the Merger" and "--Recommendation of the Boards of
Directors; Reasons for the Merger".
EFFECT OF THE MERGER AND THE SUBSIDIARY BANK MERGER
Pursuant to the Merger Agreement, at the Effective Time (as defined below),
Pulse will be merged with and into First Source, and Pulse stockholders will
become stockholders of First Source. See "THE MERGER--General."
Immediately following the consummation of the Merger, Pulse Bank will merge
with and into First Savings (the "Subsidiary Bank Merger"). First Savings will
continue as a New Jersey chartered savings and loan association and a wholly-
owned subsidiary of First Source for the forseeable future. See "THE MERGER--
General" and "CERTAIN RELATED TRANSACTIONS--Subsidiary Bank Merger Agreement."
EFFECTIVE TIME
The Merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware in accordance with
applicable law or on such later date as the certificate may specify (the
"Effective Time"). The certificate will be filed on the first day which is (i)
the last business day of a month and
5
<PAGE>
(ii) at least two business days after satisfaction or waiver of the latest to
occur of certain conditions to the Merger specified in the Merger Agreement,
unless another date is agreed to by First Source and Pulse. See "THE MERGER--
Effective Time."
EXCHANGE RATIO
At the Effective Time, each issued and outstanding share of Pulse Common
Stock, except for shares held directly or indirectly by First Source or Pulse
(other than shares held by First Source or Pulse in a fiduciary capacity
("Trust Account Shares") or in respect of a debt previously contracted ("DPC
Shares")), will be converted into and exchangeable for a certain number of
shares of First Source Common Stock as determined by the Exchange Ratio.
Subject to certain qualifications, the Exchange Ratio will be as follows: (i)
subject to certain provisions of the Merger Agreement, if the Average Closing
Price of First Source Common Stock is equal to or greater than $11.50, the
Exchange Ratio shall be equal to 3.2; (ii) if the Average Closing Price is
$10.00 or greater but less than $11.50, the Exchange Ratio shall be 3.2; (iii)
if the Average Closing Price is greater than $8.50 but less than $10.00, the
Exchange Ratio shall equal $32.00 divided by the Average Closing Price; or
(iv) subject to certain provisions of the Merger Agreement, if the Average
Closing Price is equal to or less than $8.50, the Exchange Ratio shall be
3.764.
The formula for determining the Exchange Ratio was arrived at through arms-
length negotiations between Pulse and First Source.
If the Valuation Date had been October 30, 1998, the Exchange Ratio would
have been 3.710. For further information concerning the market prices of First
Source Common Stock and Pulse Common Stock, see "MARKET PRICES AND DIVIDEND
INFORMATION."
Pulse has the right to terminate the Agreement if the Average Closing Price
of First Source is less than $8.50 per share, unless First Source provides
notice pursuant to the Agreement that it wants to proceed with the Merger, in
which event First Source will pay consideration in the form of First Source
Common Stock equal to $32.00 per share for Pulse common stock. Assuming the
Merger is approved by Pulse stockholders, the Pulse Board may elect not to
terminate the Merger Agreement and to consummate the Merger without
resoliciting Pulse stockholders if the Average Closing Price is less than $8.50
and First Source chooses not to increase the consideration, even though, as a
result of the application of the Exchange Ratio, the value of the shares of
First Source Common Stock (valued at the Average Closing Price) issued in
exchange for each share of Pulse Common Stock would be less than $32.00. In
such a situation, in considering whether to consummate the Merger without the
resolicitation of Pulse stockholders, the Pulse Board will take into account,
consistent with its fiduciary duties, all relevant facts and circumstances that
exist at such time including, without limitation, its evaluation of the then-
existing economic conditions and trends, its evaluation of the respective
business, financial condition, results of operations and prospects of each of
Pulse and First Source, its evaluation of the overall condition of the thrift
and commercial banking industry and the advice of its financial advisor and
legal counsel.
Assuming the Merger is approved by the holders of First Source Common Stock
and the Average Closing Price is less than $8.50, the First Source Board may
elect to increase the Exchange Ratio and to consummate the Merger without
resoliciting First Source stockholders even though, a result of such
adjustment, the number of shares of First Source Common Stock to be issued in
the Merger would increase. In such a situation, in considering whether to
increase the Exchange Ratio and consummate the Merger without the
resolicitation of First Source stockholders, the First Source Board will take
into account, consistent with its fiduciary duties, all relevant facts and
circumstances that exist at such time, including, without limitation, the
advice of its financial advisor and legal counsel. Such relevant facts and
circumstances would include the First Source Board's evaluation of the dilutive
impact of a higher Exchange Ratio to First Source's stockholders, its
evaluation of the strategic importance to First Source of the acquisition of
Pulse relative to any such dilutive impact and the accretive prospects of the
acquisition, its evaluation of the synergies of Pulse's business relative to
First Source,
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Pulse's financial condition, operating performance and prospects, and the
advice of First Source's financial advisor as to the fairness of such higher
Exchange Ratio to First Source stockholders from a financial point of view.
First Source has the right to terminate the Agreement if the Average Closing
Price of First Source is greater than $11.50 per share, unless Pulse provides
notice pursuant to the Agreement that it wants to proceed with the Merger, in
which event First Source will pay consideration in the form of First Source
Common Stock equal to $36.80 per share for Pulse Common Stock. Assuming the
Merger is approved by First Source stockholders, the First Source Board may
elect not to terminate the Merger Agreement and to consummate the Merger
without resoliciting First Source stockholders if the Average Closing Price is
greater than $11.50 and Pulse chooses not to decrease the consideration, even
though, as a result of the application of the Exchange Ratio, the value of the
shares of First Source Common Stock (valued at the Average Closing Price)
issued in exchange for each share of Pulse Common Stock would be greater that
$36.80. In such a situation, in considering whether to consummate the Merger
without the resolicitation of First Source stockholders, the First Source Board
will take into account, consistent with its fiduciary duties, all relevant
facts and circumstances that exist at such time including, without limitation,
its evaluation of the then-existing economic conditions and trends, its
evaluation of the respective business, financial condition, results of
operations and prospects of each of Pulse and First Source, its evaluation of
the overall condition of the thrift and commercial banking industry and the
advice of its financial advisor and legal counsel.
Assuming the Merger is approved by the holders of Pulse Common Stock and the
Average Closing Price is greater than $11.50, the Pulse Board may elect to
decrease the Exchange Ratio and to consummate the Merger without resoliciting
Pulse stockholders even though, a result of such adjustment, the number of
shares of Pulse Common Stock to be issued in the Merger would decrease. In such
a situation, in considering whether to decrease the Exchange Ratio and
consummate the Merger without the resolicitation of Pulse stockholders, the
Pulse Board will take into account, consistent with its fiduciary duties, all
relevant facts and circumstances that exist at such time, including, without
limitation, the advice of its financial advisor and legal counsel. Such
relevant facts and circumstances would include the status of the overall stock
market, the market prices of the stock of comparable financial institutions,
the economy and the performance of Pulse and First Source. See "THE MERGER--
Exchange Ratio" and "--Waiver and Amendment; Termination."
OPINIONS OF FINANCIAL ADVISORS
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") has rendered a written
opinion to the Pulse Board, dated as of the date of this Joint Proxy
Statement/Prospectus, to the effect that, as of such date, the Exchange Ratio
was fair, from a financial point of view, to the holders of Pulse Common Stock.
As discussed in "THE MERGER--Recommendation of the Boards of Directors; Reasons
for the Merger," Sandler O'Neill's opinion and presentation to the Pulse Board,
together with a review by the Pulse Board of the assumptions used by Sandler
O'Neill, were among the factors considered by the Pulse Board in reaching its
determination to approve the Merger. The opinion of Sandler O'Neill is attached
as Annex C to this Joint Proxy Statement/Prospectus. Stockholders are urged to
read such opinion in its entirety for a description of the procedures followed,
assumptions made, matters considered and qualifications and limitations on the
review undertaken by Sandler O'Neill in connection therewith. See "THE MERGER--
Opinions of Financial Advisors--Pulse."
Ryan, Beck & Co., Inc. ("Ryan, Beck") has rendered a written opinion to the
First Source Board, dated as of the date of this Joint Proxy
Statement/Prospectus, to the effect that, as of such date, the aggregate
consideration to be paid by First Source in the Merger was fair to First
Source's stockholders from a financial point of view. As discussed in "THE
MERGER--Recommendation of the Boards of Directors; Reasons for the Merger,"
Ryan, Beck's opinion and presentation to the First Source Board, together with
a review by the First Source Board of the assumptions used by Ryan, Beck, were
among the factors considered by the First Source Board in reaching its
determination to approve the Merger. The opinion of Ryan, Beck is attached as
Annex D to this Joint Proxy Statement/Prospectus. Stockholders are urged to
read such opinion in its entirety for a
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<PAGE>
description of the procedures followed, assumptions made, matters considered
and qualifications on the review undertaken by Ryan, Beck in connection
therewith. See "THE MERGER--Opinions of Financial Advisors--First Source."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors, officers and employees of Pulse have certain interests in
the Merger in addition to their interests generally as stockholders of Pulse.
It is intended that George T. Hornyak, Jr., the President and Chief Executive
Officer of Pulse, and Joseph Chadwick, a director of Pulse, will serve as
directors of First Source and First Savings following the Merger pursuant to
the Merger Agreement. Other Pulse directors will receive payments as advisory
directors for a period for three years and certain executive officers will
receive severance payments upon the termination of their employment agreements.
In addition, the Merger Agreement provides that Mr. Hornyak receive a three
year consulting contract with First Source. See "THE MERGER--Interests of
Certain Persons in the Merger."
EMPLOYEE MATTERS
The Merger Agreement provides for Pulse employees to participate in the
benefit plans maintained by First Source and provides, in certain instances,
recognition of prior service of Pulse with respect to such participation and
the treatment of Pulse employees following the Merger. See "THE MERGER--
Employee Matters."
CONDITIONS; REGULATORY APPROVALS
Consummation of the Merger is subject to various mutual conditions,
including, among others, receipt of the stockholder approvals solicited hereby,
receipt of necessary regulatory approvals, receipt of opinions of counsel
regarding certain federal income tax consequences of the Merger, and the
satisfaction of other customary closing conditions. First Source's obligation
to consummate the Merger is also subject to receipt of a letter from First
Source's independent accountants that the Merger qualifies for pooling of
interests accounting treatment unless such firm advises First Source that it is
unable to issue a letter to such effect solely by reason of First Source having
exercised its rights to purchase Pulse Common Stock pursuant to the Stock
Option Agreement. See "THE MERGER--Conditions to the Merger."
Consummation of the Merger and the transactions contemplated thereby
(including the Subsidiary Bank Merger) are subject to the prior approval of the
Office of Thrift Supervision (the "OTS"), including a waiver of the one-year
OTS restriction on acquisitions by First Source from the date of the April 9,
1998 consummation of the 1998 Conversion and Reorganization, and New Jersey
Department of Banking and Insurance (the "Department"). Applications have been
filed with each of the aforementioned agencies. There can be no assurances when
and if First Source will receive these regulatory approvals or waiver.
WAIVER AND AMENDMENT; TERMINATION
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, both Pulse and First Source may jointly waive compliance with any
provision of the Merger Agreement. The Merger Agreement may be amended by First
Source and Pulse. The Merger Agreement may be terminated in the following ways:
(a) by mutual consent; (b) by either First Source or Pulse after a request or
application for approval has been denied or withdrawn and is not resubmitted,
or a final governmental order is issued that prohibits the Merger, unless the
party seeking to terminate the Merger Agreement is responsible for the denial,
withdrawal or final governmental order; (c) by either First Source or Pulse if
the Merger is not consummated on or before March 31, 1999, unless the delay is
due to a failure by the party seeking to terminate the Merger Agreement to
perform or observe the covenants and provisions of the Merger Agreement; (d) by
either First Source or Pulse if stockholders do not approve the merger; (e) by
either First Source or Pulse (provided that the terminating party has not
materially breached the Merger Agreement) if there has been a material breach
of the Merger Agreement that cannot be readily cured; (f) by Pulse, if the
First Source stock price is less than $8.50 per share, unless First Source
increases the value of consideration to $32.00 per share; (g) by First Source,
if its price is greater than
8
<PAGE>
$11.50 per share, unless Pulse permits a decrease in the value of consideration
to $36.80 per share; or (h) by First Source, if the Board of Directors of Pulse
withdraws, modifies or amends its recommendation that stockholders approve and
adopt the Merger Agreement in any respect materially adverse to First Source.
Termination may result in the payment of substantial fees. See "THE MERGER--
Exchange Ratio" and "--Waiver and Amendment; Termination."
NO SOLICITATION
Pulse has agreed in the Merger Agreement that neither it nor any of its
subsidiaries will solicit, initiate or encourage inquiries or proposals with
respect to, or, subject to the fiduciary duties of the Pulse Board, participate
in any negotiations or discussions concerning any acquisition or purchase of
all or a substantial portion of its assets, or of a substantial equity interest
in it or any of its subsidiaries, or any merger or other business combination
with it or any of its subsidiaries, other than as contemplated by the Merger
Agreement, except that Pulse may communicate information about any such
proposal to its stockholders if and to the extent that the fiduciary duties of
the Pulse Board require it to do so (as advised by its counsel); Pulse also
agreed in the Merger Agreement that it would immediately cease and cause to be
terminated any existing activities, discussions or negotiations previously
conducted with any parties other than First Source with respect to the
foregoing; it will notify First Source immediately if any such inquiries or
proposals are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated with it or any of its
subsidiaries and will promptly inform First Source in writing of the relevant
details with respect to the foregoing; and it will instruct its officers,
directors, agents, advisors and affiliates to comply with the same
restrictions. See "THE MERGER--No Solicitation of Transactions."
STOCK EXCHANGE LISTING
First Source Common Stock is listed on The Nasdaq Stock Market. First Source
has agreed to cause the shares of First Source Common Stock to be issued in the
Merger to be approved for listing on The Nasdaq Stock Market. The obligation of
each of Pulse and First Source to consummate the Merger is subject to approval
for listing by The Nasdaq Stock Market of such shares. See "THE MERGER--
Conditions to the Merger."
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to qualify as a pooling of interests for accounting
and financial reporting purposes. It is a condition to First Source's
obligation to consummate the Merger that it receives a letter from its
independent accountants to the effect that the Merger qualifies for pooling of
interests accounting treatment. See "THE MERGER--Conditions to the Merger" and
"--Anticipated Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
It is a condition to the obligation of First Savings to consummate the Merger
that First Source and Pulse shall have received an opinion of First Source's
counsel that the Merger and the Subsidiary Bank Merger will each be treated as
reorganizations within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code") and, accordingly, for federal income tax
purposes that (i) no gain or loss will be recognized by Pulse as a result of
the Merger; (ii) no gain or loss will be recognized by Pulse Bank as a result
of the Subsidiary Bank Merger, (iii) no gain or loss will be recognized by
First Source as a result of the Merger, (iv) no gain or loss will be recognized
by First Savings as a result of the Subsidiary Bank Merger, (v) no gain or loss
will be recognized by the stockholders of Pulse who exchange all of their Pulse
Common Stock solely for First Source Common Stock pursuant to the Merger
(except with respect to cash received in lieu of a fractional share interest in
First Source Common Stock) and (vi) the aggregate tax basis of First Source
Common Stock received by stockholders who exchange all of their Pulse Common
Stock solely for First Source Common Stock pursuant to the Merger will be the
same as the aggregate tax basis of the Pulse Common Stock surrendered in
9
<PAGE>
exchange therefor (reduced by any amount allocable to a fractional share
interest for which cash is received). Each of these conditions is waivable at
the option of the party entitled to receive the requisite opinion.
The holding period for federal income tax purposes of the First Source Common
Stock received by Pulse stockholders pursuant to the Merger will include the
period during which the Pulse Common Stock surrendered therefor was held,
provided the Pulse Common Stock was held as a capital asset on the date of the
Merger. Pulse stockholders are urged to consult their tax advisors with respect
to their personal tax situation and the specific tax consequences to them of
the Merger, including the applicability and effect of various state, local and
foreign tax laws. See "THE MERGER--Certain Federal Income Tax Consequences of
the Merger" and "--Conditions to the Merger."
NO APPRAISAL RIGHTS
No stockholders of Pulse or First Source are entitled to appraisal rights in
connection with, or as a result of, the Merger. See "THE MERGER--No Appraisal
Rights."
CONSOLIDATION OF OPERATIONS, PROJECTED COST SAVINGS
First Source expects to achieve significant cost savings subsequent to the
Merger. The cost savings will be derived from implementation of operating
synergies, including reductions in compensation and other employee benefit
expenses. Further, the separate corporate existence of Pulse will cease with
the consummation of the Merger. Consequently, operating costs associated with
requirements imposed on Pulse as a publicly held entity will also be
eliminated. The aggregate annual cost savings are estimated to range between
$2.4 to $2.8 million on a pre-tax basis. Management of First Source believes
that realization of these cost savings will occur by December 31, 1999. There
can be no assurance as to when, or whether, cost savings will be realized.
However, such realization will depend, among other things, upon the regulatory
and economic environment that exists following the Merger, business changes
implemented by First Source management and other factors, many of which are
beyond the control of First Source.
MERGER AND RESTRUCTURING CHARGES
A non-recurring merger and restructuring charge estimated in the range of
$5.5 to $5.9 million, before tax effect, will be made upon consummation of the
Merger. It is expected that this charge will be made in the quarter in which
the Merger is consummated. Merger expenses of approximately $1.3 million for
primarily investment banking and professional fees are included in such
estimated restructuring charge. The merger and restructuring charges primarily
include severance and employee related expenses, and, to a lesser extent,
facility and system integration costs and other general costs. See "THE
MERGER--Merger and Restructuring Charges" and""--Certain Federal Income Tax
Consequences of the Merger" and "UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS."
TERMINATION FEE AND STOCK OPTION AGREEMENT
The inclusion of the provisions in the Merger Agreement relating to the
Termination Fee and the Stock Option Agreement were conditions to First
Source's merger proposal. Pursuant to the Stock Option Agreement, the
provisions of the Merger Agreement relating to the Termination Fee provide that
upon the termination of the Merger Agreement, Pulse will pay First Source $3.2
million, subject to the terms and conditions set forth therein. The Option may
only be exercised, and the Termination Fee is only payable, upon the occurrence
of certain events (none of which has occurred). The aggregate value which First
Source may potentially realize upon exercise of the Option and payment of the
Termination Fee is limited within certain parameters. The Merger Agreement
(which includes the provisions providing for the Termination Fee) is attached
as Annex A to this Joint Proxy Statement/Prospectus. See "CERTAIN RELATED
TRANSACTIONS--Stock Option Agreement; Termination Fee."
10
<PAGE>
The Termination Fee is intended to increase the likelihood that the Merger
will be consummated in accordance with the terms of the Merger Agreement.
Consequently, certain aspects of the Termination Fee may have the effect of
discouraging persons who might now or prior to the Effective Time be interested
in acquiring all or a significant interest in Pulse from considering or
proposing such an acquisition, even if such persons were prepared to pay a
higher price per share for Pulse Common Stock than the price per share implicit
in the Exchange Ratio.
COMPARISON OF STOCKHOLDER RIGHTS
At the Effective Time, Pulse stockholders automatically will become
stockholders of First Source and their rights as stockholders of First Source
will be governed by the Delaware General Corporation Law and by First Source's
Certificate of Incorporation and Bylaws. The rights of stockholders of First
Source differ from the rights of the stockholders of Pulse with respect to
certain matters. For a summary of these differences, see "COMPARISON OF
STOCKHOLDER RIGHTS."
11
<PAGE>
MARKET PRICES AND DIVIDEND INFORMATION
First Source Common Stock is listed and traded on the Nasdaq Stock Market
under the symbol "FSLA." Pulse Common Stock is listed and traded principally
on the Nasdaq Stock Market under the symbol "PULS."
The following table sets forth, for the periods indicated, the high and low
sale prices per share for the First Source Common Stock as reported on the
Nasdaq Stock Market, the high and low sale prices per share of the Pulse
Common Stock as reported on the Nasdaq Stock Market, and the quarterly cash
dividends declared by each of First Source and Pulse, for the periods
indicated.
<TABLE>
<CAPTION>
FIRST SOURCE COMMON
STOCK PULSE COMMON STOCK
-------------------- ----------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
----- ----- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
1996
Quarter ended September 30........ $4.12 $3.49 $0.0100 $18.00 $16.88 $0.1750
Quarter ended December 31......... 3.59 3.27 0.0101 17.75 15.50 0.1750
1997
Quarter ended March 31............ 5.46 4.24 0.0112 18.88 15.75 0.1750
Quarter ended June 30............. 6.79 4.88 0.0135 20.50 17.88 0.1750
Quarter ended September 30........ 7.55 6.24 0.0135 26.00 19.50 0.1750
Quarter ended December 31......... 13.93 8.27 0.0149 30.25 24.50 0.2000
1998
Quarter ended March 31............ 13.93 10.48 0.0307 27.50 24.50 0.2000
Quarter ended June 30............. 10.94 9.25 0.0300 28.50 27.75 0.2000
Quarter ended September 30........ 10.00 7.00 0.0450 30.50 23.00 0.2000
Fourth quarter (through October
30, 1998)........................ 8.81 6.75 0.0450 29.00 23.00 --
</TABLE>
The trading prices and cash dividends for First Source have been adjusted
for the dilutive effects of stock dividends and the conversion exchange ratio
described below. As part of the 1998 Conversion and Reorganization, existing
shares of First Savings were converted to First Source Common Stock at an
exchange ratio of 3.9133-for-1 on April 8, 1998. First Savings declared 10%
stock dividends in the fourth quarter of 1996 and 1997.
The following table sets forth the last reported sale price per share of
First Source Common Stock and Pulse Common Stock and the equivalent per share
price for Pulse Common Stock giving effect to the Merger on: (i) July 8, 1998,
the last business day preceding public announcement of the signing of the
Merger Agreement; and (ii) October 30, 1998, the last practicable date prior
to the mailing of this Joint Proxy Statement/Prospectus:
<TABLE>
<CAPTION>
FIRST EQUIVALENT
SOURCE PULSE PRICE PER
COMMON COMMON PULSE
STOCK STOCK SHARE (1)
------ ------ ----------
<S> <C> <C> <C>
July 8, 1998...................................... $9.88 $28.50 $32.00
October 30, 1998.................................. 8.63 26.00 32.00
</TABLE>
- --------
(1) The equivalent price per share of Pulse Common Stock at each specified
date was determined by multiplying the last reported sale price of a share
of First Source Common Stock on such date by the Exchange Ratio. For
purposes of determining the Exchange Ratio, the Average Closing Price was
assumed to be equal to the last reported sale price of First Source Common
Stock at each specified date (resulting in an Exchange Ratio of 3.241 on
July 8, 1998 and 3.710 on October 30, 1998). The actual Exchange Ratio
will be determined based on the Average Closing Price on the Valuation
Date.
Pulse and First Source stockholders are advised to obtain current market
quotations for Pulse Common Stock and First Source Common Stock. The market
price of First Source Common Stock will fluctuate between the date of this
Joint Proxy Statement/Prospectus and the Valuation Date, and between the
Valuation Date and
12
<PAGE>
the Effective Time. Although the Merger Agreement provides that the Exchange
Ratio will adjust to absorb fluctuations in the market price of First Source
Common Stock within certain ranges prior to the Valuation Date, fluctuations
in such market price prior to the Effective Time could result in an increase
or decrease in the market price as of the Effective Time of the shares of
First Source Common Stock to be received by Pulse stockholders in the Merger.
No assurance can be given concerning the market price of First Source Common
Stock before or after the Effective Time.
APPROVAL OF THE FIRST SOURCE BANCORP, INC.
1998 STOCK-BASED INCENTIVE PLAN
The Board of Directors of First Source is also presenting for stockholder
approval the First Source Bancorp, Inc. 1998 Stock-Based Incentive Plan
("Incentive Plan"), in the form attached hereto as Annex E. The purpose of the
Incentive Plan is to attract and retain qualified personnel in key positions,
provide officers, employees and non-employee directors ("Outside Directors")
with a proprietary interest in First Source as an incentive to contribute to
its success, promote the attention of management to other stockholder's
concerns and reward employees for outstanding performance. The summary of the
material terms of the Incentive Plan is qualified in its entirety by the
complete provisions of the Incentive Plan attached as Annex E. The First
Source Board recommends unanimously that First Source stockholders vote FOR
the approval of the Incentive Plan. See "The First Source Bancorp, Inc. 1998
Stock-Based Incentive Plan."
AMENDMENT TO THE FIRST SOURCE BANCORP, INC.
CERTIFICATE OF INCORPORATION
The Board of Directors of First Source is also presenting for stockholder
approval an amendment to its Certificate of Incorporation to change the
company's name to First Sentinel Bancorp, Inc. The First Source Board
recommends unanimously that First Source stockholders vote FOR approval of the
Corporate Name Amendment. A copy of the amendment to the Certificate of
Incorporation is attached at Annex F. See "Amendment to the First Source
Certificate of Incorporation."
SELECTED FINANCIAL DATA
The following tables set forth selected historical consolidated financial
data for First Source for the five years ended December 31, 1997 and the six
months ended June 30, 1998 and 1997, and for Pulse for the five years ended
September 30, 1997 and the six months ended June 30, 1998 and 1997. Because
Pulse's fiscal year ends on September 30 and First Source's fiscal year ends
on December 31, the financial data for Pulse for the six months ended June 30
has been presented to coincide with the fiscal reporting period for First
Source. Following the Merger, the combined company's fiscal year, like that of
First Source, will end on December 31. The selected data presented in the
tables under the captions "Selected Financial Data" and "Selected Operating
Data" as of and for each of the years in the five year period ended December
31, 1997 as it relates to First Source and September 30, 1997, as it relates
to Pulse have been derived from audited financial statements of First Source
and Pulse. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." The
unaudited financial data for the six months ended June 30, 1998 and 1997 for
First Source and Pulse reflects, in the opinions of the management of First
Source and Pulse, respectively, all adjustments necessary for a fair
presentation of such data. Results for the 1998 interim periods are not
necessarily indicative of the results which may be expected for any other
interim period or for the year as a whole.
13
<PAGE>
FIRST SOURCE BANCORP, INC. AND SUBSIDIARY
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------------- ----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets............ $1,221,038 $1,032,809 $1,049,316 $987,115 $945,012 $798,350 $783,846
Loans receivable, net... 644,385 546,081 588,500 509,627 457,756 415,902 415,010
Loans available for
sale................... -- -- -- 287 424 148 1,595
Investment securities... 15,994 40,959 31,031 38,955 39,003 23,997 19,019
Investment securities
available for sale..... 57,053 18,870 17,701 14,831 2,058 13,206 41,064
Other income-earning as-
sets(1)................ 22,352 11,945 14,095 9,278 24,151 10,066 9,967
Mortgage-backed securi-
ties, net.............. -- 244,062 207,157 252,383 288,143 283,263 244,187
Mortgage-backed securi-
ties available for
sale................... 432,785 120,885 147,137 120,797 89,339 24,367 28,314
Deposits................ 807,591 815,166 816,283 794,595 806,338 681,613 678,961
Borrowed funds.......... 139,544 110,390 118,990 88,640 39,496 34,300 26,400
Stockholders' equity.... 259,320 97,281 101,686 92,863 89,713 74,064 68,809
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......... $ 39,072 $ 36,054 $ 73,222 $ 68,039 $ 64,573 $ 52,909 $ 54,665
Interest expense........ 20,527 20,090 41,183 37,264 35,691 25,135 26,448
---------- ---------- ---------- -------- -------- -------- --------
Net interest income
before provision for
loan losses............ 18,545 15,964 32,039 30,775 28,882 27,774 28,217
Provision for loan
losses................. 740 600 1,200 550 310 300 1,200
---------- ---------- ---------- -------- -------- -------- --------
Net interest income
after provision for
loan losses............ 17,805 15,364 30,839 30,225 28,572 27,474 27,017
Other operating income.. 2,467 1,051 2,801 1,995 2,171 1,734 2,791
Operating expenses(2)... 8,811 8,541 18,863 24,701 17,830 16,021 15,551
---------- ---------- ---------- -------- -------- -------- --------
Income before income
taxes and accounting
changes................ 11,461 7,874 14,777 7,519 12,913 13,187 14,257
Income taxes............ 4,243 2,919 5,482 2,809 4,611 4,912 5,352
---------- ---------- ---------- -------- -------- -------- --------
Income before accounting
changes................ 7,218 4,955 9,295 4,710 8,302 8,275 8,905
Cumulative effect of
accounting changes(3).. -- -- -- -- -- -- 398
---------- ---------- ---------- -------- -------- -------- --------
Net income.............. $ 7,218 $ 4,955 $ 9,295 $ 4,710 $ 8,302 $ 8,275 $ 9,303
========== ========== ========== ======== ======== ======== ========
Basic earnings per share
before cumulative
effect of accounting
changes(4)............. $ 0.24 $ 0.16 $ 0.30 $ 0.15 $ 0.27 $ 0.27 $ 0.29
Cumulative effect of
accounting
changes(3)(4).......... -- -- -- -- -- -- 0.01
---------- ---------- ---------- -------- -------- -------- --------
Basic earnings per share
after cumulative effect
of accounting
changes(4)............. $ 0.24 $ 0.16 $ 0.30 $ 0.15 $ 0.27 $ 0.27 $ 0.30
========== ========== ========== ======== ======== ======== ========
Diluted earnings per
share(4)............... $ 0.23 $ 0.16 $ 0.30 $ 0.15 $ 0.27 $ 0.26 $ 0.30
========== ========== ========== ======== ======== ======== ========
Dividends paid per
share, as adjusted(4).. $ 0.06 $ 0.02 $ 0.05 $ 0.04 $ 0.03 $ 0.03 $ 0.02
========== ========== ========== ======== ======== ======== ========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS AT OR FOR THE YEAR ENDED DECEMBER
ENDED JUNE 30, 31,
--------------- ------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS
AND OTHER DATA:
Return on average as-
sets(2)(5)............... 1.27% 0.97% 0.90% 0.49% 0.91% 1.04% 1.21%
Return on average stock-
holders' equity(2)(5).... 8.26 10.38 9.55 5.12 10.14 11.63 14.71
Average stockholders' eq-
uity to average assets... 15.41 9.38 9.37 9.52 8.96 8.92 8.19
Stockholders' equity to
total assets............. 21.24 9.42 9.69 9.41 9.49 9.28 8.78
Interest rate spread(5)... 2.57 2.84 2.80 2.88 2.77 3.26 3.40
Net interest mar-
gin(5)(6)................ 3.39 3.27 3.23 3.30 3.22 3.58 3.74
Operating expenses to av-
erage assets(2)(5)(7).... 1.48 1.59 1.61 2.42 1.83 1.98 1.99
Net interest income before
provision for loan losses
to operating
expenses(2)(7)........... 2.21x 1.97x 1.92x 1.32x 1.72x 1.76x 1.84x
Non-performing loans to
loans receivable, net.... 0.39% 0.96% 0.74% 0.94% 1.32% 2.17% 2.78%
Non-performing assets to
total assets............. 0.33 0.66 0.54 0.64 0.97 1.34 1.73
Allowance for loan losses
to non-performing loans.. 269.14 111.04 140.74 110.58 86.90 63.52 51.09
Allowance for loan losses
to non-performing
assets................... 166.74 85.86 106.74 84.08 57.23 53.81 43.42
Allowance for loan losses
to loans receivable,
net...................... 1.05 1.07 1.04 1.04 1.15 1.38 1.42
Dividend payout ratio..... 26.52 15.49 17.81 26.29 12.09 9.51 7.36
Average interest-earning
assets to average
interest-bearing
liabilities.............. 1.20x 1.10x 1.10x 1.11x 1.11x 1.10x 1.10x
Full service offices...... 17 17 17 16 17 15 15
</TABLE>
- --------
(1) Includes federal funds sold and investment in the stock of the Federal
Home Loan Bank of New York ("FHLB-NY").
(2) Includes the effect of non-recurring items in 1997 and 1996. The non-
recurring item for 1997 was an impairment writedown of core deposit
goodwill totaling $1.3 million, or $867,000 net of tax. Non-recurring
items for 1996 included the Savings Association Insurance Fund ("SAIF")
assessment of $5.2 million, or $3.3 million net of tax, a writedown of
$334,000 of core deposit goodwill, and a provision for benefits payable as
a result of the passing of the First Savings' long-time President.
(3) Reflects the implementation of Statement of Financial Accounting Standards
("SFAS") No. 106--Accounting for Post-retirement Benefits and SFAS No.
109--Accounting for Income Taxes.
(4) Per share data reflects a 10% stock dividend paid July 1, 1993, April 1,
1994, December 16, 1996 and October 30, 1997, a 2-for-1 stock split on
December 1, 1994, and a conversion ratio of 3.9133 relating to the 1998
Conversion and Reorganization adjusted retroactively.
(5) Annualized for the six months ended June 30, 1998 and 1997 for
comparability.
(6) Calculation is based upon the net interest income before provision for
loan losses divided by average interest-earning assets.
(7) For purposes of calculating these ratios, operating expenses is equal to
total operating expenses less amortization of intangibles.
15
<PAGE>
PULSE BANCORP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
JUNE 30(1), SEPTEMBER 30,
----------------- --------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets............ $544,102 $520,203 $526,016 $502,500 $445,779 $447,684 $435,177
Loans receivable, net... 146,681 119,704 127,311 134,548 134,277 139,975 175,835
Investment securities... 71,553 102,551 96,552 105,549 114,381 87,917 49,277
Investment securities
available for sale..... 111,838 39,398 60,742 39,055 -- -- --
Other income-earning as-
sets(2)................ 34,137 16,976 14,701 3,043 6,465 14,885 3,667
Mortgage-backed securi-
ties, net.............. 126,193 172,403 162,764 164,092 174,969 182,000 186,309
Mortgage-backed securi-
ties available for
sale................... 40,357 56,081 53,393 40,255 -- -- --
Deposits................ 434,646 413,003 411,021 394,581 391,038 396,190 387,704
Borrowed funds.......... 59,675 60,900 67,675 64,275 -- -- --
Stockholders' equi-
ty(3).................. 45,900 41,865 43,207 38,459 52,274 49,292 45,310
<CAPTION>
SIX MONTHS ENDED
JUNE 30(1), YEAR ENDED SEPTEMBER 30,
----------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......... $ 18,717 $ 18,101 $ 36,019 $ 32,733 $ 30,739 $ 30,348 $ 31,586
Interest expense........ 11,630 11,153 22,375 19,133 17,230 13,780 14,492
-------- -------- -------- -------- -------- -------- --------
Net interest income be-
fore provision for loan
losses................. 7,087 6,948 13,644 13,600 13,509 16,568 17,094
Provision for loan loss-
es..................... -- -- -- -- -- 2,650 2,101
-------- -------- -------- -------- -------- -------- --------
Net interest income af-
ter provision for loan
losses................. 7,087 6,948 13,644 13,600 13,509 13,918 14,993
Other operating income.. 134 261 510 326 294 357 252
Operating expenses(4)... 2,911 2,677 5,275 8,474 5,643 5,003 5,148
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 4,310 4,532 8,879 5,452 8,160 9,272 10,097
Income taxes............ 1,544 1,623 3,204 1,959 2,895 3,254 3,634
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 2,766 $ 2,909 $ 5,675 $ 3,493 $ 5,265 $ 6,018 $ 6,463
======== ======== ======== ======== ======== ======== ========
Basic earnings per
share.................. $ 0.89 $ 0.95 $ 1.85 $ 0.96 $ 1.37 $ 1.59 $ 1.76
Diluted earnings per
share.................. $ 0.85 $ 0.93 $ 1.80 $ 0.94 $ 1.34 $ 1.56 $ 1.70
Dividends per share, as
adjusted............... $ 0.40 $ 0.35 $ 0.70 $ 0.70 $ 0.70 $ 0.60 $ 0.65
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS
ENDED
JUNE 30(1), AT OR FOR THE YEAR ENDED SEPTEMBER 30,
--------------- -----------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ----------- ------ ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RA-
TIOS AND OTHER DATA:
Return on average as-
sets(4)(5)............. 1.03% 1.13% 1.10% 0.74% 1.22% 1.35% 1.53%
Return on average stock-
holders' equity
(4)(5)................. 12.26 14.39 14.08 7.02 10.29 12.37 14.87
Average stockholders'
equity to average as-
sets................... 8.37 7.85 7.84 10.56 11.82 10.92 10.30
Stockholders' equity to
total assets........... 8.44 8.05 8.21 7.65 11.73 11.01 10.41
Interest rate
spread(5).............. 2.33 2.37 2.35 2.53 2.70 3.47 3.82
Net interest mar-
gin(5)(6).............. 2.69 2.77 2.71 2.96 3.12 3.81 4.16
Operating expenses to
average assets(4)(5)... 1.08 1.04 1.03 1.80 1.30 1.12 1.22
Net interest income
before provision for
loan losses to
operating expenses(4).. 2.43x 2.60x 2.59x 1.60x 2.39x 3.31x 3.32x
Non-performing loans to
loans receivable, net.. 0.80% 1.16% 1.35% 1.36% 2.44% 1.82% 2.55%
Non-performing assets to
total assets........... 0.46 0.29 0.35 0.81 1.33 1.30 1.97
Allowance for loan
losses to non-perform-
ing loans.............. 168.74 169.32 137.01 134.08 79.32 132.33 99.96
Allowance for loan
losses to non-
performing assets...... 78.83 156.61 126.98 60.46 44.05 57.82 52.30
Allowance for loan
losses to loans receiv-
able, net.............. 1.35 1.97 1.85 1.83 1.94 2.41 2.55
Dividend payout ratio... 45.05 36.89 37.81 69.37 51.21 37.67 37.29
Average interest-earning
assets to average
interest-bearing
liabilities............ 1.08x 1.07x 1.08x 1.11x 1.11x 1.11x 1.10x
Full service offices.... 5 4 4 4 4 4 4
</TABLE>
- --------
(1) Pulse's operating results for the six months ended June 30, 1998 and 1997
are presented to conform with the reporting period of First Source.
Pulse's operating results for the three month periods ended December 31,
1997 and 1996 have not been included in the foregoing and are presented in
the following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31,
-------------
1997 1996
------ ------
(UNAUDITED)
<S> <C> <C>
Net interest income (000's)................................... $3,389 $3,356
Net income (000's)............................................ 1,362 1,332
Basic earnings per share...................................... 0.44 0.44
Diluted earnings per share.................................... 0.42 0.43
</TABLE>
(2) Includes federal funds sold and investment in the stock of the FHLB-NY.
(3) During 1996, Pulse completed a buyback of 837,080 shares of its common
stock under a Stock Repurchase Plan utilizing the modified Dutch Auction
Method of repurchase.
(4) Includes the SAIF assessment of $2.7 million, or $1.7 million net of tax,
a non-recurring item in 1996.
(5)Annualized for the six months ended June 30, 1998 and 1997 for
comparability.
(6) Calculation is based upon the net interest income before provision for
loan losses divided by average interest-earning assets.
17
<PAGE>
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA
The following tables set forth certain selected condensed financial data for
First Source and Pulse on an unaudited pro forma combined basis giving effect
to the Merger as if the Merger had become effective on June 30, 1998, in the
case of the balance sheet data presented, and if the Merger had become
effective at the beginning of the periods indicated, in the case of the income
statement data presented. The pro forma data in the tables assume that the
Merger is accounted for using the pooling of interests method of accounting.
See "THE MERGER--Anticipated Accounting Treatment." The unaudited pro forma
combined condensed selected year-end balance sheet data reflect First Source
and Pulse at their respective year-end reporting periods of December 31 and
September 30 and for the periods then ended for the income statement data.
Because Pulse's fiscal year ends on September 30 and First Source's fiscal
year ends on December 31, financial data for the six months ended June 30,
1998 and 1997 combine First Source's with Pulse's interim results to coincide
with the reporting periods for First Source. Following the Merger, the
combined company's fiscal year, like that of First Source, will end on
December 31. These tables should be read in conjunction with, and are
qualified in their entirety by, the historical financial statements, including
the notes thereto, of First Source and Pulse incorporated by reference herein
and the more detailed pro forma financial information, including the notes
thereto, appearing elsewhere in this Joint Proxy Statement/Prospectus. Certain
Pulse financial information has been restated to conform with that of First
Source. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
The pro forma data and ratios set forth in the following tables do not
reflect the expected cost savings and revenue enhancement opportunities that
could result from the Merger or any other items of income or expense which may
result from the Merger. The pro forma balance sheet data and certain ratios do
reflect a $4.1 million reduction to stockholders' equity at June 30, 1998,
which represents the estimated cost of merger expenses and restructuring
charges, net of tax. The unaudited pro forma combined selected financial data
is presented for informational purposes only and is not necessarily indicative
of the combined financial position or results of operations that would have
occurred if the Merger had been consummated on June 30, 1998, or at the
beginning of the periods indicated or which may be obtained in the future.
18
<PAGE>
FIRST SOURCE BANCORP, INC. AND SUBSIDIARY
AND PULSE BANCORP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,/SEPTEMBER 30,
--------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets............ $1,765,140 $1,553,012 $1,575,332 $1,489,615 $1,390,791 $1,246,034 $1,219,023
Loans receivable, net... 791,066 665,785 715,811 644,175 592,033 555,877 590,845
Loans available for
sale................... -- -- -- 287 424 148 1,595
Investment securities... 87,547 143,510 127,583 144,504 153,384 111,914 68,296
Investment securities
available for sale..... 168,891 58,268 78,443 53,886 2,058 13,206 41,064
Other income-earning as-
sets(2)................ 56,489 28,921 28,796 12,321 30,616 24,951 13,634
Mortgage-backed securi-
ties, net.............. 126,193 416,465 369,921 416,475 463,112 465,263 430,496
Mortgage-backed securi-
ties available for
sale................... 473,142 176,966 200,530 161,052 89,339 24,367 28,314
Deposits................ 1,242,237 1,228,169 1,227,304 1,189,176 1,197,376 1,077,803 1,066,665
Borrowed funds.......... 199,219 171,290 186,665 152,915 39,496 34,300 26,400
Stockholders' equity.... 301,059 139,146 144,893 131,322 141,987 123,356 114,119
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS AT OR FOR THE
ENDED JUNE 30, YEAR ENDED DECEMBER 31,/SEPTEMBER 30,
--------------- -----------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- -------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......... $57,789 $54,155 $109,241 $100,772 $95,312 $83,257 $86,251
Interest expense........ 32,157 31,243 63,558 56,397 52,921 38,915 40,940
------- ------- -------- -------- ------- ------- -------
Net interest income be-
fore provision for loan
losses................. 25,632 22,912 45,683 44,375 42,391 44,342 45,311
Provision for loan loss-
es..................... 740 600 1,200 550 310 2,950 3,301
------- ------- -------- -------- ------- ------- -------
Net interest income af-
ter provision for loan
losses................. 24,892 22,312 44,483 43,825 42,081 41,392 42,010
Other operating income.. 2,601 1,312 3,311 2,321 2,465 2,091 3,043
Operating expenses...... 11,722 11,218 24,138 33,175 23,473 21,024 20,699
------- ------- -------- -------- ------- ------- -------
Income before income
taxes and cumulative
effect of accounting
changes(3)............. 15,771 12,406 23,656 12,971 21,073 22,459 24,354
Income taxes............ 5,787 4,542 8,686 4,768 7,506 8,166 8,986
------- ------- -------- -------- ------- ------- -------
Income before cumulative
effect of accounting
changes(3)............. 9,984 7,864 14,970 8,203 13,567 14,293 15,368
Cumulative effect of ac-
counting changes(3).... -- -- -- -- -- -- 398
------- ------- -------- -------- ------- ------- -------
Net income.............. $ 9,984 $ 7,864 $ 14,970 $ 8,203 $13,567 $14,293 $15,766
======= ======= ======== ======== ======= ======= =======
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE AT OR FOR THE
30, YEAR ENDED DECEMBER 31,/SEPTEMBER 30,
-------------- ---------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RA-
TIOS AND OTHER DATA):
Return on average as-
sets(4)(5)............. 1.19% 1.03% 0.96% 0.57% 1.01% 1.15% 1.32%
Return on average stock-
holders' equity(4)(5).. 9.08 11.57 10.88 5.79 10.20 11.93 14.78
Average stockholders'
equity to average as-
sets................... 13.14 8.86 8.86 9.86 9.88 9.64 8.94
Stockholders' equity to
total assets........... 17.06 8.96 9.20 8.82 10.21 9.90 9.36
Interest rate
spread(5).............. 2.54 2.72 2.65 2.76 2.75 3.34 3.55
Net interest mar-
gin(5)(6).............. 3.17 3.10 3.05 3.19 3.19 3.67 3.89
Operating expenses to
average as-
sets(4)(5)(7).......... 1.35 1.41 1.42 2.22 1.66 1.67 1.71
Net interest income
before provision for
loan losses to
operating
expenses(4)(7)......... 2.27x 2.12x 2.08x 1.39x 1.89x 2.13x 2.21x
Non-performing loans to
total loans receivable,
net.................... 0.47% 1.00% 0.85% 1.03% 1.57% 2.08% 2.71%
Non-performing assets to
total assets........... 0.37 0.53 0.48 0.70 1.08 1.32 1.82
Allowance for loan
losses to non-perform-
ing loans.............. 237.15 123.24 139.68 117.06 84.23 78.64 64.77
Allowance for loan
losses to non-perform-
ing assets............. 133.09 98.69 111.71 74.84 52.06 55.22 46.86
Allowance for loan
losses to total loans
receivable, net........ 1.10 1.23 1.18 1.21 1.33 1.64 1.76
Dividend payout ratio... 31.65 23.40 25.40 44.63 27.27 21.37 19.63
Average interest-earning
assets to average in-
terest-bearing liabili-
ties 1.16x 1.09x 1.10x 1.11x 1.11x 1.10x 1.10x
Full service offices.... 22 21 21 20 21 19 19
</TABLE>
- --------
(1) The table sets forth unaudited pro forma combined selected financial data
for First Source and Pulse. The historical data has been derived from the
financial statements of First Source and Pulse which are incorporated by
reference herein. The pro forma combined share data have been derived
after giving effect to the Merger as if it occurred at the beginning of
the period presented using the pooling-of-interest method of accounting.
Under a pooling-of-interest method, a business combination is accounted as
the uniting of the ownership interests of two or more enterprises through
an exchange of equity interests. The assets and liabilities of Pulse are
carried forward to First Source at their recorded amounts. The income of
the First Source and Pulse, for the current period and all prior periods,
is combined and reported as income of the combined enterprise.
(2) Includes federal funds sold and investment in the stock of FHLB-NY.
(3) Reflects the implementation of SFAS No. 106--Accounting for Post-
Retirement Benefits and SFAS No. 109--Accounting for Income Taxes.
(4) Includes the effect of non-recurring items in 1997 and 1996. Non-recurring
items for 1997 included a writedown of the core deposit goodwill totaling
$1.3 million, or $867,000 net of tax. Non-recurring items for 1996
included the SAIF assessment of $7.9 million, or $5.0 million net of tax,
a writedown of the $334,000 of core deposit goodwill, and a provision for
benefits payable as a result of the passing of First Savings' long-time
President.
(5) Annualized for the six months ended June 30, 1998 and 1997 for
comparability.
(6) Calculation is based upon the net interest income before provision for
loan losses divided by average interest-earning assets.
(7) For purposes of calculating these ratios, operating expenses is equal to
total operating expenses less amortization of intangibles.
20
<PAGE>
The following table sets forth the basic and diluted income per share,
period-end stated and tangible book value per share and cash dividends per
share of First Source Common Stock and Pulse Common Stock at or for the six
months ended June 30, 1998 and 1997 and for each of the years in the three-
year period ended December 31, 1997, on a historical and pro forma basis, as
well as pro forma equivalent per share data for Pulse. The historical per
share data have been derived from the financial statements of First Source and
Pulse which are incorporated by reference herein. The pro forma combined share
data have been derived after giving effect to the Merger as if it occurred at
the beginning of the period presented using the pooling-of-interest method of
accounting.
The historical per share data for First Source have been restated to
retroactively reflect the effect of stock dividends, a 2-for-1 stock split and
the 1998 Conversion and Reorganization. See "Pro Forma Combined Financial
Information," "Summary--Selected Financial Data of First Source" and
"Summary--Selected Financial Data of Pulse."
UNAUDITED COMPARATIVE PER SHARE DATA AT EXCHANGE RATIO OF 3.764
<TABLE>
<CAPTION>
YEARS ENDED
SIX MONTHS DECEMBER 31,/SEPTEMBER
ENDED JUNE 30, 30,
--------------- -----------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
First Source........................... $ 0.24 $ 0.16 $ 0.30 $ 0.15 $ 0.27
Pulse.................................. 0.89 0.95 1.85 0.96 1.37
First Source Pro Forma................. 0.24 0.19 0.35 0.18 0.30
Pulse Pro Forma Equivalent(1).......... 0.89 0.70 1.33 0.70 1.13
DILUTED EARNINGS PER SHARE
First Source........................... $ 0.23 $ 0.16 $ 0.30 $ 0.15 $ 0.27
Pulse.................................. 0.85 0.93 1.80 0.94 1.34
First Source Pro Forma................. 0.23 0.18 0.35 0.18 0.30
Pulse Pro Forma Equivalent(1).......... 0.87 0.68 1.31 0.68 1.11
DIVIDENDS PAID PER SHARE(2)
First Source........................... $ 0.06 $ 0.02 $ 0.05 $ 0.04 $ 0.03
Pulse.................................. 0.40 0.35 0.70 0.70 0.70
First Source Pro Forma................. 0.06 0.02 0.05 0.04 0.03
Pulse Pro Forma Equivalent(1).......... 0.23 0.09 0.20 0.15 0.12
STATED BOOK VALUE PER SHARE(3)
First Source........................... $ 8.17 $ 3.11 $ 3.24 $ 3.00 $ 2.91
Pulse.................................. 14.71 13.63 14.03 12.61 13.57
First Source Pro Forma................. 6.92 3.25 3.37 3.10 3.13
Pulse Pro Forma Equivalent(1).......... 26.06 12.23 12.69 11.66 11.80
TANGIBLE BOOK VALUE PER SHARE(4)
First Source........................... $ 7.91 $ 2.77 $ 2.96 $ 2.65 $ 2.51
Pulse.................................. 14.71 13.63 14.03 12.61 13.57
First Source Pro Forma................. 6.73 3.00 3.17 2.84 2.86
Pulse Pro Forma Equivalent(1).......... 25.33 11.30 11.92 10.68 10.77
</TABLE>
- --------
(1) Pulse pro forma equivalent per share data is computed by multiplying the
First Source Pro Forma per share data by the Exchange Ratio of 3.764.
(2) The amount of future dividends payable by First Source, if any, is subject
to the discretion of First Source's Board of Directors. The Board normally
considers First Source's and First Savings Bank's cash needs, First
Source's net income, general business conditions, dividends from
subsidiaries and applicable government regulations and policies.
(3) Stated book value is equal to total stockholders' equity divided by total
shares outstanding.
(4) Tangible book value is equal to total stockholders' equity less goodwill,
divided by total shares outstanding.
21
<PAGE>
The following table sets forth the basic and diluted income per share,
period-end stated and tangible book value per share and cash dividends per
share of First Source Common Stock and Pulse Common Stock at or for the six
months ended June 30, 1998 and 1997 and for each of the years in the three-
year period ended December 31, 1997, on a historical and pro forma basis, as
well as pro forma equivalent per share data for Pulse. The historical per
share data have been derived from the financial statements of First Source and
Pulse which are incorporated by reference herein. The pro forma combined share
data have been derived after giving effect to the Merger as if it occurred at
the beginning of the period presented using the pooling-of-interest method of
accounting.
The historical per share data for First Source have been restated to
retroactively reflect the effect of stock dividends, a 2-for-1 stock split and
the 1998 Conversion and Reorganization. See "Pro Forma Combined Financial
Information;" "Summary--Selected Financial Data of First Source" and
"Summary--Selected Financial Data of Pulse."
UNAUDITED COMPARATIVE PER SHARE DATA AT EXCHANGE RATIO OF 3.2
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE YEARS ENDED DECEMBER 31,/
30, SEPTEMBER 30,
------------- --------------------------
1998 1997 1997 1996 1995
------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
First Source.......................... $ 0.24 $ 0.16 $ 0.30 $ 0.15 $ 0.27
Pulse................................. 0.89 0.95 1.85 0.96 1.37
First Source Pro Forma................ 0.25 0.19 0.37 0.19 0.32
Pulse Pro Forma Equivalent(1)......... 0.79 0.62 1.17 0.62 1.01
DILUTED EARNINGS PER SHARE
First Source.......................... $ 0.23 $ 0.16 $ 0.30 $ 0.15 $ 0.27
Pulse................................. 0.85 0.93 1.80 0.94 1.34
First Source Pro Forma................ 0.24 0.19 0.36 0.19 0.31
Pulse Pro Forma Equivalent(1)......... 0.78 0.61 1.16 0.61 0.99
DIVIDENDS PAID PER SHARE(2)
First Source.......................... $ 0.06 $ 0.02 $ 0.05 $ 0.04 $ 0.03
Pulse................................. 0.40 0.35 0.70 0.70 0.70
First Source Pro Forma................ 0.06 0.02 0.05 0.04 0.03
Pulse Pro Forma Equivalent(1)......... 0.19 0.08 0.17 0.13 0.10
STATED BOOK VALUE PER SHARE(3)
First Source.......................... $ 8.17 $ 3.11 $ 3.24 $ 3.00 $ 2.91
Pulse................................. 14.71 13.63 14.03 12.61 13.57
First Source Pro Forma................ 7.22 3.39 3.51 3.23 3.29
Pulse Pro Forma Equivalent(1)......... 26.06 10.84 11.25 10.33 10.53
TANGIBLE BOOK VALUE PER SHARE(4)
First Source.......................... $ 7.91 $ 2.77 $ 2.96 $ 2.65 $ 2.51
Pulse................................. 14.71 13.63 14.03 12.61 13.57
First Source Pro Forma................ 7.01 3.13 3.30 2.96 3.01
Pulse Pro Forma Equivalent(1)......... 22.45 10.02 10.56 9.47 9.62
</TABLE>
- --------
(1) Pulse pro forma equivalent per share data is computed by multiplying the
First Source Pro Forma per share data by the Exchange Ratio of 3.2.
(2) The amount of future dividends payable by First Source, if any, is subject
to the discretion of First Source's Board of Directors. The Board normally
considers First Source's and First Savings Bank's cash needs, First
Source's net income, general business conditions, dividends from
subsidiaries and applicable government regulations and policies.
(3)Stated book value is equal to total stockholders' equity divided by total
shares outstanding.
(4)Tangible book value is equal to total stockholders' equity less goodwill,
divided by total shares outstanding.
22
<PAGE>
THE MEETINGS
PULSE MEETING
General. This Joint Proxy Statement/Prospectus is being furnished to
stockholders of Pulse in connection with the solicitation of proxies by the
Pulse Board for use at the Pulse Meeting and at any adjournments or
postponements thereof to be held at the Holiday Inn, Forsgate Drive,
Jamesburg, New Jersey, on Wednesday, December 16, 1998, at 9:00 a.m. local
time. At the Pulse Meeting, the stockholders of Pulse will be asked to:
(i) approve and adopt the Merger Agreement between First Source and Pulse and
the consummation of the transactions contemplated thereby, which are more
fully described herein; and (ii) act upon such other matters as may properly
be brought before the Pulse Meeting and at any adjournments or postponements
thereof. A copy of the Merger Agreement is attached as Annex A hereto. The
Merger Agreement provides for the acquisition of Pulse by First Source by
means of the merger of Pulse with and into First Source. Upon consummation of
the Merger, each share of the Pulse Common Stock outstanding on the date of
the Merger (except for certain specified shares described below) will be
converted into and exchangeable for the number of shares of First Source
Common Stock equal to the Exchange Ratio. See "THE MERGER--Exchange Ratio."
This Joint Proxy Statement/Prospectus constitutes a prospectus of First
Source with respect to the shares of First Source Common Stock to be issued in
connection with the Merger. The information in this Joint Proxy
Statement/Prospectus concerning First Source and Pulse has been furnished by
each of such entities, respectively.
HOLDERS OF PULSE COMMON STOCK ARE REQUESTED TO PROMPTLY COMPLETE, SIGN AND
DATE THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY TO PULSE IN THE
ENCLOSED POSTAGE-PAID ADDRESSED ENVELOPE.
PULSE STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
Recommendation of the Board of Directors. The Pulse Board has unanimously
approved the Merger Agreement and has determined that the Merger is fair to,
and in the best interests of, Pulse and its stockholders. The Pulse Board
therefore unanimously recommends that Pulse's stockholders vote FOR approval
of the Merger Agreement. See "THE MERGER--Background of the Merger" and "--
Recommendation of the Boards of Directors; Reasons for the Merger--Pulse."
Record Date; Voting; Solicitation and Revocation of Proxies. The Pulse Board
has fixed October 30, 1998 as the Pulse Record Date for the determination of
those Pulse stockholders entitled to notice of and to vote at the Pulse
Meeting. Only holders of record of Pulse Common Stock at the close of business
on the Pulse Record Date will be entitled to notice of and to vote at the
Pulse Meeting. As of the Pulse Record Date, there were 3,205,800 shares of
Pulse Common Stock outstanding, entitled to vote and held by approximately 800
holders of record. Each holder of record of shares of Pulse Common Stock on
the Pulse Record Date is entitled to cast one vote per share on the proposal
to approve and adopt the Merger Agreement, and on any other matter properly
submitted for the vote of the Pulse stockholders at the Pulse Meeting. The
presence, either in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Pulse Common Stock entitled to vote at
the Pulse Meeting is necessary to constitute a quorum at the Pulse Meeting.
Abstentions will be counted as present for purposes of determining the
presence or absence of a quorum at the Pulse Meeting.
The approval and adoption of the Merger Agreement by Pulse stockholders will
require the affirmative vote of the holders of a majority of the outstanding
shares of Pulse Common Stock entitled to vote thereon. As described in "THE
MERGER--Conditions to the Merger," such stockholder approval is a condition to
consummation of the Merger. Under applicable New Jersey law, in determining
whether the Merger proposal has received the requisite number of affirmative
votes, abstentions and broker non-votes will be counted and will have the same
effect as a vote against the proposal to approve and adopt the Merger
Agreement.
23
<PAGE>
As of the Pulse Record Date, directors and executive officers of Pulse and
their affiliates may be deemed to be beneficial owners of 639,641 shares,
including outstanding options to purchase Pulse Common Stock held by such
individuals, or approximately 19.0% of the shares, of Pulse Common Stock
outstanding as of the Record Date. Such persons have informed Pulse that they
intend to vote or direct the vote of all such shares of Pulse Common Stock FOR
approval and adoption of the Merger Agreement and the transactions
contemplated thereby. As of the Pulse Record Date, First Source and its
subsidiary, including the directors and executive officers of First Source,
beneficially owned 200 shares of Pulse Common Stock.
All shares of Pulse Common Stock which are entitled to be voted and are
represented at the Pulse Meeting by properly executed proxies received prior
to or at the meeting, and not revoked, will be voted at such meeting, and any
adjournments or postponements thereof, in accordance with the instructions
indicated on such proxies. If no instructions are indicated, such proxies will
be voted FOR: (i) approval and adoption of the Merger Agreement, and (ii)
otherwise in the discretion of the proxy holders as to any other matter which
may come before the Pulse Meeting or any adjournment or postponement thereof,
including, among other things, a motion to adjourn or postpone the Pulse
Meeting to another time and/or place, for the purpose of soliciting additional
proxies or otherwise; provided, however, that no proxy which is voted against
the proposal to approve and adopt the Merger Agreement will be voted in favor
of any such adjournment or postponement.
If any other matters are properly presented at the Pulse Meeting for
consideration, the persons named in the form of proxy enclosed herewith and
acting thereunder will have discretionary authority to vote on such matters in
accordance with their best judgment; provided, however, that such
discretionary authority will only be exercised to the extent possible under
applicable federal and state securities and corporation laws. Pulse does not
have any knowledge of any matters to be presented at the Pulse Meeting other
than the matters set forth above.
Any proxy given by a Pulse stockholder pursuant to this solicitation may be
revoked by the person giving it at any time before it is voted. Proxies may be
revoked by (i) filing with the Secretary of Pulse, at or before the taking of
the vote at the Pulse Meeting, a written notice of revocation bearing a later
date than the proxy, (ii) duly executing a later-dated proxy relating to the
same shares and delivering it to the Secretary of Pulse before the taking of
the vote at the Pulse Meeting, or (iii) attending the Pulse Meeting and voting
in person (although attendance at the meeting will not in and of itself
constitute a revocation of a proxy). Any written notice of revocation or
subsequently executed proxy should be sent so as to be delivered to Pulse
Bancorp, Inc., 6 Jackson Street, South River, New Jersey 08882, Attention:
Nancy M. Janosko, Secretary, or hand delivered to Ms. Janosko at or before the
taking of the vote at the Pulse Meeting.
Pulse will bear all expenses of this solicitation of proxies from the
holders of Pulse Common Stock, except that the cost of preparing and mailing
this Joint Proxy Statement/Prospectus will be borne equally by Pulse and First
Source. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of Pulse in person or by
telephone, telegram or other means of communication. Such directors, officers
and employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation. Pulse
has retained Kissel-Blake, Inc., to assist in such solicitation. The fee to be
paid to such firm is not expected to exceed $4,000 plus reasonable out-of-
pocket costs and expenses. Kissel-Blake will make arrangements with brokerage
firms and other custodians, nominees and fiduciaries to send proxy materials
to their principals and will reimburse such parties for their expenses in
doing so.
FIRST SOURCE MEETING
General. This Joint Proxy Statement/Prospectus is being furnished to
stockholders of First Source in connection with the solicitation of proxies by
the First Source Board for use at the First Source Meeting, to be held at the
Sheraton at Woodbridge Place, 515 Route 1 South, Iselin, New Jersey, on
Wednesday, December 16, 1998 at 10:30 a.m. local time. At the First Source
Meeting, the stockholders of First Source will be asked to: (i) approve and
adopt the Merger Agreement and the consummation of the transactions
contemplated thereby, which are more fully described herein; (ii) approve and
adopt the Incentive Plan; (iii) approve and adopt the
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Corporate Name Amendment; and (iv) act upon such other matters as may properly
be brought before the First Source Meeting and at any adjournments or
postponements thereof. A copy of the Merger Agreement is attached as Annex A
hereto. A copy of the Incentive Plan is attached as Annex E hereto. A copy of
the Amendment to the First Source Certificate of Incorporation is attached as
Annex F hereto.
HOLDERS OF FIRST SOURCE COMMON STOCK ARE REQUESTED TO PROMPTLY COMPLETE,
SIGN AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY TO FIRST
SOURCE IN THE ENCLOSED POSTAGE-PAID ADDRESSED ENVELOPE.
FIRST SOURCE STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES.
Recommendation of the Board of Directors. The First Source Board has
unanimously approved the Merger Agreement and has determined that the Merger
is fair to, and in the best interests of, First Source and its stockholders.
The First Source Board therefore unanimously recommends that First Source's
stockholders vote FOR approval of the Merger Agreement. The First Source board
has also unanimously approved the Incentive Plan and the Corporate Name
Amendment and unanimously recommends that First Source's stockholders vote FOR
approval and adoption of the Incentive Plan and the Corporate Name Amendment.
See "THE MERGER--Background of the Merger" and "--Recommendation of the Boards
of Directors; Reasons for the Merger--First Source"; "The First Source
Bancorp, Inc. 1998 Stock-Based Incentive Plan"; and "Amendment of the First
Source Bancorp, Inc. Certificate of Incorporation."
Record Date; Voting; Solicitation and Revocation of Proxies. The First
Source Board has fixed October 30, 1998 as the First Source Record Date for
the determination of those First Source stockholders entitled to notice of and
to vote at the First Source Meeting. Only holders of record of First Source
Common Stock at the close of business on the First Source Record Date will be
entitled to notice of and to vote at the First Source Meeting. As of the First
Source Record Date, there were 31,838,866 shares of First Source Common Stock
outstanding, held by approximately 2,667 holders of record. Each holder of
record of shares of First Source Common Stock on the First Source Record Date
is entitled to cast one vote per share on the proposals to approve and adopt
the Merger Agreement, the Incentive Plan and the Corporate Name Amendment and
on any other matter properly submitted for the vote of the First Source
stockholders at the First Source Meeting. The presence, either in person or by
properly executed proxy, of the holders of a majority of the outstanding
shares of First Source Common Stock entitled to vote at the First Source
Meeting is necessary to constitute a quorum at the First Source Meeting.
Abstentions will be counted as present for purposes of determining the
presence or absence of a quorum at the First Source Meeting.
The approval and adoption of the Merger Agreement by First Source
stockholders will require the affirmative vote of the holders of a majority of
the outstanding shares of First Source Common Stock entitled to vote thereon.
As described in "THE MERGER--Conditions to the Merger," such stockholder
approval is a condition to consummation of the Merger. The approval and
adoption of the Incentive Plan and the Corporate Name Amendment will also
require the affirmative vote of the holders of a majority of the outstanding
shares of First Source Common Stock entitled to vote thereon. Under applicable
Delaware law, in determining whether the Merger, the Incentive Plan and the
Corporate Name Amendment proposals have received the requisite number of
affirmative votes, abstentions and broker non-votes will be counted and will
have the same effect as a vote against the proposals presented.
As of the First Source Record Date, directors and executive officers of
First Source and their affiliates may be deemed to be beneficial owners of
3,468,147 shares of First Source Common Stock, or approximately 10.89% of the
shares of First Source Common Stock outstanding as of the Record Date. Such
persons have informed First Source that they intend to vote or direct the vote
of all such shares of First Source Common Stock FOR approval and adoption of
the Merger Agreement, approval and adoption of the Incentive Plan, approval
and adoption of the Corporate Name Amendment and the transactions contemplated
thereby. As of the First Source Record Date, Pulse and the directors and
executive officers of Pulse, beneficially owned 14,229 shares of First Source
Common Stock.
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All shares of First Source Common Stock which are entitled to be voted and
are represented at the First Source Meeting by properly executed proxies
received prior to or at the meeting, and not revoked, will be voted at such
meeting, and any adjournments or postponements thereof, in accordance with the
instructions indicated on such proxies. If no instructions are indicated, such
proxies will be voted FOR: (i) approval and adoption of the Merger Agreement;
(ii) approval and adoption of the Incentive Plan; (iii) approval and adoption
of the Corporate Name Amendment; and (iv) otherwise in the discretion of the
proxy holders as to any other matter which may come before the First Source
Meeting or any adjournment or postponement thereof, including, among other
things, a motion to adjourn or postpone the First Source Meeting to another
time and/or place, for the purpose of soliciting additional proxies or
otherwise; provided, however, that no proxy which is voted against the
proposals will be voted in favor of any such adjournment or postponement.
If any other matters are properly presented at the First Source Meeting for
consideration, the persons named in the form of proxy enclosed herewith and
acting thereunder will have discretionary authority to vote on such matters in
accordance with their best judgment; provided, however, that such
discretionary authority will only be exercised to the extent possible under
applicable federal and state securities and corporation laws. First Source
does not have any knowledge of any matters to be presented at the First Source
Meeting other than the matters set forth above.
Any proxy given by a First Source stockholder pursuant to this solicitation
may be revoked by the person giving it at any time before it is voted. Proxies
may be revoked by: (i) filing with the Secretary of First Source, at or before
the taking of the vote at the First Source Meeting, a written notice of
revocation bearing a later date than the proxy; (ii) duly executing a later
dated proxy relating to the same shares and delivering it to the Secretary of
First Source before the taking of the vote at the First Source Meeting; or
(iii) attending the First Source Meeting and voting in person (although
attendance at the meeting will not in and of itself constitute a revocation of
a proxy). Any written notice of revocation or subsequently executed proxy
should be sent to First Source Bancorp, Inc., 1000 Woodbridge Center Drive,
Woodbridge, NJ 07095, Attention: Christopher Martin, Corporate Secretary, or
hand delivered to Mr. Martin at such address at or before the taking of the
vote at the First Source Meeting.
First Source will bear all expenses of this solicitation of proxies from the
holders of First Source Common Stock, except that the cost of preparing and
mailing this Joint Proxy Statement/Prospectus will be borne equally by Pulse
and First Source. In addition to solicitation by use of the mails, proxies may
be solicited by directors, officers and employees of First Source in person or
by telephone, telegram or other means of communication. Such directors,
officers and employees will not be additionally compensated, but may be
reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. First Source has retained Kissel-Blake, Inc., a proxy soliciting
firm, to assist in such solicitation. The fee to be paid to such firm is not
expected to exceed $6,000 plus reasonable out-of-pocket costs and expenses. In
addition, Kissel-Blake, Inc. will make arrangements with brokerage firms and
other custodians, nominees and fiduciaries to send proxy materials to their
principals and will reimburse such parties for their expenses in doing so.
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THE MERGER
The following information concerning the Merger, insofar as it relates to
matters contained in the Merger Agreement, describes the material aspects of
the Merger but does not purport to be a complete description and is qualified
in its entirety by reference to the Merger Agreement which is incorporated
herein by reference and attached hereto as Annex A. First Source and Pulse
stockholders are urged to read carefully the Merger Agreement.
GENERAL
Pursuant to the terms of the Merger Agreement, subject to the satisfaction
or waiver (where permissible) of certain conditions, including, among other
things, the receipt of all necessary regulatory approvals, the expiration of
all waiting periods in respect thereof, and the approval of the Merger
Agreement by the requisite vote of the stockholders of First Source and Pulse,
Pulse will be merged with and into First Source. First Source shall be the
surviving corporation in the Merger, and shall continue its corporate
existence under the laws of the State of Delaware. Upon consummation of the
Merger, the separate corporate existence of Pulse shall terminate.
Immediately after the consummation of the Merger, Pulse Bank, a New Jersey
stock savings bank and a wholly-owned subsidiary of Pulse, will merge (the
"Subsidiary Bank Merger") with and into First Savings, a New Jersey savings
and loan association and a wholly-owned subsidiary of First Source. See
"CERTAIN RELATED TRANSACTIONS--Subsidiary Bank Merger Agreement."
EXCHANGE RATIO
At the Effective Time, each issued and outstanding share of Pulse Common
Stock, except for shares held directly or indirectly by Pulse or First Source
(other than Trust Account Shares and DPC Shares), will be converted into and
exchangeable for the number of shares of First Source Common Stock determined
as follows: (i) subject to certain provisions of the Agreement, if the Average
Closing Price of First Source Common Stock is equal to or greater than $11.50,
the Exchange Ratio shall be equal to 3.2; (ii) if the Average Closing Price is
$10.00 or greater but less than $11.50, the Exchange Ratio shall be 3.2; (iii)
if the Average Closing Price is greater than $8.50 but less than $10.00, the
Exchange Ratio shall equal $32.00 divided by the Average Closing Price; or
(iv) subject to certain provisions of the Agreement, if the Average Closing
Price is equal to or less than $8.50, the Exchange Ratio shall be 3.764. The
Average Closing Price is defined as the average closing sales price of the
First Source Common Stock on the Nasdaq Stock Market for the 10 consecutive
trading days ending on the fifth business day (the "Valuation Date") prior to
the date on which the later of approval of First Source's stockholders,
Pulse's Stockholders, or the date the last required regulatory approval for
the Merger and the other transactions contemplated by the Merger Agreement is
obtained, without regard to any requisite waiting periods in respect thereof.
Under the terms of the Merger Agreement, cash will be paid in lieu of the
issuance of fractional shares of First Source Common Stock.
If the Average Closing Price is less than $8.50 and, in response to an
election by Pulse to terminate the Merger Agreement, First Source elects to
increase the Exchange Ratio, First Source will exchange $32.00 of First Source
Common Stock for each share of Pulse Common Stock. See "--Waiver and
Amendment; Termination" below. Assuming the Merger is approved by the holders
of Pulse Common Stock, the Pulse Board may elect not to terminate the Merger
Agreement and to consummate the Merger without resoliciting Pulse stockholders
if the Average Closing Price is less than $8.50, even though, as a result of
the application of the Exchange Ratio, the value of the shares of First Source
Common Stock (valued at the Average Closing Price) issued in exchange for each
share of Pulse Common Stock would be less than $32.00. In such a situation, in
considering whether to consummate the Merger without the resolicitation of
Pulse stockholders, the Pulse Board will take into account, consistent with
its fiduciary duties, all relevant facts and circumstances that exist at such
time, including, without limitation, its evaluation of the then-existing
economic conditions and trends, its
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evaluation of the respective business, financial condition, results of
operations and prospects of each of Pulse and First Source, its evaluation of
the overall condition of the thrift and commercial banking industries and the
advice of its financial advisor and legal counsel. Pulse stockholders will
have no vote in the decision of the Pulse Board to either terminate the Merger
Agreement or elect to consummate the Merger in the event that the Average
Closing Price is less than $8.50. See "--Waiver and Amendment; Termination"
below.
Assuming the Merger is approved by the holders of First Source Common Stock
and the Average Closing Price is less than $8.50, the First Source Board may
elect to increase the Exchange Ratio and to consummate the Merger without
resoliciting First Source stockholders even though, as a result of such
adjustment, the number of shares of First Source Common Stock to be issued in
the Merger would increase. In such a situation, in considering whether to
increase the Exchange Ratio and consummate the Merger without the
resolicitation of First Source stockholders, the First Source Board will take
into account, consistent with its fiduciary duties, all relevant facts and
circumstances that exist at such time, including, without limitation, the
advice of its financial advisor and legal counsel. Such relevant facts and
circumstances would include the First Source Board's evaluation of the
dilutive impact of a higher Exchange Ratio to First Source's stockholders, its
evaluation of the strategic importance to First Source of the acquisition of
Pulse relative to any such dilutive impact and the accretive prospects of the
acquisition, its evaluation of the synergies of Pulse's business relative to
First Source, Pulse's financial condition, operating performance, and
prospects, and the advice of First Source's financial advisor as to the
fairness of such higher Exchange Ratio to First Source stockholders from a
financial point of view. First Source stockholders will have no vote in the
decision of the First Source Board to either permit Pulse to terminate the
Merger Agreement or elect to increase the Exchange Ratio in the event that the
Average Closing Price is less than $8.50.
First Source has the right to terminate the Agreement if the Average Closing
Price of First Source is greater than $11.50 per share, unless Pulse provides
notice pursuant to the Agreement that it wants to proceed with the Merger, in
which event First Source will exchange $36.80 of First Source Common Stock for
each share of Pulse Common Stock. Assuming the Merger is approved by First
Source stockholders, the First Source Board may elect not to terminate the
Merger Agreement and to consummate the Merger without resoliciting First
Source stockholders if the Average Closing Price is greater than $11.50 and
Pulse chooses not to decrease the consideration, even though, as a result of
the application of the Exchange Ratio, the value of the shares of First Source
Common Stock (valued at the Average Closing Price) issued in exchange for each
share of Pulse Common Stock would be greater that $36.80. In such a situation,
in considering whether to consummate the Merger without the resolicitation of
First Source stockholders, the First Source Board will take into account,
consistent with its fiduciary duties, all relevant facts and circumstances
that exist at such time including, without limitation, its evaluation of the
then-existing economic conditions and trends, its evaluation of the respective
business, financial condition, results of operations and prospects of each of
Pulse and First Source, its evaluation of the overall condition of the thrift
and commercial banking industry and the advice of its financial advisor and
legal counsel.
Assuming the Merger is approved by the holders of Pulse Common Stock and the
Average Closing Price is greater than $11.50, the Pulse Board may elect to
decrease the Exchange Ratio and to consummate the Merger without resoliciting
Pulse stockholders even though, a result of such adjustment, the number of
shares of First Source Common Stock to be issued in the Merger would decrease.
In such a situation, in considering whether to decrease the Exchange Ratio and
consummate the Merger without the resolicitation of Pulse stockholders, the
Pulse Board will take into account, consistent with its fiduciary duties, all
relevant facts and circumstances that exist at such time, including, without
limitation, the advice of its financial advisor and legal counsel. Such
relevant facts and circumstances would include the status of the overall stock
market, the market prices of stock of comparable financial institutions, the
economy and the performance of Pulse and First Source. See "THE MERGER--
Exchange Ratio" and "--Waiver and Amendment; Termination."
The formula for determining the Exchange Ratio was arrived at through arms-
length negotiations between Pulse and First Source. If First Source effects a
stock dividend, split-up or combination, or other distribution in First Source
Common Stock prior to consummation of the Merger, an appropriate adjustment to
the Exchange Ratio will be made.
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Under the terms of the Merger Agreement, the Exchange Ratio will be
determined by reference to the Average Closing Price of First Source Common
Stock as of the Valuation Date. Due to the requirements of applicable law,
among other reasons, it is possible that the Valuation Date will occur 30 days
or more prior to the Effective Time. The market price of First Source Common
Stock will fluctuate between the date of this Joint Proxy Statement/Prospectus
and the Valuation Date, and between the Valuation Date and the Effective Time.
Although the Merger Agreement provides that the Exchange Ratio will adjust to
absorb fluctuations in the market price of First Source Common Stock within
certain ranges prior to the Valuation Date, fluctuations in such market price
prior to the Effective Time could result in an increase or decrease in the
market price as of the Effective Time of the shares of First Source Common
Stock to be received by Pulse stockholders in the Merger. If the Valuation
Date had been October 30, 1998, the Exchange Ratio would have been 3.710. For
further information concerning the market prices of First Source Common Stock
and Pulse Common Stock, see "MARKET PRICES AND DIVIDEND INFORMATION." No
assurance can be given concerning the market price of First Source Common
Stock before or after the Effective Time.
No fractional shares of First Source Common Stock will be issued in
connection with the Merger. In lieu of the issuance of fractional shares,
First Source will make a cash payment to each Pulse stockholder who otherwise
would be entitled to receive a fractional share equal to the product of (i)
the fractional interest which a Pulse stockholder would otherwise receive and
(ii) the average of the closing sale prices of First Source Common Stock on
the Nasdaq National Market for the five trading days immediately preceding the
Effective Time.
Upon consummation of the Merger, any shares of Pulse Common Stock that were
owned by Pulse as treasury stock or that were held directly or indirectly by
First Source other than Trust Account Shares and DPC Shares will be canceled
and retired and no payment will be made with respect thereto.
Based on the outstanding shares of First Source and Pulse as of October 30,
1998, upon consummation of the Merger, the stockholders of Pulse will own
First Source Common Stock representing approximately 26.8% of the outstanding
First Source Common Stock following the Merger assuming an Exchange Ratio of
3.710. As more fully described above, the Exchange Ratio could be as low as
3.2 and as high as 3.764. Such percentages would range from 24.0% to 27.1%,
depending on whether the shares of Pulse Common Stock and First Source Common
Stock issuable upon exercise of outstanding Pulse stock options and First
Source stock options and warrants (vested and unvested) are issued. For
purposes of these calculations, except as set forth above, it is assumed that
no other shares of First Source Common Stock and Pulse Common Stock are
issued.
If the Merger had been consummated on September 30, 1998, First Source and
Pulse would have accounted for 69.0% and 31.0%, respectively, of the revenue
of the combined entity. Further, First Source and Pulse would have represented
70.2% and 29.8%, respectively, of the total assets and 84.6% and 15.4%,
respectively, of the stockholders' equity of the combined company. Such
amounts exclude consideration of merger and restructuring charges expected to
be made in connection with the Merger.
In addition, at the Effective Time, each outstanding and unexercised option
to purchase shares of Pulse Common Stock (a "Pulse Option") will either be
assumed by First Source or converted into shares of First Source pursuant to a
formula described below. If the Pulse options are converted into First Source
options, after the Effective Time, each Pulse Option will be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Pulse Option immediately prior to the Effective Time,
the number of shares of First Source Common Stock equal to the product,
rounded down to the nearest share, of the number of shares of Pulse Common
Stock subject to the Pulse Option and the Exchange Ratio, at a price per share
equal to the exercise price per share of Pulse Common Stock otherwise
purchasable pursuant to such Pulse Option divided by the Exchange Ratio,
rounded up to the nearest cent. If the Pulse options are converted into First
Source Common Stock, each Pulse option will be exchanged for such number of
shares (rounded down to the nearest whole share) of First Source Common Stock
as are equal in value (determined by valuing each share of First
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Source Common Stock at the Average Closing Price) to the excess of (i) the
number of shares of Pulse Common Stock subject to such option multiplied by
the Exchange Ratio multiplied by the Average Closing Price of the First Source
Common Stock over (ii) the aggregate exercise price of each option share.
BACKGROUND OF THE MERGER
Pulse is a unitary savings and loan holding company that is chartered by the
State of New Jersey. In 1990, Pulse exchanged its common stock for all of the
issued and outstanding common stock of a predecessor of Pulse Savings Bank.
The common stock of this predecessor, first chartered as a mutual institution
in 1916, had been issued in 1986. Pulse directs and plans the activities of
Pulse Bank, Pulse's primary asset. Pulse Bank is a New Jersey-chartered
capital stock savings bank headquartered in South River, New Jersey.
In connection with its normal strategic review, Pulse regularly examines its
strategic business alternatives, devoting particular attention to the
continuing consolidation and increasing competition in the banking and
financial services industries in the New Jersey market. The New Jersey market
is home to many large, aggressive regional commercial banking entities, and
the banking market in New Jersey in particular has been subject to significant
consolidation in recent years. As a result, competition in the local banking
and financial services industries has intensified, especially for smaller
thrift institutions like Pulse. This review by Pulse has included, from time
to time, presentations to the Pulse board of directors from investment banking
firms, including Sandler O'Neill. These presentations have included an
overview of the market for bank and thrift mergers, an assessment of Pulse's
then current strategic business plan, and a preliminary estimate of Pulse's
market value were it to pursue a strategic merger transaction. The President
of Pulse (Mr. Hornyak) and several of the members of the board of directors of
Pulse, were aware during the month of May 1998 that the stock prices of
certain thrift institutions in New Jersey had dropped, or failed to rise (as
had been typical), following their recent conversions from the mutual holding
company structure to a stock holding company structure.
During early June 1998, Mr. Hornyak was approached by Ryan, Beck, an
investment banker, which informed Mr. Hornyak that a financial institution
located in New Jersey was interested in discussing the possibility of pursuing
a negotiated merger with Pulse. Mr. Hornyak advised Ryan, Beck that Pulse was
not inclined to pursue a merger but agreed with Ryan, Beck that the recent
drop in share price for certain thrift institutions could present an
opportunity for Pulse if the consideration to be received by Pulse was based
on the then current share price of such a thrift institution as the potential
acquiror.
Following that discussion, in mid-June 1998, Mr. Hornyak advised the members
of the board of directors about his discussions with Ryan, Beck and that there
was an opportunity for shareholders of Pulse to realize value in exchanging
shares of Pulse for what could be relatively low priced shares of an acquiror.
Mr. Hornyak was informally advised by the members of the board of directors to
pursue his discussions. Mr. Hornyak did so and was told by Ryan, Beck that
First Source was the interested party. During the second half of June 1998, an
outline of terms was discussed with the Pulse Board of Directors, First Source
and Ryan, Beck. On June 23, 1998, with counsel present, a special meeting of
the Pulse board of directors was held to discuss the proposed terms of the
potential merger that management and certain directors had drafted. Discussion
at this meeting included the consideration received in recent merger
transactions as well as consideration that had been offered to Pulse in the
past several years during its exploration of its potential value in a merger.
The Board of Directors considered the relative merits in a tax free merger of
exchanging Pulse shares for either relatively high priced shares (on a book
value per share basis) of other financial institutions or for relatively low
priced shares (on a book value per share basis) of an institution such as
First Source. The market value of thrift institutions, such as First Source,
that had recently completed the conversion from mutual holding company to
stock form was evaluated, as was the value to Pulse of merging with another
thrift institution located in the same market area of Middlesex County, New
Jersey. At this meeting, counsel and the Board of Directors discussed
termination fees and lock-up options at great length, as well as accounting
and tax issues, and treatment of employee and other plans and other potential
impacts on Pulse. Between June 23 and 25, 1998, discussions between the
parties continued with additional revisions to the proposed terms. A regular
meeting of the Pulse Board of Directors was held on June 25, 1998. At this
meeting, the Board of Directors continued its discussion of many of the issues
discussed on June 23, 1998 and the revised terms were discussed and further
revised. Management was
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authorized on June 25, 1998 to submit a list of terms to First Source and, if
accepted by First Source, to begin a review of the operations of First Source
and negotiate a merger agreement, lock-up option and related documents.
During the remainder of June 1998 and during the early part of July 1998,
the form and amount of consideration, the Exchange Ratio, the treatment of
Pulse stock options, the termination provisions, and issues relating to the
management and operations of Pulse and Pulse Bank following the Merger were
determined on the basis of arms-length-negotiation between Pulse
representatives and the First Source representatives and agreement on other
proposed terms was reached. Pulse began to interview management of First
Source and examine documents. In early July 1998, because of Pulse's long term
relationship with Sandler O'Neill, Sandler O'Neill was engaged to render a
fairness opinion with respect to the Exchange Ratio. Pulse, First Source,
their respective legal counsel and Ryan, Beck conducted reciprocal due
diligence analyses.
During early July 1998, negotiations continued, members of the Board of
Directors of Pulse discussed the drafts of the merger agreement and Pulse's
counsel and accountants were consulted about various aspects of the proposed
merger. During this time Mr. Hornyak continued to confer with members of the
Board of Directors.
On July 9, 1998, the Pulse Board of Directors held a special meeting to
discuss the Merger Agreement and other aspects of the Merger. At that meeting,
the reasons for, and the potential benefits of the Merger were discussed;
Pulse's legal counsel reviewed the terms of the Merger Agreement, related
agreements and the transactions contemplated thereby and final revisions to
the Merger Agreement were made. At that meeting, Sandler O'Neill also made a
presentation to the Board of Directors and rendered its opinion as to the
fairness, from a financial point of view, of the Exchange Ratio to holders of
Pulse Common Stock. After a thorough discussion and consideration of the
factors discussed below under "The Merger--Recommendation of the Boards of
Directors; Reasons for the Merger" the Pulse Board of Directors unanimously
approved the Merger Agreement and the transactions contemplated in the Merger
Agreement as in the best interests of Pulse and its stockholders, and
authorized the execution of the Merger Agreement. The Merger Agreement was
entered into on July 9, 1998.
RECOMMENDATION OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER
Pulse. In reaching its decision to approve the Merger Agreement, the Pulse
Board considered a number of factors. The Pulse Board did not assign any
relative or specific weights to the factors considered. Among other things,
the Pulse Board considered: (i) the Merger consideration in relation to the
book value, assets and earnings of Pulse; (ii) information concerning the
financial condition, results of operations and prospects of First Source and
Pulse including the return on the assets and return on equity of the
respective companies; (iii) the financial terms of other recent business
combinations in the banking industry; and (iv) the opinion of Sandler O'Neill
as to the fairness of the Exchange Ratio, as of such date, to Pulse
stockholders from a financial point of view.
The Pulse Board believes that the terms of the Merger Agreement, which are
the product of arms-length negotiations between First Source and Pulse, are in
the best interest of Pulse and its stockholders. In the course of reaching its
determination, the Pulse Board consulted with its legal counsel with respect
to its legal duties, the terms of the Merger Agreement and the issues related
thereto; and with senior management regarding, among other things, operational
matters.
In reaching its determination to approve the Merger Agreement, the Pulse
Board also considered the following factors:
(a) The Pulse Board analyzed information with respect to the financial
condition, results of operations, business and prospects of First Source
and Pulse.
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(b) The Pulse Board considered the written opinion of Sandler O'Neill
that as of July 9, 1998, the Exchange Ratio was fair to Pulse shareholders
from a financial point of view. See "--Opinion of Pulse's Financial
Advisor."
(c) The Pulse Board considered the current operating environment,
including, but not limited to, the continuing consolidation and increasing
competition in the banking and financial services industries, the prospect
for further changes in these industries, and the importance of being able
to capitalize on developing opportunities in these industries. This
information had been periodically reviewed by the Pulse Board at its
regular board meetings and was also discussed between the Pulse Board and
Pulse's various advisors.
(d) The Pulse Board considered the other terms of the Merger Agreement
and exhibits, including the tax-free nature of the transaction.
(e) The Pulse Board considered the detailed financial analyses and other
information with respect to First Source and Pulse discussed by Sandler
O'Neill, as well as the Pulse Board's knowledge of Pulse, First Source and
their respective businesses. In this regard, the latest publicly-available
financial and other information for First Source and Pulse were analyzed,
including a comparison to publicly-available financial and other
information for other similar institutions.
(f) The Pulse Board considered the value of Pulse Common Stock if Pulse
continued as a stand-alone entity compared to the effect of Pulse combining
with First Source in light of the factors summarized above and the current
economic and financial environment, including, but not limited to, other
possible strategic alternatives, the results of the contacts and
discussions between Pulse and various third parties and the belief of the
Pulse Board and management that the Merger offered the best transaction
available to Pulse and its shareholders.
(g) The Pulse Board considered the likelihood of the Merger being
approved by the appropriate regulatory authorities, including factors such
as market share analysis, First Source's Community Reinvestment Act rating
and the estimated pro forma financial impact of the Merger on First Source.
(h) The Pulse Board considered the effect of the Merger on Pulse's
employees, customers and the communities it serves.
The foregoing discussion of the information and factors considered by
Pulse's Board is not intended to be exhaustive, but constitutes the material
factors considered by Pulse's Board. In reaching its determination to approve
and recommend the Merger Agreement, although Pulse's Board did not assign any
relative or specific weights to the foregoing factors, individual directors
may have weighed factors differently. After deliberating with respect to the
Merger and the other transactions contemplated by the Merger Agreement,
considering, among other things, the matters discussed above and the opinion
of Sandler O'Neill referred to above, the Pulse Board approved and adopted the
Merger Agreement and the transactions contemplated thereby as being in the
best interests of Pulse and its shareholders.
First Source. The First Source Board believes that the Merger is fair to,
and in the best interests of, First Source and its stockholders. Accordingly,
the First Source Board has unanimously approved the Merger Agreement and
recommends that First Source's stockholders vote FOR the approval and adoption
of the Merger Agreement and consummation of the transactions contemplated
thereby.
In reaching its decision to approve the Merger Agreement, the First Source
Board consulted with its legal advisors regarding the legal terms of the
transaction and First Source Board's obligations in its consideration of the
proposed transaction, its financial advisors regarding the financial aspects
and fairness of the proposed transaction, as well as with management of First
Source, and, without assigning any relative or specific weights, considered a
number of factors, both from a short-term and a longer-term perspective,
including the following:
(i) First Source Board's familiarity with and review of First Source's
business, operations, financial condition, earnings and prospects,
including, but not limited to, its potential growth, development,
productivity and profitability and the business risks associated therewith;
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(ii) First Source Board's review, based in part on a presentation by
First Source management regarding its due diligence on Pulse, of the
business, operations, earnings and financial condition of Pulse on an
historical, prospective and pro forma basis, and the enhanced opportunities
for growth that the Merger makes possible;
(iii) a variety of factors affecting and relating to the overall
strategic focus of First Source including, without limitation,
opportunities for growth in deposits, assets and earnings, and
opportunities available to First Source in the market areas where Pulse
conducts business;
(iv) the current and prospective economic, competitive and regulatory
environment facing financial institutions, including First Source;
(v) the terms of the Merger Agreement, the Stock Option Agreement and the
other documents executed in connection with the Merger;
(vi) the anticipated revenue enhancements, cost savings and efficiencies
available from the Merger; and
(vii) the financial advice rendered by Ryan, Beck and the opinion of
Ryan, Beck as to the fairness to First Source's stockholders from a
financial point of view of the aggregate consideration to be paid by First
Source in the Merger.
OPINIONS OF FINANCIAL ADVISORS
Pulse. Pursuant to an engagement letter dated as of July 1, 1998 (the
"Sandler O'Neill Agreement"), Pulse retained Sandler O'Neill as an independent
financial advisor to render an opinion as to the fairness, from a financial
point of view, of the Exchange Ratio to the holders of Pulse Common Stock.
Sandler O'Neill is a nationally recognized investment banking firm whose
principal business specialty is financial institutions. In the ordinary course
of its investment banking business, Sandler O'Neill is regularly engaged in
the valuation of such businesses and their securities in connection with
mergers and acquisitions and other corporate transactions.
On July 9, 1998, Sandler O'Neill delivered to the Pulse Board its oral and
written opinion, that, as of such date, the Exchange Ratio was fair to the
holders of shares of Pulse Common Stock, from a financial point of view.
Sandler O'Neill has also delivered to the Pulse Board a written opinion dated
the date of this Joint Proxy Statement/Prospectus (the "Sandler O'Neill
Fairness Opinion") which is substantially identical to the July 9, 1998
opinion. THE FULL TEXT OF THE SANDLER O'NEILL FAIRNESS OPINION, WHICH SETS
FORTH THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND
QUALIFICATIONS AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH
SUCH OPINION, IS ATTACHED AS ANNEX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS
AND IS INCORPORATED HEREIN BY REFERENCE. THE DESCRIPTION OF THE OPINION SET
FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ANNEX C. HOLDERS OF
SHARES OF PULSE COMMON STOCK ARE URGED TO READ THE SANDLER O'NEILL FAIRNESS
OPINION IN ITS ENTIRETY IN CONNECTION WITH THEIR CONSIDERATION OF THE PROPOSED
MERGER.
THE SANDLER O'NEILL FAIRNESS OPINION WAS PROVIDED TO THE PULSE BOARD FOR ITS
INFORMATION AND IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, OF THE EXCHANGE RATIO TO HOLDERS OF SHARES OF PULSE COMMON STOCK. IT
DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION OF PULSE TO ENGAGE IN THE
MERGER OR ANY OTHER ASPECT OF THE MERGER AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY HOLDER OF SHARES OF PULSE COMMON STOCK AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE PULSE MEETING WITH RESPECT TO THE MERGER OR ANY
OTHER MATTER RELATED THERETO.
In connection with rendering its July 9, 1998 opinion, Sandler O'Neill
performed a variety of financial analyses. The following is a summary of the
material analyses performed by Sandler O'Neill, but does not purport to be a
complete description of all the analyses underlying Sandler O'Neill's opinion.
The preparation of a fairness opinion is a complex process involving
subjective judgments and is not necessarily susceptible to a partial analysis
or summary description. Sandler O'Neill believes that its analyses must be
considered as a whole and that selecting portions of such analyses and the
factors considered therein, without considering all factors
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and analyses, could create an incomplete view of the analyses and processes
underlying its opinion. In performing its analyses, Sandler O'Neill made
numerous assumptions with respect to industry performance, business and
economic conditions and various other matters, many of which cannot be
predicted and are beyond the control of Pulse, First Source and Sandler
O'Neill. Any estimates contained in Sandler O'Neill's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates. Estimates on the values of
companies do not purport to be appraisals or necessarily reflect the prices at
which companies or their securities may actually be sold. Because such
estimates are inherently subject to uncertainty, neither Pulse nor Sandler
O'Neill assumes responsibility for their accuracy.
Summary of Proposal. Sandler O'Neill reviewed the financial terms of the
proposed transaction. Based on the closing price of First Source Common Stock
on July 8, 1998 of $9.88 and an Exchange Ratio of 3.241, Sandler O'Neill
calculated an implied transaction value per share of Pulse of $32.00. Based
upon such implied transaction value and Pulse's March 31, 1998 financial
information, Sandler O'Neill calculated the price to tangible book value and
price to last twelve months' normalized earnings. This analysis yielded a
price to tangible book value multiple of 2.21x and a price to last twelve
months' earnings multiple of 18.2x.
Stock Trading History. Sandler O'Neill reviewed the history of the reported
trading prices and volume of Pulse Common Stock and the First Source Common
Stock, and the relationship between the movements in the prices of Pulse
Common Stock and the First Source Common Stock, respectively, to movements in
certain stock indices, including the Standard & Poor's 500 Index (the "S&P
Index"), the NASDAQ Bank Index (the "Bank Index") and selected composite
groups of publicly traded savings institutions (in the case of Pulse) and
larger publicly traded savings institutions (in the case of First Source),
identified below. During the one-year period ended July 8, 1998, Pulse Common
Stock outperformed the S&P Index and the Bank Index, and slightly
underperformed the peer group index. During the six-year period ended July 8,
1998, First Source Common Stock outperformed each of the indices to which it
was compared. During the three-month period since First Source's public
offering, ended July 8, 1998, First Source Common Stock underperformed each of
the indices to which it was compared.
Comparable Company Analysis. Sandler O'Neill used publicly available
information to compare selected financial and market trading information,
including balance sheet composition, asset quality ratios, loan loss reserve
levels, profitability, capital adequacy, dividends and trading multiples, for
Pulse and two groups of savings institutions. The first group consisted of
Pulse and the following twelve publicly traded regional savings institutions
(the "Regional Group"): Ambanc Holding Co., Bayonne Bancshares Inc., Carver
Bancorp Inc., Fidelity Bancorp Inc., First Bell Bancorp Inc., FMS Financial
Corp., Lakeview Financial Corp., Northeast PA Financial Corp., Progress
Financial Corp., Raritan Bancorp Inc., TF Financial Corp., and Statewide
Financial Corp. Sandler O'Neill also compared Pulse to a group of ten publicly
traded savings institutions which had a return on average equity (based on
last twelve months' earnings) of greater than 14.3% and a price to tangible
book value of greater than 218% (the "Highly Valued Group"). The Highly Valued
Group included the following institutions: American Bank of Connecticut,
Coastal Financial Corp., FMS Financial Corp., Highland Bancorp Inc., Home
Federal Bancorp, Lakeview Financial Corp., MetroWest Bank, First Mutual
Savings Bank, Progress Financial Corp., and PVF Capital Corp. The analysis
compared publicly available financial information for Pulse and the median
data for each of the Regional Group and the Highly Valued Group as of and for
each of the years ended December 31, 1993 through December 31, 1997 and as of
and for the twelve months ended March 31, 1998.
Sandler O'Neill also used publicly available information to perform a
similar comparison of selected financial and market trading information for
First Source and two different groups of savings institutions. The first group
consisted of First Source and the following twelve publicly traded savings
institutions (the "Peer Group"): Dime Community Bancshares Inc., ESB Financial
Corp., Flushing Financial Corp., GA Financial Inc., JSB Financial Inc., Ocean
Financial Corp., Parkvale Financial Corp., PennFed Financial Services Inc.,
Peoples Bancorp Inc., Richmond County Financial Corp., WSFS Financial Corp.,
and York Financial Corp. Sandler O'Neill also compared First Source to a group
of fourteen publicly traded savings institutions which had a return on average
equity (based on last twelve months' earnings) of greater than 15.5% and a
price to tangible book
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value of greater than 169% (the "Larger Highly Valued Group"). The Larger
Highly Valued Group included American Bank of Connecticut, Anchor BanCorp
Wisconsin, CFSB Bancorp Inc., Coastal Financial Corp., D&N Financial Corp.,
First Federal Capital Corp., Highland Bancorp Inc., Home Federal Bancorp,
Lakeview Financial Corp., MECH Financial Inc., Metropolitan Financial Corp.,
MetroWest Bank, People's Bancshares Inc., and WSFS Financial Corp. The
analysis compared publicly available financial information for First Source
and the median data for each of the Peer Group and the Larger Highly Valued
Group as of and for each of the years ended December 31, 1993 through December
31, 1997 and as of and for the twelve months ended March 31, 1998.
Analysis of Selected Merger Transactions. Sandler O'Neill reviewed 72
transactions announced from January 1, 1998 through July 8, 1998 involving
publicly traded savings institutions nationwide as acquired institutions with
transaction values greater than $15 million ("Nationwide Transactions") and 17
transactions announced from January 1, 1998 through July 8, 1998 involving
publicly traded savings institutions in the Mid-Atlantic Region (Maryland, New
Jersey, New York, and Pennsylvania) as acquired institutions with transaction
values greater than $15 million ("Regional Transactions"). Sandler O'Neill
reviewed the ratios of transaction value to last four quarters' earnings,
transaction value to book value, transaction value to tangible book value,
tangible book premium to core deposits, transaction value to total deposits
and transaction value to total assets and computed high, low, mean, and median
ratios and premiums for the respective groups of transactions. These multiples
were applied to Pulse's financial information as of and for the twelve months
ended March 31, 1998. Based upon the median multiples for Nationwide
Transactions, Sandler O'Neill derived an imputed range of values per share of
Pulse Common Stock of $29.68 to $41.02. Based upon the median multiples for
Regional Transactions, Sandler O'Neill derived an imputed range of values per
share of Pulse Common Stock of $28.97 to $44.97.
No company involved in the transactions included in the above analysis is
identical to Pulse and no transaction included in the above analysis is
identical to the Merger. Accordingly, an analysis of the results of the
foregoing analysis is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the
public trading value of Pulse and First Source and the companies to which they
are being compared.
Discounted Dividend Stream and Terminal Value Analysis. Sandler O'Neill also
performed an analysis which estimated the future stream of after-tax dividend
flows of Pulse through the year 2003 under various circumstances, assuming
Pulse performed in accordance with earnings forecasts of its management and
certain variations thereof. To approximate the terminal value of Pulse Common
Stock at December 31, 2003, Sandler O'Neill applied price to earnings
multiples ranging from 12x to 27x and applied multiples of tangible book value
ranging from 100% to 350%. The dividend income streams and terminal values
were then discounted to present values using different discount rates (ranging
from 9% to 15%) chosen to reflect different assumptions regarding required
rates of return of holders or prospective buyers of Pulse Common Stock. This
analysis, assuming the current dividend payout ratio and management's earnings
forecasts, indicated an imputed range of values per share of Pulse Common
Stock of $14.65 to $39.65 when applying the price to earnings multiples, and
an imputed range of values per share of Pulse Common Stock of $12.06 to $47.07
when applying multiples of tangible book value. In connection with its
analysis, Sandler O'Neill used sensitivity analyses to consider the effects
that changes in the underlying assumptions (including variations with respect
to the growth rate of assets, net interest spread, non-interest income, non-
interest expense and dividend payout ratio) would have on the resulting
present value and discussed these effects with the Pulse Board. Sandler
O'Neill noted that the discounted dividend stream and terminal value analysis
is a widely used valuation methodology, but the results of such methodology
are highly dependent upon the numerous assumptions that must be made, and the
results thereof are not necessarily indicative of actual values or actual
future results.
Pro Forma Merger Analysis. Sandler O'Neill analyzed certain potential pro
forma effects of the Merger through December 31, 2003, based upon an Exchange
Ratio of 3.241, Pulse's and First Source's current and projected income
statements and balance sheets, and assumptions regarding the economic
environment, accounting and tax treatment of the Merger, charges associated
with the Merger, operating efficiencies and other adjustments discussed with
senior managements of Pulse and First Source. This analysis indicated that the
Merger would be accretive to First Source's earnings per share for all periods
analyzed and dilutive to tangible
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book value per share of First Source's Common Stock for all periods analyzed.
This analysis also indicated that, from a Pulse shareholder's perspective, as
compared to the projected stand-alone performance of Pulse, the Merger would
be dilutive to Pulse's earnings per share and accretive to tangible book value
per share for all periods analyzed. The actual results achieved by the
combined company may vary from projected results and the variations may be
material.
In connection with rendering its July 9, 1998 opinion, Sandler O'Neill
reviewed, among other things: (i) the Merger Agreement and exhibits thereto;
(ii) the Stock Option Agreement; (iii) certain publicly available financial
statements of Pulse and other historical financial information provided by
Pulse that Sandler O'Neill deemed relevant; (iv) certain publicly available
financial statements of First Source and other historical financial
information provided by First Source that Sandler O'Neill deemed relevant; (v)
certain financial analyses and forecasts of Pulse prepared by and reviewed
with management of Pulse and the views of senior management of Pulse regarding
Pulse's past and current business, operations, results thereof, financial
condition and future prospects; (vi) certain financial analyses and forecasts
of First Source prepared by and reviewed with management of First Source and
the views of senior management of First Source regarding First Source's past
and current business, operations, results thereof, financial condition and
future prospects; (vii) the pro forma impact of the Merger; (viii) the
publicly reported historical price and trading activity for Pulse Common Stock
and First Source Common Stock, including a comparison of certain financial and
stock market information for Pulse and First Source with similar publicly
available information for certain other companies the securities of which are
publicly traded; (ix) the financial terms of recent business combinations in
the savings institution industry, to the extent publicly available; (x) the
current market environment generally and the banking environment in
particular; and (xi) such other information, financial studies, analyses and
investigations and financial, economic and market criteria as Sandler O'Neill
considered relevant. Sandler O'Neill did not act as Pulse's financial advisor
in connection with its consideration of the Merger or in connection with the
negotiation of the Merger Agreement, and Sandler O'Neill was not asked to, and
did not, solicit indications of interest in a potential transaction from third
parties.
In connection with rendering the Sandler O'Neill Fairness Opinion, Sandler
O'Neill confirmed the appropriateness of its reliance on the analyses used to
render its July 9, 1998 opinion by performing procedures to update certain of
such analyses and by reviewing the assumptions upon which such analyses were
based and the factors considered in connection therewith.
In performing its reviews and analyses, Sandler O'Neill assumed and relied
upon, without independent verification, the accuracy and completeness of all
the financial information, analyses and other information that was publicly
available or otherwise furnished to, reviewed by or discussed with it, and
Sandler O'Neill does not assume any responsibility or liability therefor.
Sandler O'Neill did not make an independent evaluation or appraisal of the
specific assets, the collateral securing assets or the liabilities (contingent
or otherwise) of Pulse or First Source or any of their respective
subsidiaries, or the collectibility of any such assets, nor was it furnished
with any such evaluations or appraisals. Sandler O'Neill is not an expert in
the evaluation of allowances for loan losses and it has not made an
independent evaluation of the adequacy of the allowance for loan losses of
Pulse or First Source, nor has it reviewed any individual credit files
relating to Pulse or First Source. With Pulse's consent, Sandler O'Neill has
assumed that the respective aggregate allowances for loan losses for both
Pulse and First Source are adequate to cover such losses and will be adequate
on a pro forma basis for the combined entity. In addition, Sandler O'Neill has
not conducted any physical inspection of the properties or facilities of Pulse
or First Source. With respect to all financial information and projections
reviewed with each company's management, Sandler O'Neill assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the respective managements of the respective future
financial performances of Pulse and First Source and that such performances
will be achieved. Sandler O'Neill expressed no opinion as to such financial
projections or the assumptions on which they were based.
Sandler O'Neill's opinion was necessarily based upon market, economic and
other conditions as they existed on, and could be evaluated as of, the date of
such opinion. Sandler O'Neill assumed, in all respects material to its
analysis, that all of the representations and warranties contained in the
Merger Agreement and all
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related agreements are true and correct, that each party to such agreements
will perform all of the covenants required to be performed by such party under
such agreements and that the conditions precedent in the Merger Agreement are
not waived. Sandler O'Neill also assumed, with Pulse's consent, that there has
been no material change in Pulse's or First Source's assets, financial
condition, results of operations, business or prospects since the date of the
last publicly filed financial statements available to them, that Pulse and
First Source will remain as going concerns for all periods relevant to its
analyses, and that the Merger will be accounted for as a pooling of interests
and will qualify as a tax-free reorganization for federal income tax purposes.
Under the Sandler O'Neill Agreement, Sandler O'Neill has received a fee of
$200,000 for rendering its fairness opinion. Pulse has also agreed to
reimburse Sandler O'Neill for its reasonable out-of-pocket expenses incurred
in connection with its engagement and to indemnify Sandler O'Neill and its
affiliates and their respective partners, directors, officers, employees,
agents, and controlling persons against certain expenses and liabilities,
including liabilities under securities laws.
Sandler O'Neill has in the past provided certain other investment banking
services to Pulse and has received compensation for such services. Sandler
O'Neill has in the past provided certain investment banking services to First
Source and currently provides general advisory services to First Source and
has received compensation for such services. In addition, Sandler O'Neill may
in the future provide certain other investment banking services for First
Source and will receive compensation for such services. In the ordinary course
of its business as a broker/dealer, Sandler O'Neill may buy securities from
and sell securities to both Pulse and First Source. In addition, Sandler
O'Neill may actively trade the equity securities of Pulse and First Source and
their respective affiliates for its own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
First Source. Ryan, Beck began working with First Source during early June,
1998, and on July 8, 1998, First Source formally retained Ryan, Beck to advise
First Source on the acquisition of Pulse. Ryan, Beck is regularly engaged in
the valuation of banks, bank holding companies, savings and loan associations
and savings and loan holding companies in connection with mergers,
acquisitions and other securities-related transactions. Ryan, Beck has
knowledge of, and experience with, the New Jersey banking market and banking
organizations operating in that market, and was selected by First Source
because of its knowledge of, experience with, and reputation in the financial
services industry.
In its capacity as First Source's financial advisor, Ryan, Beck participated
in the negotiations with respect to the pricing and other terms and conditions
of the Merger, but the decision as to whether to acquire Pulse and the final
pricing of the Merger was ultimately made by the Board of Directors of First
Source on July 9, 1998. Ryan, Beck rendered its oral opinion to the First
Source Board on July 9, 1998, subsequently confirmed by a formal written
opinion dated as of the same date, and rendered an additional written opinion
dated November 3, 1998 (the "Opinion") that based on and subject to the
assumptions, factors and limitations as set forth in the Opinion and as
described below, that the Exchange Ratio is "fair" to First Source's
shareholders from a financial point of view. No limitations were imposed by
the First Source Board of Directors upon Ryan, Beck with respect to the
investigations made or procedures followed by it in arriving at its opinion.
THE FULL TEXT OF THE RYAN, BECK OPINION DATED AS OF NOVEMBER 3, 1998, WHICH
SETS FORTH ASSUMPTIONS MADE AND MATTERS CONSIDERED, IS SUBSTANTIALLY THE SAME
AS THE OPINION RENDERED BY RYAN, BECK ON JULY 9, 1998, AND IS ATTACHED AS
ANNEX D TO THIS JOINT PROXY STATEMENT / PROSPECTUS. SHAREHOLDERS OF FIRST
SOURCE ARE URGED TO READ THE OPINION IN ITS ENTIRETY. RYAN, BECK'S OPINION IS
DIRECTED ONLY TO THE EXCHANGE RATIO AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY FIRST SOURCE SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE
SPECIAL MEETING. THE SUMMARY OF THE OPINION OF RYAN, BECK SET FORTH IN THIS
JOINT PROXY STATEMENT / PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF SUCH OPINION. RYAN, BECK DOES NOT ADMIT THAT IT IS AN
EXPERT WITHIN THE MEANING OF THE TERM "EXPERT" AS USED IN THE SECURITIES ACT
AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER, OR THAT ITS OPINIONS
CONSTITUTE A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11 OF THE ACT
AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
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In connection with its analysis, Ryan, Beck: (i) reviewed the Merger
Agreement and related documents; (ii) reviewed this Joint Proxy
Statement/Prospectus; (iii) reviewed First Source's Annual Reports to
Shareholders and Annual Reports on Form 10-K for the years ended December 31,
1997, 1996, and 1995, and First Source's Quarterly Reports on Form 10-Q for
the periods ended June 30, 1998, March 31, 1998, September 30, 1997, June 30,
1997 and March 31, 1997; (iv) reviewed First Source's Registration Statement
filed on Form S-1/A dated February 9, 1998 in connection with its conversion
from a mutual holding company structure to a stock holding company structure;
(v) reviewed Pulse's Annual Reports to Shareholders and Annual Reports on Form
10-K for the years ended September 30, 1997, 1996, and 1995, and Pulse's
Quarterly Reports on Form 10-Q for the periods ended June 30, 1998, March 31,
1998, December 31, 1997, June 30, 1997 and March 31, 1997; (vi) reviewed the
historical stock prices and trading volume of First Source Common Stock; (vii)
reviewed the historical stock prices and trading volume of Pulse Common Stock;
(viii) reviewed the publicly available financial data of thrift organizations
which Ryan, Beck deemed generally comparable to First Source; (ix) reviewed
the publicly available financial data of thrift organizations which Ryan, Beck
deemed generally comparable to Pulse; (x) reviewed the terms of recent
acquisitions of thrift organizations which Ryan, Beck deemed generally
comparable in whole or in part to Pulse; and (xi) reviewed the potential pro
forma impact of the Merger on First Source's financial condition, operating
results and per share figures. Ryan, Beck also conducted or reviewed such
other studies, analyses, inquiries and examinations as deemed appropriate.
Ryan, Beck also reviewed certain financial projections provided by First
Source and Pulse for the year ending December 31, 1998 and met with certain
members of First Source and Pulse's senior management to discuss First Source
and Pulse's past and current business operations, financial condition,
strategic plan and future prospects, including the prospects for the combined
company and any potential operating efficiencies and synergies which may arise
from the Merger.
In connection with its review, Ryan, Beck relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information regarding First Source and Pulse provided to Ryan, Beck by
First Source and Pulse and their representatives. Ryan, Beck is not an expert
in the evaluation of allowances for loan losses. Therefore, Ryan, Beck has not
assumed any responsibility for making an independent evaluation of the
adequacy of the allowances for loan losses as set forth on First Source and
Pulse's balance sheets at June 30, 1998, and Ryan, Beck assumed such
allowances were adequate and complied fully with applicable law, regulatory
policy and prudent banking practice as of the date of such financial
statements. Ryan, Beck has reviewed certain historical financial data and
financial projections (and the assumptions and bases therefor) provided by
First Source and Pulse. Ryan, Beck assumed that such forecasts and projections
reflected the best currently available estimates and judgments of the
respective managements. In certain instances, for the purposes of its
analyses, Ryan, Beck made adjustments to such financial and operating
forecasts which in Ryan, Beck's judgment were appropriate under the
circumstances. Ryan, Beck was not retained to nor did it make any independent
evaluation or appraisal of the assets or liabilities of First Source or Pulse
nor did Ryan, Beck review any loan files of First Source or Pulse or their
respective subsidiaries. Ryan, Beck also assumed that the Merger in all
respects is, and will be, undertaken and consummated in compliance with all
laws and regulations that are applicable to First Source and Pulse.
The preparation of a fairness opinion on a transaction such as the Merger
involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances and, therefore, the Opinion is not readily
susceptible to summary description. In arriving at its opinion, Ryan, Beck
performed a variety of financial analyses. Ryan, Beck believes that its
analyses must be considered as a whole and the consideration of portions of
such analyses and the factors considered therein, without considering all
factors and analyses, could create an incomplete view of the analyses and the
process underlying Ryan, Beck's Opinion. No one of the analyses was assigned a
greater significance than any other.
The projections furnished to Ryan, Beck were prepared by the respective
managements of First Source and Pulse, without input or guidance by Ryan,
Beck. First Source and Pulse do not publicly disclose internal management
projections of the type provided to Ryan, Beck in connection with the review
of the Merger. Such projections were not prepared with a view towards public
disclosure. The public disclosure of such projections
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could be misleading since the projections were based on numerous variables and
assumptions which are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions. Accordingly,
actual results could vary significantly from those set forth in such
projections.
In its analyses, Ryan, Beck made numerous assumptions with respect to
industry performance, business and economic conditions, and other matters,
many of which are beyond the control of First Source or Pulse. Any estimates
contained in Ryan, Beck's analyses are not necessarily indicative of future
results or values, which may be significantly more or less favorable than such
estimates. Estimates of values of companies do not purport to be appraisals
nor do they necessarily reflect the prices at which companies or their
securities may actually be sold.
The following is a brief summary of the analyses and procedures performed by
Ryan, Beck in the course of arriving at its opinion.
Analysis of Selected Publicly Traded Companies: Ryan, Beck compared Pulse's
financial data as of March 31, 1998 to a peer group of fifteen thrift
organizations located in the Mid-Atlantic region with assets between $400
million and $1.1 billion. Ryan, Beck deemed this group to be generally
comparable to Pulse. At or for the twelve months ended March 31, 1998, Pulse
had tangible equity to tangible assets of 8.34%, a return on average assets of
1.07%, a return on average equity of 13.17%, a net interest margin of 2.67%, a
ratio of non-interest expenses to average assets of 1.04%, a ratio of non-
performing loans (including loans 90 days past due and still accruing
interest) to total loans of 0.85%, a ratio of non-performing assets (including
loans 90 days past due and still accruing interest) to total assets of 0.60%,
a ratio of loan loss reserves to non-performing loans (including loans 90 days
past due and still accruing interest) of 170.00%, an efficiency ratio of
38.65%, total loans to total assets of 26.35%, and non-interest income to
average assets of 0.08%. These ratios were compared to the median ratios of
the fifteen selected thrift organizations, which were, as calculated, a
tangible equity to tangible assets ratio of 7.78%, a return on average assets
of 0.85%, a return on average equity of 8.69%, a net interest margin of 3.26%,
a ratio of non-interest expenses to average assets of 2.15%, a ratio of non-
performing loans (including loans 90 days past due and still accruing
interest) to total loans of 0.65%, a ratio of non-performing assets (including
loans 90 days past due and still accruing interest) to total assets of 0.47%,
a ratio of loan loss reserves to non-performing loans (including loans 90 days
past due and still accruing interest) of 125.97%, an efficiency ratio of
58.28%, total loans to total assets of 49.75%, and non-interest income to
average assets of 0.27%. Ryan, Beck noted that the performance of Pulse as
measured by a return on average assets and average equity ratio was superior
to that of the peer group. Additionally, Ryan, Beck noted that Pulse's low
level of non-interest expenses as a percent of average assets more than
compensates for their lower net interest margin and non-interest income as a
percent of average assets when compared to the peer group. This is evidenced
by their superior efficiency ratio. Ryan, Beck also noted the significantly
lower level of loans at Pulse relative to its peers.
Ryan, Beck also compared First Source's financial data as of May 31, 1998
(pro forma for their "second step" conversion from mutual holding company
structure to stock holding company structure) with that of a group of nineteen
selected thrift organizations located in the Mid-Atlantic region with assets
between $500 million and $2.0 billion. Ryan, Beck deemed this group to be
generally comparable to First Source. At or for the twelve months ended May
31, 1998, First Source had tangible equity to tangible assets of 20.87%, a
return on average assets of 1.18%, a return on average equity of 5.50%, a
dividend yield of 1.19%, a net interest margin of 2.98%, an efficiency ratio
of 42.05%, a ratio of non-performing loans (including loans 90 days past due
and still accruing interest) to total loans of 0.51%, a ratio of non-
performing assets (including loans 90 days past due and still accruing
interest) to total assets of 0.38% and a ratio of reserves to non-performing
loans (including loans 90 days past due and still accruing interest) of
208.36%. These ratios were compared to the median ratios of the nineteen
selected thrift organizations, which were, as calculated, a tangible equity to
tangible assets ratio of 9.82%, a return on average assets ratio of 0.92%, a
return on average equity ratio of 10.15%, a dividend yield of 1.84%, a net
interest margin of 3.26%, an efficiency ratio of 51.31%, a ratio of non-
performing loans (including loans 90 days past due and still accruing
interest) to total loans of 0.85%, a ratio of non-performing assets (including
loans 90 days past due and still accruing interest) to total assets of 0.51%
and a ratio of reserves to non-performing loans (including loans 90 days past
due and still accruing interest) of
39
<PAGE>
125.97%. Using First Source's July 6, 1998 Common Stock price of $10.06, its
price to Last Twelve Months ("LTM") earnings was 23.4 times, price to book
value was 123.77% and price to tangible book value was 127.86%. The peer
group's median price to LTM earnings was 17.0 times, price to book value was
166.04% and price to tangible book value was 173.42%. Financial data for the
peer group was generally as of March 31, 1998.
Analysis of Selected Transactions: Ryan, Beck compared Pulse's financial
data at or for the twelve months ended March 31, 1998 with that of a group of
eight selected thrift organizations being acquired in transactions accounted
for as pooling-of-interests, announced since June 1, 1997, and for which
pricing data pertaining to the transactions was publicly available. The
criteria for this group was thrifts in the New England and Mid-Atlantic
regions with assets between $350 million and $750 million and equity to assets
less than 15%. Ryan, Beck deemed this group to be generally comparable to
Pulse. The median ratios of the eight selected companies, as calculated,
represented a 7.88% tangible equity to tangible assets ratio, a non-performing
assets to assets ratio of 0.78%, an annualized year-to-date return on average
assets of 0.96% and an annualized year-to-date return on average equity of
11.34%. These ratios were compared to Pulse's ratios, which were, as
calculated, a 8.34% tangible equity to tangible assets ratio, a non-performing
assets to assets ratio of 0.60%, a return on average assets of 1.07%, and a
return on average equity of 13.17%.
Ryan, Beck also calculated certain ratios based on the $32.00, subject to
adjustments and limitations, of First Source Common Stock to be issued for
each share of Pulse. This price represented 221.15% of book value at March 31,
1998, 221.15% of tangible book value at March 31, 1998, 18.18 times LTM
diluted earnings, and a core deposit premium to tangible book value at March
31, 1998 of 12.73%. The median ratios for the Comparable Transactions, as
calculated, represented a price to book value of 237.14%, a price to tangible
book value of 238.93%, a price to latest twelve months diluted earnings of
21.02 times and a core deposit premium to tangible book value of 17.35%. The
imputed value of Pulse based on the median multiples of the above mentioned
acquisition peer group was $34.31 based on price to book value, $34.57 based
on price to tangible book value, $37.00 based on price to LTM diluted earnings
and $38.35 based on the core deposit premium to tangible book value.
Prior to issuing the Opinion, Ryan, Beck updated its analyses and adjusted
the peer group statistics to reflect the change in the Nasdaq Bank Stock Index
from the date of announcement of each stock transaction to the closing value
of the index on October 28, 1998. The resultant median ratios for the
Comparable Transactions, as calculated, represented a price to stated book
value of 216.06%, a price to tangible book value of 221.99%, a price to latest
twelve months earnings of 21.02 times, and a core deposit premium over
tangible book value of 15.92%. The imputed value of Pulse based on the
adjusted median ratios of the above mentioned peer group was $32.45 based on
price to stated book value, $33.34 based on price to tangible book value,
$36.57 based on price to latest twelve months earnings, $36.15 based on the
core deposit premium to tangible book value.
No company or transaction used in the Analysis of Selected Publicly Traded
Companies and Transactions sections is identical to Pulse, First Source or the
Merger. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies involved and other factors that could affect the trading values of
the securities of the company or companies to which they are being compared.
Impact Analysis: Ryan, Beck analyzed the Merger in terms of its effect on
First Source's projected earnings per share, current book value, tangible book
value, and capital ratios. Ryan, Beck based its analysis on First Source and
Pulse's projected 1999 earnings, as provided by the management of First Source
and Pulse, assumed to grow thereafter at a compound annual growth rate of 7%,
and certain assumptions with respect to cost savings and other synergies and
the amount of the restructuring charge resulting from the Merger. Based upon
the stand alone earnings projections provided by First Source and Pulse and
First Source's closing stock price on July 6, 1998 of $10.06 per share, the
analysis showed that the Merger would be accretive to First Source's estimated
1999 earnings per share by approximately 6.9% and accretive to 2000 earnings
per share by approximately 6.4%. Based upon First Source's and Pulse's May 31,
1998 and March 31, 1998 estimated financial data, respectively, the Merger
would be dilutive to First Source's book value per share by approximately
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11.1%, and dilutive to First Source's tangible book value per share by
approximately 10.6%. Based upon May 31, 1998 estimated financial data, First
Source's pro forma total equity to total assets would decrease from 21.76% to
17.60%, its tangible equity to tangible assets would decrease from 21.21% to
17.20%, and its intangible assets to total equity would be reduced from 3.21%
to 2.74%. Ryan, Beck updated its analysis prior to issuing the Opinion using
First Source's closing stock price as of October 28, 1998. The analysis showed
that the merger would be accretive to First Source's estimated 1999 earnings
per share by approximately 1.5% and accretive to 2000 earnings per share by
approximately 1.1%. Based upon First Source's and Pulse's September 30, 1998
financial data, respectively, the Merger would be dilutive to First Source's
book value per share by approximately 14.3%, and dilutive to First Source's
tangible book value per share by approximately 13.9%. First Source's pro forma
total equity to total assets would decrease from 20.88% to 17.14%, its
tangible equity to tangible assets would decrease from 20.36% to 16.76%, and
its intangible assets to total equity would be reduced from 3.10% to 2.66%.
The actual results achieved may vary from the projected results and the
variations may be material.
Discounted Dividend Analysis: Using a discounted dividend analysis, Ryan,
Beck estimated the present value of the future dividend streams that Pulse
could produce in perpetuity. Projection ranges for Pulse's five-year balance
sheet and income statement were provided by Pulse's management. Management's
projections were based upon various factors and assumptions, many of which are
beyond the control of Pulse. These projections are, by their nature, forward-
looking and may differ materially from the actual values or actual future
results which may be significantly more or less favorable than suggested by
such projections. In producing a range of per share Pulse values, Ryan, Beck
utilized the following assumptions: discount rates range from 11.0% to 13.0%,
terminal price/earnings multiples range from 14.0x to 16.0x (which when
applied to terminal year estimated earnings produces a value which
approximates the net present value of the dividends in perpetuity, given
certain assumptions regarding growth rates and discount rates) and earnings
that include estimated savings in Pulse's non-interest expenses equal to 41.8%
in 1999 and 2000 with an assumed 5% annual growth in synergies in years
thereafter. The discounted dividend analysis produced a range of net present
values per share of Pulse Common Stock from $28.43 to $33.46. These analyses
do not purport to be indicative of actual values or expected values or an
appraisal range of the shares of Pulse Common Stock. Ryan, Beck noted that the
discounted dividend analysis is a widely used valuation methodology, but noted
that it relies on numerous assumptions, including expense savings levels,
dividend payout rates, terminal values and discount rates, the future values
of which may be significantly more or less than such assumptions. Any
variation from these assumptions would most likely produce different results.
In connection with its written Opinion dated as of November 3, 1998, Ryan,
Beck confirmed the appropriateness of its reliance on the analyses used to
render its July 9, 1998 oral and written opinions by performing procedures to
update certain of such analyses and by reviewing the assumptions and
conclusions contained in the July 9, 1998 opinion.
RYAN, BECK'S WRITTEN OPINION DATED NOVEMBER 3, 1998 WAS BASED SOLELY UPON
THE INFORMATION AVAILABLE TO IT AND THE ECONOMIC, MARKET AND OTHER
CIRCUMSTANCES AS THEY EXISTED AS OF THE DATE OF SUCH OPINION. RYAN, BECK DID
NOT EXPRESS ANY OPINION AS TO THE PRICE OR RANGE OF PRICES AT WHICH FIRST
SOURCE COMMON STOCK MIGHT TRADE SUBSEQUENT TO THE MERGER. EVENTS OCCURRING
AFTER SUCH DATE COULD MATERIALLY AFFECT THE ASSUMPTIONS AND CONCLUSIONS
CONTAINED IN SUCH OPINION. RYAN, BECK HAS NOT UNDERTAKEN TO REAFFIRM OR REVISE
ITS OPINION OR OTHERWISE COMMENT UPON ANY EVENTS OCCURRING AFTER THE DATE OF
THE OPINION.
The opinion of Ryan, Beck that the Exchange Ratio is fair to First Source's
shareholders from a financial point of view does not include situations in
which Pulse elects to terminate the Merger Agreement as a result of a decline
in the price of First Source Common Stock to $8.50 or less. Under such
circumstances, First Source can override such termination by increasing the
number of shares of First Source Common Stock issuable for each share of Pulse
Common Stock from 3.2 shares to such number of shares of First Source Common
Stock having an aggregate market value of $32.00 based upon the First Source
Market Value as of the determination date. Whether or not First Source would
agree to increase the Exchange Ratio would have to be evaluated by
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First Source's Board of Directors at the time of any such termination by Pulse
based upon the facts and circumstances existing at that time. In connection
with any such evaluation by First Source's Board of Directors, First Source
intends to request Ryan, Beck to reevaluate the transaction to determine
whether the revised Exchange Ratio is fair to First Source's shareholders from
a financial point of view. Ryan, Beck has been advised by First Source that it
would be requested to update its opinion under such circumstances and that, in
the event that Ryan, Beck is unable to deliver an opinion under such
circumstances and First Source nonetheless elects to override Pulse's
termination of the Merger Agreement and proceed with the Merger, First Source
would resolicit its shareholders to advise them of such facts.
The summary set forth above does not purport to be a complete description,
but is a brief summary of the material analyses and procedures performed by
Ryan, Beck in the course of arriving at its Opinion.
With regard to Ryan, Beck's services in connection with the Merger
Agreement, First Source has agreed to pay Ryan, Beck an advisory fee of
approximately $800,000. A portion of Ryan, Beck's advisory fee equal to
approximately $200,000 was paid upon execution of the Merger Agreement and the
remainder will be paid at the time of the closing of the Merger. First Source
has also agreed to pay Ryan, Beck an additional $50,000 for issuing an opinion
at the completion of the Merger, should an additional opinion be requested. In
addition, First Source has agreed to reimburse Ryan, Beck for its reasonable
out-of-pocket expenses, which shall not exceed $5,000 without the prior
consent of First Source. First Source has also agreed to indemnify Ryan, Beck
and certain related persons against certain liabilities, including liabilities
under federal securities law, incurred in connection with its services. The
amounts of Ryan, Beck's fees were determined by negotiation between First
Source and Ryan, Beck.
Ryan, Beck has had a prior investment banking relationship with First
Source. Ryan, Beck was the sole underwriter for First Source, which was then
known as First Savings Bank, in both its May, 1992 reorganization from a
mutual to a mutual holding company structure and its May, 1995 secondary stock
offering. Ryan, Beck was also a financial advisor, but not an underwriter for
First Source in its "second step" conversion dated April 9, 1998 from a mutual
holding company structure to a stock holding company structure. Additionally,
Ryan, Beck acted as financial advisor with respect to the sale of a branch
office. Additionally, Ryan, Beck's research department has issued research
reports on First Source and comments on First Source in its periodic
commentaries. Ryan, Beck is also a market maker in First Source's stock.
Ryan, Beck has not had an investment banking relationship with Pulse since
1986. Ryan, Beck was the sole underwriter of Pulse's conversion, which was
then known as Pulawski Savings and Loan Association, from a mutual to a stock
savings and loan association in September, 1986. Ryan, Beck is a market maker
in Pulse's stock. Ryan, Beck's research department does not cover Pulse.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Pulse Stock Options. The following table sets forth, as of October 30, 1998,
information regarding outstanding options under the Pulse Option Plans held by
directors and certain executive officers of Pulse and Pulse Bank. Unless
exercised before the Effective Time, such options will be converted into
options to acquire First Source Common Stock, adjusted for the Exchange Ratio.
For a description of the manner in which these options will be treated in
connection with the Merger, See "--Exchange Ratio."
<TABLE>
<CAPTION>
OUTSTANDING STOCK
NAME PRINCIPAL POSITION WITH PULSE OPTION SHARES
- ---- ----------------------------- -----------------
<S> <C> <C>
George T. Hornyak, Jr... President and Chief Executive Officer 33,448
Benjamin S. Konopacki... Chairman of the Board 19,448
Joseph Chadwick......... Director 20,448
Edwin A. Kolodziej...... Director 14,448
Wayne A. Kronowski...... Director 20,448
Edwin A. Roginski....... Director 14,448
Thomas Konopacki........ Executive Vice President and Chief Financial Officer 29,000
Ronald E. Vaughn, Jr.... Senior Vice President and Chief Lending Officer 5,000
</TABLE>
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Consulting Agreement. It is intended that upon the Effective Date of the
Merger, First Source will enter into a consulting agreement with George T.
Hornyak, Jr. The agreement with Mr. Hornyak will have a term of three years
during which time he will serve as consultant with an annual fee of $150,000.
During the term of the consulting agreement Mr. Hornyak will continue to
receive reimbursement for coverage for family medical insurance benefits;
existing supplemental life insurance covering Mr. Hornyak will be prepaid in
an amount up to $36,000 and country club dues and automobile benefits will
continue to be provided in an aggregate amount of up to $60,000.
Directorships. On or before the Effective Time, the First Source Board will
appoint George T. Hornyak, Jr. and Joseph Chadwick, directors of Pulse, to
newly-created directorships on the First Source Board for a term to expire in
the years 2001 and 1999, respectively. Messrs. Hornyak and Chadwick will also
be appointed to the board of directors of First Savings Bank for a term
expiring in 1999. Following their terms, they will be considered for re-
election to the boards of directors of First Source and First Savings Bank.
The Merger Agreement provides that Mr. Hornyak and Mr. Chadwick will
participate in the future stock benefit plans of First Source to the same
extent as other non-employee directors of First Source. See "APPROVAL OF THE
FIRST SOURCE BANCORP, INC. 1998 STOCK-BASED INCENTIVE PLAN." All other
directors of Pulse will serve on the Advisory Board of First Source for at
least three (3) years. Each advisory director will be entitled to an initial
payment of $45,000 during the first year of their term and $12,000 in each of
the first, second and third years of their term, or, instead, annuities of
comparable value. See "Management After the Merger."
Termination of Existing Employment Agreements. As of the Effective Time,
Pulse will terminate the employment of George T. Hornyak, Jr., Benjamin S.
Konopacki, and Thomas Konopacki, and make payments in accordance with their
employment agreements. As a result, the estimated amounts of payment at that
time is $958,000 for Mr. Hornyak, $165,000 for Mr. B. Konopacki, and $442,000
for Mr. T. Konopacki.
Continued Retainer of General Counsel. Mr. Kolodziej, the general counsel to
Pulse, will continue with the current retainer agreement for a period of three
years after the Merger with a prepaid aggregate retainer of $39,000 for the
three year period.
Severance Benefits. First Source has agreed that in the event any Pulse Bank
employee loses his/her job within one year of the merger, the employee will be
entitled to two weeks pay per year of employment.
Indemnification of and Continued Insurance Coverage for Pulse
Management. First Source has agreed that for a period of six (6) years
following the closing date of the Merger, the Merger will not affect or
diminish any of Pulse's duties and obligations of indemnification existing as
of the closing date of the Merger in favor of employees, agents, directors or
officers of Pulse or any of its subsidiaries arising by virtue of Pulse's
Certificate of Incorporation or Bylaws in the form in effect at the date of
the Merger Agreement or arising by operation of law. First Source will cause
the persons serving as officers and directors of Pulse immediately prior to
the closing date of the Merger to be covered for a period of six (6) years
from the closing date of the Merger by the directors' and officers' liability
insurance policy maintained by Pulse (provided that First Source may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are not materially less advantageous
than such policy) with respect to acts or omissions occurring prior to the
closing date of the Merger which were committed by such officers and directors
in their capacity as such.
EMPLOYEE MATTERS
Pursuant to the terms of the Merger Agreement, employees of Pulse shall
become entitled to participate in certain benefit plans maintained by First
Source on the same terms and conditions as applicable to comparable employees
of First Source and shall be granted credit for service with Pulse for certain
purposes under certain of such plans. Pursuant to the terms of the Merger
Agreement, First Source has agreed to honor in accordance with their terms,
certain employment, severance and other compensation agreements and
arrangements between Pulse and certain of its directors, officers and
employees.
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EFFECTIVE TIME
The Merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware in accordance with
applicable law or such later time as is specified in such certificate (the
"Effective Time"). The filing with respect to the Merger will occur on the
first day (the "Closing Date") which is (i) the last business day of a month
and (ii) at least two business days after satisfaction or waiver of the latest
to occur of certain conditions to the Merger specified in the Merger
Agreement, unless another date is agreed to in writing by First Source and
Pulse. See "--Conditions to the Merger" below. It is expected that a period of
time will elapse between the Special Meetings and the Effective Time while the
parties seek to obtain the regulatory approvals required to consummate the
Merger. There can be no assurance that such regulatory approvals will be
obtained, and if obtained, there can be no assurance as to the date of any
such approval. There can also be no assurance that any such approvals will not
contain a Burdensome Condition (as defined below) which causes such approvals
to fail to satisfy the conditions set forth in the Merger Agreement and
described below under "--Conditions to the Merger." There can likewise be no
assurance that the United States Department of Justice or the New Jersey
Attorney General will not challenge the Merger or, if such a challenge is
made, as to the result thereof. See "--Regulatory Approvals Required for the
Merger" below. The Merger Agreement may be terminated by either party if,
among other reasons, the Merger has not been consummated on or before March
31, 1999. See "--Waiver and Amendment; Termination" below.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; FRACTIONAL
SHARES
Pulse. As promptly as practicable after the Effective Time, and in no event
more than three business days thereafter, a transfer agent selected by First
Source and reasonably satisfactory to Pulse, acting in the capacity of
exchange agent (the "Exchange Agent"), will mail to each former holder of
record of Pulse Common Stock a form of letter of transmittal, together with
instructions for the exchange of such holder's certificates representing
shares of Pulse Common Stock for certificates representing shares of First
Source Common Stock and cash in lieu of fractional shares.
HOLDERS OF PULSE COMMON STOCK SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL
THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FROM THE EXCHANGE
AGENT, AND SHOULD NOT RETURN SUCH STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Upon surrender to the Exchange Agent of one or more certificates
representing shares of Pulse Common Stock, together with a properly completed
letter of transmittal, there will be issued and mailed to the holder of Pulse
Common Stock surrendering such items a certificate or certificates
representing the number of shares of First Source Common Stock to which such
holder is entitled and, where applicable, a check for the amount representing
any fractional share determined in the manner described below, without
interest. The Pulse certificate or certificates so surrendered will be
cancelled.
No dividend or other distribution declared after the Effective Time with
respect to First Source Common Stock will be paid to the holder of any
unsurrendered Pulse certificate until the holder surrenders such certificate,
at which time the holder will be entitled to receive all previously withheld
dividends and distributions, without interest. No holder of an unsurrendered
Pulse certificate will be entitled, until the surrender of such certificate,
to vote the shares of First Source Common Stock into which his or her shares
of Pulse Common Stock have been converted.
After the Effective Time, there will be no transfers on the stock transfer
books of Pulse of shares of Pulse Common Stock issued and outstanding
immediately prior to the Effective Time. If certificates representing shares
of Pulse Common Stock are presented for transfer after the Effective Time,
they will be cancelled and exchanged for certificates representing shares of
First Source Common Stock.
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<PAGE>
None of the Exchange Agent, First Source or Pulse, or any other person, will
be liable to any former holder of Pulse Common Stock for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
If a certificate for Pulse Common Stock has been lost, stolen or destroyed,
the Exchange Agent will issue the consideration properly payable in accordance
with the Merger Agreement upon receipt of appropriate evidence as to such
loss, theft or destruction, appropriate evidence as to the ownership of such
certificate by the claimant, and appropriate and customary indemnification.
No fractional shares of First Source Common Stock will be issued in the
Merger. Instead, the Merger Agreement provides that each holder of shares of
Pulse Common Stock exchanged pursuant to the Merger who would otherwise have
been entitled to receive a fraction of a share of First Source Common Stock
will receive, in lieu thereof, cash in an amount equal to such fractional part
of a share of First Source Common Stock multiplied by the Average Closing
Price of First Source Common Stock. See "THE MERGER--Exchange Ratio" for a
discussion of the Average Closing Price. No such holder will be entitled to
dividends, voting rights or any other rights as a stockholder in respect of
any fractional share to which such holder would otherwise have been entitled
to receive.
First Source. Shares of First Source Common Stock issued and outstanding
immediately prior to the Effective Time will remain issued and outstanding and
be unaffected by the Merger, and holders of such stock will not be required to
exchange the certificates representing such stock or take any other action by
reason of the consummation of the Merger.
CONDITIONS TO THE MERGER
The respective obligations of First Source and Pulse to effect the Merger
are subject to the satisfaction of the following conditions at or prior to the
Effective Time: (i) approval of the Merger Agreement by the affirmative vote
of the holders of at least a majority of the outstanding shares of Pulse
Common Stock entitled to vote thereon and by the affirmative vote of the
holders of at least a majority of the outstanding shares of First Source
Common Stock entitled to vote thereon; (ii) the shares of First Source Common
Stock issuable to holders of Pulse Common Stock pursuant to the Merger shall
have been authorized for listing on the Nasdaq Stock Market, subject to
official notice of issuance; (iii) approval of the Merger Agreement and the
transactions contemplated thereby (including the Merger and the Subsidiary
Bank Merger by the appropriate governmental authorities (all such governmental
authorities being referred to as the "Governmental Entities"), and the
expiration of any statutory waiting periods in respect thereof (collectively,
the "Requisite Regulatory Approvals") (see "--Regulatory Approvals Required
for the Merger" below); (iv) receipt of all necessary state securities laws
and "blue sky" permits and other authorizations required in connection with
the issuance of First Source Common Stock in the Merger; (v) the Registration
Statement of which this Joint Proxy Statement/Prospectus forms a part will
have become effective under the Securities Act of 1933, as amended (the
"Securities Act") and no stop order suspending the effectiveness of the
Registration Statement will have been issued and no proceedings for that
purpose will have been initiated or threatened by the Commission; (vi) no
order, injunction or decree issued by any court or agency of competent
jurisdiction or other legal restraint or prohibition (an "Injunction") which
prohibits the consummation of the Merger, the Subsidiary Bank Merger or any of
the other transactions contemplated by the Merger Agreement or the Subsidiary
Bank Merger Agreement (as defined below) will be in effect; (vii) no statute,
rule, regulation, order, injunction or decree will have been enacted, entered,
promulgated or enforced by any Governmental Entity which prohibits, restricts
or makes illegal consummation of the Merger or the Subsidiary Bank Merger and
(viii) the receipt of a letter from the accountants of First Source that the
merger will qualify as a "pooling of interests."
The obligations of First Source to effect the Merger are further subject to
the satisfaction, or waiver by First Source, of the following conditions: (i)
the representations and warranties of Pulse contained in the Merger Agreement
shall be true and correct in all material respects as of the date of the
Merger Agreement and (except to the extent that such representations and
warranties relate to an earlier date) as of the Effective Time as though
45
<PAGE>
made at and as of the Effective Time, provided, that for purposes of
determining the satisfaction of the condition described in this clause (i),
the representations and warranties of Pulse will be deemed true and correct in
all material respects unless the failure or failures of such representations
and warranties to be so true and correct, in the aggregate, represent a
material adverse change from the business, assets, financial condition or
results of operations of Pulse and its subsidiaries taken as a whole as
represented in the Merger Agreement; (ii) Pulse shall have performed in all
material respects all obligations required to be performed by it under the
Merger Agreement at or prior to the Effective Time; (iii) none of the
Requisite Regulatory Approvals shall impose any term, condition or restriction
upon First Source, Pulse, First Savings Bank, SLA or Pulse Bank or any of
their respective subsidiaries that First Source or Pulse, in good faith,
reasonably determines would so materially adversely affect the economic or
business benefits of the transactions contemplated by the Merger Agreement to
First Source or Pulse as to render inadvisable the consummation of the Merger
("a Burdensome Condition"); (iv) the consent, approval or waiver of each
person (other than the Governmental Entities) whose consent or approval shall
be required in order to permit the succession by the surviving corporation in
the Merger or the surviving bank in the Subsidiary Bank Merger to any
obligation, right or interest of Pulse or any subsidiary of Pulse under any
agreement shall have been obtained, except where the failure to obtain such
consent, approval or waiver would not so materially adversely affect the
economic or business benefits of the transactions contemplated by the Merger
Agreement to First Source as to render inadvisable, in the reasonable good
faith judgment of First Source, the consummation of the Merger; (v) no
proceeding initiated by a Governmental Entity seeking an Injunction shall be
pending; (vi) First Source shall have received an opinion of its counsel,
substantially to the effect that, on the basis of facts, representations and
assumptions set forth in such opinion, which are consistent with the state of
facts existing at the Effective Time, the Merger and the Subsidiary Bank
Merger will each be treated as reorganizations within the meaning of Section
368(a) of the Code (see "--Certain Federal Income Tax Consequences of the
Merger" below); (vii) First Source shall have received a customary legal
opinion from counsel for Pulse; (viii) First Source shall have received a
letter addressed to First Source, dated as of the Effective Time, from First
Source's independent public accountants to the effect that the Merger will
qualify for pooling of interests accounting treatment unless such firm advises
First Source that it is unable to issue a letter to such effect solely by
reason of First Source having exercised its right to purchase Pulse Common
Stock pursuant to the Stock Option Agreement; (ix) First Source shall have
received from Pulse's independent public accountants certain customary letters
with respect to certain financial information of Pulse; and (x) nothing shall
have come to the attention of First Source which would preclude consummation
of the Subsidiary Bank Merger.
The Merger Agreement defines a "Material Adverse Effect," when applied to a
party to the Merger Agreement, as a material adverse effect on the business,
properties, assets, liabilities, results of operations or financial condition
of such party and its subsidiaries taken as a whole, other than any such
effect attributable to or resulting from general economic conditions.
The obligations of Pulse to effect the Merger are further subject to the
satisfaction, or waiver by Pulse, of the following conditions: (i) the
representations and warranties of First Source contained in the Merger
Agreement shall be true and correct in all material respects as of the date of
the Merger Agreement and (except to the extent that such representations and
warranties relate to an earlier date) as of the Effective Time as though made
at and as of the Effective Time, provided, that for purposes of determining
the satisfaction of the condition described in this clause (i), that the
representations and warranties of First Source will be deemed true and correct
in all material respects unless the failure or failures of such
representations and warranties to be so true and correct, individually or in
the aggregate, represent a material adverse change from the business, assets,
financial condition or results of operations of First Source and its
subsidiaries taken as a whole as represented in the Merger Agreement; (ii)
First Source shall have performed in all material respects all obligations
required to be performed by it under the Merger Agreement at or prior to the
Effective Time; (iii) the consent, waiver or approval of each person (other
than the Governmental Entities) whose consent, waiver or approval shall be
required in connection with the transactions contemplated thereby under any
agreement to which First Source or any of its subsidiaries is a party or is
otherwise bound, except those for which the failure to obtain such consents,
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waivers and approvals would not have a material adverse effect on the economic
or business benefits of transactions contemplated by the Merger Agreement,
shall have been obtained; (iv) no proceeding initiated by any Governmental
Entity seeking an Injunction shall be pending; (v) Pulse shall have received
from its counsel an opinion dated as of the Effective Time, substantially to
the effect that for Federal income tax purposes the Merger and the Subsidiary
Bank Merger each be treated as reorganizations within the meaning of Section
368(a) of the Code (see "--Certain Federal Income Tax Consequences of the
Merger" below); (vi) Pulse shall have received a customary legal opinion from
counsel to First Source and (vii) First Source shall have received a letter
addressed to First Source, dated as of the Effective Time, from First Source's
independent public accountants to the effect that the Merger will qualify for
pooling of interests accounting treatment unless such firm advises First
Source that it is unable to issue a letter to such effect solely by reason of
First Source having exercised its right to purchase Pulse Common Stock
pursuant to the Stock Option Agreement.
No assurance can be provided as to when, or whether, the regulatory consents
and approvals necessary to consummate the Merger and the Subsidiary Bank
Merger will be obtained or whether all of the other conditions precedent to
the Merger will be satisfied or waived by the party permitted to do so. See
"--Regulatory Approvals Required for the Merger" below. If the Merger is not
effected on or before March 31, 1999, the Merger Agreement may be terminated
by a vote of a majority of the Board of Directors of either First Source or
Pulse, unless the failure to effect the Merger by such date is due to the
breach of the Merger Agreement by the party seeking to terminate the Merger
Agreement.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
Consummation of each of the Merger and the Subsidiary Bank Merger is subject
to a number of regulatory approvals and consents.
Pursuant to the Bank Merger Act, the Home Owners' Loan Act and the OTS
Regulations promulgated thereunder, the Merger is subject to the approval of
the OTS. First Source filed an application for approval of the Merger with the
OTS on October 6, 1998. This application is currently under review by the OTS.
The transaction is also subject to a waiver of the OTS one-year restriction on
acquisitions by First Source from the date of the April 9, 1998 consummation
of the 1998 Conversion and Reorganization. There can be no assurance as to the
timing of such approval or that the OTS will approve the Merger or grant the
waiver. The OTS is required to evaluate the applications by taking into
consideration, among other things, the capital level of the resulting
institution, the financial and managerial resources and future prospects of
the institutions involved, the convenience and needs of the communities to be
served and the conformity of the transaction to applicable law, regulation and
supervisory policies. In addition, the OTS may not approve any proposed
acquisition (i) which would result in a monopoly or which would be in
furtherance of any combination or conspiracy to monopolize or attempt to
monopolize the savings and loan business in any part of the United States or
(ii) which in any section of the country may have the effect of substantially
lessening competition or tending to create a monopoly or which in any manner
would be in restraint of trade, unless the OTS finds that the anti-competitive
effects of the proposed acquisition are clearly outweighed in the public
interest by the probable effect of the acquisition in meeting the convenience
and needs of the community to be served. Under the Community Reinvestment Act
of 1977 (the "CRA"), the OTS must take into account First Savings' record of
performance in meeting the credit needs of the entire community, including
low- and moderate-income neighborhoods, served by First Savings. The OTS also
considers, among other things, the fairness and disclosure of the plan
(including compensation to officers, directors and controlling persons of the
disappearing association by the surviving association), the justification,
need for and compensation to be paid to any advisory board, fees paid to each
person or firm rendering legal or other professional services in connection
with a merger and the accounting and tax treatment of the Merger. The
regulations of the OTS also provide for the publication of notice and the
opportunity for public comments relating to the application for approval
discussed above.
In addition, under federal law, a period of 30 days must expire following
approval by the OTS within which period the Department of Justice may file
objections to the Merger under the federal antitrust laws. The post-
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approval waiting period may be reduced by the OTS to 15 days, with the
concurrence of the Department of Justice. The Department of Justice could take
such action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the Merger unless divestiture of
an acceptable number of branches to a competitively suitable purchaser could
be made. While First Source believes that the likelihood of such action by the
Department of Justice is remote in this case, there can be no assurance that
the Department of Justice will not initiate such proceeding, or that the
Attorney General of the State of New Jersey will not challenge the Merger, or
if such proceeding is instituted or challenge is made, as to the result
thereof.
The Merger is also subject to the prior approval of the Commissioner of the
New Jersey Department of Banking and Insurance ("Department"). First Source
filed an application for approval of the Merger with the New Jersey Banking
Department on October 20, 1998. This application is currently under review by
the Banking Department. There can be no assurance as to the timing of such
approval or that the Banking Department will approve the Merger. In
determining whether to approve the application for the Merger of Pulse Bank
with and into First Savings, the Department will consider, among other
factors, whether the Merger would be consistent with adequate or sound banking
and would not result in concentration of assets beyond limits consistent with
effective competition, and whether the Merger would result in such a lessening
of competition as to be injurious to the interest of the public or tend toward
monopoly. The Department will also consider the public interest and the needs
and convenience thereof. Further, it is the policy of the State of New Jersey
to ensure the safe and sound conduct of banking organizations, to conserve
assets of banking organizations, to prevent hoarding of money, to eliminate
unsound and destructive competition among banking organizations and to
maintain public confidence in the business of banking and protect the public
interest and the interests of depositors, creditors and stockholders, and such
factors will be considered by the Commissioner in connection with First
Source's application.
First Source is not aware of any other regulatory approvals that would be
required for consummation of the Merger or the Subsidiary Bank Merger, except
as described above. Should any other approvals be required, it is presently
contemplated that such approvals would be sought. There can be no assurance
that any other approvals, if required, will be obtained.
Applications have been submitted seeking the approvals of OTS and the
Department. The Merger cannot proceed in the absence of the requisite
regulatory approvals. See "--Conditions to the Merger" and "--Waiver and
Amendment; Termination." There can be no assurance that such regulatory
approvals will be obtained, and if obtained, there can be no assurance as to
the date of any such approval. There can also be no assurance that any such
approvals will not contain a Burdensome Condition which causes such approvals
to fail to satisfy the conditions set forth in the Merger Agreement and
described above under "--Conditions to the Merger." There can likewise be no
assurance that the Department of Justice or the New Jersey State Attorney
General will not challenge the Merger or, if such a challenge is made, as to
the result thereof.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, Pulse has agreed that until the Effective
Time, except as provided in the Merger Agreement, the Subsidiary Bank Merger
Agreement, the Stock Option Agreement or with the prior consent of First
Source, Pulse and its subsidiaries will carry on their respective businesses
in the ordinary course consistent with past practice and consistent with
prudent banking practices. Pulse has agreed to use its best efforts to (x)
preserve its business organization and that of its subsidiaries' intact, (y)
keep available to itself and First Source the present services of its and its
subsidiaries' employees and (z) preserve for itself and First Source the
goodwill of its and its subsidiaries' customers and others with whom business
relationships exist.
The Merger Agreement also contains certain restrictions on the conduct of
Pulse's business pending consummation of the Merger. Among other things, the
Merger Agreement provides that, except as provided in
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the Merger Agreement or with the prior written consent of First Source, Pulse
and its subsidiaries may not: (i) solely in the case of Pulse, declare or pay
any dividends on, or make other distributions in respect of, any of its
capital stock, other than normal quarterly dividends in an amount of no more
than $0.20 per share of Pulse Common Stock, except that on or after January 1,
1999, Pulse may increase the quarterly dividends to no more than $0.225 per
share; (ii)(a) split, combine or reclassify any shares of its capital stock or
(b) repurchase, redeem or otherwise acquire (except for the acquisition of
Trust Account Shares and DPC Shares) any shares of the capital stock of Pulse
or any of its subsidiaries or securities convertible into or exchangeable
therefor; (iii) subject to certain exceptions, issue, deliver or sell, or
authorize or propose the issuance, delivery or sale of, any shares of its
capital stock or securities convertible into or exchangeable therefor; (iv)
amend its Certificate of Incorporation or Bylaws; (v) make any capital
expenditures other than in the ordinary course of business or as necessary to
maintain existing assets in good repair, and in any event which are in an
amount of no more than $50,000 individually and $75,000 in the aggregate; (vi)
enter into any new line of business; (vii) subject to certain exceptions,
acquire or agree to acquire any business or entity or otherwise acquire any
assets which would be material to Pulse; (viii) take any action that is
intended or may reasonably be expected to result in any of its representations
and warranties set forth in the Merger Agreement being or becoming untrue in
any material respect, or in any of the conditions to the Merger not being
satisfied, or in a violation of any provision of the Merger Agreement or the
Subsidiary Bank Merger Agreement, except as may be required by applicable law;
(ix) change its methods of accounting in effect at September 30, 1997, subject
to certain exceptions; (x) (a) adopt, amend, renew or terminate (except as may
be required by law) any employee benefit plan or agreement, arrangement, plan
or policy between Pulse or any of its subsidiaries and any of its current or
former directors, officers and employees, (b) except for normal increases in
the ordinary course of business consistent with past practice or except as
required by applicable law, increase in any manner the compensation or fringe
benefits of any director, officer or employee and except for continuation of
contributions to Pulse's retirement plan, not to exceed $45,000 per quarter;
(xi) take or cause to be taken any action that would cause the Merger to fail
to qualify (a) for pooling of interests accounting treatment or (b) as a tax-
free reorganization under Section 368(a) of the Code, except that nothing
contained in the Merger Agreement will limit the ability of First Source to
exercise its rights under the Stock Option Agreement; (xii) dispose or agree
to dispose of its material assets, properties or other rights or agreements;
(xiii) incur any indebtedness for borrowed money, or assume, guarantee,
endorse or otherwise become responsible for the obligations of any other
entity; (xiv) file any application to relocate or terminate the operations of
any of Pulse's or its subsidiaries' banking offices; (xv) breach any
regulatory agreement or material contract or license to which Pulse or any of
its subsidiaries is a party or by which any of them or their respective
properties is bound; (xvi) except in the ordinary course of business,
restructure, compromise or extend any real estate, commercial or construction
loan; (xvii) except in the ordinary course of business consistent with past
practice, make or commit to make any commercial business loan or any
commercial real estate loan or construction loan secured by non 1-4 family
residential property; (xviii) purchase or commit to purchase any bulk loan
portfolio; (xix) engage in or enter into any structured transactions,
derivative securities, arbitrage or hedging; (xx) subject to certain
exceptions, invest or commit to invest in real estate or any real estate
development project; (xxi) create, renew, amend or terminate or give notice to
do the same to any material contract, agreement or lease for goods, services
or office space to which Pulse or any of its subsidiaries is a party or by
which Pulse or any of its subsidiaries or their respective property is bound;
(xxii) take any action which would cause the termination or cancellation by
the FDIC of insurance in respect of Pulse's deposits; or (xxiii) agree to do
any of the foregoing.
Pursuant to the Merger Agreement, First Source has also agreed that until
the Effective Time, except as provided in the Merger Agreement, the Subsidiary
Bank Merger Agreement, or with the prior written consent of Pulse, First
Source and its subsidiaries will carry on their respective businesses in the
ordinary course consistent with prudent banking practices and shall use all
reasonable efforts to preserve intact their present business organizations and
relationships. The Merger Agreement also provides, among other things, that
First Source will not: (i) declare, pay or make any extraordinary or special
dividends or distributions in respect of its capital stock, except that
nothing contained in the Merger Agreement will prohibit First Source from
increasing the quarterly cash dividend on the First Source Common Stock; (ii)
take any action that is intended or may reasonably be expected to result in
any of its representations and warranties set forth in the Merger Agreement
being or
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becoming untrue in any material respect, or in any of the conditions to the
Merger not being satisfied, or in a violation of any provision of the Merger
Agreement or the Subsidiary Bank Merger Agreement, except as may be required
by applicable law; (iii) change its methods of accounting in effect at
December 31, 1997, subject to certain exceptions; (iv) take or cause to be
taken any action that would cause the Merger to fail to qualify (a) for
pooling of interests accounting treatment or (b) as a tax-free reorganization
under Section 368 of the Code, except that nothing contained in the Merger
Agreement will limit the ability of First Source to exercise its rights under
the Stock Option Agreement; (v) take any action which would cause the
termination or cancellation by the FDIC of insurance in respect of First
Source's deposits; or (vi) agree to do any of the foregoing.
WAIVER AND AMENDMENT; TERMINATION
Prior to the Effective Time, any provision of the Merger Agreement may be
waived by the party benefitted by the provision or, subject to applicable law,
amended or modified (including the structure of the transaction) by an
agreement in writing approved by the Boards of Directors of First Source and
Pulse, provided that, after the vote of the stockholders of Pulse, the Merger
Agreement may not be amended, without further approval of such stockholders,
to reduce the amount or change the form of the consideration to be received by
Pulse stockholders other than as contemplated by the Merger Agreement.
The Merger Agreement may be terminated at any time prior to the Effective
Time, either before or after approval of the matters presented in connection
with the Merger by the stockholders of both Pulse and First Source, as
follows: (i) by the mutual consent of First Source and Pulse if the Boards of
Directors of each so determines; (ii) by either First Source or Pulse upon
written notice to the other (a) 60 days after the date on which any request or
application for a Requisite Regulatory Approval is denied or withdrawn at the
request of the Governmental Entity which must grant such approval, unless
within such 60-day period a petition for rehearing or an amended application
has been filed with the applicable Governmental Entity (or unless the failure
to obtain the necessary regulatory approval is due to the failure of the party
seeking to terminate the Merger Agreement to perform or observe its covenants
and agreements set forth in the Merger Agreement) or (b) if any Governmental
Entity of competent jurisdiction issues a final nonappealable order enjoining
or otherwise prohibiting the consummation of any of the transactions
contemplated by the Merger Agreement; (iii) by either First Source or Pulse if
its Board of Directors so determines, in the event that the Merger has not
been consummated by March 31, 1999, unless the failure to consummate the
Merger is due to a breach of the Merger Agreement by the party seeking to
terminate the Merger Agreement; (iv) by either First Source or Pulse (provided
that the terminating party is not in breach of its obligations in the Merger
Agreement with respect to the meeting of its stockholders to approve the
Merger Agreement), if any approval of the stockholders of either of First
Source or Pulse required for consummation of the Merger Agreement shall not
have been obtained; (v) by either First Source or Pulse in the event of (a) a
material breach by the other of any of its representations or warranties
contained in the Merger Agreement which is not cured within 30 days after
written notice of such breach is given to the breaching party or which breach,
by its nature, cannot be cured prior to the Effective Time or (b) a material
breach of any of the covenants or agreements contained in the Merger Agreement
by the other which is not cured within 30 days after written notice of such
breach is given to the breaching party; (vi) by Pulse, by action of its Board
of Directors, by giving written notice of such election to First Source within
two trading days after the Valuation Date, in the event the Average Closing
Price is less than $8.50, provided that no right of termination will arise
under this provision if First Source elects within five business days of
receipt of such written notice to increase the Exchange Ratio such that the
value of the First Source Common Stock (valued at the Average Closing Price)
to be paid in respect of each share of Pulse Common Stock is $32.00 (see "--
Exchange Ratio" above); or (vii) by First Source, by action of its Board of
Directors, by giving written notice of such election to Pulse within two
trading days after the Valuation Date, in the event the Average Closing Price
is greater than $11.50, provided that no right of termination will arise under
this provision if Pulse elects within five business days, of receipt of such
written notice to decrease the Exchange Ratio such that the value of the First
Source Common Stock is $36.80 (see "Exchange Ratio" above); (viii) by First
Source if the
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Board of Directors of Pulse does not publicly recommend in the Joint Proxy
Statement/Prospectus that Pulse's stockholders approve and adopt this
agreement or if after recommending in the Joint Proxy Statement/Prospectus
that stockholders approve and adopt this agreement, the Pulse Board shall have
withdrawn, modified or amended such recommendation in any respect materially
adverse to First Source.
In the event of the termination of the Merger Agreement by either First
Source or Pulse, neither First Source nor Pulse will have any further
obligations under the Merger Agreement except (i) for certain specified
provisions of the Merger Agreement relating to confidentiality and expenses
and (ii) that no party will be relieved or released from any liabilities or
damages arising out of its willful breach of any provisions of the Merger
Agreement. In addition, if the Merger Agreement is terminated subsequent to
the occurrence of a Purchase Event (as defined hereinafter) or is terminated
by First Source for a breach of covenant by Pulse, and within 12 months
following such termination a Purchase Event occurs, then in addition to any
other amounts payable or stock issuable by Pulse pursuant to the Merger
Agreement or the Stock Option Agreement, as the case may be, Pulse must pay
First Source a termination fee of $3.2 million. Additionally, the maximum
aggregate cost of exercising the Option (as defined below) is $3.78 million.
The difference between that cost and the subsequent sale price of the
underlying Pulse Common Stock would be an additional benefit to First Source.
See "CERTAIN RELATED TRANSACTIONS--Termination Fee; Increase in Exercise
Price."
NO SOLICITATION OF TRANSACTIONS
Pulse has agreed in the Merger Agreement that neither it nor any of its
subsidiaries will authorize or permit any of its officers, directors,
employees or agents to directly or indirectly solicit, initiate or encourage
any inquiries relating to, or the making of any proposal which constitutes, a
"takeover proposal" (as defined below), or, except to the extent legally
required for the discharge of the fiduciary duties of the Pulse Board,
recommend or endorse any takeover proposal, or participate in any discussions
or negotiations, or provide third parties with any non-public information,
relating to any such inquiry or proposal or otherwise facilitate any effort or
attempt to make or implement a takeover proposal, provided that Pulse may
communicate information about any such takeover proposal to its stockholders
if, in the judgment of the Pulse Board, based upon the advice of outside
counsel, such communication is required under applicable law; Pulse has agreed
to cease any activities, discussions or negotiations previously conducted with
any parties other than First Source with respect to any of the foregoing; it
will notify First Source immediately if any such inquiries or proposals are
received by, any such information is requested from, or any such negotiations
or discussions are sought to be initiated or continued with it, and will
promptly inform First Source in writing of the relevant details with respect
to the foregoing. As used in the Merger Agreement, "takeover proposal" means
any tender or exchange offer, proposal for a merger, consolidation or other
business combination involving Pulse or any subsidiary of Pulse or any
proposal or offer to acquire in any manner a substantial equity interest in,
or a substantial portion of the assets of, Pulse or any subsidiary of Pulse
other than the transactions contemplated or permitted by the Merger Agreement,
the Subsidiary Bank Merger Agreement and the Stock Option Agreement.
RESALES OF FIRST SOURCE COMMON STOCK RECEIVED IN THE MERGER
The shares of First Source Common Stock to be issued in the Merger will be
registered under the Securities Act and will be freely transferable under the
Securities Act, except for shares issued to any Pulse stockholder who may be
deemed to be an "affiliate" of Pulse for purposes of Rule 145 under the
Securities Act. Affiliates may not sell their shares of First Source Common
Stock acquired in connection with the Merger except pursuant to an effective
registration statement under the Securities Act covering such shares or in
compliance with Rule 145 or another applicable exemption from the registration
requirements of the Securities Act. This Joint Proxy Statement/Prospectus does
not cover any resales of First Source Common Stock received in the Merger by
persons who may be deemed to be affiliates of Pulse. Persons who may be deemed
to be affiliates of Pulse generally include individuals or entities that
control, are controlled by or are under common control with Pulse, and may
include certain officers and directors as well as principal stockholders of
Pulse.
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Commission guidelines regarding qualifying for the pooling of interests
method of accounting also limit sales by affiliates of the acquiring and
acquired company in a business combination. Commission guidelines indicate
further that the pooling of interests method of accounting will generally not
be challenged on the basis of sales by affiliates of the acquiring or acquired
company if they do not dispose of any of the shares of the corporation they
own or shares of a corporation they receive in connection with a merger during
the period beginning 30 days before the effective date of the merger and
ending when financial results covering at least 30 days of post-merger
operations of the combined entity have been published.
First Source and Pulse have each agreed in the Merger Agreement to use their
best efforts to cause each person who is an affiliate (for purposes of Rule
145 of the Securities Act and for purposes of qualifying the Merger for
pooling of interests accounting treatment) of such party to deliver to the
other party a written agreement intended to ensure compliance with the
Securities Act and preserve the ability to treat the Merger as a pooling of
interests.
STOCK EXCHANGE LISTING
The First Source Common Stock is listed on the Nasdaq National Market. First
Source has agreed to cause the shares of First Source Common Stock to be
issued in the Merger to be approved for listing on the Nasdaq National Market,
subject to official notice of issuance, prior to or at the Effective Time. The
obligations of the parties to consummate the Merger are subject to approval
for listing by the Nasdaq National Market of such shares. See "--Conditions to
the Merger" above.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the
recorded amount of assets and liabilities of First Source and Pulse will be
combined at the Effective Time and carried forward at their previously
recorded amounts and the stockholders' equity accounts of First Source and
Pulse will be combined on First Source's consolidated balance sheet. Income
and other financial statements of First Source issued after the Effective Time
will be restated retroactively to reflect the consolidated operations of First
Source and Pulse as if First Source and Pulse have always been combined.
The Merger Agreement provides that a condition to First Source's obligation
to consummate the Merger is the receipt of a letter from First Source's
independent accountants to the effect that the Merger qualifies for pooling of
interests accounting treatment unless such firm advises First Source that it
is unable to issue a letter to such effect solely by reason of First Source
having exercised its right to purchase Pulse Common Stock pursuant to the
Stock Option Agreement. See "--Conditions to the Merger" above.
The issuance of shares of Pulse Common Stock pursuant to the Stock Option
Agreement may prevent the Merger from qualifying as a pooling of interests for
accounting and financial reporting purposes. See "CERTAIN RELATED
TRANSACTIONS--Stock Option Agreement; Termination Fee."
For information concerning certain restrictions to be imposed on the
transferability of First Source Common Stock to be received by affiliates in
order, among other things, to ensure the availability of pooling of interests
accounting treatment, see "--Resales of First Source Common Stock Received in
the Merger" above.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a discussion of the material federal income tax
consequences of the Merger and the Subsidiary Bank Merger to First Source,
Pulse and holders of Pulse Common Stock. The discussion is based upon the
Code, Treasury regulations, Internal Revenue Service (the "Service") rulings,
and judicial and administrative decisions in effect as of the date hereof, all
of which are subject to change at any time, possibly with retroactive effect.
This discussion assumes that the Pulse Common Stock is held as a "capital
asset" within the meaning of Section 1221 of the Code (i.e., property
generally held for investment). In addition, this
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discussion does not address all of the tax consequences that may be relevant
to a holder of Pulse Common Stock in light of his or her particular
circumstances or to holders subject to special rules, such as foreign persons,
financial institutions, tax-exempt organizations or insurance companies. The
opinions of such counsel referred to in this section will be based on facts
existing at the Effective Time, and in rendering such opinions, such counsel
will require and rely upon representations contained in certificates of
officers of First Source, Pulse and others.
HOLDERS OF PULSE COMMON STOCK SHOULD CONSULT THEIR TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY
AND EFFECT OF ANY FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
It is a condition to the obligation of First Source to consummate the Merger
that First Source and Pulse shall have received an opinion from Patton Boggs
LLP, counsel to First Source, that the Merger and the Subsidiary Bank Merger
will each be treated as reorganizations within the meaning of Section 368(a)
of the Code and, accordingly, for federal income tax purposes, that:
i) no gain or loss will be recognized by First Source as a result of the
Merger;
ii) no gain or loss will be recognized by First Savings Bank as a result
of the Merger;
iii) no gain or loss will be recognized by Pulse as a result of the
Merger;
iv) no gain or loss will be recognized by Pulse Bank as a result of the
Subsidiary Bank Merger;
v) no gain or loss will be recognized by the stockholders of Pulse who
exchange all of their Pulse Common Stock solely for First Source Common
Stock pursuant to the Merger (except with respect to cash received in lieu
of a fractional share interest in First Source Common Stock); and
vi) the aggregate tax basis of the First Source Common Stock received by
a holder of Pulse Common Stock in the Merger will be the same as the
aggregate tax basis of the Pulse Common Stock surrendered in exchange
therefor (reduced by any amount allocable to a fractional share interest in
First Source Common Stock for which cash is received).
The holding period of the First Source Common Stock received by Pulse
Stockholders pursuant to the Merger will include the period during which the
Pulse Common Stock was held as a capital asset on the date of the Merger.
Based upon the current ruling position of the Service, cash received by a
holder of Pulse Common Stock in lieu of a fractional share interest in First
Source Common Stock will be treated as received in exchange for such
fractional share interest, and gain or loss will be recognized for federal
income tax purposes measured by the difference between the amount of cash
received and the portion of the basis of the share of Pulse Common Stock
allocable to such fractional share interest. Such gain or loss should be long-
term capital gain or loss if such share of Pulse Common Stock has been held
for more than one year at the Effective Time.
Pursuant to the Subsidiary Bank Merger Agreement, Pulse Bank will be merged
with and into First Savings Bank, and, consequently, will no longer be
entitled to use the reserve method for computing and deducting its losses for
bad debts.
NO APPRAISAL RIGHTS
Pursuant to Article 14A:11-1 of the New Jersey Business Corporations Act,
the stockholders of a constituent corporation in a merger generally are not
entitled to appraisal rights if (a) the shares of stock they own are, as of
the record date fixed to determine stockholders entitled to notice of and to
vote at the meeting to act upon the agreement providing for such merger,
either listed on a national securities exchange or held by more than
1,000 stockholders or (b) pursuant to a plan of merger such stockholders will
receive: (i) cash; (ii) shares of stock which are either listed on a national
securities exchange or held of record by more than 1,000 stockholders; or
(iii) any combination of (i) and (ii). Pulse stockholders are not entitled to
appraisal rights in connection with the Merger because there are more than
1,000 holders of record of First Source Common Stock.
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CONSOLIDATION OF OPERATIONS; PROJECTED COST SAVINGS
First Source expects to achieve significant cost savings subsequent to the
Merger. The cost savings will be derived from implementation of operating
synergies, including reductions in compensation and other employee benefit
expenses. Further, the separate corporate existence of Pulse will cease with
the consummation of the Merger. Consequently, operating costs associated with
requirements imposed on Pulse as a publicly held entity will also be
eliminated. The aggregate annual pre-tax cost savings are estimated to range
between $2.4 million to $2.8 million. Management of First Source believes
that realization of these cost savings will occur by December 31, 1999. There
can be no assurance as to when, or whether, the cost savings will be realized.
Such realization will depend upon, among other things, the regulatory and
economic environment, business changes implemented by First Source management
and other factors, many of which are beyond the control of First Source.
MERGER AND RESTRUCTURING CHARGES
A non-recurring merger and restructuring charge estimated in the range of
$5.5 to $5.9 million, before tax effect, will be made upon consummation of the
Merger. It is expected that the charge will be made in the quarter in which
the Merger is consummated. Merger expenses of approximately $1.3 million for
investment banking and professional fees are included in such estimated
restructuring charge. The restructuring charge primarily includes severance
and employee related expenses, and, to a lesser extent, facility and system
integration costs and other general costs. See "THE MERGER--Certain Federal
Income Tax Consequences of the Merger."
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CERTAIN RELATED TRANSACTIONS
TERMINATION FEE
The following is a summary of the material provisions of certain provisions
of the Merger Agreement (which is attached hereto as Annex A) which provide
for the payment by Pulse to First Source of a $3.2 million fee (the
"Termination Fee") in certain circumstances. The following summary is
qualified in its entirety by reference to the Stock Option Agreement and the
relevant provisions of the Merger Agreement.
Purchase Events. The Option is exercisable, and the Termination Fee payable,
only upon the occurrence of one of the following events (each a "Purchase
Event"):
(a) Pulse authorizes, recommends, publicly proposes, or enters into an
agreement with any person (other than First Source or any of its
subsidiaries) to (i) effect a merger, consolidation or similar transaction
involving Pulse or any of its subsidiaries (other than internal mergers,
reorganizations, consolidations or dissolutions involving only existing
subsidiaries), (ii) sell, lease, exchange or otherwise dispose of assets of
Pulse or any of its subsidiaries representing 25% or more of the
consolidated assets of Pulse and its subsidiaries, or (iii) issue, sell or
otherwise dispose of (including by merger, consolidation, share exchange or
similar transaction) securities representing 25% or more of the voting
power of Pulse or any of its subsidiaries (any of the foregoing, an
"Acquisition Transaction");
(b) any person (other than First Source or its subsidiaries) shall have
acquired Beneficial Ownership (as defined in Rule 13d-3 promulgated under
the Exchange Act) of, or the right to acquire Beneficial Ownership of, or
any Group (as defined in the Exchange Act) shall have been formed which has
acquired Beneficial Ownership of, or has the right to acquire Beneficial
Ownership of, 25% or more of the then outstanding shares of Pulse Common
Stock;
(c) any person (other than First Source or any subsidiary of First
Source) shall have (i) commenced (as such term is defined in Rule 14d-2
under the Exchange Act) or shall have filed a registration statement under
the Securities Act with respect to a Tender Offer or Exchange Offer to
purchase any shares of Pulse Common Stock such that, upon consummation of
such offer, such person would own or control 25% or more of the then
outstanding shares of Pulse Common Stock (such an offer being referred to
herein as a "Tender Offer" or an "Exchange Offer," respectively);
(d) the stockholders of Pulse shall not have approved the Merger
Agreement at the meeting of such stockholders held for the purpose of
voting on the Merger Agreement, or such meeting shall not have been held or
shall have been cancelled prior to termination of the Merger Agreement, in
each case after it shall have been publicly announced that any person
(other than First Source or any subsidiary of First Source) shall have
made, or disclosed an intention to make, a proposal to engage in an
Acquisition Transaction; or
(e) Pulse's Board of Directors shall not have recommended to Pulse's
stockholders that such stockholders vote in favor of the approval of the
Merger Agreement and the transactions contemplated thereby or shall have
withdrawn or modified such recommendation in a manner adverse to First
Source.
Termination Fee; Increase in Exercise Price. The Merger Agreement provides
that in addition to the rights granted to First Source under the Stock Option
Agreement, in the event the Merger Agreement (i) is terminated subsequent to
the occurrence of a Purchase Event or (ii) is terminated by First Source as a
result of a breach by Pulse of its covenants under the Merger Agreement, and
within 12 months after such termination by First Source a Purchase Event shall
occur, then Pulse must pay to First Source the Termination Fee of $3.2
million.
The Stock Option Agreement provides that in addition to any other amounts
payable by First Source to Pulse upon the exercise of the option, upon the
first such exercise, First Source will pay to Pulse an amount, if any, by
which (i) $1,055,600 plus the product of (A) the total number of Option Shares
(620,940) and (B) the difference between the Market/Tender Offer Price (as
defined below) and the Purchase Price exceeds (ii) $32.00, provided, however,
that in no event will the amount payable pursuant to this provision exceed
$3.78 million. The "Market/Tender Offer Price" means the higher of the highest
price per share at which a Tender Offer or
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Exchange Offer has been made by any person other than First Source or any
affiliate of First Source or person acting in concert in any respect with
First Source for at least 25% of the shares of Pulse Common Stock then
outstanding or the highest closing sales price per share of Pulse Common Stock
quoted on The Nasdaq Stock Market (or if Pulse Common Stock is not quoted on
The Nasdaq Stock Market, the highest bid price per share as quoted on the
principal trading market or securities exchange on which such shares are
traded as reported by a recognized source) within the six month period
immediately preceding the execution of the Stock Option Agreement.
Effect of Stock Option Agreement and Termination Fee. The Stock Option
Agreement and the Termination Fee are intended to increase the likelihood that
the Merger will be consummated in accordance with the terms of the Merger
Agreement. Consequently, certain aspects of the Stock Option Agreement and the
Termination Fee may have the effect of discouraging persons who might now or
prior to the Effective Time be interested in acquiring all of or a significant
interest in Pulse from considering or proposing such an acquisition, even if
such persons were prepared to pay a higher price per share for Pulse Common
Stock than the price per share implicit in the Exchange Ratio. The acquisition
of Pulse or an interest in Pulse, or an agreement to do either, could cause
the Option to become exercisable and the Termination Fee to become payable.
The existence of the Option and the Termination Fee could significantly
increase the cost to a potential acquiror of acquiring Pulse compared to its
cost had the Stock Option Agreement and the Merger Agreement not been entered
into. Such increased cost might discourage a potential acquiror from
considering or proposing an acquisition or might result in a potential
acquiror proposing to pay a lower per share price to acquire Pulse than it
might otherwise have proposed to pay. Moreover, following consultation with
First Source's independent accountants, the management of First Source
believes that the exercise of the Option is likely to prohibit any acquiror of
Pulse from accounting for any acquisition of Pulse using the pooling of
interests accounting method for a period of two years. Accordingly, the
existence of the Stock Option Agreement may deter significantly, or completely
preclude, an acquisition of Pulse by certain other banking organizations. The
Pulse Board took this factor into account before approving the Stock Option
Agreement. See "THE MERGER--Recommendation of the Boards of Directors; Reasons
for the Merger--Pulse."
SUBSIDIARY BANK MERGER AGREEMENT
In connection with the Merger, First Savings and Pulse Bank will enter into
a Subsidiary Bank Merger Agreement pursuant to which Pulse Bank will be merged
with and into First Savings, which will continue as a wholly owned subsidiary
of First Source. The Subsidiary Bank Merger Agreement may be terminated by
mutual consent of the parties at any time and will be terminated automatically
in the event the Merger Agreement is terminated.
THE FOREGOING SUMMARIES OF THE STOCK OPTION AGREEMENT, THE SUBSIDIARY BANK
MERGER AGREEMENT AND THE PROVISIONS OF THE MERGER AGREEMENT RELATING TO THE
TERMINATION FEE ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH
AGREEMENTS. THE MERGER AGREEMENT IS ATTACHED HERETO AS ANNEX A AND STOCK
OPTION AGREEMENT IS ATTACHED HERETO AS ANNEX B. SEE "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
CERTAIN REGULATORY CONSIDERATIONS
GENERAL
First Source is a non-diversified unitary savings and loan holding company
within the meaning of the Home Owners' Loan Act ("HOLA"). As such, First
Source is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over First Source
and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings institution. First
Savings must notify the OTS 30 days before declaring any dividend to First
Source.
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As a unitary savings and loan holding company, First Source generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that First Savings continues to be a Qualified Thrift
Lender ("QTL"). See"--Federal Regulation of Savings Institutions--QTL Test"
for a discussion of the QTL requirements. Upon any non-supervisory acquisition
by First Source of another savings association, First Source would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company ("BHC") Act,
subject to the prior approval of the OTS, and to other activities authorized
by OTS regulation. Previously proposed legislation would treat all savings and
loan holding companies as bank holding companies and limit the activities of
such companies to those permissible for bank holding companies.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of the voting stock of another savings institution, or holding company
thereof, without prior written approval of the OTS and from acquiring or
retaining, with certain exceptions, more than 5% of a non-subsidiary holding
company or savings association. The HOLA also prohibits a savings and loan
holding company from acquiring more than 5% of a company engaged in activities
other than those authorized for savings and loan holding companies by the
HOLA; or acquiring or retaining control of a depository institution that is
not insured by the FDIC. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds,
the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition
of a savings institution in another state if the laws of the state of the
target savings institution specifically permit such acquisitions. The states
vary in the extent to which they permit interstate savings and loan holding
company acquisitions.
First Savings is subject to extensive regulation, examination and
supervision by the Department, as its chartering agency, the OTS, as its
federal banking regulator, and the FDIC, as the deposit insurer. First Savings
is a member of the FHLB System. First Savings' deposit accounts are insured up
to applicable limits by the SAIF managed by the FDIC. First Savings must file
reports with the Commissioner of the Department (the "Commissioner"), the OTS
and the FDIC concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other financial institutions. There
are periodic examinations by the Department, the OTS and the FDIC to test
First Savings' compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the Department, the OTS, the FDIC or the Congress, could
have a material adverse impact on First Source, First Savings and their
operations. First Source, as a savings and loan holding company, is also
required to file certain reports with, and otherwise comply with the rules and
regulations of the OTS and of the Securities and Exchange Commission (the
"SEC") under the federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the Department, the OTS, the FDIC or the Congress,
could have a material impact on First Source, First Savings and their
operations. Congress has been considering various proposals to eliminate the
federal thrift charter and abolish
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the OTS. The outcome of such legislation is uncertain. Therefore, First Source
is unable to determine the extent to which legislation, if enacted, would
affect its business and what charter alternatives will be available at that
time.
Certain of the regulatory requirements applicable to First Savings and to
First Source are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Joint Proxy Statement/Prospectus do not purport to be complete
descriptions of such statutes and regulations and their effects on First
Savings and First Source and is qualified in its entirety by reference to such
statutes and regulations.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
Business Activities. The activities of savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects,
the Federal Deposit Insurance Act ("FDI Act") and the regulations issued by
the agencies to implement these statutes. These laws and regulations delineate
the nature and extent of the activities in which savings associations may
engage.
Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of First Savings' unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At June 30, 1998, First Savings' general policy is to
limit loans-to-one borrower to $18.0 million. At June 30, 1998, First Savings'
largest aggregate amount of loans-to-one borrower totaled $13.2 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of
its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift
investments" (primarily residential mortgages and related investments,
including certain mortgage-backed and related securities) in at least nine
months out of each 12 month period. A savings association that fails the QTL
test must either convert to a bank charter or operate under certain
restrictions. As of June 30, 1998, First Savings maintained 84% of its
portfolio assets in qualified thrift investments and, therefore, met the QTL
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered as "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level and
supervisory condition. An institution, such as First Savings, that exceeds all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that
it is in need of more than normal supervision, could, after prior notice to,
but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In the event First Savings' capital fell
below its capital requirements or the OTS notified it that it was in need of
more than normal supervision, First Savings' ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution
would constitute an unsafe or unsound practice.
Liquidity. First Savings is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet these liquidity requirements. First Savings' average liquidity ratio at
June 30, 1998 was 47%, which exceeded the applicable requirements. First
Savings has never been subject to monetary penalties for failure to meet its
liquidity requirements.
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Assessments. Savings institutions are required by regulation to pay
assessments to the OTS and the New Jersey Department of Banking to fund the
various agency's operations and periodic Bank examinations. The assessments
paid by First Savings to these agencies for the six months ended June 30, 1998
and for the years ended December 31, 1997 and 1996 totaled $161,000, $251,000
and $271,000, respectively.
Transactions with Related Parties. First Savings' authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including First
Source and any non-savings institution subsidiaries that First Source may
establish) is limited by Sections 23A and 23B of the Federal Reserve Act
("FRA"). Section 23A restricts the aggregate amount of covered transactions
with any individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B generally requires
that certain transactions with affiliates, including loans and asset
purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies.
First Savings' authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control,
is governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations require such loans to be
made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of
repayment. Recent legislation created an exception for loans to insiders made
pursuant to a benefit or compensation program that are widely available to all
employees of the institution and do not give preference to insiders over other
employees. Regulation O also places individual and aggregate limits on the
amounts of loans First Savings may make to insiders based, in part, on First
Savings' capital position, and requires certain board approval procedures to
be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate
in wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive
or cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action
betaken with respect to a particular savings institution. If action is not
taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal and state law also establishes criminal
penalties for certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality;
earnings; and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
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Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital
standard, a 3% leverage (core capital) ratio and an 8% risk based capital
standard. Core capital is defined as common stockholder's equity (including
retained earnings), certain non-cumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and credit card relationships. The OTS regulations require that, in
meeting the leverage ratio, tangible and risk-based capital standards
institutions generally must deduct investments in and loans to subsidiaries
engaged in activities not permissible for a national bank. In addition, the
OTS prompt corrective action regulation provides that a savings institution
that has a leverage capital ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, including certain off-balance
sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by
the OTS capital regulation based on the risks OTS believes are inherent in the
type of asset. The components of core capital are equivalent to those
discussed earlier under the 3% leverage standard. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and, within specified limits, the allowance
for loan and lease losses. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital. At June
30, 1998, First Savings met each of its capital requirements, in each case on
a fully phased-in basis.
THRIFT RECHARTERING
Recently enacted legislation provides that the BIF (the deposit insurance
fund that covers most commercial bank deposits) and the SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date.
Several bills have been introduced in the current Congress that would
eliminate the federal thrift charter and the OTS. A bill recently reported by
the House Banking Committee would require federal thrifts to become national
banks or state banks or savings banks within two years after enactment or they
would, by operation of law, become national banks. A national bank resulting
from a converted federal thrift could continue to engage in activities,
including holding any assets, in which it was lawfully engaged on the day
before the date of enactment. Branches operated on the day before enactment
could be retained regardless of their permissibility for national banks.
Subject to a grandfathering provision, all savings and loan holding companies
would become subject to the same regulation and activities restrictions as
bank holding companies. The grandfathering could be lost under certain
circumstances, such as a change in control of the holding company. The
legislative proposal would also abolish the OTS and transfer its functions to
the federal bank regulators with respect to the institutions and to the Board
of Governors of the Federal Reserve Board with respect to the regulation of
holding companies. First Savings is unable to predict whether the legislation
will be enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. First Savings is also
unable to predict whether the SAIF and BIF will eventually be merged.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to
be"significantly undercapitalized" and a savings institution that has a
tangible capital to assets ratio equal to or less than 2.0% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is critically
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undercapitalized. The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date an association receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory
actions may become immediately applicable to the institution depending upon
its category, including, but not limited to, increased monitoring by
regulators, restrictions on growth, and capital distributions and limitations
on expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based 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. The capital categories are (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. An
institution is also placed in one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation 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 with the most well capitalized, healthy institutions receiving the
lowest rates.
Deposits of First Savings are presently insured by the SAIF. Both the SAIF
and the BIF are statutorily required to be recapitalized to a 1.25% of insured
reserve deposits ratio. First Savings' assessment rate for the six months
ended June 30, 1998 was 6.4 basis points for $100 in insurable deposits and
the regular premium expense for this period was $250,000.
The FDIC has exercised this authority several times 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 First Savings.
Under 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 OTS. The management of First Savings does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
First Savings is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. First Savings, as a member of the FHLB, is required to acquire
and hold shares of capital stock in the FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. First Savings was in
compliance with this requirement with an investment in FHLB stock at June 30,
1998 of $8.4 million. FHLB advances must be secured by specified types of
collateral and all long-term advances may only be obtained for the purpose of
providing funds for residential housing finance. At June 30, 1998, First
Savings had $13.0 million in FHLB advances and $81.9 million in repurchase
agreements with the FHLB.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members. For the six months ended June 30, 1998 and the
years ended December 31, 1997 and 1996, dividends from FHLB stock to First
Savings amounted to $305,000, $525,000 and $469,000, respectively. If
dividends were reduced, First Savings' net interest income would likely also
be reduced. Further, there can be no assurance that the impact of recent or
future legislation on the FHLBs will not also cause a decrease in the value of
the FHLB stock held by First Savings.
61
<PAGE>
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $47.8 million or
less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts greater than $47.8 million, the reserve
requirement is $1.479 million (subject to adjustment by the Federal Reserve
Board between 8% and 14%) against that portion of total transaction accounts
in excess of $47.8 million. The first $4.7 million of otherwise reservable
balances (subject to adjustment by the Federal Reserve Board) are exempted
from the reserve requirements. First Savings is in compliance with the
foregoing requirements. Because required reserves must be maintained in the
form of either vault cash, a noninterest-bearing account at a Federal Reserve
Bank or a pass-through account as defined by the Federal Reserve Board, the
effect of this reserve requirement is to reduce First Savings' interest-
earning assets. FHLB System members are also authorized to borrow from the
Federal Reserve "discount window," but Federal Reserve Board regulations
require institutions to exhaust all FHLB sources before borrowing from a
Federal Reserve Bank.
NEW JERSEY LAW
The Commissioner regulates, among other things, the First Savings' internal
business procedures as well as its deposits, lending and investment
activities. The Commissioner must approve changes to First Savings'
Certificate of Incorporation, establishment or relocation of branch offices,
mergers and the issuance of additional stock. In addition, the Commissioner
conducts periodic examinations of First Savings. Certain of the areas
regulated by the Commissioner are not subject to similar regulation by the
FDIC.
Recent federal and state legislative developments have reduced distinctions
between commercial banks and SAIF-insured savings institutions in New Jersey
with respect to lending and investment authority, as well as interest rate
limitations. As federal law has expanded the authority of federally chartered
savings institutions to engage in activities previously reserved for
commercial banks, New Jersey legislation and regulations ("parity
legislation") have given New Jersey chartered savings institutions, such as
First Savings, the powers of federally chartered savings institutions.
New Jersey law provides that, upon satisfaction of certain triggering
conditions, as determined by the Commissioner, insured institutions or savings
and loan holding companies located in a state which has reciprocal legislation
in effect on substantially the same terms and conditions as stated under New
Jersey law may acquire, or be acquired by New Jersey insured institutions or
holding companies on either a regional or national basis. New Jersey law
explicitly prohibits interstate branching.
62
<PAGE>
DESCRIPTION OF FIRST SOURCE CAPITAL STOCK
GENERAL
First Source is authorized to issue 85,000,000 shares of Common Stock having
a par value of $.01 per share and 10,000,000 shares of preferred stock having
a par value of $.01 per share (the "Preferred Stock"). At October 30, 1998,
there were 31,838,866 shares of Common Stock and no shares of Preferred Stock
outstanding.
COMMON STOCK
Dividends. First Source 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 First Source is subject to limitations which are
imposed by law and applicable regulation. The holders of Common Stock of First
Source are entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of First Source out of funds legally
available therefor. If First Source issues Preferred Stock, the holders
thereof may have a priority over the holders of the Common Stock with respect
to dividends.
Voting Rights. The holders of Common Stock of First Source possess exclusive
voting rights in First Source. They elect First Source's Board of Directors
and act on such other matters as are required to be presented to them under
Delaware law or First Source's Certificate of Incorporation or as are
otherwise presented to them by the Board of Directors. Except with respect to
certain voting limitations for holders of greater than 10% of the First Source
Common Stock, each holder of Common Stock is entitled to one vote per share
and does not have any right to cumulate votes in the election of directors. If
First Source issues Preferred Stock, holders of the Preferred Stock may also
possess voting rights. Certain matters require an 80% stockholder vote.
Liquidation. In the event of any liquidation, dissolution or winding up of
First Source, as holder of First Savings' capital stock, would be entitled to
receive, after payment or provision for payment of all debts and liabilities
of First Savings (including all deposit accounts and accrued interest thereon)
and after distribution of the balance in the special liquidation account
related to First Source's Conversion, all assets of First Savings available
for distribution. In the event of liquidation, dissolution or winding up of
First Source, 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 First Source available for distribution. If Preferred Stock
is issued, the holders thereof may have a priority over the holders of the
Common Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of First Source will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of First Source's authorized Preferred Stock have been
issued. Such stock may be issued with such preferences and designations as the
Board of Directors may from time to time determine. The Board of Directors
can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights which could dilute the voting
strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
COMPARISON OF STOCKHOLDER RIGHTS
Upon the consummation of the transactions contemplated in the Merger
Agreement, the stockholders of Pulse will become stockholders of First Source.
First Source is a Delaware-chartered corporation, while Pulse is a New Jersey-
chartered corporation. Therefore, the rights presently enjoyed by Pulse's
stockholders under the relevant provisions of the New Jersey Business
Corporation Act ("NJBCA"), the Certificate of Incorporation (the "Pulse
Certificate") and the Bylaws (the "Pulse Bylaws") of Pulse may differ in some
respects from the rights they would have as stockholders of First Source under
the relevant provisions of the Delaware General
63
<PAGE>
Corporation Law ("DGCL"), First Source's Certificate of Incorporation ("First
Source Certificate") and First Source's Bylaws (the "First Source Bylaws").
This summary contains a list of the material differences, but is not meant to
be relied upon as an exhaustive list or a detailed description of the
provisions discussed and is qualified in its entirety by reference to the
First Source Certificate, the First Source Bylaws, the Pulse Certificate, the
Pulse Bylaws, the DGCL and the NJBCA.
ISSUANCE OF CAPITAL STOCK
Pulse. The Pulse Certificate authorizes the issuance of 10,000,000 shares of
Pulse Common Stock, $1.00 par value per share, and 5,000,000 shares of Serial
Preferred Stock. At October 30, 1998, 3,205,800 shares of Pulse Common Stock
were issued and outstanding, and no shares of preferred stock were issued and
outstanding.
First Source. The First Source Certificate authorizes the issuance of
85,000,000 shares of Common Stock, $0.01 per value, and 10,000,000 shares of
Preferred Stock, $0.01 par value. At October 30, 1998, 31,838,866 shares of
First Source Common Stock were outstanding and no shares of Preferred Stock
were outstanding.
ADVANCE NOTICE REQUIREMENTS FOR NOMINATIONS OF DIRECTORS AND SHAREHOLDER
PROPOSALS
Pulse. The Pulse Certificate provides that nominations for the election of
directors may be made by any shareholder entitled to vote generally in the
election of directors by following certain procedures set forth therein. In
order for a Pulse shareholder to make a nomination, he or she must give notice
in writing to Pulse not fewer than 60 days prior to the anniversary date of
the immediately preceding annual meeting of shareholders of Pulse. The
shareholder's notice must contain certain information specified by the
Certificate.
First Source. The First Source Certificate contains similar notice
requirements, however, notice of a shareholder nomination or proposal must be
received by First Source at least 90 days prior to any meeting date, except
that if less than 100 days notice of the meeting is given then such
shareholder notice or nomination must be received no later than the tenth day
following notice of the meeting.
SPECIAL MEETINGS OF SHAREHOLDERS
Pulse. Special meetings of shareholders of Pulse may be called by the
President, Chairman, the Board of Directors, or a committee of the board of
directors of Pulse. Shareholders are not entitled under the Pulse Certificate
to call a special meeting.
First Source. Special meetings of shareholders of First Source may only be
called by resolution of the Board of Directors of First Source.
NUMBER AND TERM OF DIRECTORS
Pulse. The Pulse Board consists of six directors. The Pulse Certificate
provides that the number of directors may be changed by the affirmative vote
of two-thirds of the then-current members of the Pulse Board. Under the Pulse
Certificate, the number of directors may not be fewer than five or more than
15. The Pulse Board is divided into three classes with two members in each
class.
First Source. The First Source Board currently consists of eight directors,
and following the Merger will be expanded to 10 directors. The First Source
Certificate provides that the Board of Directors may set, by resolution, the
number of directors. The First Source Board is divided into three classes, as
equal in number as possible.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Pulse. The Pulse Certificate provides that any vacancy (including one
resulting from a newly created directorship) that occurs on the Pulse Board
may be filled by a majority vote of the Pulse Board and that any
64
<PAGE>
director appointed to fill the vacancy will hold office for a term expiring at
the next annual meeting of shareholders.
First Source. The First Source Certificate provides that any vacancy
(including one resulting from a newly created directorship) that occurs on the
First Source Board may be filled by a majority vote of the First Source Board
and any director appointed to fill the vacancy will hold office for a term
expiring at the annual meeting in which the term of the class to which such
director is appointed expires.
REMOVAL OF DIRECTORS
Pulse. The Pulse Certificate provides that one or more directors may be
removed for cause upon the affirmative vote of the holders of at least 80% of
the outstanding shares entitled to vote generally in the election of
directors. A director may also be removed for cause by the board of directors.
First Source. The First Source Certificate provides that one or more
directors may be removed for cause upon the affirmative vote of the holders of
at least 80% of the outstanding shares entitled to vote generally in the
election of directors.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS
Pulse. New Jersey law generally requires that an amendment to the Pulse
certificate must be approved by the Pulse board of directors and a majority of
votes cast by the holders of shares entitled to vote. The Pulse Certificate
provides that certain amendments to the Pulse Certificate must be approved by
the holders not less than 80% of the shares entitled to vote generally in the
election of directors. This 80% vote is required for amendments relating to:
(i) the number, election, classification and removal of directors; (ii)
preemptive rights; (iii) elimination of directors' liability; (iv)
indemnification of directors, officers, employees and agents; (v) meetings of
shareholders and shareholder proposals; (vi) restrictions on voting Pulse
Common Stock; (vii) approval of certain business combinations; and (viii)
amendment of the Pulse Bylaws.
The Pulse Certificate provides that the Pulse Bylaws may be amended by
either: (i) the affirmative vote of two-thirds of the directors; or (ii) the
shareholders of Pulse, by the affirmative vote of the holders of not less than
80% of the shares of Pulse entitled to vote generally in the election of
directors.
First Source. Delaware law and the First Source Certificate are
substantially similar to the provisions with respect to amendment of the Pulse
Certificate stated above.
The First Source Bylaws may be amended by a majority vote of the First
Source Board.
PAYMENT OF DIVIDENDS
The ability of First Source and Pulse to pay dividends on their common stock
is governed by Delaware and New Jersey law, respectively.
New Jersey law provides that Pulse may make distributions to its
shareholders unless, after paying the dividend: (i) Pulse would be unable to
pay its debts as they become due in the usual course of its business; or
(ii) the total assets of Pulse would be less than its total liabilities.
Delaware law provides that First Source may pay dividends only out of
either: (i) surplus, which is defined as the excess of net assets over First
Source's capital; or (ii) if no surplus, out of the net profits of First
Source for the fiscal year in which the dividend is declared or the previous
fiscal year.
The ability of First Source and Pulse to pay dividends is also affected by
regulatory restrictions on the abilities of their subsidiaries to make capital
distributions.
65
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following tables set forth certain selected condensed financial data for
First Source and Pulse on an unaudited pro forma combined basis giving effect
to the Merger as if the Merger had become effective on June 30, 1998, in the
case of the balance sheet data presented, and if the Merger had become
effective at the beginning of the periods indicated, in the case of the income
statement data presented. The pro forma data in the tables assume that the
Merger is accounted for using the pooling of interests method of accounting.
See "THE MERGER--Anticipated Accounting Treatment." Financial data for the six
months ended June 30, 1998 and 1997 combine First Source with Pulse's interim
results presented to coincide with the reporting periods for First Source.
These tables should be read in conjunction with, and are qualified in their
entirety by, the historical financial statements, including the notes thereto,
of First Source and Pulse incorporated by reference herein, including the
notes thereto, appearing elsewhere in this Joint Proxy Statement/Prospectus.
See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
The pro forma data and ratios set forth in the following tables do not
reflect the expected cost savings and revenue enhancement opportunities that
could result from the Merger or any other items of income or expense which may
result from the Merger. The pro forma balance sheet data and certain ratios do
reflect a $4.1 million reduction, net of taxes, to retained earnings and a
corresponding increase to other liabilities at June 30, 1998. This adjustment
represents the accrual of the estimated cost of merger expenses and
restructuring charges, net of tax. The unaudited pro forma combined selected
financial data are presented for informational purposes only and is not
necessarily indicative of the combined financial position or results of
operations that would have occurred if the Merger had been consummated on June
30, 1998, or at the beginning of the periods indicated, or which may be
obtained in the future.
66
<PAGE>
FIRST SOURCE BANCORP, INC. AND PULSE BANCORP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
FIRST
FIRST PRO FORMA SOURCE PRO
SOURCE PULSE ADJUSTMENTS(1) FORMA
---------- -------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.. $ 11,680 $ 3,929 $ -- $ 15,609
Federal funds sold....... 14,000 31,300 -- 45,300
---------- -------- ------- ----------
Total cash and cash
equivalents......... 25,680 35,229 -- 60,909
FHLB-NY stock, at cost... 8,352 2,837 -- 11,189
Investment securities, at
amortized cost.......... 15,994 71,553 -- 87,547
Investment securities
available for sale...... 57,053 111,838 -- 168,891
Mortgage-backed securi-
ties, net............... -- 126,193 -- 126,193
Mortgage backed securi-
ties available for
sale.................... 432,785 40,357 -- 473,142
Loans receivable, net.... 644,385 146,680 -- 791,065
Interest and dividends
receivable.............. 8,702 5,076 -- 13,778
Premises and equipment,
net..................... 14,088 2,149 -- 16,237
Excess of cost over fair
value of net assets ac-
quired.................. 8,381 -- -- 8,381
Other assets............. 5,618 2,190 7,808
---------- -------- ------- ----------
Total assets......... $1,221,038 $544,102 $ -- $1,765,140
========== ======== ======= ==========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
LIABILITIES
Deposits................. $ 807,591 $434,646 $ -- $1,242,237
Borrowed funds........... 139,544 59,675 -- 199,219
Advances by borrowers for
taxes and insurance..... 6,344 893 -- 7,237
Other liabilities........ 8,239 2,988 4,161 15,388
---------- -------- ------- ----------
Total liabilities.... 961,718 498,202 4,161 1,464,081
---------- -------- ------- ----------
STOCKHOLDERS' EQUITY
Common Stock............. 317 4,182 (4,082) 417
Paid-in capital.......... 206,948 12,756 (12,595) 207,109
Retained earnings........ 63,812 44,941 (4,161) 104,592
Accumulated other compre-
hensive income.......... 1,886 698 2,584
Less: Unallocated Common
Stock acquired by the
ESOP.................... (13,512) -- (13,512)
Unearned Common Stock
acquired by the RRP... (131) -- (131)
Treasury Stock, at
cost.................. -- (16,677) 16,677 --
---------- -------- ------- ----------
Total stockholders' eq-
uity.................. 259,320 45,900 (4,161) 301,059
---------- -------- ------- ----------
Total liabilities and
stockholders' equi-
ty.................. $1,221,038 $544,102 $ -- $1,765,140
========== ======== ======= ==========
</TABLE>
- --------
(1) Adjustments detailed are to eliminate Pulse's investment in treasury stock,
to conform the ending balance of common stock outstanding to First Source's
par value and to accrue for estimated restructuring charges, net of tax.
67
<PAGE>
FIRST SOURCE BANCORP, INC. AND PULSE BANCORP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST FIRST SOURCE
SOURCE PULSE PRO FORMA
------- ------- ------------
<S> <C> <C> <C>
Interest income.................................. $39,072 $18,717 $57,789
Interest expense................................. 20,547 11,630 32,157
------- ------- -------
Net interest income before provision for loan
losses.......................................... 18,545 7,087 25,632
Provision for loan losses........................ 740 -- 740
------- ------- -------
Net interest income after provision for loan
losses.......................................... 17,805 7,087 24,892
Other operating income........................... 2,467 134 2,601
Operating expenses............................... 8,811 2,911 11,722
------- ------- -------
Income before income taxes....................... 11,461 4,310 15,771
Income taxes..................................... 4,243 1,544 5,787
------- ------- -------
Net income....................................... $ 7,218 $ 2,766 $ 9,984
======= ======= =======
PRO FORMA WEIGHTED AVERAGE EQUIVALENT BASIC
SHARES
OUTSTANDING:
At the Exchange Ratio of 3.2..................... 30,518 3,106 40,457
At the Exchange Ratio of 3.764................... 30,518 3,106 42,209
PRO FORMA BASIC EARNINGS PER SHARE:
At the Exchange Ratio of 3.2..................... $ 0.24 $ 0.89 $ 0.25
At the Exchange Ratio of 3.764................... $ 0.24 $ 0.89 $ 0.24
PRO FORMA WEIGHTED AVERAGE EQUIVALENT DILUTED
SHARES
OUTSTANDING:
At the Exchange Ratio of 3.2..................... 30,842 3,238 41,204
At the Exchange Ratio of 3.764................... 30,842 3,238 43,031
PRO FORMA DILUTED EARNINGS PER SHARE:
At the Exchange Ratio of 3.2..................... $ 0.23 $ 0.85 $ 0.24
At the Exchange Ratio of 3.764................... $ 0.23 $ 0.85 $ 0.23
</TABLE>
68
<PAGE>
FIRST SOURCE BANCORP, INC. AND PULSE BANCORP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST FIRST SOURCE
SOURCE PULSE PRO FORMA
------- ------- ------------
<S> <C> <C> <C>
Interest income.................................. $36,054 $18,101 $54,155
Interest expense................................. 20,090 11,153 31,243
------- ------- -------
Net interest income before provision for loan
losses.......................................... 15,964 6,948 22,912
Provision for loan losses........................ 600 -- 600
------- ------- -------
Net interest income after provision for loan
losses.......................................... 15,364 6,948 22,312
Other operating income........................... 1,051 261 1,312
Operating expenses............................... 8,541 2,677 11,218
------- ------- -------
Income before income taxes....................... 7,874 4,532 12,406
Income taxes..................................... 2,919 1,623 4,542
------- ------- -------
Net income....................................... $ 4,955 $ 2,909 $ 7,864
======= ======= =======
PRO FORMA WEIGHTED AVERAGE EQUIVALENT BASIC
SHARES
OUTSTANDING:
At the Exchange Ratio of 3.2..................... 30,981 3,058 40,678
At the Exchange Ratio of 3.764................... 30,981 3,058 42,403
PRO FORMA BASIC EARNINGS PER SHARE:
At the Exchange Ratio of 3.2..................... $ 0.16 $ 0.95 $ 0.19
At the Exchange Ratio of 3.764................... $ 0.16 $ 0.95 $ 0.19
PRO FORMA WEIGHTED AVERAGE EQUIVALENT DILUTED
SHARES
OUTSTANDING:
At the Exchange Ratio of 3.2..................... 31,459 3,135 41,492
At the Exchange Ratio of 3.764................... 31,459 3,135 43,261
PRO FORMA DILUTED EARNINGS PER SHARE:
At the Exchange Ratio of 3.2..................... $ 0.16 $ 0.93 $ 0.19
At the Exchange Ratio of 3.764................... $ 0.16 $ 0.93 $ 0.18
</TABLE>
69
<PAGE>
FIRST SOURCE BANCORP, INC. AND PULSE BANCORP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 FOR FIRST SOURCE AND SEPTEMBER 30, 1997
FOR PULSE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST FIRST SOURCE
SOURCE PULSE PRO FORMA
------- ------- ------------
<S> <C> <C> <C>
Interest income.................................. $73,222 $36,019 $109,241
Interest expense................................. 41,183 22,375 63,558
------- ------- --------
Net interest income before provision for loan
losses.......................................... 32,039 13,644 45,683
Provision for loan losses........................ 1,200 -- 1,200
------- ------- --------
Net interest income after provision for loan
losses.......................................... 30,839 13,644 44,483
Other operating income........................... 2,801 510 3,311
Operating expenses............................... 18,863 5,275 24,138
------- ------- --------
Income before income taxes....................... 14,777 8,879 23,656
Income taxes..................................... 5,482 3,204 8,686
------- ------- --------
Net income....................................... $ 9,295 $ 5,675 $ 14,970
======= ======= ========
PRO FORMA WEIGHTED AVERAGE EQUIVALENT BASIC
SHARES
OUTSTANDING:
At the Exchange Ratio of 3.2..................... 30,981 3,063 40,783
At the Exchange Ratio of 3.764................... 30,981 3,063 42,511
PRO FORMA BASIC EARNINGS PER SHARE:
At the Exchange Ratio of 3.2..................... $ 0.30 $ 1.85 $ 0.37
At the Exchange Ratio of 3.764................... $ 0.30 $ 1.85 $ 0.35
PRO FORMA WEIGHTED AVERAGE EQUIVALENT DILUTED
SHARES
OUTSTANDING:
At the Exchange Ratio of 3.2..................... 31,335 3,146 41,401
At the Exchange Ratio of 3.764................... 31,335 3,146 43,176
PRO FORMA DILUTED EARNINGS PER SHARE:
At the Exchange Ratio of 3.2..................... $ 0.30 $ 1.80 $ 0.36
At the Exchange Ratio of 3.764................... $ 0.30 $ 1.80 $ 0.35
</TABLE>
70
<PAGE>
FIRST SOURCE BANCORP, INC. AND PULSE BANCORP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 FOR FIRST SOURCE AND SEPTEMBER 30, 1996
FOR PULSE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST FIRST SOURCE
SOURCE PULSE PRO FORMA
------- ------- ------------
<S> <C> <C> <C>
Interest income.................................. $68,039 $32,733 $100,772
Interest expense................................. 37,264 19,133 56,397
------- ------- --------
Net interest income before provision for loan
losses.......................................... 30,775 13,600 44,375
Provision for loan losses........................ 550 -- 550
------- ------- --------
Net interest income after provision for loan
losses.......................................... 30,225 13,600 43,825
Other operating income........................... 1,995 326 2,321
Operating expenses............................... 24,701 8,474 33,175
------- ------- --------
Income before income taxes....................... 7,519 5,452 12,971
Income taxes..................................... 2,809 1,959 4,768
------- ------- --------
Net income....................................... $ 4,710 $ 3,493 $ 8,203
======= ======= ========
PRO FORMA WEIGHTED AVERAGE EQUIVALENT BASIC
SHARES
OUTSTANDING:
At the Exchange Ratio of 3.2..................... 30,635 3,646 42,300
At the Exchange Ratio of 3.764................... 30,635 3,646 44,357
PRO FORMA BASIC EARNINGS PER SHARE:
At the Exchange Ratio of 3.2..................... $ 0.15 $ 0.96 $ 0.19
At the Exchange Ratio of 3.764................... $ 0.15 $ 0.96 $ 0.18
PRO FORMA WEIGHTED AVERAGE EQUIVALENT DILUTED
SHARES
OUTSTANDING:
At the Exchange Ratio of 3.2..................... 31,243 3,718 43,141
At the Exchange Ratio of 3.764................... 31,243 3,718 45,238
PRO FORMA DILUTED EARNINGS PER SHARE:
At the Exchange Ratio of 3.2..................... $ 0.15 $ 0.94 $ 0.19
At the Exchange Ratio of 3.764................... $ 0.15 $ 0.94 $ 0.18
</TABLE>
71
<PAGE>
FIRST SOURCE BANCORP, INC. AND PULSE BANCORP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 FOR FIRST SOURCE AND SEPTEMBER 30, 1995
FOR PULSE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST FIRST SOURCE
SOURCE PULSE PRO FORMA
------- ------- ------------
<S> <C> <C> <C>
Interest income.................................. $64,573 $30,739 $95,312
Interest expense................................. 35,691 17,230 52,921
------- ------- -------
Net interest income before provision for loan
losses.......................................... 28,882 13,509 42,391
Provision for loan losses........................ 310 -- 310
------- ------- -------
Net interest income after provision for loan
losses.......................................... 28,572 13,509 42,081
Other operating income........................... 2,171 294 2,465
Operating expenses............................... 17,830 5,643 23,473
------- ------- -------
Income before income taxes....................... 12,913 8,160 21,073
Income taxes..................................... 4,611 2,895 7,506
------- ------- -------
Net income....................................... $ 8,302 $ 5,265 $13,567
======= ======= =======
PRO FORMA WEIGHTED AVERAGE EQUIVALENT BASIC
SHARES
OUTSTANDING:
At the Exchange Ratio of 3.2..................... 30,607 3,848 42,920
At the Exchange Ratio of 3.764................... 30,607 3,848 45,090
PRO FORMA BASIC EARNINGS PER SHARE:
At the Exchange Ratio of 3.2..................... $ 0.27 $ 1.37 $ 0.32
At the Exchange Ratio of 3.764................... $ 0.27 $ 1.37 $ 0.30
PRO FORMA WEIGHTED AVERAGE EQUIVALENT DILUTED
SHARES
OUTSTANDING:
At the Exchange Ratio of 3.2..................... 31,207 3,917 43,740
At the Exchange Ratio of 3.764................... 31,207 3,917 45,949
PRO FORMA DILUTED EARNINGS PER SHARE:
At the Exchange Ratio of 3.2..................... $ 0.27 $ 1.34 $ 0.31
At the Exchange Ratio of 3.764................... $ 0.27 $ 1.34 $ 0.30
</TABLE>
72
<PAGE>
FIRST SOURCE BANCORP, INC. 1998 STOCK-BASED INCENTIVE PLAN
In connection with First Savings 1998 Conversion and Reorganization, the
Board of Directors of First Source is also presenting for stockholder approval
the First Source Bancorp, Inc. 1998 Stock-Based Incentive Plan ("Incentive
Plan"), in the form attached hereto as Annex E. The purpose of the Incentive
Plan is to attract and retain qualified personnel in key positions, provide
officers, employees and non-employee directors ("Outside Directors") with a
proprietary interest in First Source as an incentive to contribute to the
success of First Source, promote the attention of management to other
stockholder's concerns and reward employees for outstanding performance.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Beneficial owners of more than 5% of First Source's outstanding shares of
Common Stock are required to file certain reports regarding such ownership
with First Source and with the Securities and Exchange Commission ("SEC"), in
accordance with Sections 13(d) and 13(g) of the Securities Exchange Act of
1934, as amended ("Exchange Act"). First Source is not aware of any person, as
such term is defined in the Exchange Act, that owns more than 5% of First
Source's Common Stock as of the Record Date.
73
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of the Record Date as to
shares of Common Stock beneficially owned by directors and executive officers
individually (as defined below) and by all executive officers and directors as
a group. Ownership information is based upon information furnished by the
respective individuals.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENT
NAME TITLE OWNED (2)(3)(4) OF CLASS (4)
- ---- ----- --------------- -----------
<S> <C> <C> <C>
DIRECTORS(1)
Walter K. Timpson....... Director 564,305 1.77%
Donald T. Akey, M.D..... Director 123,582 0.39%
Harry F. Burke.......... Director 230,960 0.73%
Keith H. McLaughlin..... Director 270,874 0.85%
Philip T. Ruegger, Jr... Director 621,836 1.95%
Jeffries Shein.......... Director 794,142 2.49%
John P. Mulkerin........ President,
Chief Executive Officer
and Director 391,372 1.23%
Christopher P. Martin... Executive Vice President,
Chief Financial
and Operating Officer
and Director 257,043 0.81%
EXECUTIVE OFFICERS
John F. Cerulo, Jr...... Senior Vice President/
Retail Banking 60,768 0.19%
Karen I. Martino........ Senior Vice President/
Audit and Compliance 43,409 0.14%
Richard Spengler........ Senior Vice President/
Chief Lending Officer 109,850 0.35%
All Directors and
Executive Officers
as a Group (11
persons)............... 3,468,147 10.89%
</TABLE>
- --------
(1) Titles are for both First Source and First Savings unless otherwise
indicated.
(2) Each person effectively exercises sole (or shares with spouse or other
immediate family member) voting and dispositive power as to shares
reported.
(3) Does not include options and awards intended to be granted under the
Incentive Plan, which is subject to stockholder approval. For a
discussion of the options and awards that are intended to be granted
under the Incentive Plan, see "--New Plan Benefits." Includes the
following amount of unvested shares of restricted stock awarded under the
1996 Incentive Plan which may be voted by the recipient pending vesting
and distribution: 1,420 shares to each of Messrs. Akey, Burke,
McLaughlin, Ruegger and Shein; 11,681 shares to both Messrs. Mulkerin and
Martin; and 3,158 shares to each of Mr. Cerulo, Ms. Martino, and
Mr. Spengler. Includes options to purchase stock pursuant to First
Savings' 1992 Stock Option Plans and 1996 Incentive Plan which were
vested or exercisable within 60 days of October 30, 1998: 74,951 shares
to each of Messrs. McLaughlin and Ruegger; 54,470 shares to Mr. Shein;
9,470 shares to each of Messrs. Akey, Burke and Timpson; 36,302 shares to
each of Messrs. Mulkerin and Martin; and 6,314 shares to each of Messrs.
Cerulo, Spengler and Ms. Martino.
(4) Under applicable regulations, a person is deemed to have beneficial
ownership of any share of Common Stock which may be acquired within 60
days of October 30, 1998 pursuant to the exercise of outstanding stock
options. Shares of Common Stock which are subject to stock options are
deemed to be outstanding for the purpose of computing the percentage of
outstanding Common Stock owned by such person or group but not deemed
outstanding for the purpose of computing the percentage of Common Stock
owned by any other person or group.
74
<PAGE>
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Upon obtaining stockholder approval, First Source and First Savings intend
to grant to non-employee directors, and selected officers and employees of
First Savings and First Source stock options and awards in the form of shares
of Common Stock under the Incentive Plan, being presented for approval in the
Proposal.
DIRECTORS' COMPENSATION
FEE AGREEMENT. Non-employee directors of First Savings receive a monthly
retainer of $1,750, $750 for each full Board of Directors meeting attended,
and $300 for each committee meeting attended. Employee directors of First
Savings receive a monthly retainer of $1,750, but no meeting fees. Directors
currently do not receive fees for service on the First Source Board.
DIRECTORS' DEFERRED FEE PLAN. Directors may elect to defer all or part of
their fees under the Agreement for Deferment of Directors' Fees (the "Deferral
Fee Agreement"). The fees so deferred are recorded on the books of First
Savings as a liability in the year the fees are earned; however, First Savings
does not specifically fund the amount so deferred. First Savings pays the
deferred fees to the directors not earlier than the time they cease to be a
director, retirement or when they attain age 65 (or some other age
specifically elected by the director), unless First Savings determines it
serves its best interests or the best interests of the director to disburse
these funds at an earlier date.
First Savings also maintains the First Savings Bank, SLA Directors' Deferred
Fee Stock Unit Plan (the "Deferred Fee Stock Unit Plan"). During First
Savings' 1992 and 1995 stock offerings and in connection with the 1998
Conversion and Reorganization of First Savings and its mutual holding company,
Directors who had deferred fees under the Deferred Fee Agreement had the
opportunity to elect to defer the fees under the Deferred Fee Stock Unit Plan.
Each Director who elected to participate in the Deferred Fee Stock Unit Plan
had his deferred fees credited with a number of shares of Common Stock based
on the fair market value of the stock. Messrs. Burke, McLaughlin, Martin,
Ruegger, Shein and Timpson currently participate in the Plan.
RETIREMENT PLAN. First Savings also maintains a nonqualified, unfunded
retirement plan for directors who are not employees, have served as a director
for five (5) years, and who retire from the Board of Directors within the time
specified under the Retirement Plan. Benefits, in general, are equal either to
all or a portion of the current annual retainer received by Board members,
depending upon the director's age and length of service at retirement.
Benefits are paid monthly, commencing in the month following the director's
retirement from the Board and ending in the month following the director's
death.
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS. During 1992, First Savings' Board
of Directors adopted the First Savings Bank, SLA 1992 Stock Option Plan for
Outside Directors (the "Directors' Stock Option Plan") of First Savings and
its affiliates. Under the terms of the Director's Stock Option Plan, 100,399
shares of the Common Stock were reserved for issuance to directors who are not
employees of First Savings or First Source. The Directors' Stock Option Plan
is a self administering plan and provides that each member of the Board of
Directors of First Savings who is not an officer or employee of First Savings
is granted non-statutory stock options to purchase 16,733 shares of the Common
Stock (based on adjustments for four 10% stock dividends and a 2-for-1 stock
split). Upon completion of First Savings' 1998 Conversion and Reorganization,
First Source adopted the Directors' Stock Option Plan and options for First
Source Common Stock were exchanged for options in First Savings Common Stock
on a 3.9133-to-1 basis. All stock options granted under this plan are
currently exercisable at an exercise price of $.8726 per share, as adjusted
for the four 10% stock dividends, the 2-for-1 stock split and the exchange for
First Source Common Stock. As of December 31, 1997, 33,466 options had been
exercised under this plan. As of October 30, 1998, 175,962 options, as
adjusted, remain exercisable.
1996 INCENTIVE PLAN. During 1996, the Board of Directors adopted the First
Savings Bank, SLA 1996 Omnibus Incentive Plan for directors, officers and
certain employees of First Savings and its affiliates. Under the terms of the
Incentive Plan, 21,780 shares of the First Savings Common Stock were reserved
for issuance to
75
<PAGE>
directors who are not employees of First Savings. The portion of the Incentive
Plan granting awards to directors is self administering and provides that each
member of the Board of Directors who is not an officer or employee of First
Savings or First Source is granted non-statutory options to purchase 3,630
shares of First Savings' Common Stock at an exercise price of $13.02 per
share. Stock options granted under this plan vest in equal installments over a
three-year period from the date of issuance. Upon consummation of First
Savings' 1998 Conversion and Reorganization, First Source adopted the 1996
Omnibus Incentive Plan and all shares and options awarded under the plan were
exchanged for shares and options in First Source Common Stock at the 3.9133
exchange ratio. As of October 30, 1998, 222,546 options, as adjusted, were
currently exercisable or exercisable within 60 days and 74,182 options, as
adjusted, had been granted but were not yet exercisable under the 1996
Incentive Plan.
76
<PAGE>
EXECUTIVE COMPENSATION. The following table sets forth certain information
as to the total remuneration paid by First Savings to the Chief Executive
Officer and other executive officers who received salary and bonuses in excess
of $100,000 during the year ended December 31, 1997 ("Named Executive
Officers"). In addition, the table sets forth information regarding total
remuneration for the years ended December 31, 1996 and 1995. All share
information has been adjusted to reflect a 10% stock dividend paid on October
30, 1997 and the 1998 Conversion and Reorganization Exchange Ratio of 3.9133.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS PAYOUTS
------------------------------------- -------------------------- ----------
FISCAL OTHER RESTRICTED SECURITIES
NAME AND PRINCIPAL YEARS ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITIONS ENDED SALARY(1)(2) BONUS(3) COMPENSATION(4) AWARDS(5) OPTIONS/SARS(6) PAYOUTS(7) COMPENSATION(8)(9)
------------------ ------ ------------ ------- --------------- ---------- --------------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John P.
Mulkerin(10)....... 1997 $257,250 $70,875 $-- $ -- $ -- $-- $52,004
President and
Chief Executive
Officer 1996 202,250 67,500 -- 66,138 13,915 -- 19,813
1995 152,000 30,400 -- -- -- -- 17,062
Christopher P. Mar-
tin(11)............ 1997 201,250 56,700 -- -- -- -- 52,004
Executive Vice
President, Chief 1996 160,460 54,000 -- 66,138 13,915 -- 18,905
Financial Officer,
Chief Operating
Officer 1995 125,000 25,000 -- -- -- -- 14,168
and Corporate Sec-
retary
Richard Spengler... 1997 105,000 15,750 -- -- -- -- 34,176
Senior Vice Presi-
dent, 1996 100,000 15,000 -- 17,875 2,420 -- 13,042
Chief Lending Of-
ficer 1995 74,480 11,250 -- -- -- -- 7,995
</TABLE>
- ----
(1) Includes directors' fees paid to Mr. Mulkerin in 1997 and 1996, and paid
to Mr. Martin for 1997.
(2) Includes amounts of salary deferred pursuant to First Savings' Incentive
Savings Plan for Employees of First Savings Bank, SLA 401(k).
(3) Includes bonuses granted pursuant to First Savings' Annual Incentive
Plan. Under this plan, bonuses are awarded by the compensation committee
of the Board of Directors based upon achieving certain predetermined
profit levels and other identifiable goals.
(4) First Savings provides certain executive officers with the use of an
automobile, club dues and certain other benefits, which, in the
aggregate, do not exceed the lesser of either $50,000, or 10% of the
total annual salary and bonus reported for any of the named executive
officers.
(5) Pursuant to the 1996 Incentive Plan, Messrs. Mulkerin, Martin and
Spengler were awarded 11,681 shares, 11,681 shares and 3,158 shares of
Common stock, respectively, in November 1996, which had a market value of
$219,373, $219,373 and $59,290, respectively, at December 31, 1997. The
dollar amounts set forth in the table represent the market value of the
shares awarded on the date of grant. A committee of non-employee
directors determines the date on which plan share awards vest. Pursuant
to the award agreements, the awards vest over a three-year period from
the date of grant.
(6) First Savings maintains the 1992 Incentive Stock Option Plan for the
benefit of officers and employees. All options granted pursuant to the
1992 Incentive Stock Option Plan became exercisable as of July 10, 1993.
First Savings also maintains the 1996 Incentive Plan for the benefit of
officers and directors. Messrs. Mulkerin, Martin and Spengler were
awarded 54,454 shares, 54,454 shares and 9,470 shares subject to options,
respectively, under the 1996 Incentive Plan. Options granted become
exercisable in equal installments at an annual rate of 33 1/3% beginning
November 19, 1997.
(7) For 1997, 1996, and 1995, First Savings had no long-term incentive plan;
accordingly, there were no payouts or awards under any long-term
incentive plan.
(8) Includes $4,725, $4,725 and $3,150 contributed by First Savings in 1997
to the accounts of Messrs. Mulkerin, Martin and Spengler, respectively,
under the Incentive Savings Plan for Employees of First Savings Bank, SLA
(401(k)).
(9) Includes $47,279, $47,279 and $31,026, contributed by First Savings
pursuant to First Savings' ESOP in 1997 allocated for the benefit of
Messrs. Mulkerin, Martin and Spengler.
(10) Mr. Mulkerin was appointed to the positions of President and Chief
Executive Officer on June 12, 1996.
(11) Mr. Martin was appointed to the added positions of Chief Operating
Officer and Corporate Secretary on June 13, 1996.
77
<PAGE>
1996 Incentive Plan. On April 24, 1996, First Savings' stockholders approved
the First Savings Bank, SLA 1996 Omnibus Incentive Plan under which all
employees of First Savings were eligible to receive awards. The 1996 Incentive
Plan provides discretionary awards to officers and key employees, as
determined by a committee of non-employee directors. Stock options were
awarded to officers under the 1996 Incentive Plan on November 19, 1996. There
were no stock options under the Incentive Plan granted to Named Executive
Officers for the year ended December 31, 1997.
The following table provides certain information with respect to the number
of shares of Common Stock acquired upon exercise of stock options and the
value realized thereon. Also reported is the number of shares of Common Stock
represented by outstanding stock options at December 31, 1997, held by Named
Executive Officers and the values for "in-the-money" options which represent
the positive spread between the exercise price of any existing stock option
and the year-end price of the Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997(1) DECEMBER 31, 1997(1)(2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John P. Mulkerin............ 26,485 36,304 $255,845 $300,410
Christopher P. Martin....... 18,150 36,304 158,745 300,410
Richard Spengler............ 3,158 6,312 27,621 55,208
</TABLE>
- --------
(1) All options granted under the 1992 Incentive Stock Option Plan were issued
on July 10, 1992, and exercisable on July 10, 1993, at an option price of
$0.87 per share. All options granted under the 1996 Incentive Plan were
issued on November 19, 1996, at an option price of $3.78 per share.
Options granted to Messrs. Mulkerin and Martin are exercisable at the rate
of 18,150 shares per year commencing on November 19, 1997. Options granted
to Mr. Spengler are exercisable at the rate of 3,158 shares per year
commencing on November 19, 1997. All options will immediately vest upon a
change in control. The number and exercise price of options have been
adjusted as appropriate to reflect four stock dividends, a stock split,
and a 3.9133 exchange for options in First Source Common Stock.
(2) The market value of the Common Stock at December 31, 1997, prior to the
1998 Conversion and Reorganization, was $49.00 per share.
A Committee of the Board of Directors of First Savings and First Source
comprised of non-employee directors administers the 1996 Incentive Plan, and
makes awards to executive officers pursuant to the Plan. Awards under the 1996
Incentive Plan become immediately vested in the event of death, disability,
retirement or a change in control of First Savings or its successors. Upon
consummation of First Savings' 1998 Conversion and Reorganization, First
Source adopted the 1996 Incentive Plan in its entirety, and all options and
awards for shares of First Savings Common Stock were exchanged for shares of
First Source Common Stock at the 3.9133 exchange ratio.
EMPLOYMENT AGREEMENTS
First Savings and First Source have entered into employment agreements
(collectively, the "Employment Agreements") with Messrs. Mulkerin and Martin
(the "Executives"). The Employment Agreements are intended to ensure that
First Savings and First Source will be able to maintain a stable and competent
management base. The continued success of First Savings and First Source
depends to a significant degree on the skills and competence of Messrs.
Mulkerin and Martin.
The Employment Agreements provide for a three-year term for the Executives.
First Savings' Employment Agreement provides that, commencing on the first
anniversary date and continuing each anniversary date thereafter, the Board of
Directors of First Savings and First Source will review the agreements and the
Executive's performance for purposes of determining whether to extend the
agreements with First Savings and First Source for an additional year such
that the remaining terms would be the amount of the original terms. The annual
base salary for Messrs. Mulkerin and Martin under the Employment Agreements is
$260,000 and
78
<PAGE>
$210,000, respectively. In addition to the base salary, the Employment
Agreements provide for, among other things, participation in stock benefit
plans and other fringe benefits applicable to executive personnel. The
Employment Agreements provide for termination by First Savings or First Source
for cause, as defined in the agreements, at any time. In the event First
Savings or First Source chooses to terminate the Executive's employment for
reasons other than for cause, or in the event of the Executive's resignation
from First Savings and First Source upon: (i) failure to re-elect the
Executive to his current offices; (ii) a material change in the Executive's
functions, duties or responsibilities; (iii) a relocation of the Executive's
principal place of employment by more than 25 miles; (iv) liquidation or
dissolution of First Savings or First Source; or (v) a breach of the agreement
by First Savings or First Source, the Executive or, in the event of death, his
beneficiary, is entitled to receive the remaining base salary payments due to
the Executive and the contributions that would have been made on the
Executive's behalf to any employee benefit plans of First Savings or First
Source during the remaining term of the agreement. First Savings and First
Source would also continue and pay for the Executive's life, health and
disability coverage for the remaining term of the Employment Agreements.
Under the Employment Agreements, if voluntary or involuntary termination
follows a "change in control" of First Savings or First Source, as defined in
the Employment Agreements, the Executive or, in the event of death, his
beneficiary, will be entitled to a payment equal to the greater of: (1) the
payments due for the remaining term of the agreement; or (2) a severance
payment equal to three times the average of the five preceding taxable years'
compensation. First Savings and First Source would also continue the
Executive's life, health, and disability coverage for 36 months.
Notwithstanding that both agreements will provide for a severance payment in
the event of a change in control, the Executive would only be entitled to
receive a severance payment under one agreement.
Payments to the Executives under First Savings' Employment Agreement are
guaranteed by First Source in the event that payments or benefits are not paid
by First Savings. Payment under First Source's Employment Agreement will be
made by First Source. All reasonable costs and legal fees paid or incurred by
the Executive pursuant to any dispute or question of interpretation relating
to the Employment Agreements will be paid by First Savings or First Source,
respectively, if the Executive is successful on the merits pursuant to a legal
judgment, arbitration or settlement. The Employment Agreements also provide
that First Savings and First Source indemnify the Executive to the fullest
extent allowable under federal and Delaware law, respectively. In the event of
a "change in control" of First Savings or First Source, the total amount of
payments that would be due under the Employment Agreements, based solely on
cash compensation paid to Messrs. Mulkerin and Martin in the past year and
excluding any benefits under any employee benefit plan which may be payable,
would be approximately $984,000 and $774,000, respectively.
CHANGE IN CONTROL AGREEMENTS
First Savings has also entered into Change in Control Agreements ("CIC
Agreements") with certain other officers of First Savings. Such agreements
have terms ranging from one to three years. The CIC Agreements provide that
commencing on the first anniversary date and continuing on each anniversary
thereafter, First Savings' CIC Agreements may be renewed by the Board of
Directors for an additional year. The CIC Agreements with First Savings will
also provide that in the event voluntary or involuntary termination follows a
change in control of First Savings or First Source, the officer is entitled to
receive a severance payment equal to one to three times the officer's average
annual compensation for the five years preceding termination, depending on the
term of the officers' CIC Agreement. First Source and First Savings will also
continue, and pay for, the officer's life, health and disability coverage for
12 to 36 months following termination. Payments to the officer under First
Savings' CIC Agreements will be guaranteed by First Source in the event that
payments or benefits are not paid by First Savings. In the event of a change
in control of First Savings or First Source, the total payments that would be
due under the CIC Agreements, based solely on the cash compensation paid to
the officers covered by the CIC Agreements over the past three fiscal years
and excluding any benefits under any employee benefit plan that may be
payable, would be approximately $2.2 million.
79
<PAGE>
EMPLOYEE SEVERANCE COMPENSATION PLAN
First Savings' Board of Directors has also established First Savings Bank,
SLA Employee Severance Compensation Plan ("Severance Plan"), which provides
eligible employees with severance pay benefits in the event of a change in
control of First Savings or First Source. Management personnel with Employment
or CIC Agreements are not eligible to participate in the Severance Plan.
Generally, all employees are eligible to participate in the Severance Plan.
Under the Severance Plan, in the event of a change in control of First Savings
or First Source, eligible employees who are terminated from or terminate their
employment within one year of the change in control (for reasons specified
under the Severance Plan), are entitled to receive a severance payment. The
participant is entitled to a cash severance payment equal to one-twelfth of
annual compensation for each year of service up to a maximum of 100% of annual
compensation. Such payments may tend to discourage takeover attempts by
increasing costs to be incurred by First Savings in the event of a takeover.
In the event the provisions of the Severance Plan were triggered, the total
amount of payments that would be due thereunder, based solely upon salary
levels at December 31, 1997, would be approximately $2.5 million.
BENEFIT PLANS
Pension Plan. First Savings is a participant in the Financial Institutions
Retirement Fund, a multi-employer defined benefit plan. All employees age 21
or older who have completed one year of service are eligible to participate in
this Plan. Retirement benefits are based upon a formula utilizing years of
service and average compensation. Participants are vested 100% upon the
completion of five years of service.
Financial Institutions Retirement Fund does not segregate its assets,
liabilities or costs by participating employer. Therefore, disclosure of the
accumulated benefit obligations, plan assets and the components of annual
pension expense attributable to First Savings cannot be ascertained.
The following table illustrates annual pension benefits at age 65 under the
most advantageous plan provisions available at various levels of compensation
and years of service. The benefits listed in the table are not subject to a
deduction for Social Security or any other offset amount.
YEARS OF SERVICE
<TABLE>
<CAPTION>
HIGH 5 YEAR
FINAL AVERAGE 25 AND
EARNINGS(1) 10 15 20 OVER
============= ------ ------ ------- -------
<S> <C> <C> <C> <C>
$20,000.................................. $4,000 $6,000 $ 8,000 $10,000
$30,000.................................. 6,000 9,000 12,000 15,000
$50,000.................................. 10,000 15,000 25,000 25,000
$75,000.................................. 15,000 22,000 30,000 37,000
$100,000................................. 20,000 30,000 40,000 50,000
$150,000................................. 30,000 45,000 60,000 75,000
$200,000................................. 40,000 60,000 80,000 100,000
$300,000 and over(1)..................... 60,000 90,000 130,000(2) 130,000(2)
</TABLE>
- --------
(1) Under current law, the average final compensation for computing benefits
under the Pension Plan cannot exceed $160,000 (indexed for inflation).
However, benefits are not reduced below the level of benefits accrued as
of December 31, 1992.
(2) Under current law, the maximum benefit is limited to $130,000 per year
beginning in 1998.
(3) The compensation utilized for formula purposes include salary amounts
listed under "Summary Compensation Table."
As of December 31, 1997, John P. Mulkerin, Christopher P. Martin and Richard
Spengler had 10, 14 and 15 years of credited service, respectively.
80
<PAGE>
Supplemental Executive Retirement Plan. Effective as of January 1, 1994, the
Board of Directors revised a previously existing plan entitled the Retirement
Benefit Maintenance Plan (the "Maintenance Plan") and restated it as the First
Savings Bank, SLA Supplemental Executive Retirement Plan ("SERP"). The SERP
provides a post-employment supplemental retirement benefit for participants
who retire on or after their "Normal Retirement Age" (age 65) equal to (i)
seventy-five percent (75%) of the participant's base salary during the twelve
months prior to retirement, (ii) less the amount of the participant's "Pension
Plan Annual Benefit" and "Primary Social Security Benefit," as defined in the
plan. The plan allows for benefits, reduced according to actuarial
considerations, for early retirement. The SERP is not a tax-qualified employee
benefit plan. Pursuant to the SERP, the estimated additional annual benefits
payable upon retirement at normal retirement age for Messrs. Mulkerin and
Martin are $107,600 and $47,900, respectively.
First Savings also implemented in 1998 an additional supplemental executive
retirement plan to provide for supplemental benefits to certain employees
whose benefits under the ESOP and/or 401(k) Plan are reduced by limitations
imposed by the Code. From time to time, the Board will designate which
employees may participate in this additional supplemental executive retirement
plan. This supplemental executive retirement plan will also be an "unfunded"
promise to pay supplemental benefits in the future and any amount set aside to
pay the benefits under the plan remains subject to the claims of First
Savings' general creditors until they are paid to plan participants. First
Savings may establish a grantor trust in connection with the plan to satisfy
the obligations of First Savings under the plan. The grantor trust would be
permitted to invest in a wide-variety of investments, including First Source
Common Stock.
Employee Stock Ownership Plan and Trust. On July 10, 1992, First Savings
established the First Savings Bank, SLA Employee Stock Ownership Plan (the
"ESOP") and related trust for eligible employees, who were employed with First
Savings as of January 1, 1992 and employees of First Source and First Savings
employed after such date, who have been credited with at least 1,000 hours
during a 12-month period and who have attained the age of 21. The ESOP
acquired 70,000 shares of common stock. On July 11, 1995, First Savings
completed a secondary offering of common stock, and the ESOP purchased 42,000
shares of common stock at $13.00 per share. Stock dividends and splits have
caused the restatement of the shares originally purchased to equal 204,974
shares and stock dividends have caused the shares purchased in the 1995
offering to equal 50,820 shares. Funds for the purchase of the additional
shares were borrowed from First Source. The ESOP acquired an additional
1,324,029 shares of Common Stock in the 1998 Conversion and Reorganization.
The funds used to acquire such shares were borrowed from First Source. The
loan was aggregated with First Source's existing loan to the ESOP and
refinanced with a 15 year payout term. The loan will be repaid principally
from First Savings' contributions to the ESOP over the 15 year term, and the
collateral for the loan is the Common Stock purchased by the ESOP.
Contributions to the ESOP will be discretionary, however, First Source or
First Savings intend to make annual contributions to the ESOP in an aggregate
amount at least equal to the principal and interest requirement on the debt.
Shares purchased by the ESOP are held by a trustee for allocation among
participants as the loan is repaid. First Savings recognizes compensation
expense when debt payments are made.
First Savings accounts for the allocation of ESOP shares purchased prior to
1995 at their original issue price. First Savings accounts for the shares
purchased in the secondary offering in accordance with American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 93-6.
Those shares had a fair value of $2.8 million at December 31, 1997. The ESOP
allocated 114,589, 114,589 and 104,172 shares for the years ended December 31,
1997, 1996 and 1995, respectively, inclusive of four stock dividends of 10%, a
2-for-1 stock split and the 3.9133 exchange ratio for shares of First Source
Common Stock. The compensation expense for payments made to the ESOP totaled
$75,000 for each of the years ended December 31, 1997, 1996 and 1995.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") required that all loans or extensions of credit to executive
officers and directors be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and not involve more than the normal risk
of repayment or present other unfavorable features. In addition,
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<PAGE>
loans made to a director or executive officer in excess of the greater of
$25,000, or 5% of First Savings' capital and surplus (up to a maximum of
$500,000) must have been approved in advance by a majority of the
disinterested members of the Board of Directors.
First Savings currently makes loans to its directors and executive officers
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons
and do not involve more than the normal risk of collectibility or present
other unfavorable features. First Savings may, in the future, determine to
offer loans to executive officers and directors on terms not available to the
public, but available to other employees, in accordance with recently modified
federal regulations. Under First Savings' existing policy, any loan to an
executive officer or director, must be approved, in advance, by a majority of
the disinterested members of the Board of Directors.
Prior to the enactment of FIRREA, First Savings provided loans to directors
and executive officers at reduced rates and/or with points waived or reduced.
There were no loans to First Savings' current executive officers and directors
that exceeded $500,000 as of December 31, 1997. Set forth below is certain
information as of December 31, 1997, as to loans made by First Savings prior
to the enactment of FIRREA (August 9, 1989), to any director or executive
officer and associates of directors and executive officers whose aggregate
indebtedness to First Savings exceeded $60,000 at any time since January 1,
1997, and who were extended accommodations on origination fees and application
fees on first mortgage loans and as to rate on home equity credit lines.
<TABLE>
<CAPTION>
OUTSTANDING
ORIGINAL BALANCE AT
NAME OF OFFICER OR DATE AMOUNT OF DECEMBER INTEREST
DIRECTOR ORIGINATED LOAN 31, 1997 RATE LOAN TYPE
------------------ ---------- --------- ----------- -------- -----------------------
<S> <C> <C> <C> <C> <C>
Keith H. McLaughlin, Di-
rector................. 11/87 $ 100,000 $ 23,261 9.50% Home Equity Credit Line
John F. Cerulo, Sr.,
V.P.................... 4/88 165,000 149,000 8.00% Mortgage
--------- --------
$ 265,000 $172,369
========= ========
</TABLE>
APPROVAL OF THE FIRST SOURCE BANCORP, INC.
1998 STOCK-BASED INCENTIVE PLAN
The Board of Directors of First Source is presenting for shareholder
approval the First Source Bancorp, Inc. 1998 Stock-Based Incentive Plan in the
form attached hereto as Annex E. The following is a summary of the material
terms of the Incentive Plan which is qualified in its entirety by the complete
provisions of the Incentive Plan attached as Annex E. For a description of
prior awards granted by First Savings, see "Executive Compensation."
GENERAL
The Incentive Plan authorizes the granting of options to purchase Common
Stock, option-related awards and awards of Common Stock (collectively,
"Awards"). Subject to certain adjustments to prevent dilution of Awards to
participants, the maximum number of shares reserved for Awards under the
Incentive Plan is 2,317,051 shares. All officers, other employees, Outside
Directors, and consultants and advisers of First Source and its affiliates are
eligible to receive Awards under the Incentive Plan. The Incentive Plan will
be administered by a committee of non-employee directors of First Source (the
"Committee"). Authorized but unissued shares or shares previously issued and
reacquired by First Source may be used to satisfy Awards under the Incentive
Plan. The grant of stock awards and the exercise of options granted under the
Incentive Plan will result in an increase in the number of shares outstanding,
and may have a dilutive effect on the holdings of existing shareholders.
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<PAGE>
AWARDS
TYPES OF AWARDS. The Incentive Plan authorizes the grant of Awards to
officers, employees and Outside Directors in the form of: (i) options to
purchase First Source's Common Stock intended to qualify as incentive stock
options under Section 422 of the Code (options that afford tax benefits to the
recipients upon compliance with certain conditions and do not result in tax
deductions to First Source), referred to as "Incentive Stock Options"; (ii)
options that do not so qualify (options that do not afford income tax benefits
to recipients, but which may provide tax deductions to First Source), referred
to as "Non-statutory Stock Options"; (iii) limited rights that are exercisable
only upon a change in control of First Source (as defined in the Incentive
Plan) ("Limited Rights"); and (iv) Stock Awards, which provide a grant of
Common Stock that vests over time (a portion of such vesting would be
contingent upon the attainment of stated performance goals for all officers,
employees and Outside Directors who receive such Stock Awards).
OPTIONS. The Incentive Plan provides for the granting of options to purchase
Common Stock of First Source ("Options") to employees, officers and Outside
Directors for up to 1,655,037 shares. Pursuant to the Incentive Plan, the
Committee has the authority to determine the date, or dates, on which Options
shall become exercisable and any other conditions which must be met prior to
becoming exercisable. The exercise price of an Option may be paid in cash or
in Common Stock at the discretion of the Committee. See "--Method of Exercise
of Options."
All options granted to employees will be qualified as Incentive Stock
Options to the extent permitted under Section 422 of the Code. Incentive Stock
Options, at the discretion of the Committee with the concurrence of the
holder, may be converted into Non-Statutory Stock Options. The exercise price
of all Incentive Stock Options must be a minimum of 100% of the fair market
value of the underlying Common Stock at the time of grant, except as provided
below. In order to qualify as Incentive Stock Options under Section 422 of the
Code, the option must be granted to an employee, the exercise price must not
be less than 100% of the fair market value on the date of grant, the term of
the option may not exceed ten years from the date of grant, and no more than
$100,000 of options may become exercisable or vest in any fiscal year.
Incentive Stock Options granted to any person who is the beneficial owner of
more than 10% of the outstanding voting stock may be exercised only for a
period of five years from the date of grant and the exercise price must be at
least equal to 110% of the fair market value of the underlying Common Stock on
the date of grant.
Each Outside Director of First Source or its affiliates will be eligible to
receive Non-Statutory Stock Options to purchase shares of Common Stock.
Additionally, officers and employees are eligible to receive Non-Statutory
Stock Options under the Plan to the extent they are ineligible to receive
Incentive Stock Options. The exercise price of each Non-Statutory Stock Option
shall be equal to the greater of the fair market value of the Common Stock on
the date the option is granted or $9.00 per share.
Options granted under the Incentive Plan may be exercised at such times as
the Committee determines, but in no event shall an Option be exercisable more
than ten years from the date of grant (or five years from date of grant for a
10% owner). Unless otherwise determined by the Committee, upon termination of
an optionee's services for any reason other than death, disability, change in
control, retirement or termination for cause, all exercisable Options shall
remain exercisable for a period of three (3) months following termination and
all unexercised Options shall be canceled. Unless otherwise determined by the
Committee, in the event of the death or disability of the optionee, all
unexercisable Options held by such optionee will become fully exercisable and
remain exercisable for up to one (1) year thereafter. In the event of
termination for cause, all exercisable and unexercisable options held by the
optionee shall be canceled. In the event of the retirement of an optionee, all
exercisable options shall remain exercisable for a period of one (1) year, and
the Committee shall have the discretion to allow unexercisable options to
continue to vest in accordance with their original terms, provided the
optionee is immediately engaged as a consultant, advisor or advisory director
of First Source or any of its affiliates. Any option originally designated as
an Incentive Stock Option shall be treated as a Non-statutory Stock Option to
the extent the optionee exercises such option more than three (3) months after
retirement. In the event of the termination of an optionee due to a change in
control of First Source or First Savings, the optionee may
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<PAGE>
exercise only those options that were exercisable upon termination and only
for a period of one (1) year with respect to Non-Statutory Stock Options and
three (3) months with respect to Incentive Stock Options.
LIMITED RIGHTS. The Incentive Plan also provides the Committee with the
ability to grant a Limited Right concurrently with any Option. Limited Rights
are related to specific Options granted and become exercisable only upon a
change in control of First Savings or First Source. Upon exercise, the holder
will be entitled to receive in lieu of purchasing the stock underlying the
Option, a lump sum cash payment equal to the difference between the exercise
price of the related Option and the fair market value of the shares of Common
Stock subject to the Option on the date of exercise of the right less any
applicable tax withholding.
STOCK AWARDS. The Incentive Plan also authorizes the granting of Stock
Awards to employees and Outside Directors, in an amount not to exceed 662,014
shares in the aggregate. The Committee has the authority to determine the
dates on which Stock Awards granted will vest or any other conditions that
must be satisfied prior to vesting.
When stock awards are distributed in accordance with the Incentive Plan, the
recipients will also receive amounts equal to accumulated cash and stock
dividends (if any) with respect thereto plus earnings thereon minus any
required tax withholding amounts. Prior to vesting, recipients of Awards may
direct the voting of shares of Common Stock granted to them and held in a
trust established to hold shares of Common Stock which may be granted under
the Incentive Plan. Shares of Common Stock held by the Incentive Plan trust
which have not been allocated or for which voting has not been directed are
voted by the trustee in the same proportion as the awarded shares are voted in
accordance with the directions given by all recipients of Awards.
Unless otherwise determined by the Committee, upon termination of the
services of a holder of a Stock Award for any reason other than death,
disability, change in control, retirement or termination for cause, all such
holder's rights in unvested Stock Awards shall be canceled. Unless otherwise
determined by the Committee, in the event of the death or disability of the
holder of the Stock Award, all unvested Stock Awards held by such individual
will become fully vested. In the event of the termination of a holder of a
Stock Award due to a change in control of First Source or First Savings, or
termination for cause of a holder of a Stock Award, all unvested Stock Awards
held by such individual shall be canceled. In the event of a Stock Award
holder's retirement, the Committee shall have the discretion to determine that
all unvested Stock Awards shall continue to vest in accordance with their
original terms, provided the holder is engaged as a consultant, advisor or
advisory director of First Source or any of its affiliates.
TAX TREATMENT
OPTIONS. An optionee will generally not be deemed to have recognized taxable
income upon grant or exercise of any Incentive Stock Option, provided that
shares transferred in connection with the exercise are not disposed of by the
optionee for at least one year after the date the shares are transferred in
connection with the exercise of the option and two years after the date of
grant of the option. If certain holding periods are satisfied, upon disposal
of the shares, the aggregate difference between the per share option exercise
price and the fair market value of the Common Stock is recognized as income
taxable at long-term capital gains rates. No compensation deduction may be
taken by First Source as a result of the grant or exercise of Incentive Stock
Options, assuming these holding periods are met.
In the case of the exercise of a Non-Statutory Stock Option, an optionee
will be deemed to have received ordinary income upon exercise of the stock
option in an amount equal to the aggregate amount by which the per share
exercise price is exceeded by the fair market value of the Common Stock. In
the event shares received through the exercise of an Incentive Stock Option
are disposed of prior to the satisfaction of the holding periods (a
"disqualifying disposition"), the exercise of the option will be treated as
the exercise of a Non-Statutory Stock Option, except that the optionee will
recognize the ordinary income for the year in which the disqualifying
disposition occurs. The amount of any ordinary income deemed to have been
received by an optionee upon the exercise of a Non-Statutory Stock Option or
due to a disqualifying disposition will be a deductible expense of First
Source for tax purposes.
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<PAGE>
LIMITED RIGHTS. In the case of Limited Rights, the holder would have to
include the amount paid to him upon the exercise of the Limited Right in his
gross income for federal income tax purposes in the year in which the payment
is made and First Source would be entitled to a deduction for federal income
tax purposes of the amount paid.
STOCK AWARDS. When shares of Common Stock, as Stock Awards, are distributed,
the recipient is deemed to receive ordinary income equal to the fair market
value of such shares at the date of distribution plus any dividends and
earnings on such shares (provided such date is more than six months after the
date of grant) and First Source is permitted a commensurate compensation
expense deduction for income tax purposes.
PERFORMANCE AWARDS
GENERAL. The Incentive Plan provides the Committee with the ability to
condition or restrict the vesting or exercisability of any Award upon the
achievement of performance targets or goals as set forth under the Incentive
Plan. Any Award subject to such conditions or restrictions is considered to be
a "Performance Award." Subject to the express provisions of the Plan and as
discussed in this paragraph, the Committee has discretion to determine the
terms of any Performance Award, including the amount of the award, or a
formula for determining such, the performance criteria and level of
achievement related to these criteria which determine the amount of the award
granted, issued, retainable and/or vested, the period as to which performance
shall be measured for determining achievement of performance (a "performance
period"), the timing of delivery of any awards earned, forfeiture provisions,
the effect of termination of employment for various reasons, and such further
terms and conditions, in each case not inconsistent with the Plan, as may be
determined from time to time by the Committee. The performance criteria upon
which Performance Awards are granted, issued, retained and/or vested may be
based on financial performance and/or personal performance evaluations, except
that for any Performance Award that is intended by the Committee to satisfy
the requirements for "performance-based compensation" under Code Section
162(m), the performance criteria shall be a measure based on one or more
Qualifying Performance Criteria (as defined below). Notwithstanding
satisfaction of any performance goals, the number of shares granted, issued,
retainable and/or vested under a Performance Award may be adjusted by the
Committee on the basis of such further considerations as the Committee in its
sole discretion shall determine. However, the Committee may not increase the
amount earned upon satisfaction of any performance goal by any Participant who
is a "covered employee" within the meaning of Section 162(m) of the Code.
QUALIFYING PERFORMANCE CRITERIA AND SECTION 162(M) LIMITS. Subject to
stockholder approval of the Plan, the performance criteria for any Performance
Award that is intended to satisfy the requirements for "performance-based
compensation" under the Code Section 162(m) shall be based upon any one or
more of the following performance criteria, either individually, alternatively
or in any combination, applied to either First Source as a whole or to a
business unit or subsidiary, either individually, alternatively or in any
combination, and measured either on an absolute basis or relative to a pre-
established target, to previous years' results or to a designated comparison
group, in each case as pre-established by the Committee under the terms of the
Award; net income, as adjusted for non-recurring items; cash earnings;
earnings per share; cash earnings per share; return on equity; return on
assets; assets; stock price; total shareholder return; capital; net interest
income; market share; cost control or efficiency ratio; and asset growth.
The aggregate amount of Options granted under the Plan during any 60-month
period to any one Participant may not exceed 25% of the total amount of
options available to be granted under the Incentive Plan. The aggregate amount
of shares of Common Stock issuable under a Stock Award granted under the Plan
for any 60-month period to any one Participant may not exceed 25% of the total
amount of Stock Awards available to be granted under the Incentive Plan.
PAYOUT OF AWARDS. Payment due to a participant upon the exercise of an
option or the redemption of a Stock Award shall be in the form of shares of
Common Stock. Payment upon the exercise of a Limited Right shall be made in
cash. Any shares of Common Stock tendered in payment of an obligation arising
under the Incentive Plan or applied to tax withholding amounts shall be valued
at the fair market value of the Common
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<PAGE>
Stock. The Committee may use treasury stock, authorized but unissued stock or
it may direct the market purchase of shares of Common Stock to satisfy its
obligations under the Incentive Plan.
METHOD OF EXERCISE OF OPTIONS
Subject to the terms of the Incentive Plan, the Committee has discretion to
determine the form of payment for the exercise of an Option. The Committee may
indicate acceptable forms in the Award Agreement covering such Options or may
reserve its decision to the time of exercise. No Option is to be considered
exercised until payment in full is accepted by the Committee. The Committee
may permit the following forms of payment for Options: (a) in cash or by
certified or cashiers check, or (b) by tendering previously acquired shares of
Common Stock. Any shares of Common Stock tendered in payment of the exercise
price of an Option shall be valued at the Fair Market Value of the Common
Stock on the due date prior to the date of exercise.
AMENDMENT
The Board of Directors may amend the Incentive Plan in any respect, at any
time, provided that no amendment may affect the rights of the holder of an
Award without his or her permission. In addition, no amendment may adversely
affect the rights of an Award recipient without his or her permission.
ADJUSTMENTS
In the event of any change in the outstanding shares of Common Stock of
First Source by reason of any stock dividend or split, recapitalization,
merger, consolidation, spin-off, reorganization, combination or exchange of
shares, or other similar corporate change, or other increase or decrease in
such shares without receipt or payment of consideration by First Source, or in
the event an extraordinary capital distribution is made, including the payment
of an extraordinary dividend, the Committee may make such adjustments to
previously granted Awards, to prevent dilution, diminution or enlargement of
the rights of the holder. All Awards under this Incentive Plan shall be
binding upon any successors or assigns of First Source.
NONTRANSFERABILITY
Unless determined otherwise by the Committee, awards under the Incentive
Plan shall not be transferable by the recipient other than by will or the laws
of intestate succession or pursuant to a domestic relations order. With the
consent of the Committee, a participant may designate a person or his or her
estate as beneficiary of any award to which the recipient would then be
entitled, in the event of the death of the participant.
SHAREHOLDER APPROVAL
The Incentive Plan complies with the regulations of the OTS. The OTS has not
endorsed or approved the Incentive Plan. Pursuant to OTS regulations, the
Incentive Plan may not be implemented during the first year after First
Savings' 1998 Conversion and Reorganization unless the affirmative vote of the
holders of a majority of the total votes eligible to be cast at this Special
Meeting is received. If such approval is not obtained, but the Incentive Plan
receives the affirmative vote of a majority of the shares present at the
Special Meeting and eligible to be cast on the Proposal, the Incentive Plan
will not become effective at this time, but will become effective immediately
following a period of one year after the 1998 Conversion and Reorganization
without further shareholder approval. The Board of Directors also could
determine to have the Incentive Plan become effective one year after the 1998
Conversion and Reorganization even if the Incentive Plan does not receive the
requisite affirmative vote of shareholders at this Special Meeting. In the
absence of shareholder approval, the option awards under the Incentive Plan
would not qualify as Incentive Stock Options under the Code, and First
Source's qualification to have its stock traded on the Nasdaq National Market
could be adversely affected.
UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED PROXY
CARD, IF EXECUTED AND RETURNED, WILL BE VOTED "FOR" THE APPROVAL OF THE FIRST
SOURCE BANCORP, INC. 1998 STOCK-BASED INCENTIVE PLAN.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE
FIRST SOURCE BANCORP, INC. 1998 STOCK-BASED INCENTIVE PLAN.
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NEW PLAN BENEFITS
The following table provides certain information with respect to all Awards
that are intended to be granted immediately after the Special Meeting,
assuming stockholder approval is obtained, under the Incentive Plan,
specifying the amounts to be granted to the named executive officers
individually, all current executive officers as a group, all current directors
who are not executive officers as a group, and all employees, including all
current officers who are not executive officers, as a group.
All awards granted to the officers and directors of First Source and First
Savings reflected in the table below become vested and exercisable in equal
annual installments of 20% each year commencing one year from the date of
grant. All such awards will immediately vest and become exercisable upon
termination of employment due to death or disability. Additionally, on or
after April 8, 1999, the Board of Directors intends to amend the Incentive
Plan or the awards reflected below to provide for acceleration of the vesting
of such previously granted awards upon a change in control of First Source or
First Savings (as defined in the Incentive Plan). The Incentive Plan generally
defines a change in control to occur when a person or group of persons acting
in concert acquires beneficial ownership of 20% or more of any class of equity
security, such as the Common Stock of First Source or First Savings, or in the
event of a tender offer or exchange offer, merger or other form of business
combination, sale of assets or contested election of directors which results
in a change in control of a majority of the incumbent Board of Directors of
First Source or First Savings. First Source will present any such amendment
made more than one year after the 1998 Conversion and Reorganization to
stockholders for approval, if required by the OTS. First Source is not
otherwise required to obtain stockholder approval of amendments to the
Incentive Plan.
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
STOCK OPTIONS STOCK AWARDS
------------------- --------------------
DOLLAR NUMBER DOLLAR NUMBER
NAME AND POSITION VALUE(1) OF UNITS(2) VALUE(3) OF UNITS(2)
----------------- ------- ---------- --------- ----------
<S> <C> <C> <C> <C>
John P. Mulkerin
President, Chief Executive Officer
and Director....................... -- 300,000 $888,375 103,000
Christopher P. Martin
Executive Vice President, Chief Fi-
nancial and
Operating Officer and Director..... -- 260,000 819,375 95,000
Richard Spengler
Senior Vice President, Chief Lend-
ing Officer........................ -- 87,500 362,250 42,000
All current executive officers
as a group (5 persons)............. -- 727,500 2,371,875 275,000
All other current directors
of First Source and First Savings
as a group (6 persons)............. -- 496,511 1,712,960 198,604
Other employees (4)................. -- 241,000 1,000,500 116,000
</TABLE>
- --------
(1) The "dollar value" for options to be granted pursuant to the Incentive
Plan on the date of grant will be zero, as the exercise price for such
options will be the greater of the fair market value on the date of grant
which is intended to be the date stockholder approval is obtained or $9.00
per share.
(2) 190,026 Stock Option Awards and 72,410 Stock Awards remain unallocated
under the Incentive Plan.
(3) Based upon $8.625, the closing price of the Common Stock, as reported on
the Nasdaq National Market on October 30, 1998.
(4) Fifteen other employees will receive options and fourteen other employees
will receive stock awards.
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AMENDMENT OF FIRST SOURCE CERTIFICATE OF INCORPORATION
The Board of Directors of First Source has proposed that the Company's
Certificate of Incorporation be amended to change the name of the Company from
First Source Bancorp, Inc. to First Sentinel Bancorp, Inc. A copy of the
Corporate Name Amendment is attached at Annex F and incorporated herein by
reference.
The Corporate Name Amendment, if passed, would become effective upon the
filing with the Secretary of State of Delaware a Certificate of Amendment,
which filing is expected to take place shortly after the shareholders approve
the amendment. The affirmative vote of the holders of a majority of the
outstanding shares of Common Stock entitled to vote on the Amendment is
required to approve the Corporate Name Amendment.
The Board of Directors believe that a name change would be beneficial to the
Company because it allows for a diversity of operations which is consistent
with the future plans of the Company.
UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED PROXY
CARD, IF EXECUTED AND RETURNED, WILL BE VOTED "FOR" THE APPROVAL OF THE
CORPORATE NAME AMENDMENT.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE
CORPORATE NAME AMENDMENT.
LEGAL MATTERS
The validity of the shares of First Source Common Stock which will be issued
in the Merger will be passed upon for First Source by Patton Boggs LLP,
Washington, D.C.
Legal matters in connection with the Merger will be passed upon for Pulse by
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.
EXPERTS
The consolidated financial statements of First Source Bancorp, Inc. and
subsidiary as of December 31, 1997 and 1996 and for each of the years in the
three year period ended December 31, 1997, included in First Source's 1997
Annual Report on Form 10-K, as amended, incorporated by reference into this
Joint Proxy Statement/Prospectus, have been incorporated by reference herein
and in the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, included in First
Source's 1997 Annual Report on Form 10-K and incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Pulse Bancorp, Inc. and
subsidiaries as of September 30, 1997 and 1996 and for each of the years in
the three-year period ended September 30, 1997, included in Pulse's 1997
Annual Report on Form 10-K incorporated by reference into this Joint Proxy
Statement/Prospectus have been incorporated by reference herein and in the
Registration Statement of which the Joint Proxy Statement/Prospectus is a part
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, included in Pulse's 1997 Annual Report on Form 10-K and
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
First Source Meeting and the Pulse Meeting, and are expected to be available
to respond to appropriate questions.
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<PAGE>
STOCKHOLDER PROPOSALS
First Source. Proposals of stockholders intended to be presented at the 1998
Annual Meeting of Stockholders of First Source must be received by First
Source at 1000 Woodbridge Center Drive, Woodbridge, New Jersey 07095 no later
than November 24, 1998 for inclusion in First Source Proxy Statement and Form
of Proxy relating to that meeting. Unless notice that a stockholder intends to
present a proposal at the Company's 1998 annual 1998 Meeting of stockholders
received by the Company on or before February 8, 1998, the Company will have
discretionary authority to vote on any stockholder proposal presented at the
meeting.
Pulse will hold a 1998 Annual Meeting of Stockholders only if the Merger is
not consummated before the time of such meeting. Proposals of stockholders
intended to be presented at the 1998 Annual Meeting of Stockholders (if such
meeting is to be held) of Pulse should have been received by Pulse at 6
Jackson Street, South River, New Jersey 08882 no later than August 14, 1998,
for inclusion in Pulse Proxy Statement and Form of Proxy relating to that
meeting. Unless notice that a stockholder intends to present a proposal at
Pulse's 1998 Annual Meeting of Stockholders is received by Pulse on or before
January 17, 1999, Pulse will have discretionary authority to vote on any
stockholder proposal presented at the meeting.
OTHER MATTERS
The Boards of Directors of First Source Bancorp, Inc. and Pulse Bancorp,
Inc. are not aware of any business to come before the Special Meetings other
than those matters described above in this Joint Proxy Statement/Prospectus.
However, if any other matter should properly come before the Special Meetings,
including proposals to adjourn a Special Meeting to permit further
solicitation of proxies in the event that there are not sufficient votes to
approve the Merger, the Incentive Plan and/or the Corporate Name Amendment
proposal at the time of the Special Meeting, it is intended that holders of
the proxies will act in accordance with their best judgment.
<TABLE>
<S> <C>
BY ORDER OF THE BY ORDER OF THE
BOARD OF DIRECTORS BOARD OF DIRECTORS
OF FIRST SOURCE BANCORP, INC. OF PULSE BANCORP, INC.
John P. Mulkerin George T. Hornyak, Jr.
President and Chief Executive Officer President and Chief Executive Officer
</TABLE>
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Annex A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of July 9, 1998, by and among First
Source Bancorp, Inc., a Delaware corporation ("Buyer") and Pulse Bancorp, Inc.,
a New Jersey corporation (the "Company"). (Buyer and the Company are herein
sometimes collectively referred to herein as the "Constituent Corporations".)
WHEREAS, the Boards of Directors of Buyer and the Company have determined
that it is in the best interests of their respective companies and their
shareholders to consummate the business combination transaction provided for
herein in which the Company will, subject to the terms and conditions set forth
herein, merge (the "Merger") with and into Buyer; and
WHEREAS, as soon as practicable after the execution and delivery of this
Agreement and Plan of Merger ("Agreement"), First Savings Bank, SLA, a New
Jersey chartered stock savings and loan association and a wholly owned
subsidiary of Buyer ("First Savings Bank", and sometimes referred to herein as
the "Surviving Bank"), and Pulse Savings Bank, a New Jersey chartered stock
savings bank and a wholly owned subsidiary of the Company (the "Company Bank"),
will enter into a Subsidiary Agreement and Plan of Merger (the "Bank Merger
Agreement") providing for the merger (the "Subsidiary Merger") of the Company
Bank with and into First Savings Bank, and it is intended that the Subsidiary
Merger be consummated immediately following the consummation of the Merger; and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
1.THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement,
----------
in accordance with the Delaware General Corporation Law (the "DGCL") and the New
Jersey Business Corporations Act ("NJBCA"), at the Effective Time (as defined in
Section 1.2 hereof), the Company shall merge with and into Buyer. Buyer shall
be the surviving corporation (hereinafter sometimes called the "Surviving
Corporation") in the Merger, and shall continue its corporate existence under
the laws of the State of Delaware. The name of the Surviving Corporation shall
be First Source Bancorp, Inc., or such other name as may be determined by the
Buyer. Upon consummation of the Merger, the separate corporate existence of the
Company shall terminate.
<PAGE>
1.2 Effective Time. The Merger shall become effective as set forth in
--------------
the certificate of merger (the "Certificate of Merger") which shall be filed
with appropriate authorities in the States of New Jersey and Delaware (the
"Authorities") on the Closing Date (as defined in Section 9.1 hereof). The term
"Effective Time" shall be the date and time when the Merger becomes effective,
as set forth in the Certificate of Merger.
1.3 Effects of the Merger. At and after the Effective Time, the Merger
---------------------
shall have the effects set forth in Sections 259 and 261 of the DGCL and Section
14A:10-6 of NJBCA.
1.4 Conversion of Company Common Stock.
----------------------------------
(a) At the Effective Time, subject to Section 2.2 (e) hereof, each
share of the common stock, par value $1.00 per share, of the Company (the
"Company Common Stock") issued and outstanding immediately prior to the
Effective Time (other than shares of Company Common Stock held (x) in the
Company's treasury or (y) directly or indirectly by Buyer or the Company or any
of their respective Subsidiaries (as defined below) (except for Trust Account
Shares and DPC shares, as such terms are defined in Section 1.4 (b) hereof))
shall, by virtue of this Agreement and without any action on the part of the
holder thereof, be converted into and exchangeable for the number of shares (the
"Exchange Ratio") of the common stock, par value $0.01 per share, of Buyer
("Buyer Common Stock"), determined as follows (I) subject to the provisions of
Section 8.1(h), if the Average Closing Price (as defined below) is equal to or
greater than $11.50, the Exchange Ratio shall be equal to 3.2 (the "Minimum
Exchange Ratio"); (II) if the Average Closing Price is $10.00 or greater but
less than $11.50, the Exchange Ratio shall be 3.2; (III) if the Average Closing
Price is greater than $8.50 but less than $10.00 the Exchange Ratio shall equal
$32.00 divided by the Average Closing Price; or (IV) subject to the provisions
of Section 8.1(g) hereof, if the Average Closing Price is equal to or less than
$8.50, the Exchange Ratio shall be 3.764 (the "Maximum Exchange Ratio"). As used
herein, the term "Average Closing Price" means the average of the last reported
daily sales price (or if no sale on such date, then the mean of the closing
bid/ask price) per share of Buyer Common Stock on the Nasdaq Stock Market
("Nasdaq"), for the 10 consecutive trading days (the "Valuation Period") ending
on the fifth business day prior to the later of approval of the Buyer's
stockholders, approval of the Company's stockholders or the date on which the
last of all regulatory approvals required to consummate the transactions
contemplated hereby (including the Merger and the Subsidiary Merger) are
obtained, without regard to any requisite waiting periods in respect thereof.
All of the shares of Company Common Stock converted into Buyer Common Stock
pursuant to this Article I shall no longer be outstanding and shall
automatically be cancelled and shall cease to exist, and each certificate (each
a "Certificate") previously representing any such shares of Company Common Stock
shall thereafter only represent the right to receive (i) the number of whole
shares of Buyer Common Stock and (ii) the cash in lieu of fractional shares into
which the shares of Company Common Stock represented by such Certificate have
been converted pursuant to this Section 1.4(a) and Section 2.2(e) hereof.
Certificates previously representing shares of Company Common Stock shall be
exchanged for certificates representing whole shares of Buyer Common Stock and
cash in lieu of fractional shares issued in consideration therefor upon the
surrender of such Certificates in accordance with Section 2.2 hereof, without
any interest thereon. If prior to the Effective Time Buyer should split or
combine
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<PAGE>
its common stock, or pay a dividend or other distribution in such common stock,
then the Exchange Ratio, Minimum Exchange Ratio and Maximum Exchange Ratio shall
be appropriately adjusted to reflect such split, combination, dividend or
distribution.
(b) At the Effective Time, all shares of Company Common Stock that
are owned by the Company as treasury stock and all shares of Company Common
Stock that are owned directly or indirectly by Buyer or the Company or any of
their respective Subsidiaries (other than shares of Company Common Stock (x)
held directly or indirectly in trust accounts, managed accounts and the like or
otherwise held in a fiduciary capacity that are beneficially owned by third
parties (any such shares, and shares of Buyer Common Stock which are similarly
held, whether held directly or indirectly by Buyer or the Company, as the case
may be, being referred to herein as "Trust Account Shares") and (y) shares of
Company Common Stock held by Buyer or the Company or any of their respective
Subsidiaries in respect of a debt previously contracted (any such shares of
Company Common Stock, and shares of Buyer Common Stock which are similarly held,
whether held directly or indirectly by Buyer or the Company being referred to
herein as "DPC Shares")) shall be cancelled and shall cease to exist and no
stock of Buyer or other consideration shall be delivered in exchange therefor.
All shares of Buyer Common Stock that are owned by the Company or any of its
Subsidiaries (other than Trust Account Shares and DPC Shares) shall become
treasury stock of Buyer.
1.5 Stock Options.
-------------
(a) At the Effective Time, all options granted by the Company
("Company Options") to purchase shares of Company Common Stock which are
outstanding and unexercised immediately prior thereto shall, at the Company's
election to be made by written notice to the Buyer within 30 days of the date
hereof, be converted, in their entirety, automatically into either options to
purchase shares of Buyer Common Stock in an amount and at an exercise price
determined as provided below (and otherwise subject to the terms of the
Company's 1986 and 1993 Stock Option and Incentive Plans and the Company's 1997
Directors Stock Option Plan and 1997 Stock Compensation Plan (collectively, the
"Company's Stock Plans")) or shares of Buyer Common Stock in an amount and at an
exercise price determined as provided below, provided, however, that such
conversion does not impair the pooling of interests accounting treatment:
(1) The number of shares of Buyer Common Stock to be subject to the
new options or to the exchange for Company Options shall be equal to the
product of the number of shares of Company Common Stock subject to the
original options and the Exchange Ratio, provided that any fractional
shares of Buyer Common Stock resulting from such multiplication shall be
rounded down to the nearest share; and
(2) The exercise price per share of the Company Options if exchanged
for shares of Buyer Common Stock, or of Buyer Common Stock under the new
options if exchanged for options for Buyer Common Stock shall be equal to
the exercise price per share of Company Common Stock under the original
option divided by the Exchange Ratio, provided that such exercise price
shall be rounded up to the nearest cent.
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<PAGE>
The adjustment provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code")) shall be and is intended to be effected in a manner
which is consistent with Section 424(a) of the Code. The duration and other
terms of the new option shall be the same as the original option, except that
all references to the Company shall be deemed to be references to Buyer.
(b) Shares of Buyer Common Stock issuable upon exercise of Company
Stock Options shall be covered by an effective registration statement on Form S-
8, and Buyer shall file a registration statement on Form S-8 covering such
shares as soon as practicable after the Effective Time, but in no event later
than 30 days after the Effective Time.
(c) It is understood that the holders of a Company Option may
exercise such options, in accordance with the terms of the option, and
applicable regulations, prior to the Effective Time.
1.6 Buyer Common Stock. Except for shares of Buyer Common Stock owned by
------------------
the Company or any of its Subsidiaries (other than Trust Account Shares and DPC
Shares), which shall be converted into treasury stock of Buyer as contemplated
by Section 1.4 hereof, the shares of Buyer Common Stock issued and outstanding
immediately prior to the Effective Time shall be unaffected by the Merger and at
the Effective Time, such shares shall remain issued and outstanding.
1.7 Certificate of Incorporation. At the Effective Time, the Certificate
----------------------------
of Incorporation of Buyer, as in effect at the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation.
1.8 By-Laws. At the Effective Time, the By-Laws of Buyer, as in effect
-------
immediately prior to the Effective Time, shall be the By-Laws of the Surviving
Corporation until thereafter amended in accordance with applicable law, subject
to amendment to increase the number of director seats by two.
1.9 Directors and Officers. Except as provided in Section 6.14 hereof,
----------------------
the directors and officers of Buyer immediately prior to the Effective Time
shall be the directors and officers of the Surviving Corporation, each to hold
office in accordance with the Certificate of Incorporation and By-Laws of the
Surviving Corporation until their respective successors are duly elected or
appointed and qualified.
1.10 Tax Consequences. It is intended that the Merger and the Subsidiary
----------------
Merger each constitute a reorganization within the meaning of Section 368(a) of
the Code, and that this Agreement shall constitute a "plan of reorganization"
for the purposes of Section 368 of the Code.
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<PAGE>
ARTICLE II
EXCHANGE OF SHARES
2.1 Buyer to Make Shares Available. At or prior to the Effective Time,
------------------------------
Buyer shall deposit, or shall cause to be deposited, with a bank or trust
company (which may be a Subsidiary of Buyer) (the "Exchange Agent"), selected by
Buyer and reasonably satisfactory to the Company, for the benefit of the holders
of Certificates, for exchange in accordance with this Article II, certificates
representing the shares of Buyer Common Stock and the cash in lieu of fractional
shares (such cash and certificates for shares of Buyer Common Stock, together
with any dividends or distributions with respect thereto, being hereinafter
referred to as the "Exchange Fund") to be issued pursuant to Section 1.4 and
paid pursuant to Section 2.2(a) in exchange for outstanding shares of Company
Common Stock.
2.2 Exchange of Shares.
------------------
(a) As soon as practicable after the Effective Time, and in no event
more than three business days thereafter, the Exchange Agent shall mail to each
holder of record of a Certificate or Certificates a form letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent) and instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing the shares of Buyer
Common Stock and the cash in lieu of fractional shares into which the shares of
Company Common Stock represented by such Certificate or Certificates shall have
been converted pursuant to this Agreement. The Company shall have the right to
review both the letter of transmittal and the instructions prior to the
Effective Time and provide reasonable comments thereon. Upon surrender of a
Certificate for exchange and cancellation to the Exchange Agent, together with
such letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor (x) a certificate representing that
number of whole shares of Buyer Common Stock to which such holder of Company
Common Stock shall have become entitled pursuant to the provisions of Article I
hereof and (y) a check representing the amount of cash in lieu of fractional
shares, if any, which such holder has the right to receive in respect of the
Certificate surrendered pursuant to the provisions of this Article II, and the
Certificate so surrendered shall forthwith be cancelled. No interest will be
paid or accrued on the cash in lieu of fractional shares and unpaid dividends
and distributions, if any, payable to holders of Certificates.
(b) No dividends or other distributions declared after the Effective
Time with respect to Buyer Common Stock and payable to the holders of record
thereof shall be paid to the holder of any unsurrendered Certificate until the
holder thereof shall surrender such Certificate in accordance with this Article
II. After the surrender of a Certificate in accordance with this Article II, the
record holder thereof shall be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Buyer Common Stock represented by such
Certificate. No holder of an unsurrendered Certificate shall be entitled, until
the surrender of such Certificate, to vote the shares of Buyer Common Stock into
which his Company Common Stock shall have been converted.
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<PAGE>
(c) If any certificate representing shares of Buyer Common Stock is to
be issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the Certificate so surrendered shall be properly endorsed (or accompanied
by an appropriate instrument of transfer) and otherwise in proper form for
transfer, and that the person requesting such exchange shall pay to the Exchange
Agent in advance any transfer or other taxes required by reason of the issuance
of a certificate representing shares of Buyer Common Stock in any name other
than that of the registered holder of the Certificate surrendered, or required
for any other reason, or shall establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(d) After the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares of Company Common Stock which were
issued and outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates representing such shares are presented for transfer
to the Exchange Agent, they shall be cancelled and exchanged for certificates
representing shares of Buyer Common Stock as provided in this Article II.
(e) Notwithstanding anything to the contrary contained herein, no
certificates or scrip representing fractional shares of Buyer Common Stock shall
be issued upon the surrender for exchange of Certificates, no dividend or
distribution with respect to Buyer Common Stock shall be payable on or with
respect to any fractional share, and such fractional share interests shall not
entitle the owner thereof to vote or to any other rights of a shareholder of
Buyer. In lieu of the issuance of any such fractional share, Buyer shall pay to
each former stockholder of the Company who otherwise would be entitled to
receive a fractional share of Buyer Common Stock an amount in cash determined by
multiplying (i) the product of the Average Closing Price and the Exchange Ratio
by (ii) the fraction of a share of Buyer Common Stock to which such holder would
otherwise be entitled to receive pursuant to Section 1.4 hereof.
(f) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of the Company for six months after the Effective Time shall be
paid to Buyer. Any stockholders of the Company who have not theretofore
complied with this Article II shall thereafter look only to Buyer for payment of
their shares of Buyer Common Stock, cash in lieu of fractional shares and unpaid
dividends and distributions on the Buyer Common Stock deliverable in respect of
each share of Company Common Stock such stockholder holds as determined pursuant
to this Agreement, in each case, without any interest thereon. Notwithstanding
the foregoing, none of Buyer, the Company, the Exchange Agent or any other
person shall be liable to any former holder of shares of Company Common Stock
for any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(g) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and the posting by such person
of a bond in such amount as Buyer may direct as indemnity against any claim that
may be made against it with respect to such Certificate, the Exchange Agent will
issue in exchange for such lost, stolen or destroyed Certificate the shares of
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<PAGE>
Buyer Common Stock and cash in lieu of fractional shares deliverable in respect
thereof pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Buyer as follows:
3.1 Corporate Organization.
----------------------
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of New Jersey. The Company has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would not have a
Material Adverse Effect (as defined below) on the Company. The Company is duly
registered as a unitary savings and loan holding company under the Home Owners'
Loan Act of 1933, as amended. The Certificate of Incorporation and By-laws of
the Company, copies of which have previously been delivered to Buyer, are true,
complete and correct copies of such documents as in effect as of the date of
this Agreement. As used in this Agreement, the term "Material Adverse Effect"
means, with respect to Buyer, the Company or the Surviving Corporation, as the
case may be, a material adverse effect on the business, properties, assets,
liabilities, results of operations or financial condition of such party and its
Subsidiaries taken as a whole, other than any such effect attributable to or
resulting from general economic conditions. As used in this Agreement, the word
"Subsidiary" when used with respect to any party means any corporation,
partnership or other organization, whether incorporated or unincorporated, which
is consolidated with such party for financial reporting purposes.
(b) The Company Bank is a savings bank duly organized, validly
existing and in good standing under the laws of the State of New Jersey. The
deposit accounts of the Company Bank are insured by the Federal Deposit
Insurance Corporation (the "FDIC") through the Savings Association Insurance
Fund to the fullest extent permitted by law, and all premiums and assessments
required to be paid in connection therewith have been paid when due by the
Company Bank. Each of the Company's other Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization. Each of the Company's
Subsidiaries has the corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being conducted
and is duly licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or the location of
the properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed or qualified
would not have a Material Adverse Effect on the Company. The articles of
incorporation, by-laws and similar governing documents of each Subsidiary of the
Company,
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<PAGE>
copies of which have previously been delivered to Buyer, are true, complete and
correct copies of such documents as in effect as of the date of this Agreement.
(c) The minute books of the Company and each of its Subsidiaries
contain true, complete and accurate records in all material respects of all
meetings and other corporate actions held or taken since December 31, 1993 of
their respective stockholders and Boards of Directors (including committees of
their respective Boards of Directors).
3.2 Capitalization.
--------------
(a) The authorized capital stock of the Company consists of
10,000,000 shares of Company Common Stock and 5,000,000 shares of preferred
stock (the "Company Preferred Stock"). As of the date of this Agreement, there
are (x) 3,120,300 shares of Company Common Stock issued and outstanding and
1,062,080 shares of Company Common Stock held in the Company's treasury, (y) no
shares of Company Common Stock reserved for issuance upon exercise of
outstanding stock options or otherwise except for (i) 297,988 shares of Company
Common Stock reserved for issuance pursuant to the Company Option Plans and
described in Section 3.2(a) of the Disclosure Schedule which is being delivered
to Buyer concurrently herewith (the "Company Disclosure Schedule") and (ii)
620,940 shares of Company Common Stock reserved for issuance upon exercise of
the option issued to Buyer pursuant to the Stock Option Agreement, dated July 9,
1998, between Buyer and the Company (the "Option Agreement") and (z) no shares
of Company Preferred Stock issued or outstanding, held in the Company's treasury
or reserved for issuance upon exercise of outstanding stock options or
otherwise. All of the issued and outstanding shares of Company Common Stock have
been duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights. Except as referred to above or reflected in Section
3.2(a) of the Company Disclosure Schedule, and except for the Option Agreement,
the Company does not have and is not bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character calling for
the purchase or issuance of any shares of Company Common Stock or Company
Preferred Stock or any other equity security of the Company or any securities
representing the right to purchase or otherwise receive any shares of Company
Common Stock or any other equity security of the Company. The names of the
optionees, the date of each option to purchase Company Common Stock granted, the
number of shares subject to each such option, the expiration date of each such
option, and the price at which each such option may be exercised under the
Option Plan, the Incentive Plan, as applicable, are set forth in Section 3.2(a)
of the Company Disclosure Schedule.
(b) Section 3.2(b) of the Company Disclosure Schedule sets forth a
true and correct list of all of the Subsidiaries of the Company as of the date
of this Agreement. Except as set forth in Section 3.2(b) of the Company
Disclosure Schedule, the Company owns, directly or indirectly, all of the issued
and outstanding shares of the capital stock of each of such Subsidiaries, free
and clear of all liens, charges, encumbrances and security interests whatsoever,
and all of such shares are duly authorized and validly issued and are fully
paid, nonassessable and free of preemptive rights. No Subsidiary of the Company
has or is bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for
-8-
<PAGE>
the purchase or issuance of any shares of capital stock or any other equity
security of such Subsidiary or any securities representing the right to purchase
or otherwise receive any shares of capital stock or any other equity security of
such Subsidiary. Assuming compliance by Buyer with Section 1.5 hereof, at the
Effective Time, there will not be any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character by which the Company
or any of its Subsidiaries will be bound calling for the purchase or issuance of
any shares of the capital stock of the Company or any of its Subsidiaries.
3.3 Authority; No Violation.
-----------------------
(a) The Company has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of the Company. The Board of Directors of the Company has
directed that this Agreement and the transactions contemplated hereby be
submitted to the Company's stockholders for approval at a meeting of such
stockholders and, except for the adoption of this Agreement by the requisite
vote of the Company's stockholders, no other corporate proceedings (except for
regulatory approvals) on the part of the Company are necessary to approve this
Agreement and to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by the Company and
(assuming due authorization, execution and delivery by Buyer) constitutes a
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency and similar laws affecting creditors' rights and
remedies generally.
(b) The Company Bank has full corporate power and authority to
execute and deliver the Bank Merger Agreement and to consummate the transactions
contemplated thereby. The execution and delivery of the Bank Merger Agreement
and the consummation of the transactions contemplated thereby will be duly and
validly approved by the Board of Directors of the Company Bank. Upon the due and
valid approval of the Bank Merger Agreement by the Company as the sole
stockholder of the Company Bank and by the Board of Directors of the Company
Bank, no other corporate proceedings on the part of the Company Bank will be
necessary to consummate the transactions contemplated thereby. The Bank Merger
Agreement, upon execution and delivery by the Company Bank, will be duly and
validly executed and delivered by the Company Bank and will (assuming due
authorization, execution and delivery by First Savings Bank) constitute a valid
and binding obligation of the Company Bank, enforceable against the Company Bank
in accordance with its terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency and similar laws affecting creditors' rights and
remedies generally.
(c) Except as set forth in Section 3.3(c) of the Company Disclosure
Schedule, neither the execution and delivery of this Agreement by the Company or
the Bank Merger Agreement by the Company Bank, nor the consummation by the
Company or the Company Bank, as the case may be, of the transactions
contemplated hereby or thereby, nor compliance by
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<PAGE>
the Company or the Company Bank, as the case may be, with any of the terms or
provisions hereof or thereof, will (i) violate any provision of the Certificate
of Incorporation or By-Laws of the Company or the certificate of incorporation,
by-laws or similar governing documents of any of its Subsidiaries, or (ii)
assuming that the consents and approvals referred to in Section 3.4 hereof are
duly obtained, (x) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to the Company or any of
its Subsidiaries, or any of their respective properties or assets, or (y)
violate, conflict with, result in a breach of any provision of or the loss of
any benefit under, constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under, result in the termination
of or a right of termination or cancellation under, accelerate the performance
required by, or result in the creation of any lien, pledge, security interest,
charge or other encumbrance upon any of the respective properties or assets of
the Company or any of its Subsidiaries under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which the Company or any
of its Subsidiaries is a party, or by which they or any of their respective
properties or assets may be bound or affected, except (in the case of clause (y)
above) for such violations, conflicts, breaches or defaults which, either
individually or in the aggregate, would not have or be reasonably likely to have
a Material Adverse Effect on the Company.
3.4 Consents and Approvals. Except for (a) the filing of applications
----------------------
with the Office of Thrift Supervision (the "OTS") and, if necessary, the Federal
Deposit Insurance Corporation ("FDIC") and approval of such applications, (b)
the filing of an application with the New Jersey Department of Banking and
Insurance (the "Banking Department") and approval of such application, (c) the
filing with the Securities and Exchange Commission (the "SEC") of a joint proxy
statement in definitive form relating to the meetings of the Company's
stockholders and Buyer's stockholders to be held in connection with this
Agreement and the transactions contemplated hereby (collectively, the "Proxy
Statement"), (d) the approval of this Agreement by the requisite vote of the
stockholders of the Company, (e) the filing of the Certificate of Merger with
the Secretary of New Jersey pursuant to the NJBCA, (f) the filings required by
the Bank Merger Agreement, (g) the approval of the Bank Merger Agreement by the
Company as the sole stockholder of the Company Bank and (h) such filings,
authorizations or approvals as may be set forth in Section 3.4 of the Company
Disclosure Schedule, no consents or approvals of or filings or registrations
with any court, administrative agency or commission or other governmental
authority or instrumentality (each a "Governmental Entity") or with any third
party are necessary in connection with (1) the execution and delivery by the
Company of this Agreement, (2) the consummation by the Company of the Merger and
the other transactions contemplated hereby, (3) the execution and delivery by
the Company Bank of the Bank Merger Agreement, and (4) the consummation by the
Company Bank of the Subsidiary Merger and the transactions contemplated thereby.
3.5 Reports. The Company and each of its Subsidiaries have timely filed
-------
all material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
December 31, 1994 with (i) the OTS, (ii) the FDIC, (iii) any state banking
commissions or any other state regulatory authority (each a "State Regulator")
and (iv) any other self-regulatory organization ("SRO") (collectively, the
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<PAGE>
"Regulatory Agencies"), and all other material reports and statements required
to be filed by them since December 31, 1994, including, without limitation, any
report or statement required to be filed pursuant to the laws, rules or
regulations of the United States, the OTS, the FDIC, any State Regulator or any
SRO, and have paid all fees and assessments due and payable in connection
therewith. Except for normal examinations conducted by a Regulatory Agency in
the regular course of the business of the Company and its Subsidiaries, except
as set forth in Section 3.5 of the Company Disclosure Schedule, no Regulatory
Agency has initiated any proceeding or, to the best knowledge of the Company,
investigation into the business or operations of the Company or any of its
Subsidiaries since December 31, 1994. There is no unresolved material
violation, criticism, or exception by any Regulatory Agency with respect to any
report or statement relating to any examinations of the Company or any of its
Subsidiaries.
3.6 Financial Statements. The Company has previously delivered to Buyer
--------------------
copies of (a) the consolidated balance sheets of the Company and its
Subsidiaries as of September 30 for the fiscal years 1995, 1996 and 1997, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the fiscal years 1994 through 1997, inclusive, as reported in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997 filed with the SEC under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), in each case accompanied by the audit report of KPMG Peat
Marwick, independent public accountants with respect to the Company, and (b) the
unaudited consolidated balance sheets of the Company and its Subsidiaries as of
March 31, 1998 and March 31, 1997 and the related unaudited consolidated
statements of income, cash flows and changes in stockholders' equity for the six
month periods then ended as reported in the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1998 filed with the SEC under the Exchange
Act. The September 30, 1997 consolidated balance sheet of the Company
(including the related notes, where applicable) fairly presents the consolidated
financial position of the Company and its Subsidiaries as of the date thereof,
and the other financial statements referred to in this Section 3.6 (including
the related notes, where applicable) fairly present, and the financial
statements referred to in Section 6.9 hereof will fairly present (subject, in
the case of the unaudited statements, to recurring audit adjustments normal in
nature and amount), the results of the consolidated operations and consolidated
financial position of the Company and its Subsidiaries for the respective fiscal
periods or as of the respective dates therein set forth; each of such statements
(including the related notes, where applicable) comply, and the financial
statements referred to in Section 6.9 hereof will comply, in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto; and each of such statements
(including the related notes, where applicable) has been, and the financial
statements referred to in Section 6.9 hereof will be, prepared in accordance
with generally accepted accounting principles ("GAAP") consistently applied
during the periods involved, except as indicated in the notes thereto or, in the
case of unaudited statements, as permitted by Form 10-Q. The books and records
of the Company and its Subsidiaries have been, and are being, maintained in all
material respects in accordance with GAAP and any other applicable legal and
accounting requirements and reflect only actual transactions.
3.7 Broker's Fees. Neither the Company nor any Subsidiary of the Company
-------------
nor any of their respective officers or directors has employed any broker or
finder or incurred any
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<PAGE>
liability for any broker's fees, commissions or finder's fees in connection with
any of the transactions contemplated by this Agreement, the Bank Merger
Agreement or the Option Agreement, except that the Company has engaged, and will
pay a fee or commission to, Sandler O'Neill & Partners, L.P. ("Sandler O'Neill")
in accordance with the terms of a letter agreement between Sandler O'Neill and
the Company concerning the issuance of an opinion regarding the fairness of the
Exchange Ratio, a true, complete and correct copy of which has been previously
delivered by the Company to Buyer.
3.8 Absence of Certain Changes or Events.
------------------------------------
(a) Except as may be set forth in Section 3.8(a) of the Company
Disclosure Schedule or as disclosed in the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 (a true, complete and correct copy of
which has previously been delivered to Buyer), since September 30, 1997, (i)
neither the Company nor any of its Subsidiaries has incurred any material
liability, except in the ordinary course of their business consistent with their
past practices, and (ii) no event has occurred which has caused, or is
reasonably likely to cause, individually or in the aggregate, a Material Adverse
Effect on the Company.
(b) Except as set forth in Section 3.8(b) of the Company Disclosure
Schedule, since March 31, 1998, the Company and its Subsidiaries have carried on
their respective businesses in the ordinary course consistent with their past
practices.
(c) Except as set forth in Section 3.8(c) of the Company Disclosure
Schedule, since March 31, 1998, neither the Company nor any of its Subsidiaries
has (i) increased the wages, salaries, compensation, pension, or other fringe
benefits or perquisites payable to any executive officer, employee, or director
from the amount thereof in effect as of March 31, 1998 (which amounts have been
previously disclosed to Buyer), granted any severance or termination pay,
entered into any contract to make or grant any severance or termination pay, or
paid any bonus other than year-end bonuses for fiscal 1998 as listed in Section
3.8 of the Company Disclosure Schedule or (ii) suffered any strike, work
stoppage, slow-down, or other labor disturbance.
3.9 Legal Proceedings.
-----------------
(a) Except as set forth in Section 3.9 of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is a party to any, and
there are no pending or, to the best of the Company's knowledge, threatened,
legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against the Company or
any of its Subsidiaries or challenging the validity or propriety of the
transactions contemplated by this Agreement, the Bank Merger Agreement or the
Option Agreement as to which there is a reasonable probability of an adverse
determination and which, if adversely determined, would, individually or in the
aggregate, have or be reasonably likely to have a Material Adverse Effect on the
Company.
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<PAGE>
(b) There is no injunction, order, judgment, decree, or regulatory
restriction imposed upon the Company, any of its Subsidiaries or the assets of
the Company or any of its Subsidiaries which has had, or could reasonably be
expected to have, a Material Adverse Effect on the Company.
3.10 Taxes.
-----
(a) Except as set forth in Section 3.10(a) of the Company Disclosure
Schedule, each of the Company and its Subsidiaries has (i) duly and timely filed
or will duly and timely file (including applicable extensions granted without
penalty) all Tax Returns (as hereinafter defined) required to be filed at or
prior to the Effective Time, and such Tax Returns which have heretofore been
filed are, and those to be hereinafter filed will be, true, correct and complete
and (ii) paid in full or have made adequate provision for on the financial
statements of the Company (in accordance with GAAP) all Taxes (as hereinafter
defined) and will pay in full or make adequate provision for all Taxes. There
are no material liens for Taxes upon the assets of either the Company or its
Subsidiaries except for statutory liens for current Taxes not yet due. Except
as set forth in Section 3.10(a) of the Company Disclosure Schedule, neither the
Company nor any of its Subsidiaries has requested any extension of time within
which to file any Tax Returns in respect of any fiscal year which have not since
been filed and no request for waivers of the time to assess any Taxes are
pending or outstanding. The federal and state income Tax Returns of the Company
and its Subsidiaries have been audited by the Internal Revenue Service or
appropriate state tax authorities with respect to those periods and
jurisdictions set forth on Section 3.10(a) of the Company Disclosure Schedule.
Except as set forth in Section 3.10(a) of the Company Disclosure Schedule,
neither the Company nor any of its Subsidiaries (i) is a party to any agreement
providing for the allocation or sharing of Taxes (other than the allocation of
federal income taxes as provided by Regulation 1.1552-l(a)(l) under the Code;
(ii) is required to include in income any adjustment pursuant to Section 481(a)
of the Code, by reason of the voluntary change in accounting method (nor has any
taxing authority proposed in writing any such adjustment or change of accounting
method); or (iii) has filed a consent pursuant to Section 341(f) of the Code.
For the purposes of this Agreement, "Taxes" shall mean all taxes, charges,
fees, levies, penalties or other assessments imposed by any United States
federal, state, local or foreign taxing authority, including, but not limited to
income, excise, property, sales, transfer, franchise, payroll, withholding,
social security or other taxes, including any interest, penalties or additions
attributable thereto.
For purposes of this Agreement, "Tax Return" shall mean any return, report,
information return or other document (including any related or supporting
information) with respect to Taxes.
3.11 Employees.
---------
(a) Section 3.11(a) of the Company Disclosure Schedule sets forth a
true and complete list of each employee benefit plan, arrangement or agreement
that is maintained or contributed to or required to be contributed to as of the
date of this Agreement (the "Plans") by
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<PAGE>
the Company, any of its Subsidiaries or by any trade or business, whether or not
incorporated (an "ERISA Affiliate"), all of which together with the Company
would be deemed a "single employer" within the meaning of Section 4001 of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), for the
benefit of any employee or former employee of the Company, any Subsidiary or any
ERISA Affiliate.
(b) The Company has heretofore delivered to Buyer true and complete
copies of each of the Plans and all related documents, including but not limited
to (i) the actuarial report for any Plan (if applicable) for each of the last
two years, and (ii) the most recent determination letter from the Internal
Revenue Service (if applicable) for any Plan.
(c) Except as set forth in Section 3.11(c) of the Company Disclosure
Schedule, (i) each of the Plans has been operated and administered in all
material respects in accordance with its terms and applicable law, including but
not limited to ERISA and the Code, (ii) each of the Plans intended to be
"qualified" within the meaning of Section 401(a) of the Code either (1) has
received a favorable determination letter from the IRS, or (2) is or will be the
subject of an application for a favorable determination letter, and the Company
is not aware of any circumstances likely to result in the revocation or denial
of any such favorable determination letter, (iii) with respect to each Plan
which is subject to Title IV of ERISA, the present value of accrued benefits
under such Plan, based upon the actuarial assumptions used for funding purposes
in the most recent actuarial report prepared by such Plan's actuary with respect
to such Plan, did not, as of its latest valuation date, exceed the then current
value of the assets of such Plan allocable to such accrued benefits, (iv) no
Plan provides benefits, including without limitation death or medical benefits
(whether or not insured), with respect to current or former employees of the
Company, its Subsidiaries or any ERISA Affiliate beyond their retirement or
other termination of service, other than (w) coverage mandated by applicable
law, (x) death benefits or retirement benefits under any "employee pension
plan," as that term is defined in Section 3(2) of ERISA, (y) deferred
compensation benefits accrued as liabilities on the books of the Company, its
Subsidiaries or the ERISA Affiliates or (z) benefits the full cost of which is
borne by the current or former employee (or his beneficiary), (v) no liability
under Title IV of ERISA has been incurred by the Company, its Subsidiaries or
any ERISA Affiliate that has not been satisfied in full, and no condition exists
that presents a material risk to the Company, its Subsidiaries or an ERISA
Affiliate of incurring a material liability thereunder, (vi) no Plan is a
"multiemployer pension plan," as such term is defined in Section 3(37) of ERISA,
(vii) all contributions or other amounts payable by the Company, its
Subsidiaries or any ERISA Affiliates as of the Effective Time with respect to
each Plan in respect of current or prior plan years have been paid or accrued in
accordance with generally accepted accounting practices and Section 412 of the
Code, (viii) neither the Company, its Subsidiaries nor any ERISA Affiliate has
engaged in a transaction in connection with which the Company, its Subsidiaries
or any ERISA Affiliate could be subject to either a civil penalty assessed
pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section
4975 or 4976 of the Code, (ix) there are no pending, or, to the best knowledge
of the Company, threatened or anticipated claims (other than routine claims for
benefits) by, on behalf of or against any of the Plans or any trusts related
thereto and (x) the consummation of the transactions contemplated by this
Agreement will not (y) entitle any current or former employee or officer of the
Company or any ERISA Affiliate to severance pay,
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<PAGE>
termination pay or any other payment, except as expressly provided in this
Agreement or (z) accelerate the time of payment or vesting or increase the
amount of compensation due any such employee or officer.
3.12 SEC Reports. The Company has previously made available to Buyer an
-----------
accurate and complete copy of each (a) final registration statement, prospectus,
report, schedule and definitive proxy statement filed since September 30, 1994
by the Company with the SEC pursuant to the Securities Act of 1933, as amended
(the "Securities Act") or the Exchange Act (the "Company Reports") and (b)
communication mailed by the Company to its stockholders since September 30,
1994, and no such registration statement, prospectus, report, schedule, proxy
statement or communication contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances in which
they were made, not misleading, except that information as of a later date shall
be deemed to modify information as of an earlier date. The Company has timely
filed all Company Reports and other documents required to be filed by it under
the Securities Act and the Exchange Act, and, as of their respective dates, all
Company Reports complied in all material respects with the published rules and
regulations of the SEC with respect thereto.
3.13 Company Information. The information relating to the Company and its
-------------------
Subsidiaries to be contained in the Proxy Statement and the Registration
Statement on Form S-4 (the "S-4") of which the Proxy Statement will be included
as a prospectus, or in any other document filed with any other regulatory agency
in connection herewith, will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
light of the circumstances in which they are made, not misleading. The sections
of the Proxy Statement relating to the Company will comply in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder.
3.13A Ownership of Buyer Common Stock: Affiliates and Associates. Except
-------------------------------- -------------------------
for the Stock Option Agreement, neither Company nor any of its Subsidiaries, (i)
beneficially own, directly or indirectly, or (ii) is a party to any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of, in each case, any shares of capital stock of the Buyer (other than
Trust Account Shares and DPC Shares).
3.14 Compliance with Applicable Law. The Company and each of its
------------------------------
Subsidiaries hold, and have at all times held, all material licenses,
franchises, permits and authorizations necessary for the lawful conduct of their
respective businesses under and pursuant to all, and have complied with and are
not, to its knowledge, in default in any respect under any applicable law,
statute, order, rule, regulation, policy and/or guideline of any Governmental
Entity relating to the Company or any of its Subsidiaries, except where the
failure to hold such license, franchise, permit or authorization or such
noncompliance or default would not, individually or in the aggregate, have or be
reasonably likely to have a Material Adverse Effect on the Company, and neither
the Company nor any of its Subsidiaries knows of, or has received notice of, any
material violations of any of the above.
-15-
<PAGE>
3.15 Certain Contracts.
-----------------
(a) Except as set forth in Section 3.15(a) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries; is a party to or
bound by any contract, arrangement, commitment or understanding (whether written
or oral) (i) with respect to the employment of any directors, officers,
employees or consultants, (ii) which, upon the consummation of the transactions
contemplated by this Agreement or the Bank Merger Agreement will (either alone
or upon the occurrence of any additional acts or events) result in any payment
(whether of severance pay or otherwise) becoming due from Buyer, the Company,
the Surviving Corporation, the Surviving Bank or any of their respective
Subsidiaries to any officer or employee thereof, (iii) which is a material
contract (as defined in Item 601(b)(10) of Regulation S-K of the SEC) to be
performed after the date of this Agreement that has not been filed or
incorporated by reference in the Company Reports, (iv) which is a consulting
agreement (including data processing, software programming and licensing
contracts) not terminable on 60 days or less notice involving the payment of
more than $50,000 per annum, in the case of any such agreement with an
individual, or $100,000 per annum, in the case of any other such agreement, (v)
which materially restricts the conduct of any line of business by the Company or
any of its Subsidiaries, (vi) with or to a labor union or guild (including any
collective bargaining agreement) or (vii) (including any stock option plan,
stock appreciation rights plan, restricted stock plan or stock purchase plan)
any of the benefits of which will be increased, or the vesting of the benefits
of which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the Bank Merger Agreement, or the value of any
of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement or the Bank Merger Agreement. Each
contract, arrangement, commitment or understanding of the type described in this
Section 3.15(a), whether or not set forth in Section 3.15(a) of the Company
Disclosure Schedule, is referred to herein as a "Company Contract". The Company
has previously delivered to Buyer true and correct copies of each Company
Contract.
(b) Except as set forth in Section 3.15(b) of the Company Disclosure
Schedule, (i) each Company Contract is valid and binding and in full force and
effect, (ii) the Company and each of its Subsidiaries have in all material
respects performed all obligations required to be performed by it to date under
each Company Contract, except where such noncompliance, individually or in the
aggregate, would not have or be reasonably likely to have a Material Adverse
Effect on the Company, (iii) no event or condition exists which constitutes or,
after notice or lapse of time or both, would constitute, a material default on
the part of the Company or any of its Subsidiaries under any such Company
Contract, except where such default, individually or in the aggregate, would not
have or be reasonably likely to have a Material Adverse Effect on the Company
and (iv) no other party to such Company Contract is, to the best knowledge of
the Company, in default in any respect thereunder.
3.16 Agreements with Regulatory Agencies. Except as set forth in Section
-----------------------------------
3.16 of the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries is subject to any cease-and-desist or other order issued by, or is
a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or
-16-
<PAGE>
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any board
resolutions at the request of (each, whether or not set forth on Section 3.16 of
the Company Disclosure Schedule, a "Regulatory Agreement"), any Regulatory
Agency or other Governmental Entity that restricts the conduct of its business
or that in any manner relates to its capital adequacy, its credit policies, its
management or its business, nor has the Company or any of its Subsidiaries been
advised by any Regulatory Agency or other Governmental Entity that it is
considering issuing or requesting any Regulatory Agreement.
3.17 Investment Securities. Section 3.17 of the Company Disclosure
---------------------
Schedule sets forth the book and market value as of March 31, 1998 of the
investment securities, mortgage backed securities and securities held for sale
of the Company and its Subsidiaries. Section 3.17 of the Company Disclosure
Schedule sets forth an investment securities report which includes, security
descriptions, CUSIP numbers, pool face values, book values, coupon rates and
current market values.
3.18 Intellectual Property. Except where there would be no Material
---------------------
Adverse Effect on the Company, the Company and each of its Subsidiaries owns or
possesses valid and binding licenses and other rights to use without payment all
material patents, copyrights, trade secrets, trade names, servicemarks,
trademarks and computer software used in its businesses; and neither the Company
nor any of its Subsidiaries has received any notice of conflict with respect
thereto that asserts the right of others. The Company and each of its
Subsidiaries have in all material respects performed all the obligations
required to be performed by them and are not in default in any material respect
under any contract, agreement, arrangement or commitment relating to any of the
foregoing, except where such non-performance or default would not, individually
or in the aggregate, have or be reasonably likely to have a Material Adverse
Effect on the Company.
3.19 Undisclosed Liabilities. Except (a) as set forth in Section 3.19 of
-----------------------
the Company Disclosure Schedule, (b) for those liabilities that are fully
reflected or reserved against on the consolidated balance sheet of the Company
as of March 31, 1998 included in its Form 10-Q for the period ended March 31,
1998 and (c) for liabilities incurred in the ordinary course of business
consistent with past practice since March 31, 1998 that, either alone or when
combined with all similar liabilities, have not had, and could not reasonably be
expected to have, a Material Adverse Effect on the Company, neither the Company
nor any of its Subsidiaries has incurred any liability of any nature whatsoever
(whether absolute, accrued, contingent or otherwise and whether due or to become
due).
3.20 State Takeover Laws. The provisions of Article XV of the Company's
-------------------
Certificate of Incorporation will not, assuming the accuracy of the
representations contained in Section 4.12 hereof, apply to the Agreement, the
Bank Merger Agreement or the Stock Option Agreement or any of the transactions
contemplated hereby or thereby.
3.21 Administration of Fiduciary Accounts. The Company and each of its
------------------------------------
Subsidiaries has properly administered in all material respects all accounts for
which it acts as a fiduciary, including but not limited to accounts for which it
serves as a trustee, agent, custodian, personal
-17-
<PAGE>
representative, guardian, conservator or investment advisor, in accordance with
the terms of the governing documents and applicable state and federal law and
regulation and common law. Neither the Company nor any of its Subsidiaries nor
any of their respective directors, officers or employees has committed any
breach of trust with respect to any such fiduciary account which has had or
could reasonably be expected to have a Material Adverse Effect on the Company,
and the accountings for each such fiduciary account are true and correct in all
material respects and accurately reflect the assets of such fiduciary account.
3.22 Environmental Matters. Except as set forth in Section 3.22 of the
---------------------
Company Disclosure Schedule:
(a) Each of the Company, its Subsidiaries, the Participation
Facilities and the Loan Properties (each as hereinafter defined) are, and have
been, in compliance with all applicable federal, state and local laws including
common law, regulations and ordinances and with all applicable decrees, orders
and contractual obligations relating to pollution, the discharge of, or exposure
to materials in the environment or workplace ("Environmental Laws"), except for
violations which, either individually or in the aggregate, have not had and
cannot reasonably be expected to have a Material Adverse Effect on the Company;
(b) There is no suit, claim, action or proceeding, pending or
threatened, before any Governmental Entity or other forum in which the Company,
any of its Subsidiaries, any Participation Facility or any Loan Property, has
been or, with respect to threatened proceedings, may be, named as a defendant
(x) for alleged noncompliance (including by any predecessor), with any
Environmental Laws, or (y) relating to the release, threatened release or
exposure to any material whether or not occurring at or on a site owned, leased
or operated by the Company or any of its Subsidiaries, any Participation
Facility or any Loan Property, except where such noncompliance or release has
not resulted, and cannot be reasonably expected to result, either individually
or in the aggregate, a Material Adverse Effect on the Company;
(c) During the period of (x) the Company's or any of its
Subsidiaries' ownership or operation of any of their respective current
properties, (y) the Company's or any of its Subsidiaries' participation in the
management of any Participation Facility, or (z) the Company's or any of its
Subsidiaries' holding of a security interest in a Loan Property, there has been
no release of materials in, on, under or affecting any such property, except
where such release has not had and cannot reasonably be expected to result in,
either individually or in the aggregate, a Material Adverse Effect on the
Company. Prior to the period of (x) the Company's or any of its Subsidiaries'
ownership or operation of any of their respective current properties, (y) the
Company's or any of its Subsidiaries' participation in the management of any
Participation Facility, or (z) the Company's or any of its Subsidiaries' holding
of a security interest in a Loan Property, there was no release or threatened
release of materials in, on, under or affecting any such property, Participation
Facility or Loan Property, except where such release has not had and cannot be
reasonably expected to have, either individually or in the aggregate, a Material
Adverse Effect on the Company;
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<PAGE>
(d) All property formerly owned or leased by the Company and its
Subsidiaries which was subject to the provisions of the Industrial Site Recovery
Act, N.J.S.A. 13:1K-6, et seq. as amended ("ISRA"), compiled with all applicable
provisions of ISRA at the time such property was sold or transferred; and
(e) The following definitions apply for purposes of this Section
3.22: (x) "Loan Property" means any property in which the Company or any of its
Subsidiaries holds a security interest, and, where required by the context, said
term means the owner or operator of such property; and (y) "Participation
Facility" means any facility in which the Company or any of its Subsidiaries
participates in the management and, where required by the context, said term
means the owner or operator of such property.
3.23 Derivative Transactions. Except as set forth in Section 3.23 of the
-----------------------
Company Disclosure Schedule, since September 30, 1997, neither Company nor any
of its Subsidiaries has engaged in transactions in or involving forwards,
futures, options on futures, swaps or other derivative instruments except (i) as
agent on the order and for the account of others, or (ii) as principal for
purposes of hedging interest rate risk on U.S. dollar denominated securities and
other financial instruments. None of the counterparts to any contract or
agreement with respect to any such instrument is in default with respect to such
contract or agreement and no such contract or agreement, were it to be a Loan
(as defined below) held by the Company or any of its Subsidiaries, would be
classified as "Other Loans Specially Mentioned", "Special Mention",
"Substandard", "Doubtful", "Loss", "Classified", "Criticized", "Credit Risk
Assets", "Concerned Loans" or words of similar import. The financial position
of the Company and its Subsidiaries on a consolidated basis under or with
respect to each such instrument has been reflected in the books and records of
the Company and such Subsidiaries in accordance with GAAP consistently applied,
and no open exposure of the Company or any of its Subsidiaries with respect to
any such instrument (or with respect to multiple instruments with respect to any
single counterparty) exceeds $500,000.
3.24 Opinion. The Company has received a written opinion, dated the date
-------
hereof, from Sandler O'Neill to the effect that, subject to the terms,
conditions and qualifications set forth therein, as of the date thereof the
Exchange Ratio is fair to such stockholders from a financial point of view.
Such opinion has not been amended or rescinded as of the date of this Agreement,
and will be updated at the time the Proxy Statement is mailed to stockholders of
the Company.
3.25 Assistance Agreements. Neither the Company nor any of its
---------------------
Subsidiaries is a party to any agreement or arrangement entered into in
connection with the consummation of a federally assisted acquisition of a
depository institution pursuant to which the Company or any of its Subsidiaries
is entitled to receive financial assistance or indemnification from any
governmental agency.
3.26 Approvals. As of the date of this Agreement, the Company knows of no
---------
reason why all regulatory approvals required for the consummation of the
transactions contemplated
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<PAGE>
hereby (including, without limitation, the Merger and the Subsidiary Merger)
should not be obtained without the imposition of a Burdensome Condition (as
defined below).
3.27 Loan Portfolio.
--------------
(a) In the Company's reasonable judgment, the allowance for loan
losses reflected in the Company's audited statement of condition at September
30, 1997 was, and the allowance for loan losses shown on the balance sheets in
its Reports for periods ending after September 30, 1997 have been and will be,
adequate in all material respects, as of the dates thereof, under generally
accepted accounting principles, and no Regulatory Agencies have required or
requested Company to increase the allowance for loan losses for such periods.
(b) Except as set forth in Section 3.27 of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is a party to any
written or oral (i) loan agreement, note or borrowing arrangement (including,
without limitation, leases, credit enhancements, commitments, guarantees and
interest-bearing assets) (collectively, "Loans"), other than Loans the unpaid
principal balance of which does not exceed $50,000, under the terms of which the
obligor is, as of the date of this Agreement, over 90 days delinquent in payment
of principal or interest or in default of any other provision, or (ii) Loan with
any director, executive officer or ten percent stockholder of the Company or any
of its Subsidiaries, or to the best knowledge of the Company, any person,
corporation or enterprise controlling, controlled by or under common control
with any of the foregoing. Section 3.27 of the Company Disclosure Schedule sets
forth (i) all of the Loans in original principal amount in excess of $50,000 of
the Company or any of its Subsidiaries that as of the date of this Agreement are
classified by any bank examiner (whether regulatory or internal) as "Other Loans
Specially Mentioned," "Special Mention," "Substandard," "Doubtful," "Loss,"
"Classified," "Criticized," "Credit Risk Assets," "Concerned Loans," "Watch
List" or words of similar import, together with the principal amount of and
accrued and unpaid interest on each such Loan and the identity of the borrower
thereunder, and (ii) by category of Loan (i.e., commercial, consumer, etc.), all
of the other Loans of the Company and its Subsidiaries that as of the date of
this Agreement are classified as such, together with the aggregate principal
amount of and accrued and unpaid interest on such Loans by category. The Company
shall promptly inform Buyer in writing of any Loan that becomes classified in
the manner described in the previous sentence, or any Loan the classification of
which is changed, at any time after the date of this Agreement.
(c) To the best of its knowledge, each loan reflected as an asset
in the Company Disclosure Schedule (i) is evidenced by notes, agreements or
other evidences of indebtedness which are true, genuine and correct in all
material respects, (ii) to the extent secured, has been secured by valid liens
and security interests which have been perfected, and (iii) is the legal, valid
and binding obligation of the obligor named therein, enforceable in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles, in each case other than loans as to which the
failure to satisfy the foregoing standards would not have a Material Adverse
Effect on the Company.
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3.28 Year 2000 Compliance. The Company and the Company's Subsidiaries have
--------------------
taken all reasonable steps necessary to address the software, accounting and
record keeping issues raised in order for the data processing systems used in
the business conducted by the Company and its Subsidiaries to be substantially
Year 2000 compliant on or before the end of 1999 and, except as set forth in the
Company Disclosure Schedule, the Company does not expect the future cost of
addressing such issues to be material. Neither the Company nor any of its
Subsidiaries has received a rating of less than satisfactory from any bank
regulatory agency with respect to Year 2000 compliance.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to the Company as follows:
4.1 Corporate Organization.
----------------------
(a) Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Buyer has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly licensed or
qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would not have a
Material Adverse Effect on Buyer. Buyer is duly registered as a bank holding
company under the BHC Act. The Certificate of Incorporation and By-laws of
Buyer, copies of which have previously been made available to the Company, are
true, complete and correct copies of such documents as in effect as of the date
of this Agreement.
(b) First Savings Bank is a savings and loan association duly
organized, validly existing and in good standing under the laws of the State of
New Jersey. The deposit accounts of First Savings Bank are insured by the FDIC
through the SAIF Insurance Fund to the fullest extent permitted by law, and all
premiums and assessments required in connection therewith have been paid by
First Savings Bank. Each of Buyer's other Subsidiaries is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation. Each Subsidiary of Buyer has the corporate power and authority to
own or lease all of its properties and assets and to carry on its business as it
is now being conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary, except where the failure to be so
licensed or qualified would not have a Material Adverse Effect on Buyer. The
Certificate of Incorporation and Bylaws of each subsidiary of the Buyer, copies
of which have previously been made available to the Company, are true, complete
and correct copies of such documents as in effect as of the date of this
Agreement.
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<PAGE>
(c) The minute books of Buyer and each of its Subsidiaries contain
true, complete and accurate records in all material respects of all meetings and
other corporate actions held or taken since December 31, 1993 of their
respective stockholders and Boards of Directors (including committees of their
respective Boards of Directors) .
4.2 Capitalization.
--------------
(a) As of the date of this Agreement, the authorized capital stock of
Buyer consists of 85,000,000 shares of Buyer Common Stock and 10,000,000 shares
of preferred stock, par value $.01 per share ("Buyer Preferred Stock"). As of
June 30, 1998, there were 31,740,000 shares of Buyer Common Stock and no shares
of Buyer Preferred Stock issued and outstanding, and no shares of Buyer Common
Stock held in Buyer's treasury. As of the date of this Agreement, no shares of
Buyer Common Stock or Buyer Preferred Stock were reserved for issuance, except
that 11,775 shares of Buyer Common Stock were reserved for issuance upon the
exercise of stock options pursuant to the First Savings Bank, SLA 1992 Incentive
Stock Option Plan and the 1992 Stock Option Plan for Outside Directors and
261,924 shares of Buyer Common Stock were reserved for issuance upon the
exercise of stock options pursuant to the Buyer 1996 Omnibus Incentive Plan
(collectively, the "Buyer Stock Plans"). All of the issued and outstanding
shares of Buyer Common Stock and Buyer Preferred Stock have been duly authorized
and validly issued and are fully paid, nonassessable and free of preemptive
rights, with no personal liability attaching to the ownership thereof. As of
the date of this Agreement, except as referred to above or reflected in Section
4.2(a) of the Buyer Disclosure Schedule and the Buyer Shareholder Rights
Agreement, Buyer does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of Buyer Common
Stock or Buyer Preferred Stock or any other equity securities of Buyer or any
securities representing the right to purchase or otherwise receive any shares of
Buyer Common Stock or Buyer Preferred Stock. The shares of Buyer Common Stock
to be issued pursuant to the Merger will be duly authorized and validly issued
and, at the Effective Time, all such shares will be fully paid, nonassessable
and free of preemptive rights.
(b) Section 4.2(b) of the Buyer Disclosure Schedule sets forth a true
and correct list of all of the Buyer Subsidiaries as of the date of this
Agreement. Except as set forth in Section 4.2(b) of the Buyer Disclosure
Schedule, Buyer owns, directly or indirectly, all of the issued and outstanding
shares of capital stock of each of the Subsidiaries of the Buyer, free and clear
of all liens, charges, encumbrances and security interests whatsoever, and all
of such shares are duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights. No Subsidiary of the Buyer has or
is bound by any outstanding subscriptions, options, warrants, calls, commitments
or agreements of any character with any party that is not a direct or indirect
Subsidiary of Buyer calling for the purchase or issuance of any shares of
capital stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
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<PAGE>
4.3 Authority. No Violation.
------------------------
(a) Buyer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Buyer. The Board of Directors of Buyer has directed that
this Agreement and the transactions contemplated hereby be submitted to Buyer's
stockholders for approval at a meeting of such stockholders and, except for the
adoption of this Agreement by the requisite vote of Buyer's stockholders, no
other corporate proceedings on the part of Buyer are necessary to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Buyer and (assuming due authorization, execution and
delivery by the Company) constitutes a valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, except as enforcement
may be limited by general principles of equity whether applied in a court of law
or a court of equity and by bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally.
(b) First Savings Bank has full corporate power and authority to
execute and deliver the Bank Merger Agreement and to consummate the transactions
contemplated thereby. The execution and delivery of the Bank Merger Agreement
and the consummation of the transactions contemplated thereby will be duly and
validly approved by the Board of Directors of First Savings Bank. Upon the due
and valid approval of the Bank Merger Agreement by Buyer as the sole stockholder
of First Savings Bank, and by the Board of Directors of First Savings Bank, no
other corporate proceedings on the part of First Savings Bank will be necessary
to consummate the transactions contemplated thereby. The Bank Merger Agreement,
upon execution and delivery by First Savings Bank, will be duly and validly
executed and delivered by First Savings Bank and will (assuming due
authorization, execution and delivery by the Company Bank) constitute a valid
and binding obligation of First Savings Bank, enforceable against First Savings
Bank in accordance with its terms, except as enforcement may be limited by
general principles of equity whether applied in a court of law or a court of
equity and by bankruptcy, insolvency and similar laws affecting creditors'
rights and remedies generally.
(c) Except as set forth in Section 4.3(c) of the Buyer Disclosure
Schedule, neither the execution and delivery of this Agreement by Buyer or the
Bank Merger Agreement by First Savings Bank, nor the consummation by Buyer or
First Savings Bank, as the case may be, of the transactions contemplated hereby
or thereby, nor compliance by Buyer or First Savings Bank, as the case may be,
with any of the terms or provisions hereof or thereof, will (i) violate any
provision of the Certificate of Incorporation or By-Laws of Buyer, or the
articles of incorporation or by-laws or similar governing documents of any of
its Subsidiaries or (ii) assuming that the consents and approvals referred to in
Section 4.4 are duly obtained, (x) violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable to Buyer or
any of its Subsidiaries or any of their respective properties or assets, or (y)
violate, conflict with, result in a breach of any provision of or the loss of
any benefit under, constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under, result in the termination
of or a right of termination or cancellation under, accelerate the performance
required by, or result in the creation of any lien, pledge, security
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<PAGE>
interest, charge or other encumbrance upon any of the respective properties or
assets of Buyer or any of its Subsidiaries under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Buyer or any of its
Subsidiaries is a party, or by which they or any of their respective properties
or assets may be bound or affected, except (in the case of clause (y) above) for
such violations, conflicts, breaches or defaults which either individually or in
the aggregate will not have or be reasonably likely to have a Material Adverse
Effect on Buyer.
4.4 Consents and Approvals. Except for (a) the filing of applications
----------------------
with the OTS and approval of such applications, (b) the state banking approvals,
(c) the filing with the SEC of the Proxy Statement and the S-4, (d) the approval
of this Agreement by the requisite vote of the stockholders of Buyer, (e) the
filing of the Certificate of Merger with the Secretary, (f) such filings and
approvals as are required to be made or obtained under the securities or "Blue
Sky" laws of various states in connection with the issuance of the shares of
Buyer Common Stock pursuant to this Agreement, (g) filings required by the Bank
Merger Agreement, (h) the approval of the Bank Merger Agreement by the
stockholder of First Savings Bank, and (i) such filings, authorizations or
approvals as may be set forth in Section 4.4 of the Buyer Disclosure Schedule,
no consents or approvals of or filings or registrations with any Governmental
Entity or with any third party are necessary in connection with (1) the
execution and delivery by Buyer of this Agreement, (2) the consummation by Buyer
of the Merger and the other transactions contemplated hereby, (3) the execution
and delivery by First Savings Bank of the Bank Merger Agreement, and (4) the
consummation of First Savings Bank of the transactions contemplated by the Bank
Merger Agreement.
4.5 Financial Statements. Buyer has previously delivered to the Company
--------------------
copies of (a) the consolidated balance sheets of Buyer and its Subsidiaries as
of December 31 for the years 1997 and 1996 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
fiscal years 1995 through 1997, inclusive, as reported in Buyer's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 filed with the SEC
under the Exchange Act, in each case accompanied by the audit report of KPMG
Peat Marwick LLP, independent public accountants with respect to Buyer, and (b)
the unaudited consolidated balance sheet of Buyer and its Subsidiaries as of
March 31, 1998 and March 31, 1997 and the related unaudited consolidated
statements of income, changes in shareholders' equity and cash flows for the
three-month periods then ended as reported in Buyer's Quarterly Report on Form
10-Q for the period ended March 31, 1998 filed with the SEC under the Exchange
Act. The December 31, 1997 consolidated balance sheet of Buyer (including the
related notes, where applicable) fairly presents the consolidated financial
position of Buyer and its Subsidiaries as of the date thereof, and the other
financial statements referred to in this Section 4.5 (including the related
notes, where applicable) fairly present and the financial statements referred to
in Section 6.9 hereof will fairly present (subject, in the case of the unaudited
statements, to recurring audit adjustments normal in nature and amount), the
results of the consolidated operations and changes in shareholders' equity and
consolidated financial position of Buyer and its Subsidiaries for the respective
fiscal periods or as of the respective dates therein set forth; each of such
statements (including the related notes, where applicable) comply, and the
financial statements referred to in Section 6.9 hereof will comply, in all
material respects with applicable accounting requirements
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<PAGE>
and with the published rules and regulations of the SEC with respect thereto;
and each of such statements (including the related notes, where applicable) has
been, and the financial statements referred to in Section 6.9 hereof will be,
prepared in accordance with GAAP consistently applied during the periods
involved, except as indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Form 10-Q. The books and records of Buyer and its
Subsidiaries have been, and are being, maintained in all material respects in
accordance with GAAP and any other applicable legal and accounting requirements
and reflect only actual transactions.
4.6 Broker's Fees. Neither Buyer nor any Subsidiary of Buyer, nor any of
-------------
their respective officers or directors, has employed any broker or finder or
incurred any liability for any broker's fees, commissions or finder's fees in
connection with any of the transactions contemplated by this Agreement, the Bank
Merger Agreement or the Option Agreement, except that Buyer has engaged, and
will pay a fee or commission to Ryan, Beck & Co. A copy of the Agreement with
Ryan, Beck & Co. has been provided to the Company.
4.7 Absence of Certain Changes or Events.
------------------------------------
(a) Except as may be set forth in Section 4.7 of the Buyer Disclosure
Schedule, or as disclosed in Buyer's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 (a true, complete and correct copy of which has
previously been delivered to the Company), since December 31, 1997, (i) neither
Buyer nor any of its Subsidiaries has incurred any material liability, except in
the ordinary course of their business consistent with their past practices, and
(ii) no event has occurred which has caused, or is reasonably likely to cause,
individually or in the aggregate, a Material Adverse Effect on Buyer.
(b) Except as set forth in Section 4.7(b) of the Buyer Disclosure
Schedule, since March 31, 1998, the Buyer and its Subsidiaries have carried on
their respective businesses in the ordinary course consistent with their past
practices.
4.8 Legal Proceedings.
-----------------
(a) Except as set forth in Section 4.8 of the Buyer Disclosure
Schedule or in Buyer's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, neither Buyer nor any of its Subsidiaries is a party to any and there
are no pending or to the best of Buyer's knowledge, threatened, material legal,
administrative, arbitral or other proceedings, claims, actions or governmental
or regulatory investigations of any nature against Buyer or any of its
Subsidiaries or challenging the validity or propriety of the transactions
contemplated by this Agreement, the Bank Merger Agreement or the Option
Agreement as to which there is a reasonable probability of an adverse
determination and which, if adversely determined, would have or be reasonably
likely to have a Material Adverse Effect on Buyer.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction imposed upon Buyer, any of its Subsidiaries or the assets of Buyer
or any of its Subsidiaries which has had, or could reasonably be expected to
have, a Material Adverse Effect on Buyer.
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<PAGE>
4.9 Compliance with Applicable Law. Buyer and each of its Subsidiaries
------------------------------
holds, and has at all times held, all material licenses, franchises, permits and
authorizations necessary for the lawful conduct of their respective businesses
under and pursuant to all, and have complied with and are not in default in any
respect under any, applicable law, statute, order, rule, regulation, policy
and/or guideline of any Governmental Entity relating to Buyer or any of its
Subsidiaries, except where the failure to hold such license, franchise, permit
or authorization or such non-compliance or default would not, individually or in
the aggregate, have, or be reasonably likely to have, a Material Adverse Effect
on Buyer, and neither Buyer nor any of its Subsidiaries knows of, or has
received notice of violation of, any material violations of any of the above.
4.10 SEC Reports. Buyer has previously made available to the Company an
-----------
accurate and complete copy of each (a) final registration statement, prospectus,
report, schedule and definitive proxy statement filed since January 1, 1995 by
Buyer with the SEC pursuant to the Securities Act or the Exchange Act (the
"Buyer Reports") and (b) communication mailed by Buyer to its shareholders since
January 1, 1995, and no such registration statement, prospectus, report,
schedule, proxy statement or communication contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances in which they were made, not misleading, except that information
as of a later date shall be deemed to modify information as of an earlier date.
Buyer has timely filed all Buyer Reports and other documents required to be
filed by it under the Securities Act and the Exchange Act, and, as of their
respective dates, all Buyer Reports complied in all material respects with the
published rules and regulations of the SEC with respect thereto.
4.11 Buyer Information. The information relating to Buyer and its
-----------------
Subsidiaries to be contained in the Proxy Statement and the S-4, or in any other
document filed with any other regulatory agency in connection herewith, will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances in which
they are made, not misleading. The S-4 (except for such portions thereof that
relate only to the Company or any of its Subsidiaries) will comply in all
material respects with the provisions of the Securities Act of 1933 and the
rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
4.12 Ownership of Company Common Stock: Affiliates and Associates.
---------------------------------- -------------------------
(a) Except for the Stock Option Agreement, neither Buyer nor any of
its affiliates or associates (as such terms are defined under the Exchange Act),
(i) beneficially own, directly or indirectly, or (ii) is a party to any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of, in each case, any shares of capital stock of the Company
(other than Trust Account Shares and DPC Shares); and
(b) Neither Buyer nor any of its Subsidiaries is an "affiliate" (as
such term is defined in DGCL 203(c)(1)), an "associate" (as such term is defined
in DGCL 203(c)(2)) of the
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<PAGE>
Company or an "Interested Stockholder" (as such term is defined in Section 8 of
the Company's Certificate of Incorporation).
4.13 Taxes. Except as set forth in Section 4.13 of the Buyer Disclosure
-----
Schedule, each of Buyer and its Subsidiaries has (i) duly and timely filed or
will duly and timely file (including applicable extensions granted without
penalty) all Tax Returns required to be filed at or prior to the Effective Time,
and such Tax Returns which have heretofore been filed are, and those to be
hereinafter filed will be, true, correct and complete, and (ii) paid in full or
have made adequate provision for on the financial statements of Buyer (in
accordance with GAAP) all Taxes and will pay in full or make adequate provision
for all Taxes. There are no material liens for Taxes upon the assets of either
Buyer or its Subsidiaries except for statutory liens for current Taxes not yet
due. Except as set forth in Section 4.13 of the Buyer Disclosure Schedule,
neither Buyer nor any of its Subsidiaries has requested any extension of time
within which to file any Tax Returns in respect of any fiscal year which have
not since been filed and no request for waivers of the time to assess any Taxes
are pending or outstanding. The federal and state income Tax Returns of Buyer
and its Subsidiaries have been audited by the Internal Revenue Service or
appropriate state tax authorities with respect to those periods and
jurisdictions set forth on Section 4.13 of the Buyer Disclosure Schedule.
Except as set forth in Section 4.13 of the Buyer Disclosure Schedule, neither
Buyer nor any of its Subsidiaries (i) is a party to any agreement providing for
the allocation or sharing of Taxes (other than the allocation of federal income
taxes as provided by Regulation 1.1552 l(a)(1) under the Code); (ii) is required
to include in income any adjustment pursuant to Section 481(a) of the Code, by
reason of the voluntary change in accounting method (nor has any taxing
authority proposed in writing any such adjustment or change of accounting
method); or (iii) has filed a consent pursuant to Section 341(f) of the Code.
4.14 Employees.
---------
(a) Section 4.14(a) of the Buyer Disclosure Schedule sets forth a true
and complete list of each employee benefit plan, arrangement or agreement that
is maintained or contributed to or required to be contributed to as of the date
of this Agreement (the "Buyer Plans") by Buyer, any of its Subsidiaries or by
any trade or business, whether or not incorporated (a "Buyer ERISA Affiliate"),
all of which together with Buyer would be deemed a "single employer" within the
meaning of Section 4001 of ERISA, for the benefit of any employee or former
employee of Buyer, any Subsidiary or any ERISA Affiliate.
(b) Except as set forth in Section 4.14(b) of the Buyer Disclosure
Schedule, (i) each of the Buyer Plans has been operated and administered in all
material respects in accordance with its terms and applicable law, including but
not limited to ERISA and the Code, (ii) each of the Buyer Plans intended to be
"qualified" within the meaning of Section 401(a) of the Code has either (1)
received a favorable determination letter from the IRS, or (2) is or will be the
subject of an application for a favorable determination letter, and Buyer is not
aware of any circumstances likely to result in the revocation or denial of any
such favorable determination letter, (iii) with respect to each Buyer Plan which
is subject to Title IV of ERISA, the present value of accrued benefits under
such Buyer Plan, based upon the actuarial assumptions used for funding purposes
in the most recent actuarial report prepared by such Buyer Plan's actuary with
respect to such
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<PAGE>
Buyer Plan, did not, as of its latest valuation date, exceed the then current
value of the assets of such Buyer Plan allocable to such accrued benefits, (iv)
no Plan provides benefits, including without limitation death or medical
benefits (whether or not insured), with respect to current or former employees
of Buyer, its Subsidiaries or any ERISA Affiliate beyond their retirement or
other termination of service, other than (w) coverage mandated by applicable
law, (x) death benefits or retirement benefits under any "employee pension
plan," as that term is defined in Section 3(2) of ERISA, (y) deferred
compensation benefits accrued as liabilities on the books of Buyer, its
Subsidiaries or the ERISA Affiliates or (z) benefits the full cost of which is
borne by the current or former employee (or his beneficiary), (v) no liability
under Title IV of ERISA has been incurred by Buyer, its Subsidiaries or any
Buyer ERISA Affiliate that has not been satisfied in full, (vi) no Buyer Plan is
a "multiemployer pension plan," as such term is defined in Section 3(37) of
ERISA, (vii) all contributions or other amounts payable by Buyer, its
Subsidiaries or any ERISA Affiliate as of the Effective Time with respect to
each Plan in respect of current or prior plan years have been paid or accrued in
accordance with generally accepted accounting practices and Section 412 of the
Code, (viii) neither Buyer, its Subsidiaries nor any ERISA Affiliate has engaged
in a transaction in connection with which Buyer, its Subsidiaries or any ERISA
Affiliate could be subject to either a civil penalty assessed pursuant to
Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975 or 4976
of the Code, (ix) there are no pending, or, to the best knowledge of Buyer,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the Buyer Plans or any trusts related thereto and
(x) the consummation of the transactions contemplated by this Agreement will not
(y) entitle any current or former employee or officer of Buyer or any ERISA
Affiliate to severance pay, termination pay or any other payment, except as
expressly provided in this Agreement or (z) accelerate the time of payment or
vesting or increase in the amount of compensation due any such employee or
officer.
4.15 Agreements with Regulatory Agencies. Except as set forth in Section
-----------------------------------
4.15 of the Buyer Disclosure Schedule or as disclosed in Buyer's Annual Report
on Form 10-K for the year ended December 31, 1997, neither Buyer nor any of its
Subsidiaries is subject to any cease-and-desist or other order issued by, or is
a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient of
any extraordinary supervisory letter from, or has adopted any board resolutions
at the request of (each, whether or not set forth in Section 4.15 of the Buyer
Disclosure Schedule, a "Buyer Regulatory Agreement"), any Regulatory Agency or
other Governmental Entity that restricts the conduct of its business or that in
any manner relates to its capital adequacy, its credit policies, its management
or its business, nor has Buyer or any of its Subsidiaries been advised by any
Regulatory Agency or other Governmental Entity that it is considering issuing or
requesting any Regulatory Agreement.
4.15A Investments Securities. Section 4.15A of the Buyer Disclosure
----------------------
Schedule sets forth the book and market value as of March 31, 1998 of the
investment securities, mortgage backed securities and securities held for sale
of the Buyer and its Subsidiaries. Section 4.15A of the Buyer Disclosure
Schedule sets forth an investment securities report which includes, security
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<PAGE>
descriptions, CUSIP numbers, pool face values, book values, coupon rates and
current market values.
4.16 Undisclosed Liabilities. Except (a) as set forth in Section 4.16 of
-----------------------
the Buyer Disclosure Schedule, (b) for those liabilities that are fully
reflected or reserved against on the consolidated balance sheet of Buyer
included in its Form 10-Q for the period ended March 31, 1998 and (c) for
liabilities incurred in the ordinary course of business consistent with past
practice since March 31, 1998 that, either alone or when combined with all
similar liabilities, have not had, and could not reasonably be expected to have,
a Material Adverse Effect on Buyer, neither Buyer nor any of its Subsidiaries
has incurred any liability of any nature whatsoever (whether absolute, accrued,
contingent or otherwise and whether due or to become due).
4.17 Administration of Fiduciary Accounts. Buyer and each of its
------------------------------------
Subsidiaries has properly administered in all material respects all accounts for
which it acts as a fiduciary, including but not limited to accounts for which it
serves as a trustee, agent, custodian, personal representative, guardian,
conservator or investment advisor, in accordance with the terms of the governing
documents and applicable state and federal law and regulation and common law.
Neither Buyer nor any of its Subsidiaries nor any of their respective directors,
officers or employees has committed any breach of trust with respect to any such
fiduciary account which has or could reasonably be expected to have a Material
Adverse Effect on Buyer, and the accountings for each such fiduciary account are
true and correct in all material respects and accurately reflect the assets of
such fiduciary account.
4.18 Approvals. As of the date of this Agreement, Buyer knows of no reason
---------
why all regulatory approvals required for the consummation of the transactions
contemplated hereby (including, without limitation, the Merger and the
Subsidiary Merger) should not be obtained without the imposition of a Burdensome
Condition.
4.19 Reports. Buyer and each of its Subsidiaries have timely filed all
-------
material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
December 31, 1994 with any Regulatory Agency, and all other material reports and
statements required to be filed by them since December 31, 1994, including,
without limitation, any report or statement required to be filed pursuant to the
laws, rules or regulations of the United States, the Federal Reserve Board, the
FDIC, any State Regulator or any SRO, and have paid all fees and assessments due
and payable in connection therewith. Except for normal examinations conducted
by a Regulatory Agency in the regular course of the business of Buyer and its
Subsidiaries; except as set forth in Section 4.19 of Buyer Disclosure Schedule,
no Regulatory Agency has initiated any proceeding or, to the best knowledge of
Buyer, investigation into the business or operations of Buyer or any of its
Subsidiaries since December 31, 1994. There is no unresolved material
violation, criticism, or exception by any Regulatory Agency with respect to any
report or statement relating to any examinations of Buyer or any of its
Subsidiaries.
4.19A State Takeover Laws. The provisions of Article VIII of Buyer's
-------------------
Certificate of Incorporation will not, assuming the accuracy of the
representations contained in Section 3.13A
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<PAGE>
hereof, apply to the Agreement, the Bank Merger Agreement or the Stock Option
Agreement or any of the transactions contemplated hereby or thereby.
4.20 Environmental Matters. Except as set forth in Section 4.20 of the
---------------------
Buyer Disclosure Schedule:
(a) Each of Buyer, its Subsidiaries, the Participation Facilities and
the Loan Properties (each as hereinafter defined) are, and have been, in
compliance with Environmental Laws, except for violations which, either
individually or in the aggregate, have not had and cannot reasonably be expected
to have a Material Adverse Effect on Buyer;
(b) There is no suit, claim, action or proceeding, pending or
threatened, before any Governmental Entity or other forum in which Buyer, any of
its Subsidiaries, any Participation Facility or any Loan Property, has been or,
with respect to threatened proceedings, may be, named as a defendant (x) for
alleged noncompliance (including by any predecessor), with any Environmental
Laws, or (y) relating to the release, threatened release or exposure to any
material whether or not occurring at or on a site owned, leased or operated by
Buyer or any of its Subsidiaries, any Participation Facility or any Loan
Property, except where such noncompliance or release has not resulted, and
cannot be reasonably expected to result, either individually or in the
aggregate, a Material Adverse Effect on Buyer;
(c) During the period of (x) Buyer's or any of its Subsidiaries'
ownership or operation of any of their respective current properties, (y)
Buyer's or any of its Subsidiaries' participation in the management of any
Participation Facility, or (z) Buyer's or any of its Subsidiaries' holding of a
security interest in a Loan Property, there has been no release of materials in,
on, under or affecting any such property, except where such release has not had
and cannot reasonably be expected to result in, either individually or in the
aggregate, a Material Adverse Effect on Buyer. Prior to the period of (x)
Buyer's or any of its Subsidiaries' ownership or operation of any of their
respective current properties, (y) Buyer's or any of its Subsidiaries'
participation in the management of any Participation Facility, or (z) Buyer's or
any of its Subsidiaries' holding of a security interest in a Loan Property,
there was no release or threatened release of materials in, on, under or
affecting any such property, Participation Facility or Loan Property, except
where such release has not had and cannot be reasonably expected to have, either
individually or in the aggregate, a Material Adverse Effect on Buyer; and
(d) The following definitions apply for purposes of this Section 4.20:
(x) "Loan Property" means any property in which Buyer or any of its Subsidiaries
holds a security interest, and, where required by the context, said term means
the owner or operator of such property; and (y) "Participation Facility" means
any facility in which Buyer or any of its Subsidiaries participates in the
management and, where required by the context, said term means the owner or
operator of such property.
4.21 Derivative Transactions. Except as set forth in Section 4.21 of the
-----------------------
Buyer Disclosure Schedule, since December 31, 1997, neither Buyer nor any of its
Subsidiaries has engaged in transactions in or involving forwards, futures,
options on futures, swaps or other
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derivative instruments except (i) as agent on the order and for the account of
others, or (ii) as principal for purposes of hedging interest rate risk on U.S.
dollar denominated securities and other financial instruments. None of the
counterparts to any contract or agreement with respect to any such instrument is
in default with respect to such contract or agreement and no such contract or
agreement, were it to be a Loan held by Buyer or any of its Subsidiaries, would
be classified as "Other Loans Specially Mentioned," "Special Mention,"
"Substandard," "Doubtful," "Loss," "Classified," "Criticized," "Credit Risk
Assets," "Concerned Loans" or words of similar import. The financial position of
Buyer and its Subsidiaries on a consolidated basis under or with respect to each
such instrument has been reflected in the books and records of Buyer and such
Subsidiaries in accordance with GAAP consistently applied, and no open exposure
of Buyer or any of its Subsidiaries with respect to any such instrument (or with
respect to multiple instruments with respect to any single counterparty) exceeds
$500,000.
4.22 Loan Portfolio.
--------------
(a) Except as set forth in Section 4.22 of the Buyer Disclosure
Schedule, neither Buyer nor any of its Subsidiaries is a party to any written or
oral (i) Loan, other than Loans the unpaid principal balance of which does not
exceed $50,000, under the terms of which the obligor is, as of the date of this
Agreement, over 90 days delinquent in payment of principal or interest or in
default of any other provision, or (ii) Loan as of the date of this Agreement
with any director, executive officer or ten percent stockholder of Buyer or any
of its Subsidiaries, or to the best knowledge of Buyer, any person, corporation
or enterprise controlling, controlled by or under common control with any of the
foregoing. Section 4.22 of the Buyer Disclosure Schedule sets forth (i) all of
the Loans in original principal amount in excess of $50,000 of Buyer or any of
its Subsidiaries that as of the date of this Agreement are classified by any
bank examiner (whether regulatory or internal) as "Other Loans Specially
Mentioned", "Special Mention", "Substandard", "Doubtful", "Loss", "Classified",
"Criticized", "Credit Risk Assets", "Concerned Loans", "Watch List" or words of
similar import, together with the principal amount of and accrued and unpaid
interest on each such Loan and the identity of the borrower thereunder, and (ii)
by category of Loan (i.e., commercial, consumer, etc.), all of the other Loans
of Buyer and its Subsidiaries that as of the date of this Agreement are
classified as such, together with the aggregate principal amount of and accrued
and unpaid interest on such Loans by category. Buyer shall promptly inform the
Company in writing of any loan that becomes classified in the manner described
in the previous sentence, or any Loan the classification of which is changed, at
any time after the date of this Agreement.
(b) To the best of its knowledge, each loan reflected as an asset in
the Buyer Disclosure Schedule (i) is evidenced by notes, agreements or other
evidences of indebtedness which are true, genuine and correct in all material
respects, (ii) to the extent secured, has been secured by valid liens and
security interests which have been perfected, and (iii) is the legal, valid and
binding obligation of the obligor named therein, enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent conveyance and other
laws of general applicability relating to or affecting creditors' rights and to
general equity principles, in each case other than loans as to which the failure
to satisfy the foregoing standards would not have a Material Adverse Effect on
the Buyer.
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ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1 Covenants of the Company. During the period from the date of this
------------------------
Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement, the Bank Merger Agreement or the
Option Agreement or with the prior written consent of Buyer, the Company and its
Subsidiaries shall carry on their respective businesses in the ordinary course
consistent with past practice and consistent with prudent banking practice. The
Company will use its best efforts to (x) preserve its business organization and
that of its Subsidiaries intact, (y) keep available to itself and Buyer the
present services of the employees of the Company and its Subsidiaries and (z)
preserve for itself and Buyer the goodwill of the customers of the Company and
its Subsidiaries and others with whom business relationships exist. Without
limiting the generality of the foregoing, and except as set forth on Section 5.1
of the Company Disclosure Schedule or as otherwise contemplated by this
Agreement or consented to in writing by Buyer, the Company shall not, and shall
not permit any of its Subsidiaries to:
(a) solely in the case of the Company, declare or pay any dividends
on, or make other distributions in respect of, any of its capital stock, other
than normal quarterly dividends in an amount of no more than $0.20 per share of
Company Common Stock, provided, however, that on or after January 1, 1999, the
Company may increase its quarterly dividend to no more than $0.225 per share if
such increase will not prevent the Merger from being accounted for as a pooling
of interests;
(b) (i) split, combine or reclassify any shares of its capital stock
or issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock except upon
the exercise or fulfillment of rights or options issued or existing pursuant to
employee benefit plans, programs or arrangements, all to the extent outstanding
and in existence on the date of this Agreement and in accordance with their
present terms, and except pursuant to the Option Agreement, or (ii) repurchase,
redeem or otherwise acquire (except for the acquisition of Trust Account Shares
and DPC Shares, as such terms are defined in Section 1.4(b) hereof) any shares
of the capital stock of the Company or any Subsidiary of the Company, or any
securities convertible into or exercisable for any shares of the capital stock
of the Company or any Subsidiary of the Company;
(c) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or any securities
convertible into or exercisable for, or any rights, warrants or options to
acquire, any such shares, or enter into any agreement with respect to any of the
foregoing, other than (i) the issuance of Company Common Stock pursuant to stock
options or similar rights to acquire Company Common Stock granted pursuant to
the Company Stock Plans and outstanding prior to the date of this Agreement, in
each case in accordance with their present terms and (ii) pursuant to the Option
Agreement;
(d) amend its Certificate of Incorporation, By-laws or other similar
governing documents;
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(e) authorize or permit any of its officers, directors, employees or
agents to directly or indirectly solicit, initiate or encourage any inquiries
relating to, or the making of any proposal which constitutes, a "takeover
proposal" (as defined below), or, except to the extent legally required for the
discharge of the fiduciary duties of the Board of Directors of the Company,
recommend or endorse any takeover proposal, or participate in any discussions or
negotiations, or provide third parties with any nonpublic information, relating
to any such inquiry or proposal or otherwise facilitate any effort or attempt to
make or implement a take over proposal; provided, however, that the Company may
-------- -------
communicate information about any such takeover proposal to its stockholders if,
in the judgment of the Company's Board of Directors, based upon the written
opinion of outside counsel, such communication is required under applicable law.
The Company will immediately cease and cause to be terminated any existing
activities, discussions or negotiations previously conducted with any parties
other than Buyer with respect to any of the foregoing. The Company will take
all actions necessary or advisable to inform the appropriate individuals or
entities referred to in the first sentence hereof of the obligations undertaken
in this Section 5.1(e). The Company will notify Buyer immediately if any such
inquiries or takeover proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, the Company, and the Company will promptly inform
Buyer in writing of all of the relevant details with respect to the foregoing.
As used in this Agreement, "takeover proposal" shall mean any tender or exchange
offer, proposal for a merger, consolidation or other business combination
involving the Company or any Subsidiary of the Company or any proposal or offer
to acquire in any manner a substantial equity interest in, or a substantial
portion of the assets of the Company or any Subsidiary of the Company other than
the transactions contemplated or permitted by this Agreement, the Bank Merger
Agreement and the Option Agreement;
(f) make any capital expenditures other than the expenses which are
set forth in Section 5.1(f) of the Company Disclosure Schedule and expenses
which (i) are made in the ordinary course of business or are necessary to
maintain existing assets in good repair, or (ii) in an amount of no more than
$50,000 individually and $75,000 in the aggregate;
(g) enter into any new line of business;
(h) acquire or agree to acquire, by merging or consolidating with, or
by purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire any assets, which would be material, individually or in the aggregate,
to the Company, other than in connection with foreclosures, settlements in lieu
of foreclosure or troubled loan or debt restructurings in the ordinary course of
business consistent with prudent banking practices;
(i) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect, or in any of the conditions to
the Merger set forth in Article VII not being satisfied, or in a violation of
any provision of this Agreement or the Bank Merger Agreement, except, in every
case, as may be required by applicable law;
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(j) change its methods of accounting in effect at September 30, 1997,
except as required by changes in GAAP or regulatory accounting principles as
concurred to by the Company's independent auditors;
(k) (i) except as required by applicable law or to maintain
qualification pursuant to the Code, adopt, amend, renew or terminate any Plan or
any agreement, arrangement, plan or policy between the Company or any Subsidiary
of the Company and one or more of its current or former directors, officers or
employees or (ii) except for normal increases in the ordinary course of business
consistent with past practice or except as required by applicable law, increase
in any manner the compensation or fringe benefits of any director, officer or
employee or pay any benefit not required by any plan or agreement as in effect
as of the date hereof (including, without limitation, the granting of stock
options, stock appreciation rights, restricted stock, restricted stock units or
performance units or shares), except for continuation of contributions to the
Company's retirement plan in accordance with past practice, such contributions
not to exceed $45,000 per calendar quarter;
(l) take or cause to be taken any action which would disqualify the
Merger as a "pooling of interests" for accounting purposes or a tax free
reorganization under Section 368 of the Code, provided, however, that nothing
-------- -------
contained herein shall limit the ability of Buyer to exercise its rights under
the Stock Option Agreement;
(m) except as set forth in Section 5.1(m) of the Company Disclosure
Schedule, other than activities in the ordinary course of business consistent
with prior practice, sell, lease, encumber, assign or otherwise dispose of, or
agree to sell, lease, encumber, assign or otherwise dispose of, any of its
material assets, properties or other rights or agreements;
(n) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money, assume, guarantee, endorse
or otherwise as an accommodation become responsible for the obligations of any
other individual, corporation or other entity;
(o) file any application to relocate or terminate the operations of any
banking office of it or any of its Subsidiaries;
(p) commit any act or omission which constitutes a material breach or
default by the Company or any of its Subsidiaries under any Regulatory Agreement
or under any material contract or material license to which the Company or any
of its Subsidiaries is a party or by which any of them or their respective
properties is bound;
(q) except as set forth in Disclosure Schedule 3.27, compromise, extend
or restructure any real estate loan, construction loan or commercial loan with
an unpaid principal balance except in the ordinary course of business consistent
with past practices;
(r) make or commit to any commercial business loan (including, without
limitation, lines of credit and letters of credit) or any commercial real estate
or construction loan
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(including, without limitation, lines of credit and letters of credit) secured
by any non-1-4 family residential properties, except in the ordinary course of
business consistent with past practices;
(s) purchase or commit to purchase any bulk loan portfolio;
(t) engage in or enter into any structured transactions, derivative
securities, arbitrage or hedging activity;
(u) make any equity investment or commitment to make such an investment
in real estate or in any real estate development project, other than in
connection with foreclosures, settlements in lieu of foreclosure or troubled
loan or debt restructurings in the ordinary course of business consistent with
prudent banking practices, or for goods, services or other items necessary in
the ordinary course of business relating to foreclosures, settlements in lieu of
foreclosure or troubled loan or debt restructurings;
(v) create, renew, amend or terminate or give notice of a proposed
renewal, amendment or termination of, any material contract, agreement or lease
for goods, services or office space to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries or
their respective properties is bound;
(w) take any action which would cause the termination or cancellation
by the FDIC of insurance in respect of the Company Bank's deposits; or
(x) agree to do any of the foregoing.
5.2 Covenants of Buyer. During the period from the date of this Agreement
------------------
and continuing until the Effective Time, except as expressly contemplated or
permitted by this Agreement, the Bank Merger Agreement or the Option Agreement
or with the prior written consent of the Company, Buyer and its Subsidiaries
shall carry on their respective businesses in the ordinary course consistent
with past practice and consistent with prudent banking practice. Buyer will use
its best efforts to (x) preserve its business organization and that of its
Subsidiaries intact and (y) preserve for itself and the Company the goodwill of
the customers of Buyer and its Subsidiaries and others with whom business
relationships exist. Without limiting the generality of the foregoing and
except as set forth on Section 5.2 of the Buyer Disclosure Schedule or as
otherwise contemplated by this Agreement or consented to in writing by the
Company, Buyer shall not, and shall not permit any of its Subsidiaries to:
(a) declare or pay any extraordinary or special dividends on or make
any other extraordinary or special distributions in respect of any of its
capital stock; provided, however, that nothing contained herein shall prohibit
-------- -------
Buyer from increasing the quarterly cash dividend on the Buyer Common Stock;
(b) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect, or in any of the conditions to
the Merger set forth in Article VII not being
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satisfied or in a violation of any provision of this Agreement or the Bank
Merger Agreement, except, in every case, as may be required by applicable law;
(c) change its methods of accounting in effect at December 31, 1997,
except in accordance with changes in GAAP or regulatory accounting principles as
concurred to by Buyer's independent auditors;
(d) take or cause to be taken any action which would disqualify the
Merger as a "pooling of interests" for accounting purposes or a tax free
reorganization under Section 368 of the Code, provided, however, that nothing
-------- -------
contained herein shall limit the ability of Buyer to exercise its rights under
the Option Agreement;
(e) take any action which would cause the termination or cancellation
by the FDIC of insurance in respect of First Savings Bank's deposits; or
(f) agree to do any of the foregoing.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Regulatory Matters.
------------------
(a) The Company and Buyer shall promptly prepare and file with the SEC
Proxy Statements (the "Joint Proxy Statement") and Buyer shall promptly prepare
and file with the SEC the S-4, in which the Joint Proxy Statement will be
included as a prospectus. Each of the Company and Buyer shall use all reasonable
efforts to have the S-4 declared effective under the Securities Act as promptly
as practicable after such filing, and each of the Company and Buyer shall
thereafter mail the Joint Proxy Statement to each of its respective
stockholders. Buyer shall also use all reasonable efforts to obtain all
necessary state securities law or "Blue Sky" permits and approvals required to
carry out the transactions contemplated by this Agreement and the Bank Merger
Agreement, and the Company shall furnish all information concerning the Company
and the holders of Company Common Stock as may be reasonably requested in
connection with any such action.
(b) The parties hereto shall cooperate with each other and use their
best efforts to promptly prepare and file all necessary documentation, to effect
all applications, notices, petitions and filings, and to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Entities which are necessary or advisable to consummate
the transactions contemplated by this Agreement (including without limitation
the Merger and the Subsidiary Merger) (it being understood that any amendments
to the S-4 or a resolicitation of proxies as consequence of a subsequent
proposed merger, stock purchase or similar acquisition by Buyer or any of its
Subsidiaries shall not violate this covenant). The Company and Buyer shall have
the right to review in advance, and to the extent practicable each will consult
the other on, in each case subject to applicable laws relating to the exchange
of
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information, all the information relating to the Company or Buyer, as the
case may be, and any of their respective Subsidiaries, which appear in any
filing made with, or written materials submitted to, any third party or any
Governmental Entity in connection with the transactions contemplated by this
Agreement. In exercising the foregoing right, each of the parties hereto shall
act reasonably and as promptly as practicable. The parties hereto agree that
they will consult with each other with respect to the obtaining of all permits,
consents, approvals and authorizations of all third parties and Governmental
Entities necessary or advisable to consummate the transactions contemplated by
this Agreement and each party will keep the other apprised of the status of
matters relating to completion of the transactions contemplated herein.
(c) Buyer and the Company shall, upon request, furnish each other with
all information concerning themselves, their Subsidiaries, directors, officers
and stockholders and such other matters as may be reasonably necessary or
advisable in connection with the Proxy Statement, the S-4 or any other
statement, filing, notice or application made by or on behalf of Buyer, the
Company or any of their respective Subsidiaries to any Governmental Entity in
connection with the Merger and the other transactions contemplated by this
Agreement.
(d) Buyer and the Company shall promptly furnish each other with
copies of written communications received by Buyer or the Company, as the case
may be, or any of their respective Subsidiaries, Affiliates or Associates (as
such terms are defined in Rule 12b-2 under the Exchange Act as in effect on the
date of this Agreement) from, or delivered by any of the foregoing to, any
Governmental Entity in respect of the transactions contemplated hereby.
6.2 Access to Information.
---------------------
(a) Upon reasonable notice and subject to applicable laws relating to
the exchange of information, the Company shall, and shall cause each of its
Subsidiaries to, afford to the officers, employees, accountants, counsel and
other representatives of Buyer, access, during normal business hours during the
period prior to the Effective Time, to all its properties, books, contracts,
commitments, records, officers, employees, accountants, counsel and other
representatives and, during such period, the Company shall, and shall cause its
Subsidiaries to, make available to Buyer (i) a copy of each report, schedule,
registration statement and other document filed or received by it during such
period pursuant to the requirements of Federal securities laws or Federal or
state banking laws (other than reports or documents which the Company is not
permitted to disclose under applicable law) and (ii) all other information
concerning its business, properties and personnel as Buyer may reasonably
request. Neither the Company nor any of its Subsidiaries shall be required to
provide access to or to disclose information where such access or disclosure
would violate or prejudice the rights of the Company's customers, jeopardize any
attorney-client privilege or contravene any law, rule, regulation, order,
judgment, decree, fiduciary duty or binding agreement entered into prior to the
date of this Agreement. The parties hereto will make appropriate substitute
disclosure arrangements under circumstances in which the restrictions of the
preceding sentence apply. Buyer will hold all such information in confidence to
the extent required by, and in accordance with, the provisions of the
confidentiality agreement, dated July 9, 1998, between Buyer and the Company
(the "Confidentiality Agreement").
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(b) Upon reasonable notice and subject to applicable laws relating to
the exchange of information, Buyer shall, and shall cause its Subsidiaries to,
afford to the officers, employees, accountants, counsel and other
representatives of the Company, access, during normal business hours during the
period prior to the Effective Time, to such information regarding Buyer and its
Subsidiaries as shall be reasonably necessary for the Company to fulfill its
obligations pursuant to this Agreement to prepare the Proxy Statement or which
may be reasonably necessary for the Company to confirm that the representations
and warranties of Buyer contained herein are true and correct and that the
covenants of Buyer contained herein have been performed in all material
respects. Neither Buyer nor any of its Subsidiaries shall be required to provide
access to or to disclose information where such access or disclosure would
violate or prejudice the rights of Buyer's customers, jeopardize any attorney-
client privilege or contravene any law, rule, regulation, order, judgment,
decree, fiduciary duty or binding agreement entered into prior to the date of
this Agreement. The parties hereto will make appropriate substitute disclosure
arrangements under circumstances in which the restrictions of the preceding
sentence apply.
(c) All information furnished by Buyer to the Company or its
representatives pursuant hereto shall be treated as the sole property of Buyer
and, if the Merger shall not occur, the Company and its representatives shall
return to Buyer all of such written information and all documents, notes,
summaries or other materials containing, reflecting or referring to, or derived
from, such information. The Company shall, and shall use its best efforts to
cause its representatives to, keep confidential all such information, and shall
not directly or indirectly use such information for any competitive or other
commercial purpose. The obligation to keep such information confidential shall
continue for two years from the date the proposed Merger is abandoned and shall
not apply to (i) any information which (x) was already in the Company's
possession prior to the disclosure thereof by Buyer; (y) was then generally
known to the public; or (z) was disclosed to the Company by a third party not
bound by an obligation of confidentiality or (ii) disclosures made as required
by law. It is further agreed that, if in the absence of a protective order or
the receipt of a waiver hereunder the Company is nonetheless, in the opinion of
its counsel, compelled to disclose information concerning Buyer to any tribunal
or governmental body or agency or else stand liable for contempt or suffer other
censure or penalty, the Company may disclose such information to such tribunal
or governmental body or agency without liability hereunder.
(d) All information furnished by Company to the Buyer or its
representatives pursuant hereto shall be treated as the sole property of Company
and, if the Merger shall not occur, the Buyer and its representatives shall
return to Company all of such written information and all documents, notes,
summaries or other materials containing, reflecting or referring to, or derived
from, such information. The Buyer shall, and shall use its best efforts to
cause its representatives to, keep confidential all such information, and shall
not directly or indirectly use such information for any competitive or other
commercial purpose. The obligation to keep such information confidential shall
continue for two years from the date the proposed Merger is abandoned and shall
not apply to (i) any information which (x) was already in the Buyer's possession
prior to the disclosure thereof by Company; (y) was then generally known to the
public; or (z) was disclosed to the Buyer by a third party not bound by an
obligation of
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confidentiality or (ii) disclosures made as required by law. It is further
agreed that, if in the absence of a protective order or the receipt of a waiver
hereunder the Buyer is nonetheless, in the opinion of its counsel, compelled to
disclose information concerning Company to any tribunal or governmental body or
agency or else stand liable for contempt or suffer other censure or penalty, the
Buyer may disclose such information to such tribunal or governmental body or
agency without liability hereunder.
(e) No investigation by either of the parties or their respective
representatives shall affect the representations, warranties, covenants or
agreements of the other set forth herein.
(f) Company shall respond reasonably and in good faith to any timely
request of Buyer to permit a representative of Buyer to attend any meeting of
Company's Board of Directors or the Executive Committee thereof, except to the
extent that such meeting, or portion thereof, relates to the Merger.
6.3 (a) Stockholder Meetings. The Company and Buyer each shall take all
--------------------
steps necessary to duly call, give notice of, convene and hold a special or
annual meeting of its respective stockholders to be held as soon as is
reasonably practicable after the date on which the S-4 becomes effective for the
purpose of voting upon the approval of this Agreement and the consummation of
the transactions contemplated hereby. The Company and Buyer each will, through
its respective Board of Directors, except to the extent legally required for the
discharge of the fiduciary duties of such board, recommend to its respective
stockholders approval of this Agreement and the transactions contemplated hereby
and such other matters as may be submitted to its stockholders in connection
with this Agreement. The Company and Buyer shall coordinate and cooperate with
respect to the foregoing matters, with a view towards, among other things,
holding the respective meetings of each party's stockholders on the same day.
(b) Voting Agreements. Each of the Company's directors have entered
-----------------
into a Voting Agreement, a form of which is attached as Exhibit 6.3(b), hereto.
6.4 Legal Conditions to Merger. Each of Buyer and the Company shall, and
--------------------------
shall cause its Subsidiaries to, use their best efforts (a) to take, or cause to
be taken, all actions necessary, proper or advisable to comply promptly with all
legal requirements which may be imposed on such party or its Subsidiaries with
respect to the Merger or the Subsidiary Merger and, subject to the conditions
set forth in Article VII hereof, to consummate the transactions contemplated by
this Agreement and (b) to obtain (and to cooperate with the other party to
obtain) any consent, authorization, order or approval of, or any exemption by,
any Governmental Entity and any other third party which is required to be
obtained by the Company or Buyer or any of their respective Subsidiaries in
connection with the Merger and the Subsidiary Merger and the other transactions
contemplated by this Agreement, and to comply with the terms and conditions of
such consent, authorization, order or approval; provided, however, that neither
-------- -------
Buyer nor the Company shall be obligated to take any action pursuant to the
foregoing if the taking of such action or such compliance or the obtaining of
such consent, authorization, order or approval is likely, in the good faith
reasonable opinion of Buyer, to result in the imposition of a Burdensome
Condition.
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6.5 Affiliates. Each of Buyer and the Company shall use its best efforts
----------
to cause each director, executive officer and other person who is an "affiliate"
(for purposes of Rule 145 under the Securities Act and for purposes of
qualifying the Merger for "pooling-of- interests" accounting treatment) of such
party to deliver to the other party hereto, as soon as practicable after the
date of this Agreement, and in any event prior to the earlier of the date of the
stockholders meeting called by the Company to approve this Agreement and the
date of the stockholders meeting called by Buyer to approve this Agreement, a
written agreement, in the form of Exhibit 6.5(a) hereto (in the case of
affiliates of Buyer) or 6.5(b) hereto (in the case of affiliates of the
Company), providing that such person will not sell, pledge, transfer or
otherwise dispose of any shares of Buyer Common Stock or Company Common Stock
held by such "affiliate" and, in the case of the "affiliates" of the Company,
the shares of Buyer Common Stock to be received by such "affiliate" in the
Merger: (1) in the case of shares of Buyer Common Stock to be received by
"affiliates" of the Company in the Merger, except in compliance with the
applicable provisions of the Securities Act and the rules and regulations
thereunder; and (2) during the period commencing 30 days prior to the Merger and
ending at the time of the publication of financial results covering at least 30
days of combined operations of Buyer and the Company.
6.6 Stock Exchange Listing. Buyer shall cause the shares of Buyer Common
----------------------
Stock to be issued in the Merger to be approved for listing on the Nasdaq,
subject to official notice of issuance, as of the Effective Time.
6.7 Employee Benefit Plans; Existing Agreements.
--------------------------------------------
(a) The employees of the Company (the "Company Employees") shall be
entitled to participate in Buyer's employee benefit plans in which similarly
situated employees of Buyer participate, to the same extent as comparable
employees of Buyer. As of the Effective Time, Buyer shall permit the Company
Employees to participate in Buyer's group hospitalization, medical, life and
disability insurance plans on the same terms and conditions as applicable to
comparable employees of Buyer and its Subsidiaries; provided, however, that all
Company employees and dependents will be eligible to participate in medical
insurance plans of First Savings Bank upon the merger without regard to any pre-
existing conditions or exclusions and with no uninsured waiting periods, and the
carry over of all current plan year deductibles and annual out-of-pocket
contribution, to the extent permitted by the Buyer's medical insurance plans.
As of the next entry date immediately following the Effective Time, Buyer shall
permit the Company Employees to participate in Buyer's defined benefit pension
plan, 401(k) savings plan, employee stock ownership plan ("ESOP") and similar
plans on the same terms and conditions as employees of Buyer and its
Subsidiaries, giving effect to years of service with the Company and its
Subsidiaries (to the extent the Company gave effect) as if such service were
with Buyer, for purposes of eligibility and vesting, but not for benefit accrual
purposes, provided, however, in no event shall said Company employees be
credited with more than three (3) years of service for vesting purposes under
the ESOP as of the Effective Time. Buyer shall as of the Effective Time enter
into a Consulting Agreement as contained at Disclosure Schedule 6.7(b) (2)
including the provisions detailed at 6.7(b)(2)(ii) of said Disclosure Schedule
with respect to Mr. George Hornyak. As of the merger date, Company Employees
retain accrual or payout for
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short-term disability, unused sick leave benefits and vacation pay, provided
such amounts have been fully accrued for by Company as of the Effective Time and
are in accordance with such amounts provided in past practice by the Company. As
of the Effective Time, all participants under the Company's defined contribution
plan shall become 100% vested in all participant accounts. With respect to
Buyer's welfare benefit plans, (including by example, vacation, sick leave,
severance), Company employees shall have prior service with the Company
recognized for purposes of eligibility to participate, vesting and benefits
accrual purposes.
(b) Following the Effective Time, Buyer shall honor and shall cause
the Surviving Bank to honor in accordance with their terms all employment,
severance and other compensation agreements and arrangements, including, but not
limited to, severance benefit plans listed in Section 6.7(b)(1) of the Company
Disclosure Schedule, existing prior to the execution of this Agreement and the
agreements and arrangement, as set forth in Section 6.7(b)(2) of the Company
Disclosure Schedule which are between the Company and any director, officer or
employee thereof and which have been disclosed in the Company Disclosure
Schedule and previously have been delivered to Buyer and agrees to make the
payments and provide the benefits pursuant thereto described in Section 6.7(b)
of the Company Disclosure Schedule.
(c) As of the Effective Time, Buyer will assume, or will cause First
Savings Bank to assume, the tax qualified plans of the Company Bank as listed in
Section 3.11(a) of the Company Disclosure Schedule. Neither Buyer nor First
Savings Bank shall be required to make further contributions to such plans. As
of the Effective Time, all accrued benefits under the plans shall be fully
vested and nonforfeitable. As soon as practicable after the Effective Time,
Buyer shall terminate or shall cause First Savings Bank to terminate the tax
qualified plans of the Company Bank assumed by Buyer, or First Savings Bank,
pursuant to this Section 6.7(c), and distribution of the accounts of active
participants immediately prior to the Effective Time under the plans shall be
made to the participants and beneficiaries in accordance with the terms of such
plans.
(d) Buyer and Surviving Bank shall implement the programs detailed at
items (i), (ii), (iii), (iv), (v) and (vii) of Disclosure Schedule 6.7(b)(2).
6.8 Indemnification.
---------------
(a) In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil or administrative, including, without
limitation, any such claim, action, suit, proceeding or investigation in which
any person who is now, or has been at any time prior to the date of this
Agreement, or who becomes prior to the Effective Time, a director or officer or
employee of the Company or any of its Subsidiaries (the "Indemnified Parties")
is, or is threatened to be, made a party based in whole or in part on, or
arising in whole or in part out of, or pertaining to (i) the fact that he is or
was a director, officer or employee of the Company, any of the Subsidiaries of
the Company or any of their respective predecessors or (ii) this Agreement or
any of the transactions contemplated hereby, whether in any case asserted or
arising before or after the Effective Time, the parties hereto agree to
cooperate and use their best efforts to defend against and respond thereto. It
is understood and agreed that after the Effective Time, Buyer
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shall indemnify and hold harmless, as and to the extent permitted by Delaware
law, each such Indemnified Party against any losses, claims, damages,
liabilities, costs, expenses (including reasonable attorney's fees and expenses
in advance of the final disposition of any claim, suit, proceeding or
investigation to each Indemnified Party to the fullest extent permitted by law
upon receipt of any undertaking required by applicable law), judgments, fines
and amounts paid in settlement in connection with any such threatened or actual
claim, action, suit, proceeding or investigation, and in the event of any such
threatened or actual claim, action, suit, proceeding or investigation (whether
asserted or arising before or after the Effective Time), the Indemnified Parties
may retain counsel reasonably satisfactory to them after consultation with
Buyer; provided, however, that (1) Buyer shall have the right to assume the
-------- -------
defense thereof and upon such assumption Buyer shall not be liable to any
Indemnified Party for any legal expenses of other counsel or any other expenses
subsequently incurred by any Indemnified Party in connection with the defense
thereof, except that if Buyer elects not to assume such defense or counsel for
the Indemnified Parties reasonably advises that there are issues which raise
conflicts of interest between Buyer and the Indemnified Parties, the Indemnified
Parties may retain counsel reasonably satisfactory to them after consultation
with Buyer, and Buyer shall pay the reasonable fees and expenses of such counsel
for the Indemnified Parties, (2) Buyer shall in all cases be obligated pursuant
to this paragraph to pay for only one firm of counsel for all Indemnified
Parties, (3) Buyer shall not be liable for any settlement effected without its
prior written consent (which consent shall not be unreasonably withheld) and (4)
Buyer shall have no obligation hereunder to any Indemnified Party when and if a
court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and nonappealable, that indemnification of
such Indemnified Party in the manner contemplated hereby is prohibited by
applicable law. Any Indemnified Party wishing to claim Indemnification under
this Section 6.8, upon learning of any such claim, action, suit, proceeding or
investigation, shall notify promptly Buyer thereof, provided that the failure to
so notify shall not affect the obligations of Buyer under this Section 6.8
except to the extent such failure to notify prejudices Buyer. Buyer's
obligations under this Section 6.8 continue in full force and effect for a
period of six (6) years from the Effective Time; provided, however, that all
-------- -------
rights to indemnification in respect of any claim (a "Claim") asserted or made
within such period shall continue until the final disposition of such Claim.
Notwithstanding anything to the contrary contained in this Section 6.8(a), in no
event shall Buyer's obligations under this Section 6.8(a) with respect to
indemnification or the advancement of expenses be greater than the obligations
of the Company and its Subsidiaries with respect thereto set forth as of the
date of this Agreement in the Certificate of Incorporation, By-laws or similar
governing documents of the Company and its Subsidiaries.
(b) Buyer shall cause the persons serving as officers and directors of
the Company immediately prior to the Effective Time to be covered for a period
of six years from the Effective Time by the directors' and officers' liability
insurance policy maintained by the Company (provided that Buyer may substitute
therefor policies of at least the same coverage and amounts containing terms and
conditions which are not less advantageous than such policy) with respect to
acts or omissions occurring prior to the Effective Time which were committed by
such officers and directors in their capacity as such.
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(c) In the event Buyer or the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers or conveys all or substantially all
of its properties and assets to any person, then, and in each such case, to the
extent necessary, proper provision shall be made so that the successors and
assigns of Buyer or the Surviving Corporation, as the case may be, assume the
obligations set forth in this section.
(d) The provisions of this Section 6.8 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
heirs and representatives; and the provisions of this Section 6.8 will survive
the Effective Time.
6.9 Subsequent Interim and Annual Financial Statements. As soon as
--------------------------------------- ----------
reasonably available, but in no event later than April 1, 1999 or, in the case
of the Company, December 31, 1998, Buyer will deliver to the Company and the
Company will deliver to Buyer their respective Annual Reports on Form 10-K for,
year ending December 31, 1998 and, in the case of the Company, the fiscal year
ending September 30, 1998, as filed with the SEC under the Exchange Act. As
soon as reasonably available, but in no event more than 45 days after the end of
each fiscal quarter ending after the date of this Agreement, Buyer will deliver
to the Company and the Company will deliver to Buyer their respective Quarterly
Reports on Form 10-Q, as filed with the SEC under the Exchange Act.
6.10 Additional Agreements. In case at any time after the Effective Time
---------------------
any further action is necessary or desirable to carry out the purposes of this
Agreement, or the Bank Merger Agreement, or to vest the Surviving Corporation or
the Surviving Bank with full title to all properties, assets, rights, approvals,
immunities and franchises of any of the parties to the Merger or the Subsidiary
Merger, the proper officers and directors of each party to this Agreement and
their respective Subsidiaries shall take all such necessary action as may be
reasonably requested by Buyer.
6.11 Advice of Changes. Buyer and the Company shall promptly advise the
-----------------
other party of any change or event having a Material Adverse Effect on it or
which it believes would or would be reasonably likely to cause or constitute a
material breach of any of its representations, warranties or covenants contained
herein. From time to time prior to the Effective Time (and on the date prior to
the Closing Date), each party will promptly supplement or amend the Disclosure
Schedules delivered in connection with the execution of this Agreement to
reflect any matter which, if existing, occurring or known at the date of this
Agreement, would have been required to be set forth or described in such
Disclosure Schedules or which is necessary to correct any information in such
Disclosure Schedules which has been rendered inaccurate thereby. No supplement
or amendment to such Disclosure Schedules shall have any effect for the purpose
of determining satisfaction of the conditions set forth in Sections 7.2(a) or
7.3(a) hereof, as the case may be, or the compliance by the Company or Buyer, as
the case may be, with the respective covenants and agreements of such parties
contained herein.
6.12 Current Information. During the period from the date of this
-------------------
Agreement to the Effective Time, the Company will cause one or more of its
designated representatives to notify
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on a regular and frequent basis (not less than monthly) representatives of Buyer
and to report (i) the general status of the ongoing operations of the Company
and its Subsidiaries; (ii) the status of, and the action proposed to be taken
with respect to, those Loans held by the Company or any Subsidiary of the
Company which, individually or in combination with one or more other Loans to
the same borrower thereunder, have an original principal amount of $250,000 or
more and are non-performing assets; (iii) the origination of all loans other
than 1-4 family residential mortgage loans and consumer loans; and (iv) any
material changes in the Company's pricing of deposits. The Company will promptly
notify Buyer of any material change in the normal course of business or in the
operation of the properties of the Company or any of its Subsidiaries and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the institution or the threat
of significant litigation involving the Company or any of its Subsidiaries, and
will keep Buyer fully informed of such events.
6.13 Execution and Authorization of Bank Merger Agreement. As soon as
----------------------------------- ----------------
reasonably practicable after the date of this Agreement, (a) Buyer shall (i)
cause the Board of Directors of First Savings Bank to approve the Bank Merger
Agreement, (ii) cause First Savings Bank to execute and deliver the Bank Merger
Agreement, and (iii) approve the Bank Merger Agreement as the sole stockholder
of First Savings Bank, and (b) the Company shall (i) cause the Board of
Directors of the Company Bank to approve the Bank Merger Agreement, (ii) cause
the Company Bank to execute and deliver the Bank Merger Agreement, and (iii)
approve the Bank Merger Agreement as the sole stockholder of the Company Bank.
The Bank Merger Agreement shall contain terms that are normal and customary in
light of the transactions contemplated hereby and such additional terms as are
necessary to carry out the purposes of this Agreement.
6.14 Directorships. Buyer and Surviving Bank shall cause its Board of
-------------
Directors to be expanded by two members and shall appoint two of the current
directors of the Company George T. Hornyak, Jr. and Joseph Chadwick as nominees
to fill the vacancies on Buyer's Board of Directors created by such increase as
of the Effective Time. The initial term for Mr. Hornyak on the Buyer's Board
shall expire in 2001 and for Mr. Chadwick in 1999. The initial term for both
Messrs. Hornyak and Chadwick on the Surviving Bank's Board shall expire in 1999.
Upon expiration of the initial terms, Messrs. Hornyak and Chadwick will be
considered by the respective Board Nominating Committees to stand for election
for a new three-year term.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation To Effect the Merger. The
----------------------------------------------------------
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
--------------------
adopted by the affirmative vote of the holders of at least a majority of the
outstanding shares of Company Common Stock entitled to vote thereon and by the
affirmative vote of the holders of at least a majority of the outstanding shares
of Buyer Common Stock entitled to vote thereon.
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(b) Nasdaq Stock Market Listing. The shares of Buyer Common Stock
---------------------------
which shall be issued to the stockholders of the Company upon consummation of
the Merger shall have been authorized for listing on the Nasdaq Stock Market,
subject to official notice of issuance.
(c) Other Approvals. All regulatory approvals required to consummate
---------------
the transactions contemplated hereby (including the Merger, the Subsidiary
Merger and, if necessary to consummate the Subsidiary Merger) shall have been
obtained and shall remain in full force and effect and all statutory waiting
periods in respect thereof shall have expired (all such approvals and the
expiration of all such waiting periods being referred to herein as the
"Requisite Regulatory Approvals").
(d) S-4. The S-4 shall have become effective under the Securities
---
Act and no stop order suspending the effectiveness of the S-4 shall have been
issued and no proceedings for that purpose shall have been initiated or
threatened by the SEC.
(e) No Injunctions or Restraints; Illegality. No order, injunction or
----------------------------------------
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition (an "Injunction") preventing the consummation of the
Merger, the Subsidiary Merger or any of the other transactions contemplated by
this Agreement or the Bank Merger Agreement shall be in effect. No statute,
rule, regulation, order, injunction or decree shall have been enacted, entered,
promulgated or enforced by any Governmental Entity which prohibits, restricts or
makes illegal consummation of the Merger or the Subsidiary Merger.
7.2 Conditions to Obligations of Buyer. The obligation of Buyer to effect
----------------------------------
the Merger is also subject to the satisfaction or waiver by Buyer at or prior to
the Effective Time of the following conditions:
(a) Representations and Warranties. (I) The representations and
------------------------------
warranties of the Company set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as of
the Closing Date as though made on and as of the Closing Date; and (II) the
representations and warranties of the Company set forth in this Agreement shall
be true and correct in all material respects as of the date of this Agreement
and (except to the extent such representations and warranties speak as of an
earlier date) as of the Closing Date as though made on and as of the Closing
Date; provided, however, that, for purposes of this clause (II), such
-------- -------
representations and warranties shall be deemed to be true and correct in all
material respects unless the failure or failures of such representations and
warranties to be so true and correct, individually or in the aggregate,
represent a material adverse change from the business, assets, financial
condition or results of operations of the Company and its Subsidiaries taken as
a whole as represented herein. Buyer shall have received a certificate signed
on behalf of the Company by the Chief Executive Officer and the Chief Financial
Officer of the Company to the foregoing effect.
(b) Performance of Obligations of the Company. The Company shall have
-----------------------------------------
performed in all material respects all obligations required to be performed by
it under this
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Agreement at or prior to the Closing Date, and Buyer shall have received a
certificate signed on behalf of the Company by the Chief Executive Officer and
the Chief Financial Officer of the Company to such effect.
(c) No Burdensome Condition. None of the Requisite Regulatory
-----------------------
Approvals shall impose any term, condition or restriction upon Buyer, the
Company, the Company Bank, the Surviving Corporation, the Surviving Bank or any
of their respective Subsidiaries that Buyer, or the Company, in good faith,
reasonably determines would so materially adversely affect the economic or
business benefits of the transactions contemplated by this Agreement to Buyer or
the Company as to render inadvisable in the reasonable good faith judgment of
Buyer or the Company, the consummation of the Merger (a "Burdensome Condition").
(d) Consents Under Agreements. The consent, approval or waiver of each
-------------------------
person (other than the Governmental Entities) whose consent or approval shall be
required in order to permit the succession by the Surviving Corporation or the
Surviving Bank pursuant to the Merger or the Subsidiary Merger, as the case may
be, to any obligation, right or interest of the Company or any Subsidiary of the
Company under any loan or credit agreement, note, mortgage, indenture, lease,
license or other agreement or instrument shall have been obtained, except where
the failure to obtain such consent, approval or waiver would not so materially
adversely affect the economic or business benefits of the transactions
contemplated by this Agreement to Buyer as to render inadvisable, in the
reasonable good faith judgment of Buyer, the consummation of the Merger.
(e) No Pending Governmental Actions. No proceeding initiated by any
-------------------------------
Governmental Entity seeking an Injunction shall be pending.
(f) Federal Tax Opinion. Buyer and Company shall have received an
-------------------
opinion of Patton Boggs, LLP, counsel to Buyer ("Buyer's Counsel"), in form and
substance reasonably satisfactory to Buyer, substantially to the effect that, on
the basis of facts, representations and assumptions set forth in such opinion
which are consistent with the state of facts existing at the Effective Time, the
Merger and Subsidiary Merger will be treated as reorganizations within the
meaning of Section 368(a) of the Code and that, accordingly, for federal income
tax purposes:
(i) No gain or loss will be recognized by the Buyer as a result
of the Merger;
(ii) No gain or loss will be recognized by First Savings Bank as
a result of the Subsidiary Merger;
(iii) No gain or loss will be recognized by the Company as a
result of the Merger;
(iv) No gain or loss will be recognized by the Company Bank as a
result of the Subsidiary Merger;
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<PAGE>
(v) No gain or loss will be recognized by the shareholders of the
Company who exchange all of their Company Common Stock solely for Buyer Common
Stock pursuant to the Merger (except with respect to cash received in lieu of a
fractional share interest in Buyer Common Stock;
(vi) The aggregate tax basis of the Buyer Common Stock received by
shareholders who exchange all of their Company Common Stock solely for Common
Stock pursuant to the Merger will be the same as the aggregate tax basis of the
Company Common Stock surrendered in exchange therefor (reduced by any amount
allocable to a fractional share interest for which cash is received).
In rendering such opinion, the Buyer's Counsel may require and rely
upon representations and covenants contained in certificates of officers of
Buyer, the Company, the Company Bank and others, including certain shareholders
of the Company.
(g) Legal Opinion. Buyer shall have received the opinion of Malizia,
-------------
Spidi, Sloane & Fisch, P.C., counsel to the Company (the "Company's Counsel"),
dated the Closing Date, substantially in the form attached hereto as Exhibit
7.2(g). As to any matter in such opinion which involves matters of fact or
matters relating to laws other than Federal securities or New Jersey corporate
law, such counsel may rely upon the certificates of officers and directors of
the Company and of public officials and opinions of local counsel, reasonably
acceptable to Buyer, provided a copy of such reliance opinion shall be attached
as an exhibit to the opinion of such counsel.
(h) Pooling of Interests. Buyer shall have received a letter from its
--------------------
accountants (at the expense of the Buyer) addressed to Buyer, to the effect that
the Merger will qualify for "pooling of interests" accounting treatment, unless
such firm advises Buyer that it is unable to issue a letter to such effect
solely by reason of Buyer having exercised its right to purchase Company Common
Stock pursuant to the Option Agreement.
(i) Accountant's Letter. The Company shall have caused to be delivered
-------------------
to Buyer (at Buyer's expense) letters from KPMG Peat Marwick, independent public
accountants with respect to the Company, dated the date on which the
Registration Statement or last amendment thereto shall become effective, and
dated the date of the Closing, and addressed to Buyer, with respect to the
Company's consolidated financial position and results of operations, which
letters shall be based upon agreed upon procedures to be specified by Buyer,
which procedures shall be consistent with applicable professional standards for
letters delivered by independent accountants in connection with comparable
transactions; provided, however, that if the Merger is terminated, all costs
incurred in connection with the preparation of such letters shall be borne
equally by the Buyer and the Company.
(j) Subsidiary Merger. Nothing shall have come to the attention of
Buyer which would preclude consummation of the Subsidiary Merger immediately
following consummation of the Merger.
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7.3 Conditions to Obligations of the Company. The obligation of the
----------------------------------------
Company to effect the Merger is also subject to the satisfaction or waiver by
the Company at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. (I) The representations and
------------------------------
warranties of Buyer set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date; and (II) the
representations and warranties of Buyer set forth in this Agreement shall be
true and correct in all material respects as of the date of this Agreement and
(except to the extent such representations and warranties speak as of an earlier
date) as of the Closing Date as though made on and as of the Closing Date;
provided, however, that, for purposes of this clause (II), such representations
- -------- -------
and warranties shall be deemed to be true and correct in all material respects
unless the failure or failures of such representations and warranties to be so
true and correct, individually or in the aggregate, represent a material adverse
change from the business, assets, financial condition or results of operations
of Buyer and its Subsidiaries taken as a whole as represented herein. The
Company shall have received a certificate signed on behalf of Buyer by the Chief
Executive Officer and the Chief Financial Officer of Buyer to the foregoing
effect.
(b) Performance of Obligations of Buyer. Buyer shall have performed in
-----------------------------------
all material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and the Company shall have received a
certificate signed on behalf of Buyer by the Chief Executive Officer and the
Chief Financial Officer of Buyer to such effect.
(c) Consents Under Agreements. The consent, approval or waiver of each
-------------------------
person (other than the Governmental Entities) whose consent or approval shall be
required in order to permit the succession by the Surviving Corporation or the
Surviving Bank pursuant to the Merger or the Subsidiary Merger, as the case may
be, to any obligation, right or interest of the Buyer or any Subsidiary of the
Buyer under any loan or credit agreement, note, mortgage, indenture, lease,
license or other agreement or instrument shall have been obtained, except those
for which failure to obtain such consent, approval or waiver would not so
materially adversely affect the economic or business benefits of the
transactions contemplated by this Agreement to Buyer as to render inadvisable,
in the reasonable good faith judgment of the Buyer, the consummation of the
Merger.
(d) No Pending Governmental Actions. No proceeding initiated by any
-------------------------------
Governmental Entity seeking an injunction shall be pending.
(e) Pooling of Interests. Buyer shall have received a letter from its
---------------------
accountants (at the expense of the Buyer) addressed to Buyer, to the effect that
the Merger will qualify for "pooling of interests" accounting treatment, unless
such firm advises Buyer that it is unable to issue a letter to such effect
solely by reason of Buyer having exercised its right to purchase Company Common
Stock pursuant to the Stock Option Agreement.
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(f) Federal Tax Opinion. The Company shall have received an opinion of
-------------------
the Buyer's Counsel, in form and substance satisfactory to the Company, dated as
of the Effective Time, substantially to the effect as set forth in Section
7.2(f) hereof.
(g) Legal Opinion. The Company shall have received the opinion of
-------------
Buyer's Counsel, dated the Closing Date, substantially in the form attached
hereto as Exhibit 7.3(f). As to any matter in such opinion. which involves
matters of fact or matters relating to laws other than Federal securities law or
Delaware corporate law, such counsel may rely upon the certificates of officers
and directors of Buyer and of public officials and opinions of local counsel,
reasonably acceptable to the Company, provided a copy of such reliance opinions
shall be attached as an exhibit to the opinion of such counsel.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of both the Company and Buyer:
(a) by mutual consent of the Company and Buyer in a written
instrument, if the Board of Directors of each so determines by a vote of a
majority of the members of its entire Board;
(b) by either Buyer or the Company upon written notice to the other
party (i) 60 days after the date on which any request or application for a
Requisite Regulatory Approval shall have been denied or withdrawn at the request
or recommendation of the Governmental Entity which must grant such Requisite
Regulatory Approval, unless within the 60-day period following such denial or
withdrawal a petition for rehearing or an amended application has been filed
with the applicable Governmental Entity, provided, however, that no party shall
-------- -------
have the right to terminate this Agreement pursuant to this Section 8.1(b)(i) if
such denial or request or recommendation for withdrawal shall be due to the
failure of the party seeking to terminate this Agreement to perform or observe
the covenants and agreements of such party set forth herein or (ii) if any
Governmental Entity of competent jurisdiction shall have issued a final
nonappealable order enjoining or otherwise prohibiting the consummation of any
of the transactions contemplated by this Agreement;
(c) by either Buyer or the Company if the Merger shall not have been
consummated on or before March 31, 1999, unless the failure of the Closing to
occur by such date shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe the covenants and agreements of such party
set forth herein;
(d) by either Buyer or the Company (provided that the terminating
party shall not be in material breach of any of its obligations under Section
6.3) if any approval of the stockholders of either of the Company or Buyer
required for the consummation of the Merger
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shall not have been obtained by reason of the
failure to obtain the required vote at a duly held meeting of such stockholders
or at any adjournment or postponement thereof;
(e) by either Buyer or the Company (provided that the terminating
party is not then in material breach of any representation, warranty, covenant
or other agreement contained herein) if there shall have been a material breach
of any of the representations or warranties set forth in this Agreement on the
part of the other party, which breach is not cured within thirty days following
written notice to the party committing such breach, or which breach, by its
nature, cannot be cured prior to the Closing; provided, however, that neither
-------- -------
party shall have the right to terminate this Agreement pursuant to this Section
8.1(e) unless the breach of representation or warranty, together with all other
such breaches, would entitle the party receiving such representation not to
consummate the transactions contemplated hereby under Section 7.2(a) (in the
case of a breach of representation or warranty by the Company) or Section 7.3(a)
(in the case of a breach of representation or warranty by Buyer);
(f) by either Buyer or the Company (provided that the terminating
party is not then in material breach of any representation, warranty, covenant
or other agreement contained herein) if there shall have been a material breach
of any of the covenants or agreements set forth in this Agreement on the part of
the other party, which breach shall not have been cured within thirty days
following receipt by the breaching party of written notice of such breach from
the other party hereto;
(g) by the Company, by giving written notice of such election to Buyer
within two trading days after the Valuation Period in the event the Average
Closing Price is less than $8.50 per share; provided, however, that no right of
-------- -------
termination shall arise under this Section 8.1(g) if Buyer, within 5 business
days of receipt of such written notice, notifies the Company in writing that it
has waived its right to utilize the Maximum Exchange Ratio and has increased the
Exchange Ratio such that the value of the consideration (valued at the Average
Closing Price) to be paid in respect of each share of Company Common Stock to be
converted into Buyer Common Stock and cash in lieu of fractional shares upon
consummation of the Merger is $32.00 per share;
(h) by Buyer, by given written notice of such election to Company
within two trading days after the Valuation Period in the event the Average
Closing Price is greater than $11.50 per share; provided, however, that no right
-------- -------
of termination shall arise under this Section 8.1(h) if the Company, within 5
business days of receipt of such written notice, notifies the Buyer in writing
that it has waived its right to utilize the Minimum Exchange Ratio and has
decreased the Exchange Ratio such that the value of the consideration (valued at
the Average Closing Price) to be paid in respect of each share of Company Common
Stock to be converted into Buyer Common Stock and cash in lieu of fractional
shares upon consummation of the Merger is $36.80 per share; or
(i) by Buyer, if the Board of Directors of the Company does not
publicly recommend in the Proxy Statement that the Company's stockholders
approve and adopt this Agreement or if, after recommending in the Proxy
Statement that stockholders approve and adopt
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this Agreement, the Board of Directors of the Company shall have withdrawn,
modified or amended such recommendation in any respect materially adverse to
Buyer.
8.2 Effect of Termination; Expenses. In the event of termination of this
-- -------------------------------
Agreement by either Buyer or the Company as provided in Section 8.1, this
Agreement shall forthwith become void and have no effect except (i) the last
sentence of Section 6.2(a), and Sections 6.2(c), 6.2(d), 8.2 and 9.4, shall
survive any termination of this Agreement, (ii) that notwithstanding anything to
the contrary contained in this Agreement, no party shall be relieved or released
from any liabilities or damages arising out of its willful breach of any
provision of this Agreement, and (iii) in the event this Agreement (x) is
terminated subsequent to the occurrence of a Purchase Event (as such term is
defined in the Option Agreement) or (y) is terminated by Buyer pursuant to
Section 8.1(e) and (f) hereof, and within 12 months after such termination by
Buyer pursuant to Section 8.1(e) and (f) hereof a Purchase Event shall occur,
then in addition to any other amounts payable or stock issuable by the Company
pursuant to this Agreement or the Option Agreement, as the case may be, the
Company shall pay to Buyer a termination fee of $3.2 million.
8.3 Amendment. Subject to compliance with applicable law, this Agreement
---------
may be amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by the stockholders of either
the Company or Buyer; provided, however, that after any approval of the
-------- -------
transactions contemplated by this Agreement by the Company's stockholders, there
may not be, without further approval of such stockholders, any amendment of this
Agreement which reduces the amount or changes the form of the consideration to
be delivered to the Company stockholders hereunder other than as contemplated by
this Agreement. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, the
-----------------
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party, but such
extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
ARTICLE IX
GENERAL PROVISIONS
9.1 Closing. Subject to the terms and conditions of this Agreement and
-------
the Bank Merger Agreement, the closing of the Merger (the "Closing") will take
place at 10:00 a.m. on a
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<PAGE>
date to be specified by the parties, which shall be the
first day which is (a) the last business day of a month and (b) at least two
business days after the satisfaction or waiver (subject to applicable law) of
the latest to occur of the conditions set forth in Article VII hereof (the
"Closing Date"), at the offices of Buyer's counsel unless another time, date or
place is agreed to in writing by the parties hereto.
9.2 Alternative Structure. Notwithstanding anything to the contrary
---------------------
contained in this Agreement, subject to the Company's consent, which consent
shall not be unreasonably withheld, prior to the Effective Time, Buyer shall be
entitled to revise the structure of the Merger and/or the Subsidiary Merger and
related transactions provided that each of the transactions comprising such
revised structure shall (i) fully qualify as, or fully be treated as part of,
one or more tax-free reorganizations within the meaning of Section 368(a) of the
Code, and not subject any of the stockholders of the Company to adverse tax
consequences or change the amount of consideration to be received by such
stockholders, (ii) be properly treated for financial reporting purposes as a
pooling of interests, (iii) be capable of consummation in as timely a manner as
the structure contemplated herein and (iv) not otherwise be prejudicial to the
interests of the stockholders of the Company. This Agreement and any related
documents shall be appropriately amended in order to reflect any such revised
structure.
9.3 Nonsurvival of Representations, Warranties and Agreements. None of
---------------------------------------------------------
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement (other than pursuant to
the Option Agreement, which shall terminate in accordance with its terms) shall
survive the Effective Time, except for those covenants and agreements contained
herein and therein which by their terms apply in whole or in part after the
Effective Time.
9.4 Expenses. All costs and expenses incurred in connection with this
--------
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expense, provided, however, that the costs and expenses of
-------- -------
printing and mailing the Proxy Statement to the stockholders of the Company and
Buyer shall be borne equally by Buyer and the Company, provided, however, that
--------- --------
all filing and other fees paid to the SEC or any other Governmental Entity in
connection with the Merger, the Subsidiary Merger and other transactions
contemplated thereby shall be borne by the Buyer; provided, further, however,
-------- ------- -------
that nothing contained herein shall limit either party's rights to recover any
liabilities or damages arising out of the other party's willful breach of any
provision of this Agreement.
9.5 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt requested)
or delivered by an express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
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<PAGE>
(a) if to Buyer, to:
Pulse Bancorp, Inc.
6 Jackson Street
P.O. Box 193
South River, New Jersey
Attention: George T. Hornyak, Jr.
President and Chief Executive Officer
with a copy to:
Malizia, Spidi, Sloane & Fisch, P.C.
One Franklin Square
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
Attention: Samuel J. Malizia
and
(b) First Source Bancorp, Inc.
1000 Woodbridge Center Drive
Woodbridge, New Jersey 07095
Attention: John P. Mulkerin
President and Chief Executive Officer
with a copy to:
Patton Boggs LLP
2550 M Street, N.W.
Washington, D.C. 20037
Attention: Joseph G. Passaic, Jr.
9.6 Interpretation. When a reference is made in this Agreement to
--------------
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or ''including'' are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". The phrases "the date
of this Agreement", "the date hereof" and terms of similar import, unless the
context otherwise requires, shall be deemed to refer to July 9, 1998.
9.7 Counterparts. This Agreement may be executed in counterparts, all of
------------
which shall be considered one and the same agreement and shall become effective
when counterparts have
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<PAGE>
been signed by each of the parties and delivered to the other parties, it being
understood that all parties need not sign the same counterpart.
9.8 Entire Agreement. This Agreement (including the documents and the
----------------
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof, other than the
Confidentiality Agreement, the Bank Merger Agreement and the Option Agreement.
9.9 Governing Law. This Agreement shall be governed and construed in
-------------
accordance with the laws of the States of Delaware and New Jersey, as
applicable, without regard to any applicable conflicts of law.
9.10 Enforcement of Agreement. The parties hereto agree that irreparable
------------------------
damage would occur in the event that the provisions contained in the last
sentence of Section 6.2(a) and in Section. 6.2(c) of this Agreement were not
performed in accordance with its specific terms or was otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the last sentence of Section 6.2(a) and
Section 6.2(c) of this Agreement and to enforce specifically the terms and
provisions thereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
9.11 Severability. Any term or provision of this Agreement which is
------------
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
9.12 Publicity. Except as otherwise required by law or the rules of the
---------
Nasdaq Stock Market, so long as this Agreement is in effect, neither Buyer nor
the Company shall, or shall permit any of its Subsidiaries to, issue or cause
the publication of any press release or other public announcement with respect
to, or otherwise make any public statement concerning, the transactions
contemplated by this Agreement without the consent of the other party, which
consent shall not be unreasonably withheld.
9.13 Assignment; No Third Party Beneficiaries. Neither this Agreement nor
----------------------------------------
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns. Except as otherwise
expressly provided herein, this Agreement (including the documents and
instruments referred to herein) is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder.
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<PAGE>
IN WITNESS WHEREOF, Buyer and the Company have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
FIRST SOURCE BANCORP, INC.
By: /s/ John P. Mulkerin
-----------------------------------
Name: John P. Mulkerin
Title: President and Chief Executive Officer
Attest:
/s/ Christopher Martin
- -------------------------------------
Name: Christopher Martin
PULSE BANCORP, INC.
By: /s/ George T. Hornyak, Jr.
--------------------------------
Name: George T. Hornyak, Jr.
Title: President and Chief Executive Officer
Attest:
/s/ Nancy M. Janosko____
---------------------------
Name: Nancy M. Janosko
Secretary
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<PAGE>
Annex B
THE TRANSFER OF THIS AGREEMENT IS
SUBJECT TO CERTAIN PROVISIONS CONTAINED
HEREIN AND TO RESALE RESTRICTIONS UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of July 9, 1998 (the "Agreement"), by and
between Pulse Bancorp, Inc., a New Jersey corporation ("Issuer"), and First
Source Bancorp, Inc., a Delaware corporation ("Grantee").
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger (the "Merger Agreement"), dated July 9, 1998 herewith, providing for,
among other things, the merger of Issuer with and into Grantee; and
WHEREAS, as a condition and inducement to Grantee's execution of the Merger
Agreement, Grantee has requested that Issuer agree, and Issuer has agreed, to
grant Grantee the Option (as defined below);
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Merger Agreement, and intending to be legally bound hereby, Issuer and
Grantee agree as follows:
1. Defined Terms. Capitalized terms which are used but not defined herein
shall have the meanings ascribed to such terms in the Merger Agreement.
2. Grant of option. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to purchase
620,940 shares (subject to adjustment as set forth herein) (the "Option Shares")
of common stock, par value $1.00 per share, of Issuer ("Issuer Common Stock") at
a purchase price (subject to adjustment as set forth herein) of $30.30 per
Option Share (the "Purchase Price").
3. Exercise of Option. (a) Grantee may exercise the Option, in whole or in
part, at any time and from time to time following the occurrence of a Purchase
Event (as defined below); provided, however, that the Option, to the extent not
previously exercised, shall terminate and be of no further force and effect upon
the earliest to occur of (i) the Effective Time, (ii) 12 months after the first
occurrence of a Purchase Event (as defined below), (iii) termination of the
Merger Agreement in accordance with the terms thereof prior to the occurrence of
a Purchase Event (other than a termination of the Merger Agreement by Grantee
pursuant to Section 8.1 (f) thereof) or (iv) 12 months after the termination of
the Merger Agreement by Grantee pursuant to Section 8.1 (f) thereof, provided,
however, that if within 12 months after a termination of the Merger Agreement by
Grantee pursuant to Section 8.1 (f) thereof a Purchase Event shall occur, then
notwithstanding anything to the contrary contained herein, this Option shall
terminate 12
<PAGE>
months after the first occurrence of such Purchase Event; and provided further,
however, that any purchase of shares upon exercise of the Option shall be
subject to compliance with applicable law, including, without limitation, the
Bank Holding Company Act of 1956, as amended (the "Act"); and provided further,
however, that if the Option cannot be exercised on any day because of any
injunction, order or similar restraint issued by a court of competent
jurisdiction, the period during which the Option may be exercised shall be
extended so that the Option shall expire no earlier than on the 10th business
day after such injunction, order or restraint shall have been dissolved or when
such injunction, order or restraint shall have become permanent and no longer
subject to appeal, as the case may be. Notwithstanding anything to the contrary
contained herein, (i) the Option may not be exercised at any time when Grantee
shall be in material breach of any of its covenants or agreements contained in
the Merger Agreement such that Issuer shall be entitled to terminate the Merger
Agreement pursuant to Section 8.1(f) thereof and (ii) this Agreement shall
automatically terminate upon the proper termination of the Merger Agreement by
Issuer pursuant to Section 8.1(f) thereof as a result of the material breach by
Grantee of its covenants or agreements contained in the Merger Agreement.
(b) As used herein, a "Purchase Event" means any of the following events:
(i) Issuer shall have authorized, recommended, publicly proposed or
entered into an agreement with any person (other than Grantee or any
affiliate of Grantee or any person acting in concert in any respect with
Grantee) to effect an Acquisition Transaction (as defined below). As used
herein, the term Acquisition Transaction shall mean (A) a merger,
consolidation or similar transaction involving Issuer or any of its
Subsidiaries (other than internal mergers, reorganizations, consolidations
or dissolutions involving only existing Subsidiaries), (B) the disposition,
by sale, lease, exchange or otherwise, of assets of Issuer or any of its
Subsidiaries representing 25% or more of the consolidated assets of Issuer
and its Subsidiaries or (C) the issuance, sale or other disposition of
(including by way of merger, consolidation, share exchange or any similar
transaction) securities representing 25% or more of the voting power of
Issuer or any of its Subsidiaries;
(ii) any person (other than Grantee or any affiliate of Grantee or
any person acting in concert in any respect with Grantee) shall have
acquired Beneficial Ownership (as such term is defined in Rule l3d-3
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of, or the right to acquire Beneficial Ownership of, or
any Group (as such term is defined under the Exchange Act) shall have been
formed which shall have acquired Beneficial Ownership of, or the right to
acquire Beneficial Ownership of, 25% or more of the then outstanding shares
of Issuer Common stock,
(iii) any person (other than Grantee or any affiliate of Grantee or
any person acting in concert in any respect with Grantee) shall have
commenced (as such term is defined in Rule l4d-2 under the Exchange Act) or
shall have filed a registration statement under the Securities Act of 1933,
as amended (the "Securities Act") with respect to, a tender offer or
exchange offer to purchase any shares of Issuer Common Stock and, upon
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<PAGE>
consummation of such offer, such person owns or controls 25% or more of the
then outstanding shares of Issuer Common Stock (such an offer being
referred to herein as a "Tender Offer" or an "Exchange Offer,"
respectively);
(iv) the holders of Issuer Common Stock shall not have approved the
Merger Agreement and the transactions contemplated thereby, at the meeting
of such stockholders held for the purpose of voting on such agreement, or
such meeting shall not have been held or shall have been cancelled prior to
termination of the Merger Agreement, in each case after it shall have been
publicly announced that any person (other than Grantee or any affiliate of
Grantee or any person acting in concert in any respect with Grantee) shall
have made, or disclosed an intention to make, a proposal to engage in an
Acquisition Transaction; or
(v) Issuer's Board of Directors shall not have recommended to the
stockholders of Issuer that such stockholders vote in favor of the approval of
the Merger Agreement and the transactions contemplated thereby or shall have
withdrawn or modified such recommendation in a manner adverse to Grantee.
As used in this Agreement, "person" shall have the meaning specified in
Sections 3 (a) (9) and 13 (d) (3) of the Exchange Act.
(c) In the event Grantee wishes to exercise the Option, it shall send to
Issuer a written notice (the date of which being herein referred to as the
"Notice Date") specifying (i) the total number of Option Shares it intends to
purchase pursuant to such exercise and (ii) a place and date not earlier than
three business days nor later than 30 business days from the Notice Date for the
closing (the "Closing") of such purchase (the "Closing Date"). If prior
notification to or approval of the Office of Thrift Supervision (the "OTS") or
---------------------------- ---
any other regulatory authority is required in connection with such purchase,
Issuer shall cooperate in good faith with Grantee in the filing of the required
notice or application for approval and the obtaining of any such approval and
the period of time that otherwise would run pursuant to the preceding sentence
shall run instead from the date on which, as the case may be (i) any required
notification period has expired or been terminated or (ii) such approval has
been obtained, and in either event, any requisite waiting period shall have
passed.
4. Payment and Delivery of Certificates. (a) On each Closing Date, Grantee
shall (i) pay to Issuer, in immediately available funds by wire transfer to a
bank account designated by Issuer, an amount equal to the Purchase Price
multiplied by the number of Option Shares to be purchased on such Closing Date
and (ii) present and surrender this Agreement to the Issuer at the address of
the Issuer specified in Section 12(f) hereof. In addition to any other amounts
payable pursuant to this Section 4(a), upon the first exercise of the Option,
Grantee shall pay an amount, if any, by which (i) $1,055,600 plus the product of
(A) the total number of Option Shares and (B) the difference between the
Market/Tender Offer Price (as defined below) and the Purchase Price exceeds (ii)
$32.00 provided, however, that in no event shall the amount payable pursuant to
this sentence exceed $3,780,000. As used herein, the "Market/Tender Offer
Price" shall mean the higher of the highest price per share at which a Tender
Offer or Exchange Offer has been made
B-3
<PAGE>
by any person other than Grantee or any affiliate of Grantee or person acting in
concert in any respect with Grantee for at least 25% of the shares of Issuer
Common Stock then outstanding or the highest closing sales price per share of
Issuer Common Stock quoted on the Nasdaq Stock Market ("Nasdaq") (or if Issuer
Common Stock is not quoted on the Nasdaq, the highest bid price per share as
quoted on the principal trading market or securities exchange on which such
shares are traded as reported by a recognized source) within the six-month
period immediately preceding this Agreement.
(b) At each Closing, simultaneously with the delivery of immediately
available funds and surrender of this Agreement as provided in Section 4(a)
hereof, Issuer shall deliver to Grantee (A) a certificate or certificates
representing the Option Shares to be purchased at such Closing, which Option
Shares shall be free and clear of all liens, claims, charges and encumbrances of
any kind whatsoever, other than any such lien or encumbrance created by Grantee
and (B) if the Option is exercised in part only, an executed new agreement with
the same terms as this Agreement evidencing the right to purchase the balance of
the shares of Issuer Common Stock purchasable hereunder. If Issuer shall have
issued rights or any similar securities ("Rights") pursuant to any shareholder
rights, poison pill or similar plan (a "Shareholder Rights Plan") prior or
subsequent to the date of this Agreement and such Rights remain outstanding and
attached to shares of Issuer Common Stock at the time of the issuance of any
Option Shares pursuant to an exercise of all or part of the Option hereunder,
then each Option Share issued pursuant to such exercise shall also represent the
number of Rights issued per share of Issuer Common Stock with terms
substantially the same as and at least as favorable to Grantee as are provided
under the Shareholder Rights Plan as then in effect.
(c) Certificates for the Option Shares delivered at each Closing shall be
endorsed with a restrictive legend which shall read substantially as follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE MAY BE
SUBJECT TO RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF
JULY 9, 1998. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE HOLDER
HEREOF WITHOUT CHARGE UPON RECEIPT BY THE ISSUER OF A WRITTEN REQUEST
THEREFOR.
It is understood and agreed that: (i) the reference to the resale
restrictions of the Securities Act in the above legend shall be removed by
delivery of substitute certificate (s) without such legend if Grantee shall have
delivered to Issuer a copy of a letter from the staff of the Securities and
Exchange Commission (the "SEC"), or an opinion of outside counsel reasonably
satisfactory to Issuer in form and substance reasonably satisfactory to Issuer
and its counsel, to the effect that such legend is not required for purposes of
the Securities Act; (ii) the reference to the provisions of this Agreement in
the above legend shall be removed by delivery of substitute certificate(s)
without such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do not
require the retention of such reference; and (iii) the legend shall
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<PAGE>
be removed in its entirety if the conditions in the preceding clauses (i) and
(ii) are both satisfied. In addition, such certificates shall bear any other
legend as may be required by law.
5. Representations and Warranties of Issuer. Issuer hereby represents and
warrants to Grantee as follows:
(a) Due Authorization. Issuer has full corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Issuer. This Agreement has been duly and
validly executed and delivered by Issuer.
(b) No Violation. Neither the execution and delivery of this Agreement, nor
the consummation of the transactions contemplated hereby, nor compliance by
Issuer with any of the terms or provisions hereof, will (i) violate any
provision of the Certificate of Incorporation (the "Certificate of
Incorporation") or By-Laws of Issuer or the certificates of incorporation, by-
laws or similar governing documents of any of its Subsidiaries or (ii) (x)
assuming that all of the consents and approvals required under applicable law
for the purchase of shares upon the exercise of the Option are duly obtained,
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to Issuer or any of its Subsidiaries, or any of
their respective properties or assets, or (y) violate, conflict with, result in
a breach of any provisions of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of Issuer or any of
its Subsidiaries under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Issuer or any of its Subsidiaries is a party,
or by which they or any of their respective properties or assets may be bound or
affected.
(c) Authorized Stock. Issuer has taken all necessary corporate and other
action to authorize and reserve and to permit it to issue, and, at all times
from the date of this Agreement until the obligation to deliver Issuer Common
Stock upon the exercise of the Option, will have reserved for issuance, upon
exercise of the Option, shares of Issuer Common Stock necessary for Grantee to
exercise the Option, and Issuer will take all necessary corporate action to
authorize and reserve for issuance all additional shares of Issuer Common Stock
(together with any Rights which may have been issued with respect thereto) or
other securities which may be issued pursuant to Section 7 upon exercise of the
Option. The shares of Issuer Common Stock to be issued upon due exercise of the
Option, including all additional shares of Issuer Common Stock (together with
any Rights which may have been issued with respect thereto) or other securities
which may be issuable pursuant to Section 7, upon issuance pursuant hereto,
shall be duly and validly issued, fully paid and nonassessable, and shall be
delivered free and clear of all liens, claims, charges and encumbrances of any
kind or nature whatsoever (except any such lien or encumbrance created by
Grantee), including any preemptive rights of any stockholder of Issuer.
B-5
<PAGE>
(d) Board Action. By action of the Board of Directors of Issuer prior to the
execution of this Agreement, resolutions were duly adopted approving the
execution, delivery and performance of this Agreement, any purchase or other
transaction respecting Issuer Common Stock provided for herein, and the other
transactions contemplated hereby. Accordingly, the provisions of the New Jersey
Business Corporations Act as they relate to Issuer and Article XV of Issuer's
Certificate of Incorporation do not and will not apply to this Agreement or any
of the other transactions contemplated hereby.
6. Representations and Warranties of Grantee. Grantee hereby represents
and warrants to Issuer that:
(a) Due Authorization. Grantee has corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) Purchase Not for Distribution. This Option is not being acquired with a
view to the public distribution thereof and neither this Option nor any Option
Shares will be transferred or otherwise disposed of except in a transaction
registered or exempt from registration under the Securities Act.
7. Adjustment upon Changes in Capitalization, etc. (a) In the event (i) of
any change in Issuer Common Stock by reason of a stock dividend, stock split,
split-up, recapitalization, combination, exchange of shares or similar
transaction or (ii) that any Rights issued by Issuer shall become exercisable,
the type and number of shares or securities subject to the Option, and the
Purchase Price therefor, shall be adjusted appropriately, and, in the case of
any of the transactions described in clause (i) above, proper provision shall be
made in the agreements governing such transaction so that Grantee shall receive,
upon exercise of the Option, the number and class of shares or other securities
or property that Grantee would have received in respect of Issuer Common Stock
if the Option had been exercised immediately prior to such event, or the record
date therefor, as applicable. If any additional shares of Issuer Common Stock
are issued after the date of this Agreement (other than pursuant to an event
described in the first sentence of this Section 7 (a), the number of shares of
Issuer Common Stock subject to the option shall be adjusted so that, after such
issuance, the Option, together with any shares of Issuer Common Stock previously
issued pursuant hereto, equals 19.9% of the number of shares of Issuer Common
Stock then issued and outstanding, without giving effect to any shares subject
to or Previously issued pursuant to the option.
(b) In the event that Issuer shall enter into an agreement (i) to consolidate
with or merge into any person, other than Grantee or one of its Subsidiaries,
and shall not be the continuing or surviving corporation of such consolidation
or merger, (ii) to permit any person, other than Grantee or one of its
Subsidiaries, to merge into Issuer and Issuer shall be the continuing or
surviving corporation, but, in connection with such merger, the then outstanding
shares of Issuer
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Common Stock shall be changed into or exchanged for stock or other securities of
Issuer or any other person or cash or any other property or the outstanding
shares of Issuer Common Stock immediately prior to such merger shall after such
merger represent less than 50% of the outstanding shares and share equivalents
of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or one of its
Subsidiaries, then, and in each such case, the agreement governing such
transaction shall make proper provisions so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option (the "Substitute
Option"), at the election of Grantee, of either (I) the Acquiring Corporation
(as defined below), (II) any person that controls the Acquiring Corporation, or
(III) in the case of a merger described in clause (ii), the Issuer (such person
being referred to as the "Substitute Option Issuer").
(c) The Substitute Option shall have the same terms as the Option, provided,
that if the terms of the Substitute Option cannot, for legal reasons, be the
same as the Option, such terms shall be as similar as possible and in no event
less advantageous to Grantee. The Substitute Option Issuer shall also enter
into an agreement with the then holder or holders of the Substitute Option in
substantially the same form as this Agreement, which shall be applicable to the
Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares of
the Substitute Common Stock (as hereinafter defined) as is equal to the Assigned
Value (as hereinafter defined) multiplied by the number of shares of Issuer
Common Stock for which the Option was theretofore exercisable, divided by the
Average Price (as hereinafter defined). The exercise price of the Substitute
Option per share of the Substitute Common Stock (the "Substitute Purchase
Price") shall then be equal to the Purchase Price multiplied by a fraction in
which the numerator is the number of shares of the Issuer Common Stock for which
the Option was theretofore exercisable and the denominator is the number of
shares of the Substitute Common Stock for which the Substitute Option is
exercisable.
(e) The following terms have the meanings indicated:
(I) "Acquiring Corporation" shall mean (i) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than
Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving person, and (iii) the transferee of all or substantially all of
the Issuer's assets (or the assets of its Subsidiaries).
(II) "Substitute Common Stock" shall mean the common stock issued by
the Substitute Option Issuer upon exercise of the Substitute Option.
(III) "Assigned Value" shall mean the highest of (i) the price per
share of Issuer Common Stock at which a tender offer or exchange offer
therefor has been made by any person (other than Grantee), (ii) the price
per share of Issuer Common Stock to be paid by any person (other than the
Grantee) pursuant to an agreement with Issuer, and (iii) the highest
closing sales price per share of Issuer Common Stock quoted on the Nasdaq
(or if
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<PAGE>
Issuer Common Stock is not quoted on the Nasdaq, the highest bid
price per share as quoted on the principal trading market or securities
exchange on which such shares are traded as reported by a recognized
source) within the six-month period immediately preceding the agreement;
provided, however, that in the event of a sale of less than all of Issuer's
assets, the Assigned Value shall be the sum of the price paid in such sale
for such assets and the current market value of the remaining assets of
Issuer as determined by a nationally recognized investment banking firm
selected by Grantee or by a Grantee Majority, divided by the number of
shares of Issuer Common Stock outstanding at the time of such sale. In the
event that an exchange offer is made for the Issuer Common Stock or an
agreement is entered into for a merger or consolidation involving
consideration other than cash, the value of the securities or other
property issuable or deliverable in exchange for the Issuer Common Stock
shall be determined by a nationally recognized investment banking firm
mutually selected by Grantee and Issuer (or if applicable, Acquiring
Corporation), provided that if a mutual selection cannot be made as to such
investment banking firm, it shall be selected by Grantee (or a majority of
interest of the Grantees if there shall be more than one Grantee (a
"Grantee Majority").
(IV) "Average Price" shall mean the average closing price of a share
of the Substitute Common Stock for the one year immediately preceding the
consolidation, merger or sale in question; but in no event higher than the
closing price of the shares of the Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is
the issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by Issuer, the person
merging into Issuer or by any company which controls or is controlled by
such merging person, as Grantee may elect.
(f) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of the Substitute Common Stock outstanding prior to exercise of the
Substitute Option. In the event that the Substitute Option would be exercisable
for more than 19.9% of the aggregate of the shares of Substitute Common Stock
but for this clause (f), the Substitute Option Issuer shall make a cash payment
to Grantee equal to the excess of (i) the value of the Substitute Option without
giving effect to the limitation in this clause (f) over (ii) the value of the
Substitute Option after giving effect to the limitation in this clause (f).
This difference in value shall be determined by a nationally recognized
investment banking firm selected by Grantee (or a Grantee Majority).
(g) Issuer shall not enter into any transaction described in subsection (b) of
this Section 7 unless the Acquiring Corporation and any person that controls the
Acquiring Corporation assume in writing all the obligations of Issuer hereunder
and take all other actions that may be necessary so that the provisions of this
Section 7 are given full force and effect (including, without limitation, any
action that may be necessary so that the shares of Substitute Common Stock are
in no way distinguishable from or have lesser economic value than other shares
of common stock issued by the Substitute Option Issuer).
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<PAGE>
(h) The provisions of Sections 8 and 9 shall apply to any securities for which
the Option becomes exercisable pursuant to this Section 7 and as applicable,
references in such sections to "Issuer", "Option", "Purchase Price" and "Issuer
Common Stock" shall be deemed to be references to "Substitute Option Issuer",
"Substitute Option", "Substitute Purchase Price" and "Substitute Common Stock",
respectively.
8. Registration Rights. Issuer shall, if requested by Grantee (or if
applicable, a Grantee Majority) at any time and from time to time within three
years of the date on which the Option first becomes exercisable, as
expeditiously as possible prepare and file up to two registration statements
under the Securities Act if such registration is necessary in order to permit
the sale or other disposition of any or all shares of Issuer Common Stock or
other securities that have been acquired by or are issuable to Grantee upon
exercise of the Option in accordance with the intended method of sale or other
disposition stated by Grantee, including a "shelf" registration statement under
Rule 415 under the Securities Act or any successor provision, and Issuer shall
use its best efforts to qualify such shares or other securities under any
applicable state securities laws. Issuer shall use its best efforts to cause
each such registration statement to become effective, to obtain all consents or
waivers of other parties which are required therefor and to keep such
registration statement effective for such period not in excess of 180 days from
the day such registration statement first becomes effective as may be reasonably
necessary to effect such sale or other disposition. Any registration statement
prepared and filed under this Section 8, and any sale covered thereby, shall be
at Issuer's expense except for underwriting discounts or commissions, brokers'
fees and the fees and disbursements of Grantee's counsel related thereto.
Grantee shall provide all information reasonably requested by Issuer for
inclusion in any registration statement to be filed hereunder. If during the
time periods referred to in the first sentence of this Section 8 Issuer effects
a registration under the Securities Act of Issuer Common Stock for its own
account or for any other stockholders of Issuer (other than on Form S-4 or Form
S-8, or any successor forms or any form with respect to a dividend reinvestment
or similar plan), it shall allow Grantee the right to participate in such
registration, and such participation shall not affect the obligation of Issuer
to effect two registration statements for Grantee under this Section 8;
provided, however, that, if the managing underwriters of such offering advise
Issuer in writing that in their opinion the number of shares of Issuer Common
Stock requested by Grantee to be included in such registration, together with
the shares of Issuer Common Stock proposed to be included in such registration,
exceeds the number which can be sold in such offering, Issuer shall include the
shares requested to be included therein by Grantee pro rata with the shares
intended to be included therein by Issuer. In connection with any registration
pursuant to this Section 8, Issuer and Grantee shall provide each other and any
underwriter of the offering with customary representations, warranties,
covenants, indemnification and contribution in connection with such
registration. Notwithstanding anything to the contrary contained herein, in no
event shall Issuer be obligated to effect more than two registrations pursuant
to the first sentence of this Section 8 by reason of the fact that there shall
be more than one Grantee as a result of any assignment of this Agreement or
division of this Agreement pursuant to Section 10 hereof.
9. Listing. If Issuer Common Stock or any other securities to be acquired
upon exercise of the Option are then authorized for quotation on the Nasdaq or
any securities exchange, Issuer,
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<PAGE>
upon the request of Grantee, will promptly file an application to authorize for
quotation the shares of Issuer Common Stock or other securities to be acquired
upon exercise of the Option on the Nasdaq or such other securities exchange and
will use its best efforts to obtain approval of such listing as soon as
practicable.
10. Division of Option. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of Grantee, upon presentation and
surrender of this Agreement at the principal office of Issuer for other
Agreements providing for Options of different denominations entitling the holder
thereof to purchase in the aggregate the same number of shares of Issuer Common
Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein
include any other Agreements and related Options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
11. Rights Agreement. Issuer shall not approve or adopt, or propose the
approval and adoption of, any Shareholder Rights Plan unless such Shareholder
Rights Plan contains terms which provide, to the reasonable satisfaction of
Grantee, that (a) the Rights issued pursuant thereto will not become exercisable
by virtue of the fact that (i) Grantee is the Beneficial Owner of shares of
Issuer Common Stock (x) acquired or acquirable pursuant to the grant or exercise
of this Option and (y) held by Grantee or any of its Subsidiaries as Trust
Account Shares or DPC Shares or (ii) while Grantee is the Beneficial Owner of
the shares of Issuer Common Stock described in clause (a) (i), an Acquisition
Transaction involving Issuer or any of its Subsidiaries, on the one hand, and
Grantee, any of its Subsidiaries, on the other hand, is proposed, agreed to or
consummated and (b) no restrictions or limitations with respect to the exercise
of any Rights acquired or acquirable by Grantee will result or be imposed by
virtue of the fact that Grantee is the Beneficial Owner of the shares of Issuer
Common Stock described in clause (a) (i) of this Section 11.
12. Miscellaneous. (a) Expenses. Except as otherwise provided in Section
8 hereof, each of the parties hereto shall bear and pay all costs and expenses
incurred by it or on its behalf in connection with the transactions contemplated
hereunder, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel.
(b) Waiver and Amendment. Any provision of this Agreement may be waived
at any time by the party that is entitled to the benefits of such provision.
This Agreement may not be modified, amended, altered or supplemented except upon
the execution and delivery of a written agreement executed by the parties
hereto.
(c) Entire Agreement; No Third-Party Beneficiary; Severability. This
Agreement, together with the Merger Agreement and the other agreements and
instruments referred to herein
B-10
<PAGE>
and therein, (a) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof and (b) is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
Notwithstanding anything to the contrary contained in this Agreement or the
Merger Agreement, this Agreement shall be deemed to amend the confidentiality
agreement between Issuer and Grantee so as to permit Grantee to enter into this
Agreement and exercise all of its rights hereunder, including its right to
acquire Issuer Common Stock upon exercise of the Option. If any term, provision,
covenant or restriction of this Agreement is held by a court of competent
jurisdiction or a federal or state regulatory agency to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. If for any reason such court or
regulatory agency determines that the Option does not permit Grantee to acquire
the full number of shares of Issuer Common Stock as provided in Section 3 hereof
(as adjusted pursuant to Section 7 hereof), it is the express intention of
Issuer to allow Grantee to acquire such lesser number of shares as may be
permissible without any amendment or modification hereof.
(d) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New Jersey without regard to any
applicable conflicts of law rules.
(e) Descriptive Headings. The descriptive headings contained herein are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
If to Issuer to:
Pulse Bancorp, Inc.
6 Jackson Street
P.O. Box 193
South River, New Jersey
Attention: George T. Hornyak, Jr.
President and Chief Executive Officer
with a copy to:
Malizia, Spidi, Sloane & Fisch, P.C.
One Franklin Square
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
Attention: Samuel J. Malizia, Esq.
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<PAGE>
If to Grantee to:
First Source Bancorp, Inc.
1000 Woodbridge Center Drive
Woodbridge, New Jersey 07095
Attention: John P. Mulkerin
President and Chief Executive Officer
with a copy to:
Patton Boggs LLP
2550 M Street, NW
Washington, D.C. 20037
Attention: Joseph G. Passaic, Jr., Esq.
(g) Counterparts. This Agreement and any amendments hereto may be executed in
two counterparts, each of which shall be considered one and the same agreement
and shall become effective when both counterparts have been signed, it being
understood that both parties need not sign the same counterpart.
(h) Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party, except that Grantee may assign this
Agreement to a wholly owned subsidiary of Grantee and after the occurrence of a
Purchase Event Grantee may assign its rights under this Agreement to one or more
third parties, provided, however, that Grantee may not assign this Agreement,
without the written consent of Issuer, to any third party who, to Grantee's
knowledge, would, upon exercise of the Option, own in excess of 6% of Issuer's
then issued and outstanding common stock. Subject to the preceding sentence,
this Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns. As used in this
Agreement, Grantee shall include any person to whom this Agreement or the Option
shall be assigned by a previous Grantee in accordance with the terms hereof .
(i) Further Assurances. In the event of any exercise of the Option by
Grantee, Issuer and Grantee shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in order
to consummate the transactions provided for by such exercise.
(j) Specific Performance. The parties hereto agree that this Agreement may be
enforced by either party through specific performance, injunctive relief and
other equitable relief. Both parties further agree to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
equitable relief and that this provision is without prejudice to any other
rights that the parties hereto may have for any failure to perform this
Agreement.
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<PAGE>
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
PULSE BANCORP, INC.
BY: /s/ George T. Hornyak, Jr.
------------------------------------
Name: George T. Hornyak, Jr.
Title: President and Chief Executive Officer
FIRST SOURCE BANCORP, INC.
BY: /s/ John P. Mulkerin
------------------------------------
Name: John P. Mulkerin
Title: President and Chief Executive Officer
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Annex C
LETTERHEAD SANDLER O'NEILL & PARTNERS, L.P.
Sandler O'Neill
November 3, 1998
Board of Directors
Pulse Bancorp, Inc.
6 Jackson Street
South River, NJ 08882
Ladies and Gentlemen:
Pulse Bancorp, Inc. ("Pulse") and First Source Bancorp, Inc. ("First
Source") have entered into an Agreement and Plan of Reorganization, dated as of
July 9, 1998 (the "Agreement"), pursuant to which Pulse will be merged with and
into First Source (the "Merger"). Upon consummation of the Merger, each share
of Pulse common stock, par value $1.00 per share, issued and outstanding
immediately prior to the Merger will be converted into the right to receive
between 3.2 and 3.764 shares, based on the Average Closing Price (as defined in
the Agreement), of First Source common stock, par value $0.01 per share (the
"Exchange Ratio"), subject to adjustment as described in the Agreement. The
terms and conditions of the Merger are more fully set forth in the Agreement.
You have requested our opinion as to the fairness, from a financial point of
view, of the Exchange Ratio to the holders of Pulse Shares.
Sandler O'Neill & Partners, L.P., as part of its investment banking
business, is regularly engaged in the valuation of financial institutions and
their securities in connection with mergers and acquisitions and other corporate
transactions. In connection with this opinion, we have reviewed, among other
things: (i) the Agreement and exhibits thereto; (ii) the Stock Option Agreement,
dated as of July 9, 1998, by and between Pulse and First Source; (iii) certain
publicly available financial statements of Pulse and other historical financial
information provided by Pulse that we deemed relevant; (iv) certain publicly
available financial statements of First Source and other historical financial
information provided by First Source that we deemed relevant; (v) certain
financial analyses and forecasts of Pulse prepared by and reviewed with
management of Pulse and the views of senior management of Pulse regarding
Pulse's past and current business, operations, results thereof, financial
condition and future prospects; (vi) certain financial analyses and forecasts of
First Source prepared by and reviewed with management of First Source and the
views of senior management of First Source regarding First Source's past and
current business, operations, results thereof, financial condition and future
prospects; (vii) the pro forma impact of the Merger; (viii) the publicly
reported historical price and trading activity for Pulse's and First Source's
common stock, including a comparison of certain financial and stock market
information for Pulse and First Source with similar publicly available
information for certain other companies the securities of which are publicly
traded; (ix) the financial terms of recent business combinations in the savings
institution
<PAGE>
Board of Directors
Pulse Bancorp, Inc.
November 3, 1998 Sandler O'Neill
Page 2
industry, to the extent publicly available; (x) the current market environment
generally and the banking environment in particular; and (xi) such other
information, financial studies, analyses and investigations and financial,
economic and market criteria as we considered relevant. We did not act as
Pulse's financial advisor in connection with its consideration of the Merger or
in connection with the negotiation of the Agreement, and we have not been asked
to, and did not, solicit indications of interest in a potential transaction from
other third parties.
In performing our review, we have assumed and relied upon, without
independent verification, the accuracy and completeness of all the financial
information, analyses and other information that was publicly available or
otherwise furnished to, reviewed by or discussed with us, and we do not assume
any responsibility or liability for the accuracy or completeness thereof. We
did not make an independent evaluation or appraisal of the specific assets, the
collateral securing assets or the liabilities (contingent or otherwise) of Pulse
or First Source or any of their subsidiaries, or the collectibility of any such
assets, nor have we been furnished with any such evaluations or appraisals.
With respect to the financial projections reviewed with management, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective managements of the
respective future financial performances of Pulse and First Source and that such
performances will be achieved, and we express no opinion as to such financial
projections or the assumptions on which they are based. We have also assumed
that there has been no material change in Pulse's or First Source's assets,
financial condition, results of operations, business or prospects since the date
of the most recent financial statements made available to us. We have assumed
in all respects material to our analysis that Pulse and First Source will remain
as going concerns for all periods relevant to our analyses, that all of the
representations and warranties contained in the Agreement and all related
agreements are true and correct, that each party to such agreements will perform
all of the covenants required to be performed by such party under such
agreements, that the conditions precedent in the Agreement are not waived and
that the Merger will be accounted for as a pooling of interests and will qualify
as a tax-free reorganization for federal income tax purposes.
Our opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Events occurring after the date hereof could materially affect
this opinion. We have not undertaken to update, revise or reaffirm this opinion
or otherwise comment upon events occurring after the date hereof. We are
expressing no opinion herein as to what the value of First Source common stock
will be when issued to Pulse's shareholders pursuant to the Agreement or the
prices at which Pulse's or First Source's common stock will trade at any time.
We have been retained by you to render this opinion and will receive a fee
for our services. In the past, we have also provided certain other investment
banking services for Pulse and have
<PAGE>
Board of Directors
Pulse Bancorp, Inc.
November 3, 1998 Sandler O'Neill
Page 3
received compensation for such services. As we have previously advised you, in
the past we have also provided certain investment banking services for First
Source and currently provide general advisory services for First Source and have
received compensation for such services. In addition, we have advised you that
we may in the future provide certain other investment banking services for First
Source, and will receive compensation for such services.
In the ordinary course of our business as a broker-dealer, we may buy
securities from and sell securities to both Pulse and First Source. In
addition, we may actively trade the equity securities of Pulse and First Source
for our own account and for the accounts of our customers and, accordingly, may
at any time hold a long or short position in such securities.
Our opinion is directed to the Board of Directors of Pulse in connection
with its consideration of the Merger and does not constitute a recommendation to
any stockholder of Pulse as to how such stockholder should vote at any meeting
of stockholders called to consider and vote upon the Merger. Our opinion is not
to be quoted or referred to, in whole or in part, in a registration statement,
prospectus, proxy statement or in any other document, nor shall this opinion be
used for any other purposes, without Sandler O'Neill's prior written consent;
provided, however, that we hereby consent to the inclusion of this opinion as an
annex to Pulse's and First Source's Joint Proxy Statement/Prospectus dated the
date hereof and to the references to this opinion therein.
Based upon and subject to the foregoing, it is our opinion, as of the date
hereof, that the Exchange Ratio is fair, from a financial point of view, to the
holders of Pulse Shares.
Very truly yours,
SANDLER O'NEILL & PARTNERS, L.P.
<PAGE>
Annex D
[LOGO OF RYAN, BECK & CO. APPEARS HERE]
November 3, 1998
The Board of Directors
First Source Bancorp, Inc.
1000 Woodbridge Center Drive
Woodbridge, New Jersey 07095
Members of the Board:
You have requested our opinion as investment bankers that the Exchange Ratio in
the Merger (the "Merger") between First Source Bancorp, Inc., Woodbridge, New
Jersey ("First Source") and Pulse Bancorp, Inc., South River, New Jersey
("Pulse") the holding company for Pulse Savings Bank ("Pulse Savings Bank") as
provided and described in the Merger Agreement is fair to the holders of First
Source from a financial point of view.
Pursuant to the Agreement and Plan of Merger dated July 9, 1998 (the
"Agreement"), Pulse shall merge with and into First Source, and each share of
Pulse's issued and outstanding common stock will be converted into and become
the right to receive a minimum of 3.2 shares and a maximum of 3.764 shares
subject to certain adjustments as set forth in the Agreement (the "Exchange
Ratio"). The exact Exchange Ratio shall be determined as follows: (i) if First
Source's Average Closing Price (as defined) is equal to or greater than $10.00,
the Exchange Ratio shall equal 3.2 shares; (ii) if First Source's Average
Closing Price is greater than $8.50 but less than $10.00, the Exchange Ratio
shall equal the number of shares determined by dividing $32.00 by the Average
Closing Price; or (iii) if First Source's Average Closing Price is equal to or
less than $8.50, the Exchange Ratio shall be 3.764 shares. We have assumed that
the Merger will qualify as a tax free transaction for the stockholders of Pulse
and be accounted for by First Source as a pooling-of-interests transaction.
Ryan, Beck & Co., as a customary part of its investment banking business, is
engaged in the valuation of banking and savings institutions and their
securities in connection with mergers and acquisitions. In conducting our
investigation and analysis of the Merger, we have met separately with members of
senior management of First Source and Pulse to discuss their respective
operations, historical financial statements, strategic plans and future
prospects. We have reviewed and analyzed material prepared in connection with
the Merger, including but not limited to the following: (i) the Agreement and
related documents; (ii) the Joint Proxy Statement / Prospectus; (iii) First
Source's Annual Reports to Shareholders and Annual Reports on Form 10-K for the
years ended December 31, 1997, 1996, and 1995, and First Source's Quarterly
Reports on Form 10-Q for the periods ended June 30, 1998, March 31, 1998,
September 30,
<PAGE>
[LOGO OF RYAN, BECK & CO. APPEARS HERE]
First Source Bancorp, Inc.
November 3, 1998
Page 2
1997, June 30, 1997 and March 31, 1997; (iv) First Source's Registration
Statement filed on Form S-1/A dated February 9, 1998 in connection with its
conversion from a mutual holding company structure to a stock holding company
structure; (v) Pulse's Annual Reports to Shareholders and Annual Reports on Form
10-K for the years ended September 30, 1997, 1996, and 1995, and Pulse's
Quarterly Reports on Form 10-Q for the periods ended June 30, 1998, March 31,
1998, December 31, 1997, June 30, 1997 and March 31, 1997; (vi) the historical
stock prices and trading volume of First Source's common stock; (vii) the
historical stock prices and trading volume of Pulse's common stock; (viii) the
publicly available financial data of thrift organizations which Ryan, Beck
deemed generally comparable to First Source; (ix) the publicly available
financial data of thrift organizations which Ryan, Beck deemed generally
comparable to Pulse; (x) the terms of recent acquisitions of thrift
organizations which Ryan, Beck deemed generally comparable in whole or in part
to Pulse; and (xi) the potential pro-forma impact of the Merger on First
Source's financial condition, operating results and per share figures. We also
conducted or reviewed such other studies, analyses, inquiries and examinations
as we deemed appropriate. Ryan, Beck as part of its review of the Merger, also
analyzed First Source's ability to consummate the Merger.
While we have taken care in our investigation and analyses, we have relied upon
and assumed the accuracy, completeness and fairness of the financial and other
information provided to us by the respective institutions or which was publicly
available and have not assumed any responsibility for independently verifying
such information. We have also relied upon the managements of First Source and
Pulse as to the reasonableness and achievability of the financial and operating
forecasts and projections (and the assumptions and bases therefor) provided to
us and in certain instances we have made certain adjustments to such financial
and operating forecasts which in our judgment were appropriate under the
circumstances. In addition, we have assumed with your consent that such
forecasts and projections reflect the best currently available estimates and
judgments of the respective managements. We are not experts in the evaluation
of allowances for loan losses. Therefore, we have not assumed any
responsibility for making an independent valuation of the adequacy of the
allowances for loan losses set forth in the balance sheets of First Source and
Pulse at June 30, 1998, and we assumed such allowances were adequate and comply
fully with applicable law, regulatory policy and sound banking practice as of
the date of such financial statements. We also assumed that the Merger in all
respects is, and will be consummated in compliance with all laws and regulations
applicable to First Source and Pulse. We have not made or obtained any
independent evaluations or appraisals of the assets and liabilities of either
First Source or Pulse or their respective subsidiaries, nor have we reviewed any
individual loan files of First Source or Pulse or their respective subsidiaries.
In conducting our analysis and arriving at our opinion as expressed herein, we
have considered such financial and other factors as we have deemed appropriate
in the circumstances. In rendering our opinion, we have assumed that in the
course of obtaining the necessary regulatory
<PAGE>
[LOGO OF RYAN, BECK & CO. APPEARS HERE]
First Source Bancorp, Inc.
November 3, 1998
Page 3
approvals for the Merger, no conditions will be imposed that will have a
material adverse effect on the contemplated benefits of the Merger to First
Source. We have not opined on the fairness of the transaction should First
Source elect to increase the Exchange Ratio above the maximum in order to avoid
a termination of the Agreement by Pulse because the Average Closing Price of
First Source Common Stock is less than $8.50.
Our opinion is necessarily based on economic, market and other conditions and
projections as they exist and can be evaluated on the date hereof. Ryan, Beck
did not express any opinion as to the price or range of prices at which First
Source Common Stock might trade subsequent to the Merger.
We have been retained by the Board of Directors of First Source as an
independent contractor to act as financial advisor to First Source with respect
to the Merger and will receive a fee for our services. Ryan, Beck has had a
prior investment banking relationship with First Source. Ryan, Beck was the
sole underwriter for First Source, which was then known as First Savings Bank,
in both its May, 1992 reorganization from a mutual to a federal mutual holding
company and its May, 1995 secondary stock offering. Ryan, Beck was also a
financial advisor, but not an underwriter for First Source in its "second step"
conversion dated April 9, 1998 from a mutual holding company structure to a
stock holding company structure. Ryan, Beck also acted as financial advisor with
respect to the sale of a branch office. Additionally, Ryan, Beck's research
department has issued research reports on First Source and comments on First
Source in its periodic commentaries. Ryan, Beck is also a market maker in First
Source's stock. Ryan, Beck has not had an investment banking relationship with
Pulse since 1986. Ryan, Beck was the sole underwriter of Pulse's conversion,
which was then known as Pulawski Savings and Loan Association, from a mutual to
a stock savings and loan association in September, 1986. Ryan, Beck is a market
maker in Pulse's stock. Ryan, Beck's research department does not cover Pulse.
Our opinion is directed to the Board of Directors of First Source and does not
constitute a recommendation to any shareholder of First Source as to how such
shareholder should vote at any shareholder meeting held in connection with the
Merger.
Based upon and subject to the foregoing it is our opinion as investment bankers
that the Exchange Ratio in the Merger as provided and described in the Merger
Agreement is fair to the holders of First Source common stock from a financial
point of view.
Very truly yours,
/s/ RYAN, BECK & CO., INC
---------------------
RYAN, BECK & CO., INC.
<PAGE>
Annex E
FIRST SOURCE BANCORP, INC.
1998 STOCK-BASED INCENTIVE PLAN
1. DEFINITIONS.
-----------
(a) "Affiliate" means (i) a member of a controlled group of corporations of
which the Holding Company is a member or (ii) an unincorporated trade or
business which is under common control with the Holding Company as determined in
accordance with Section 414(c) of the Code and the regulations issued
thereunder. For purposes hereof, a "controlled group of corporations" shall mean
a controlled group of corporations as defined in Section 1563(a) of the Code
determined without regard to Section 1563(a)(4) and (e)(3)(C).
(b) "Alternate Option Payment Mechanism" refers to one of several methods
available to a Participant to fund the exercise of a stock option set out in
Section 11 hereof. These mechanisms include: broker assisted cashless exercise
and stock for stock exchange.
(c) "Award" means a grant of one or some combination of one or more Non-
statutory Stock Options, Incentive Stock Options and Stock Awards under the
provisions of this Plan.
(d) "Bank" means First Savings Bank, SLA.
(e) "Board of Directors" or "Board" means the board of directors of the
Holding Company or the Bank and Directors Emeritus of the Holding Company or the
Bank.
(f) "Change in Control" means a change in control of the Bank or Holding
Company of a nature that; (i) would be required to be reported in response to
Item 1 of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Exchange Act; or (ii) results in a Change
in Control within the meaning of the Home Owners' Loan Act of 1933, as amended
("HOLA") and the Rules and Regulations promulgated by the Office of Thrift
Supervision ("OTS") (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under such rules and regulations the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Holding Company representing 20% or
more of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company and any securities
purchased by any tax qualified employee benefit plan of the Bank; or (B)
individuals who constitute the Board of Directors of the Holding Company on the
date hereof (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequent to
the date hereof whose election was approved
<PAGE>
by a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding Company's stockholders
was approved by a Nominating Committee serving under an Incumbent Board, shall
be, for purposes of this clause (B), considered as though he were a member of
the Incumbent Board; or (C) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Holding Company
or similar transaction occurs in which the Bank or Holding Company is not the
resulting entity; or (D) after a solicitation of shareholders of the Holding
Company, by someone other than current management of the Holding Company,
stockholders approve a plan of reorganization, merger or consolidation of the
Holding Company or Bank or similar transaction with one or more corporations, as
a result of which the outstanding shares of the class of securities then subject
to the plan would be exchanged for or converted into cash or property or
securities not issued by the Bank or the Holding Company; or (E) a tender offer
is made for 20% or more of the voting securities of the Bank or the Holding
Company.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means a committee consisting of the entire Board of
Directors or consisting solely of two or more members of the Board of Directors
who are defined as Non-Employee Directors as such term is defined under Rule
16b-3(b)(3)(i) under the Exchange Act as promulgated by the Securities and
Exchange Commission.
(i) "Common Stock" means the Common Stock of the Holding Company, par
value, $.01 per share or any stock exchanged for shares of Common Stock pursuant
to Section 15 hereof.
(j) "Date of Grant" means the effective date of an Award.
(k) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of a Participant to perform the work
customarily assigned to him or, in the case of a Director, to serve on the
Board. Additionally, a medical doctor selected or approved by the Board of
Directors must advise the Committee that it is either not possible to determine
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said Participant's
lifetime.
(l) "Effective Date" means ____________, 1998, the effective date of the
Plan.
(m) "Employee" means any person who is currently employed by the Holding
Company or an Affiliate, including officers, but such term shall not include
Outside Directors.
(n) "Employee Participant" means an Employee who holds an outstanding Award
under the terms of the Plan.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
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<PAGE>
(p) "Exercise Price" means the purchase price per share of Common Stock
deliverable upon the exercise of each Option in order for the option to be
exchanged for shares of Common Stock.
(q) "Fair Market Value" means, when used in connection with the Common
Stock on a certain date, the average of the high and low bid prices of the
Common Stock as reported on the Nasdaq Stock Market (as published by the Wall
Street Journal, if published) on such date or if the Common Stock was not traded
on such date, on the next preceding day on which the Common Stock was traded
thereon or the last previous date on which a sale is reported. If the Common
Stock is not traded on the Nasdaq Stock Market, the Fair Market Value of the
Common Stock is the value so determined by the Board in good faith.
(r) "Holding Company" means First Source Bancorp, Inc.
(s) "Incentive Stock Option" means an Option granted by the Committee to a
Participant, which Option is designated by the Committee as an Incentive Stock
Option pursuant to Section 7 hereof and is intended to be such under Section 422
of the Code.
(t) "Limited Right" means the right to receive an amount of cash based upon
the terms set forth in Section 8 hereof.
(u) "Non-statutory Stock Option" means an Option to a Participant pursuant
to Section 6 hereof, which is not designated by the Committee as an Incentive
Stock Option or which is redesignated by the Committee as a Non-statutory Stock
Option or which is designated an Incentive Stock Option under Section 7 hereof,
but does not meet the requirements of such under Section 422 of the Code.
(v) "Option" means the right to buy a fixed amount of Common Stock at the
Exercise Price within a limited period of time designated as the term of the
option as granted under Section 6 or 7 hereof.
(w) "Outside Director" means a member of the Board of Directors or a
Director Emeritus of the Holding Company or its Affiliates, who is not also an
Employee.
(x) "Outside Director Participant" means an Outside Director who holds an
outstanding Award under the terms of the Plan.
(y) "Participant(s)" means collectively an Employee Participant and/or an
Outside Director Participant who hold(s) outstanding Awards under the terms of
the Plan.
(z) "Performance Goal" is a specific condition or goal which may be set by
the Committee as a prerequisite to the vesting of a Stock Award in accordance
with Section 9(b) hereof.
(aa) "Retirement" with respect to an Employee Participant means termination
of
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<PAGE>
employment which constitutes retirement under any tax qualified plan maintained
by the Bank. However, "Retirement" will not be deemed to have occurred for
purposes of this Plan if a Participant continues to serve as a consultant to or
on the Board of Directors of the Holding Company or its Affiliates even if such
Participant is receiving retirement benefits under any retirement plan of the
Holding Company or its Affiliates. With respect to an Outside Director
Participant, "Retirement" means the termination of service from the Board of
Directors of the Holding Company or its Affiliates following written notice to
the Board as a whole of such Outside Director's intention to retire, except that
an Outside Director Participant shall not be deemed to have "retired" for
purposes of the Plan in the event he continues to serve as a consultant to the
Board or as an advisory director or director emeritus, including pursuant to any
retirement plan of the Holding Company or the Bank.
(bb) "Stock Awards" are Awards of Common Stock which may vest immediately
or over a period of time. Vesting of Stock Awards under Section 9 hereof may be
contingent upon the occurrence of specified events or the attainment of
specified performance goals as determined by the Committee.
(cc) "Termination for Cause" shall mean, in the case of a Director, removal
from the Board of Directors, or, in the case of an Employee, termination of
employment, in both such cases as determined by the Board of Directors, because
of Participant's personal dishonesty, incompetence, willful misconduct, any
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule or regulation (other
than traffic violations or similar offenses) or in the case of an employee
without a written employment agreement with the Bank or Holding Company, any
other grounds provided for under employment policies of the Bank or Holding
Company in effect at the Effective Date or as amended from time to time.
(dd) "Trust" means a trust established by the Board in connection with this
Plan to hold Plan assets for the purposes set forth herein.
(ee) "Trustee" means that person or persons and entity or entities approved
by the Board to hold legal title to any of the Trust assets for the purposes set
forth herein.
2. ADMINISTRATION.
--------------
(a) The Plan shall be administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to grant awards to Employees
and establish such rules and regulations as it deems necessary for the proper
administration of the Plan and to make whatever determinations and
interpretations in connection with the Plan it deems necessary or advisable.
All determinations and interpretations made by the Committee shall be binding
and conclusive on all Employee Participants and Outside Director Participants in
the Plan and on their legal representatives and beneficiaries.
(b) Awards to Outside Directors of the Holding Company or its Affiliates
shall be granted by the Board of Directors or the Committee, pursuant to the
terms of this Plan.
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<PAGE>
(c) Actual transference of the Award requires no, nor allows any,
discretion by the Trustee.
3. TYPES OF AWARDS AND RELATED RIGHTS.
-----------------------------------
The following Awards and related rights as described below in Paragraphs 6
through 12 hereof may be granted under the Plan:
(a) Non-statutory Stock Options
(b) Incentive Stock Options
(c) Limited Rights
(d) Stock Awards
4. STOCK SUBJECT TO THE PLAN.
-------------------------
Subject to adjustment as provided in Section 15 hereof, the maximum number
of shares of Common Stock reserved for Awards under the Plan is 2,317,051
shares, which number may not be in excess of 14% of the number of shares of the
Common Stock sold in the Company's Subscription and Community Offering completed
on April 8, 1998 (not including those shares of Common Stock issued in exchange
for shares of First Savings Bank, SLA Common Stock). Subject to adjustment as
provided in Section 15 hereof, the maximum number of shares of Common Stock
reserved hereby for purchase pursuant to the exercise of Options and Option-
related Awards granted under the Plan is 1,655,037 shares, which number may not
be in excess of 10% of the number of shares of Common Stock sold in the
Company's Subscription and Community Offering completed on April 8, 1998 (not
including those shares of Common Stock issued in exchange for shares of First
Savings Bank, SLA Common Stock). The maximum number of the shares of Common
Stock reserved for award as Stock Awards is 662,014 shares, which number is not
in excess of 4% of the number of shares of Common Stock sold in the Company's
Subscription and Community Offering completed on April 8, 1998 (not including
those shares of Common Stock issued in exchange for shares of First Savings
Bank, SLA Common Stock). These shares of Common Stock may be either authorized
but unissued shares or authorized shares previously issued and reacquired by the
Holding Company. To the extent that Options and Stock Awards are granted under
the Plan, the shares underlying such Awards will be unavailable for any other
use including future grants under the Plan except that, to the extent that Stock
Awards or Options terminate, expire, or are forfeited without having been
exercised (or in cases where a Limited Right has been granted in connection with
an option, the amount of such Limited Right received in lieu of the exercise of
such option), new Awards may be made with respect to those shares underlying
such terminated, expired or forfeited Options or Stock Awards.
5. ELIGIBILITY.
-----------
Subject to the terms herein, all Employees and Outside Directors shall be
eligible to receive Awards under the Plan.
-5-
<PAGE>
6. NON-STATUTORY STOCK OPTIONS.
---------------------------
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded under the Plan, from time to
time, grant Non-statutory Stock Options to Employees and Outside Directors, upon
such terms and conditions as the Committee may determine and grant Non-statutory
Stock Options in exchange for and upon surrender of previously granted Awards
under this Plan under such terms and conditions as the Committee may determine.
Non-statutory Stock Options granted under this Plan are subject to the following
terms and conditions:
(a) Exercise Price. The Exercise Price of each Non-statutory Stock Option
--------------
shall be determined by the Committee. Such Exercise Price shall not be less
than 100% of the Fair Market Value of the Holding Company's Common Stock on the
Date of Grant. Shares of Common Stock underlying a Non-statutory Stock Option
may be purchased only upon full payment of the Exercise Price or upon operation
of an Alternate Option Payment Mechanism set out in Section 11 hereof.
(b) Terms of Non-statutory Stock Options. The term during which each Non-
------------------------------------
statutory Stock Option may be exercised shall be determined by the Committee,
but in no event shall a Non-statutory Stock Option be exercisable in whole or in
part more than 10 years from the Date of Grant. The Committee shall determine
the date on which each Non-statutory Stock Option shall become exercisable. The
shares of Common Stock underlying each Non-statutory Stock Option installment
may be purchased in whole or in part by the Participant at any time during the
term of such Non-statutory Stock Option after such installment becomes
exercisable. The Committee may, in its sole discretion, accelerate the time at
which any Non-statutory Stock Option may be exercised in whole or in part. The
acceleration of any Non-statutory Stock Option under the authority of this
paragraph shall create no right, expectation or reliance on the part of any
other Participant or that certain Participant regarding any other unaccelerated
Non-statutory Stock Options. Unless determined otherwise by the Committee and
except in the event of the Participant's death or pursuant to a domestic
relations order, a Non-statutory Stock Option is not transferable and may be
exercisable in his lifetime only by the Participant to whom it is granted. Upon
the death of a Participant, a Non-statutory Stock Option is transferable by will
or the laws of descent and distribution.
(c) NSO Agreement. The terms and conditions of any Non-statutory Stock
--------------
Option granted shall be evidenced by an agreement (the "NSO Agreement") which
shall be subject to the terms and conditions of the Plan.
(d) Termination of Employment or Service. Unless otherwise determined by
------------------------------------
the Committee, upon the termination of a Participant's employment or service for
any reason other than Disability, death or Termination for Cause, the
Participant's Non-statutory Stock Options shall be exercisable only as to those
shares that were immediately exercisable by the Participant at the date of
termination and only for a period of three months following termination.
Notwithstanding any provisions set forth herein or contained in any NSO
Agreement relating to
-6-
<PAGE>
an award of a Non-statutory Stock Option, in the event of termination of the
Participant's employment or service for Disability or death, all Non-statutory
Stock Options held by such Participant shall immediately vest and be exercisable
for one year after such termination of service, and, in the event of a
Termination for Cause, all rights under the Participant's Non-statutory Stock
Options shall expire immediately upon such Termination for Cause.
7. INCENTIVE STOCK OPTIONS.
-----------------------
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded under the Plan, from time to
time, grant Incentive Stock Options to Employees upon such terms and conditions
as the Committee may determine. Incentive Stock Options granted pursuant to the
Plan shall be subject to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Incentive Stock Option
--------------
shall be not less than 100% of the Fair Market Value of the Common Stock on the
Date of Grant. However, if at the time an Incentive Stock Option is granted to
an Employee Participant, such Employee Participant owns Common Stock
representing more than 10% of the total combined voting securities of the
Holding Company (or, under Section 424(d) of the Code, is deemed to own Common
Stock representing more than 10% of the total combined voting power of all
classes of stock of the Holding Company, by reason of the ownership of such
classes of stock, directly or indirectly, by or for any brother, sister, spouse,
ancestor or lineal descendent of such Employee Participant, or by or for any
corporation, partnership, estate or trust of which such Employee Participant is
a shareholder, partner or beneficiary) ("10% Owner"), the Exercise Price per
share of Common Stock deliverable upon the exercise of each Incentive Stock
Option shall not be less than 110% of the Fair Market Value of the Common Stock
on the Date of Grant. Shares may be purchased only upon payment of the full
Exercise Price or upon operation of an Alternate Option Payment Mechanism set
out in Section 11 hereof.
(b) Amounts of Incentive Stock Options. Incentive Stock Options may be
----------------------------------
granted to any Employee in such amounts as determined by the Committee; provided
that the amount granted is consistent with the terms of Section 422 of the Code.
In the case of an Option intended to qualify as an Incentive Stock Option, the
aggregate Fair Market Value (determined as of the time the Option is granted) of
the Common Stock with respect to which Incentive Stock Options granted are
exercisable for the first time by the Employee Participant during any calendar
year (under all plans of the Employee Participant's employer corporation and its
parent and subsidiary corporations) shall not exceed $100,000. The provisions
of this Section 7(b) shall be construed and applied in accordance with Section
422(d) of the Code and the regulations, if any, promulgated thereunder. To the
extent an Award of an Incentive Stock Option under this Section 7 exceeds this
$100,000 limit, the portion of the Award in excess of such limit shall be deemed
a Non-statutory Stock Option. The Committee shall have discretion to
redesignate Options granted as Incentive Stock Options as Non-Statutory Stock
Options. Such Non-statutory Stock Options shall be subject to Section 6 hereof.
(c) Terms of Incentive Stock Options. The term during which each Incentive
--------------------------------
Stock Option may be exercised shall be determined by the Committee, but in no
event shall an
-7-
<PAGE>
Incentive Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. If at the time an Incentive Stock Option is granted to
an Employee Participant who is a 10% Owner, the Incentive Stock Option granted
to such Employee Participant shall not be exercisable after the expiration of
five years from the Date of Grant. No Incentive Stock Option is transferable
except by will or the laws of descent and distribution and is exercisable in his
or her lifetime only by the Employee Participant to whom it is granted. The
designation of a beneficiary does not constitute a transfer.
The Committee shall determine the date on which each Incentive Stock Option
shall become exercisable. The shares comprising each installment of the
Incentive Stock Option may be purchased in whole or in part at any time during
the term of such Option after such installment becomes exercisable. The
Committee may, in its sole discretion, accelerate the time at which any
Incentive Stock Option may be exercised in whole or in part. The acceleration
of any Incentive Stock Option under the authority of this paragraph shall not
create a right, expectation or reliance on the part of any other Participant or
that certain Participant regarding any other unaccelerated Incentive Stock
Options.
(d) ISO Agreement. The terms and conditions of any Incentive Stock Option
-------------
granted shall be evidenced by an agreement (the "ISO Agreement") which shall be
subject to the terms and conditions of the Plan.
(e) Termination of Employment. Unless otherwise determined by the
-------------------------
Committee, upon the termination of an Employee Participant's employment for any
reason other than Disability, death or Termination for Cause, the Employee
Participant's Incentive Stock Options shall be exercisable only as to those
shares that were immediately exercisable by the Participant at the date of
termination and only for a period of three months following termination.
Notwithstanding any provision set forth herein or contained in any ISO Agreement
relating to an award of an Incentive Stock Option, in the event of termination
of the Employee Participant's employment for Disability or death, all Incentive
Stock Options held by such Employee Participant shall immediately vest and be
exercisable for one year after such termination, and, in the event of
Termination for Cause, all rights under the Employee Participant's Incentive
Stock Options shall expire immediately upon termination. No Incentive Stock
Option shall be eligible for treatment as an Incentive Stock Option in the event
such Incentive Stock Option is exercised more than three months following the
date of Participant's cessation of employment. In no event shall an Incentive
Stock Option be exercisable beyond the expiration of the Incentive Stock Option
term.
(f) Compliance with Code. The Incentive Stock Options granted under this
--------------------
Section 7 are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Code, but the Holding Company makes no warranty as
to the qualification of any Option as an incentive stock option within the
meaning of Section 422 of the Code. All Options that do not so qualify shall be
treated as Non-statutory Stock Options.
-8-
<PAGE>
8. LIMITED RIGHT.
-------------
Simultaneously with the grant of any Option to an Employee or Outside
Director, the Committee may grant a Limited Right with respect to all or some of
the shares covered by such Option. Limited Rights granted under this Plan are
subject to the following terms and conditions:
(a) Terms of Rights. In no event shall a Limited Right be exercisable in
---------------
whole or in part before the expiration of six months from the Date of Grant of
the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control.
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, and only when the Fair Market Value of the underlying
shares on the day of exercise is greater than the Exercise Price of the
underlying Option.
Upon exercise of a Limited Right, the underlying Option shall cease to be
exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the purchase price and the Fair Market Value of the Common
Stock subject to the underlying option. The Limited Right is transferable only
when the underlying option is transferable and under the same conditions.
(b) Payment. Upon exercise of a Limited Right, the holder shall promptly
-------
receive from the Holding Company an amount of cash equal to the difference
between the Exercise Price of the underlying option and the Fair Market Value of
the Common Stock subject to the underlying Option on the date the Limited Right
is exercised, multiplied by the number of shares with respect to which such
Limited Right is exercised. Payments shall be less any applicable tax
withholding as set forth in Section 16 hereof.
9. STOCK AWARD.
-----------
The Committee may, subject to the limitations of the Plan, from time to
time, make an Award of shares of Common Stock to Employees and Outside Directors
("Stock Awards"). The Stock Awards shall be made subject to the following terms
and conditions:
(a) Payment of the Stock Award. The Stock Award may only be made in whole
--------------------------
shares of Common Stock. Stock Awards may only be granted from shares reserved
under the Plan but unawarded at the time the new Stock Award is made.
(b) Terms of the Stock Awards. The Committee shall determine the dates on
-------------------------
which Stock Awards granted to a Participant shall vest and any specific
conditions or performance goals which must be satisfied prior to the vesting of
any installment or portion of the Stock Award. Notwithstanding other paragraphs
in this Section 9, the Committee may, in its sole discretion, accelerate the
vesting of any Stock Award. The acceleration of any Stock Award
-9-
<PAGE>
under the authority of this paragraph shall create no right, expectation or
reliance on the part of any other Participant or that certain Participant
regarding any other unaccelerated Stock Awards.
(c) Stock Award Agreement. The terms and conditions of any Stock Award
---------------------
shall be evidenced by an agreement (the "Stock Award Agreement") which such
Stock Award Agreement will be subject to the terms and conditions of the Plan.
Each Stock Award Agreement shall set forth:
(i) the period over which the Stock Award will vest;
(ii) the performance goals, if any, which must be satisfied prior
to the vesting of any installment or portion of the Stock
Award. The performance goals may be set by the Committee on
an individual level, for all Participants, for all Awards
made during a given period of time, or for all Awards for
indefinite periods;
(d) Certification of Attainment of the Performance Goal. No Stock Award or
---------------------------------------------------
portion thereof that is subject to a performance goal is to be distributed to an
Employee Participant until the Committee certifies that the underlying
performance goal has been achieved, or in the case of an Outside Director
Participant, until an independent third party presents a certification to the
Board of Directors that the underlying performance goal associated with a Stock
Award has been achieved.
(e) Termination of Employment or Service. Unless otherwise determined by
------------------------------------
the Committee, upon the termination of a Participant's employment or service for
any reason other than Disability, death or Termination for Cause, the
Participant's unvested Stock Awards as of the date of termination shall be
forfeited and any rights the Participant had to such unvested Stock Awards shall
become null and void. Notwithstanding any provisions set forth herein or
contained in any NSO Agreement relating to an award of a Non-statutory Stock
Option, in the event of termination of the Participant's service due to
Disability or death, all unvested Stock Awards held by such Participant,
including any portion of a Stock Award subject to a performance goal, shall
immediately vest and, in the event of the Participant's Termination for Cause,
the Participant's unvested Stock Awards as of the date of such termination shall
be forfeited and any rights the Participant had to such unvested Stock Awards
shall become null and void.
(f) Non-Transferability. Except to the extent permitted by the Code, the
-------------------
rules promulgated under Section 16(b) of the Exchange Act or any successor
statutes or rules:
(i) The recipient of a Stock Award shall not sell, transfer,
assign, pledge, or otherwise encumber shares subject to
the Stock Award until full vesting of such shares has
occurred. For purposes of this section, the separation of
beneficial ownership and legal title through the use of any
"swap" transaction is deemed to be a prohibited encumbrance.
(ii) Unless determined otherwise by the Committee and except in
the event of
-10-
<PAGE>
the Participant's death or pursuant to a domestic relations
order, a Stock Award is not transferable and may be earned
in his lifetime only by the Participant to whom it is
granted. Upon the death of a Participant, a Stock Award is
transferable by will or the laws of descent and
distribution. The designation of a beneficiary does not
constitute a transfer.
(iii) If a recipient of a Stock Award is subject to the
provisions of Section 16 of the Exchange Act, shares of
Common Stock subject to such Stock Award may not, without
the written consent of the Committee (which consent may be
given in the Stock Award Agreement), be sold or otherwise
disposed of within six months following the date of grant of
the Stock Award.
(g) Accrual of Dividends. Whenever shares of Common Stock underlying a
--------------------
Stock Award are distributed to a Participant or beneficiary thereof under the
Plan, such Participant or beneficiary shall also be entitled to receive, with
respect to each such share distributed, a payment equal to any cash dividends or
distributions (other than distributions in shares of Common Stock) and the
number of shares of Common Stock equal to any stock dividends, declared and paid
with respect to a share of the Common Stock if the record date for determining
shareholders entitled to receive such dividends falls between the date the
relevant Stock Award was granted and the date the relevant Stock Award or
installment thereof is distributed. There shall also be distributed an
appropriate amount of net earnings, if any, of the Trust with respect to any
dividends paid out.
(h) Voting of Stock Awards. After a Stock Award has been granted, but for
-----------------------
which the shares covered by such Stock Award have not yet been earned and
distributed to the Participant pursuant to the Plan, the Participant shall be
entitled to direct the Trustee as to the voting of such shares of Common Stock
which the Stock Award covers subject to the rules and procedures adopted by the
Committee for this purpose. All shares of Common Stock held by the Trust as to
which Participants are not entitled to direct, or have not directed the voting,
shall be voted by the Trustee in the same proportion as the Common Stock covered
by Stock Awards which have been awarded is voted.
10. PAYOUT ALTERNATIVES
-------------------
Payments due to a Participant upon the exercise or redemption of an Award,
may be made subject to the following terms and conditions:
(a) Discretion of the Committee. The Committee has the sole discretion to
---------------------------
determine what form of payment (whether monetary, Common Stock, a combination of
payout alternatives or otherwise) it shall use in making distributions of
payments for all Awards. If the Committee requests any or all Participants to
make an election as to form of distribution or payment, it shall not be
considered bound by the election.
-11-
<PAGE>
(b) Payment in the form of Common Stock. Any shares of Common Stock
-----------------------------------
tendered in satisfaction of an obligation arising under this Plan shall be
valued at the Fair Market Value of the Common Stock on the day preceding the
date of the issuance of such stock to the Participant.
11. ALTERNATE OPTION PAYMENT MECHANISM
----------------------------------
The Committee has sole discretion to determine what form of payment it will
accept for the exercise of an Option. The Committee may indicate acceptable
forms in the ISO or NSO Agreement covering such Options or may reserve its
decision to the time of exercise. No Option is to be considered exercised until
payment in full is accepted by the Committee or its agent.
(a) Cash Payment. The exercise price may be paid in cash or by certified
------------
check.
(b) Borrowed Funds. To the extent permitted by law, the Committee may
--------------
permit all or a portion of the exercise price of an Option to be paid through
borrowed funds.
(c) Exchange of Common Stock.
------------------------
(i) The Committee may permit payment by the tendering of
previously acquired shares of Common Stock. This includes
the use of "pyramiding transactions" whereby some number of
Options are exercised; then the shares gained through the
exercise are tendered back to the Holding Company as payment
for a greater number of Options. This transaction may be
repeated as needed to exercise all of the Options available.
(ii) Any shares of Common Stock tendered in payment of the
exercise price of an Option shall be valued at the Fair
Market Value of the Common Stock on the date prior to the
date of exercise.
12. RIGHTS OF A SHAREHOLDER: NONTRANSFERABILITY.
-------------------------------------------
No Participant shall have any rights as a shareholder with respect to any
shares of Common Stock covered by an Option until the date of issuance of a
stock certificate for such shares. Nothing in this Plan or in any Award granted
confers on any person any right to continue in the employ or service of the
Holding Company or its Affiliates or interferes in any way with the right of the
Holding Company or its Affiliates to terminate a Participant's services as an
officer or other employee at any time.
Except as permitted under the Code (with respect to Incentive Stock
Options) and the rules promulgated pursuant to Section 16(b) of the Exchange Act
or any successor statutes or rules, no Award under the Plan shall be
transferable by the Participant other than by will or the laws of intestate
succession or pursuant to a domestic relations order or unless determined
otherwise by the Committee.
-12-
<PAGE>
13. AGREEMENT WITH GRANTEES.
-----------------------
Each Award will be evidenced by a written agreement(s) (whether
constituting an NSO Agreement, ISO Agreement, Stock Award Agreement or any
combination thereof), executed by the Participant and the Holding Company or its
Affiliates that describes the conditions for receiving the Awards including the
date of Award, the Exercise Price if any, the terms or other applicable periods,
and other terms and conditions as may be required or imposed by the Plan, the
Committee, or the Board of Directors, and may describe or specify tax law
considerations or applicable securities law considerations.
14. DESIGNATION OF BENEFICIARY.
--------------------------
A Participant may, with the consent of the Committee, designate a person or
persons to receive, in the event of death, any Award to which the Participant
would then be entitled. Such designation will be made upon forms supplied by
and delivered to the Holding Company and may be revoked in writing. If a
Participant fails effectively to designate a beneficiary, then the Participant's
estate will be deemed to be the beneficiary.
15. DILUTION AND OTHER ADJUSTMENTS.
------------------------------
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Holding Company, or in the event a capital
distribution is made, the Committee will make such adjustments to Awards to
prevent dilution, diminution or enlargement of the rights of the Participant, as
the Committee deems appropriate, including any or all of the following:
(a) adjustments in the aggregate number or kind of shares of Common
Stock or other securities that may underlie future Awards under the
Plan;
(b) adjustments in the aggregate number or kind of shares of Common
Stock or other securities underlying Awards already made under the
Plan;
(c) adjustments in the exercise price of outstanding Incentive and/or
Non-statutory Stock Options, or any Limited Rights attached to such
Options.
Alternatively, the Committee could provide the participant with a cash
benefit for shares underlying vested, but unexercised options, in order to
achieve the aforementioned effect. All awards under this Plan shall be binding
upon any successors or assigns of the Holding Company.
-13-
<PAGE>
16. TAX WITHHOLDING.
---------------
Awards under this Plan shall be subject to tax withholding to the extent
required by any governmental authority. Any withholding shall comply with Rule
16b-3 or any amendment or successive rule. Shares of Common Stock withheld to
pay for tax withholding amounts shall be valued at their Fair Market Value on
the date the Award is deemed taxable to the Participant.
17. AMENDMENT OF THE PLAN.
---------------------
The Board of Directors may at any time, and from time to time, subject to
applicable rules and regulations, modify or amend the Plan, or any Award granted
under the Plan, in any respect, prospectively or retroactively; provided
however, that provisions governing grants of Incentive Stock Options, unless
permitted by the rules and regulations or staff pronouncements promulgated under
the Code shall be submitted for shareholder approval to the extent required by
such law, regulation or interpretation.
Failure to ratify or approve amendments or modifications by shareholders
shall be effective only as to the specific amendment or modification requiring
such ratification. Other provisions, sections, and subsections of this Plan
will remain in full force and effect.
No such termination, modification or amendment may adversely affect the
rights of a Participant under an outstanding Award without the written
permission of such Participant.
18. EFFECTIVE DATE OF PLAN.
----------------------
The Plan shall become effective upon being presented to shareholders for
ratification for purposes of: (i) obtaining preferential tax treatment for
Incentive Stock Options; and (ii) maintaining the listing of the Common Stock on
the Nasdaq National Market. The failure to obtain shareholder ratification for
such purposes will not affect the validity of the Plan and the Options
thereunder, provided, however, that if the Plan is not ratified, the Plan shall
remain in full force and effect, and any Incentive Stock Options granted under
the Plan shall be deemed to be Non-statutory Stock Options.
19. TERMINATION OF THE PLAN.
-----------------------
The right to grant Awards under the Plan will terminate upon the earlier
of: (i) ten (10) years after the Effective Date; (ii) the issuance of a number
of shares of Common Stock pursuant to the exercise of Options or the
distribution of Stock Awards which together with the exercise of Limited Rights
is equivalent to the maximum number of shares reserved under the Plan as set
forth in Section 4. The Board of Directors has the right to suspend or
terminate the Plan at any time, provided that no such action will, without the
consent of a Participant, adversely affect a Participant's vested rights under a
previously granted Award.
-14-
<PAGE>
20. APPLICABLE LAW
--------------
The Plan will be administered in accordance with the laws of the State of
Delaware and applicable federal law.
21. COMPLIANCE WITH OTS CONVERSION REGULATIONS
------------------------------------------
Notwithstanding any other provision contained in this Plan:
(a) unless the Plan is approved by a majority vote of the outstanding
shares of the total votes eligible to be cast at a duly called
meeting of stockholders to consider the Plan, as required by 12
C.F.R. (S) 563b.3(g)(4)(vii), the Plan shall not become effective or
implemented prior to one year from the date of the Bank's
reorganization into the stock holding company structure;
(b) no Award granted prior to one year from the date of the Bank's
reorganization into the stock holding company structure shall become
vested or exercisable at a rate in excess of 20% per year of the
total number of Stock Awards or Options (whichever may be the case)
granted to such Participant, provided, that Awards shall become fully
vested or immediately exercisable in the event of a Participant's
termination of service due to death or Disability;
(c) no Award granted to any individual employee prior to one year from
the date of the Bank's reorganization into the stock holding company
structure may exceed 25% of the total amount of Awards which may be
granted under the Plan;
(d) no Award granted to any individual Outside Director prior to one year
from the date of the Bank's reorganization into the stock holding
company structure may exceed 5% of the total amount of Awards which
may be granted under the Plan; and
(e) the aggregate amount of Awards granted to all Outside Directors prior
to one year from the date of the Bank's reorganization into the stock
holding company structure may not exceed 30% of the total amount of
Awards which may be granted under the Plan.
22. DELEGATION OF AUTHORITY
-----------------------
The Committee may delegate all authority for: the determination of forms of
payment to be made by or received by the Plan; the execution of Award
agreements; the determination of Fair Market Value; and the determination of all
other aspects of administration of the Plan to the executive officer(s) of the
Holding Company or the Bank. The Committee may rely on the descriptions,
representations, reports and estimates provided to it by the management of the
Holding Company or the Bank for determinations to be made pursuant to the Plan,
including the attainment of performance goals. However, only the Committee or a
portion of the Committee may certify the attainment of a performance goal.
-15-
<PAGE>
IN WITNESS WHEREOF, the Holding Company has established this Plan to
be executed by its duly authorized executive officer and the corporate seal to
be affixed and duly attested, effective as of the __________day of
_________________________, 1998.
[CORPORATE SEAL] FIRST SOURCE BANCORP, INC.
____________________ By: ____________________ Date
Chairman of the Board
ADOPTED BY THE BOARD OF DIRECTORS:
____________________ By: ____________________
Date Secretary
APPROVED BY STOCKHOLDERS:
____________________ By: ____________________
Date Secretary
-16-
<PAGE>
Annex F
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF FIRST SOURCE BANCORP, INC.
The Certificate of Incorporation of the Corporation is hereby amended by
striking article FIRST in its entirety and replacing therefore:
"FIRST: The name of the Corporation is First Sentinel Bancorp, Inc.
(hereinafter sometimes referred to as the `Corporation'"
IN WITNESS WHEREOF, First Source Bancorp, Inc. has caused this Certificate
to be signed and attested by its duly authorized officer, this _____ day of
_______________, 1998.
First Source Bancorp, Inc.
______________________________
Christopher P. Martin
Secretary
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of First Source
Bancorp, Inc.'s Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a
Director, Officer, employee or agent, or in any other capacity while serving
as a Director, Officer, employee or agent, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than such
law permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such indemnitee in connection therewith; provided,
however, that, except as provided in Section C hereof with respect to
proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware
General Corporation Law requires, an advancement of expenses incurred by an
indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, services to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the
advancement of expenses conferred in Sections A and B of this Article TENTH
shall be contract rights and such rights shall continue as to an indemnitee
who has ceased to be a Director, Officer, employee or agent and shall inure to
the benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full
by the Corporation within sixty days after a written claim has been received
by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expenses of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the
Corporation shall be entitled to recover such expenses upon a final
adjudication that, the indemnitee has not
II-1
<PAGE>
met any applicable standard for indemnification set forth in the Delaware
General Corporation Law. Neither the failure of the Corporation (including its
Board of Directors, independent legal counsel, or its stockholders) to have
made a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances because the
indemnitee has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee
to enforce a right to indemnification or to an advancement of expenses
hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses conferred
in this Article TENTH shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself
and any Director, Officer, employee or agent of the Corporation or subsidiary
or Affiliate or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH:
A Director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability: (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the Director derived
an improper personal benefit. If the Delaware General Corporation Law is
amended to authorize corporate action further eliminating or limiting the
personal liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of
the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or
modification.
II-2
<PAGE>
ITEM 21. 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)
2.1 Agreement and Plan of Merger, dated July 9, 1998, by and between First
Source Bancorp, Inc. and Pulse Bancorp, Inc., is included as Annex A to
the Joint Proxy Statement/Prospectus*
2.2 Stock Option Agreement, dated as of July 9, 1998, by and between First
Source Bancorp, Inc. and Pulse Bancorp, Inc., is included as Annex B to
the Joint Proxy Statement/Prospectus*
3.1 Certificate of Incorporation of First Source Bancorp, Inc., previously
filed and incorporated by reference to First Source Bancorp, Inc.'s
Registration Statement on Form S-1 (File No. 333-42757) dated
December 19, 1997*
3.2 Amendment to the Certificate of Incorporation of First Source Bancorp,
Inc., included as Annex F to the Joint Proxy Statement/Prospectus
3.3 Bylaws of First Source Bancorp, Inc. previously filed and incorporated by
reference to First Source Bancorp, Inc. Registration Statement on Form S-
1 (File No. 333-42757), dated December 19, 1997*
5.1 Opinion of Patton Boggs LLP
8.0 Opinion of Patton Boggs LLP as to certain Federal Income Tax matters
10.0 1998 First Source Bancorp, Inc. Stock-Based Incentive Plan, is included
as Annex E to the Joint Proxy Statement/Prospectus*
12.0 Statement regarding Computations of Ratios, is included in the Joint
Proxy Statement/Prospectus*
23.0 Consent of Patton Boggs (included in Exhibits 5.1 and 8.0 hereto)
23.2 Consent of Ryan, Beck & Co., Inc.
23.3 Consent of Sandler O'Neill & Partners, L.P.
23.4 Consent of KPMG Peat Marwick LLP for First Source Bancorp, Inc.
23.5 Consent of KPMG Peat Marwick LLP for Pulse Bancorp, Inc.
24.0 Power of Attorney of Certain Officer and Directors of the Company*
(Located on the signature page hereto)
27.0 Financial Data Schedule
99.1 Pulse Bancorp, Inc.'s Proxy Card
99.2 First Source Bancorp, Inc.'s Proxy Card
99.3 Opinion of Sandler O'Neill and Partners, L.P., is included as Annex C to
the Joint Proxy Statement/Prospectus
99.4 Opinion of Ryan, Beck & Co., Inc. is included as Annex D to the Joint
Proxy Statement/Prospectus
- --------
* Previously filed.
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 22. UNDERTAKINGS.
The undersigned Registrants hereby undertake:
(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
II-3
<PAGE>
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 percent 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrants of expenses incurred or paid by a director, officer or controlling
person of the Registrants in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrants will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrants hereby undertake to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Woodbridge, State of New Jersey on November 3, 1998.
FIRST SOURCE BANCORP, INC.
/s/ John P. Mulkerin
By___________________________________
John P. Mulkerin
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John P. Mulkerin and Christopher P. Martin,
jointly and severally, each in his own capacity, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents 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 might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully or do cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
NAME DATE
/s/ John P. Mulkerin President, Chief Executive November 3,
- ------------------------------- Officer and Director 1998
John P. Mulkerin (principal executive
officer)
* Senior Vice President, November 3,
- ------------------------------- Chief Financial Officer, 1998
Christopher P. Martin and Treasurer and Director
(principal accounting and
financial officer)
* Director November 3,
- ------------------------------- 1998
Donald T. Akey MD
* Director November 3,
- ------------------------------- 1998
Harry F. Burke
* Director November 3,
- ------------------------------- 1998
Keith H. McLaughlin
* Director November 3,
- ------------------------------- 1998
Philip T. Ruegger, Jr.
* Director November 3,
- ------------------------------- 1998
Jeffries Shein
* Director November 3,
- ------------------------------- 1998
Walter K. Timpson
</TABLE>
- --------
* Pursuant to Power of Attorney filed with the Commission as Exhibit 24 on
September 17, 1998.
II-5
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1998
REGISTRATION NO. 333-63601
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
EXHIBITS
TO THE
PRE-EFFECTIVE AMENDMENT NO.1
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
FIRST SOURCE BANCORP, INC.
(Exact name of registrants as specified in their certificates of incorporation)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
List of Exhibits (Filed herewith unless otherwise noted)
2.1 Agreement and Plan of Merger, dated July 9, 1998, by and between First
Source Bancorp, Inc. and Pulse Bancorp, Inc., is included as Annex A to
the Joint Proxy Statement/Prospectus*
2.2 Stock Option Agreement, dated as of July 9, 1998, by and between First
Source Bancorp, Inc. and Pulse Bancorp, Inc., is included as Annex B to
the Joint Proxy Statement/Prospectus*
3.1 Certificate of Incorporation of First Source Bancorp, Inc., previously
filed and incorporated by reference to First Source Bancorp, Inc.'s
Registration Statement on Form S-1 (File No. 333-42757) dated
December 19, 1997*
3.2 Amendment to the Certificate of Incorporation of First Source Bancorp,
Inc., included as Annex F to the Joint Proxy Statement/Prospectus
3.3 Bylaws of First Source Bancorp, Inc. previously filed and incorporated by
reference to First Source Bancorp, Inc. Registration Statement on Form S-
1 (File No. 333-42757), dated December 19, 1997*
5.1 Opinion of Patton Boggs LLP
8.0 Opinion of Patton Boggs LLP as to certain Federal Income Tax matters
10.0 1998 First Source Bancorp, Inc. Stock-Based Incentive Plan, is included
as Annex E to the Joint Proxy Statement/Prospectus*
12.0Statement regarding Computations of Ratios, is included in the Joint Proxy
Statement/Prospectus*
23.0 Consent of Patton Boggs (included in Exhibits 5.1 and 8.0 hereto)
23.2 Consent of Ryan, Beck & Co., Inc.
23.3 Consent of Sandler O'Neill & Partners, L.P.
23.4 Consent of KPMG Peat Marwick LLP for First Source Bancorp, Inc.
23.5 Consent of KPMG Peat Marwick LLP for Pulse Bancorp, Inc.
24.0 Power of Attorney of Certain Officers and Directors of the Company*
(Located on the signature page hereto)
27.0 Financial Data Schedule
99.1 Pulse Bancorp, Inc.'s Proxy Card
99.2 First Source Bancorp, Inc.'s Proxy Card
99.3 Opinion of Sandler O'Neill and Partners, L.P., is included as Annex C to
the Joint Proxy Statement/Prospectus
99.4 Opinion of Ryan, Beck & Co., Inc., is included as Annex D to the Joint
Proxy Statement/Prospectus
- --------
* Previously filed.
<PAGE>
EXHIBIT 5.1
[PATTON BOGGS LLP letterhead]
November 3, 1998
(202) 457-6000
First Source Bancorp, Inc.
Board of Directors
1000 Woodbridge Center Drive
Woodbridge, NJ 07095
RE: First Source Bancorp, Inc. Registration Statement on Form S-4
Dear Ladies and Gentlemen:
We have acted as special counsel to First Source Bancorp, Inc., a Delaware
corporation (the "Company"), in connection with the issuance and sale by the
Company of an aggregate of up to 13,625,152 shares (the "Shares") of common
stock, par value $0.01 per share (the "Common Stock"), of the Company pursuant
to an Agreement and Plan of Merger, dated as of July 9, 1998 (the "Merger
Agreement"), by and between the Company and Pulse Bancorp, Inc., a New Jersey
corporation.
This opinion is delivered in accordance with the requirements of Item 601(b)(5)
of Regulation S-K under the Securities Act of 1933, as amended.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise indicated to our satisfaction, of
(i) the Registration Statement of the Company on Form S-4 filed with the
Securities and Exchange Commission (the "Commission") on the date hereof (the
"Registration Statement"); (ii) the form of certificates to be used to
represent the Shares, (iii) the Certificate of Incorporation and By-Laws of the
Company, as amended to date; (iv) resolutions adopted by the Board of Directors
of the Company relating to the Merger Agreement and the issuance of Shares; and
(vi) such other documents as we have deemed necessary or appropriate as a basis
for the opinion set forth below.
In our examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic
<PAGE>
First source Bancorp, Inc.
November 3, 1998
Page 2
copies, and the authenticity of originals of such copies. As to any other facts
material to this opinion which we did not independently establish or verify, we
have relied upon statements or representations of officers and other
representatives of the Company and others.
The opinion is limited in all respects to matters of Federal law and the law of
the State of Delaware, and we express no opinion as to the laws of any other
jurisdiction.
Based upon the foregoing and assuming the due execution and delivery of
certificates representing the Shares in the form examined by us, we are of the
opinion that the Shares to be issued by the Company pursuant to the Merger
Agreement, when issued in accordance with the terms of the Merger Agreement,
will be duly authorized, validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as Exhibit 5
to the Registration Statement. We also consent to the reference to our firm
under the caption "Legal Opinions" in the Registration Statement. In giving
such consent we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Act.
Very truly yours,
/s/ Patton Boggs LLP
PATTON BOGGS LLP
<PAGE>
EXHIBIT 8
Board of Directors
11/03/98
Page 1
Board of Directors
First Source Bancorp, Inc.
1000 Woodbridge Center Drive
Woodbridge, NJ 07095
Dear Ladies and Gentlemen:
We have acted as counsel to First Source Bancorp, Inc., a Delaware corporation
("FIRST SOURCE") in connection with the proposed merger of Pulse Bancorp, Inc.,
a New Jersey corporation ("PULSE"), with and into FIRST SOURCE (the "Merger")
and the merger of Pulse Savings Bank ("PULSE BANK"), a wholly owned subsidiary
of PULSE with and into First Savings Bank SLA ("FIRST SAVINGS"), a wholly owned
subsidiary of FIRST SOURCE (the "Bank Merger") immediately after and following
the Merger, pursuant to: (i) the terms of the Agreement and Plan of Merger dated
as of July 9, 1998 (the "Merger Agreement") by and among FIRST SOURCE and PULSE;
and (ii) the terms of the Subsidiary Agreement and Plan of Merger (the "Bank
Merger Agreement") by and among FIRST SAVINGS and PULSE BANK, each as described
in the Registration Statement on Form S-4 filed by FIRST SOURCE with the
Securities and Exchange Commission (the "Registration Statement"). All
capitalized terms, unless otherwise specified, have the meaning assigned to them
in the Merger Agreement.
For purposes of such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons and the authenticity of all
documents submitted to us as relevant to this opinion, and we have relied upon
the documents referred to above (the "Documents"). We have assumed that all
parties had the corporate power and authority to enter into and perform all
obligations thereunder, and we have also assumed the due authorization by all
requisite corporate actions, the due execution and delivery and the validity and
binding effect and enforceability of such Documents. We have made investigations
of such matters of law and fact as we have considered necessary or appropriate
for this opinion. Our opinion is based on the assumption that there are no
agreements or understandings with
<PAGE>
Board of Directors
11/03/98
Page 2
respect to the transactions contemplated in the Documents other than those
contained in the Documents. Furthermore, our opinion is based on the assumption
that all parties to the Documents will comply with the terms thereof, including
all tax reporting requirements contained therein.
We hereby confirm that the discussions described under the captions "Certain
Federal Income Tax Consequences of the Merger" in the Prospectus that is part of
the Registration Statement on Form S-4 filed by the Company with the Securities
and Exchange Commission on November 3, 1998, as amended, are a fair and accurate
summary of the matters addressed therein. Capitalized terms used herein but not
defined have the meanings as provided in the Merger Agreement.
We hereby consent to the use of our name under the caption "Federal Income Tax
Consequences of the Merger" in the Prospectus. In giving the foregoing
consent, we do not thereby admit we come within the category of Persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
The opinions set forth herein are based upon the existing provisions of the Code
and Treasury regulations issued or proposed thereunder, published Revenue
Rulings and releases of the Internal Revenue Service and existing case law, any
of which could be changed at any time. Any such changes may be retroactive in
application and could modify the legal conclusions upon which such opinions are
based. The opinions expressed herein are limited as described above, and we do
not express an opinion on any other legal or income tax aspect of the
transactions contemplated by the Documents.
<PAGE>
Board of Directors
11/03/98
Page 3
In rendering the foregoing opinions, we express no opinion as to the laws of any
jurisdiction other than the federal income tax laws of the United States. This
opinion is rendered as of the date hereof and we undertake no obligation to
update this opinion or advise you of changes in the event there is any change in
legal authorities, facts, assumptions or Documents on which this opinion is
based (including the taking of any action by any party to the Documents pursuant
to any opinion of counsel or a waiver) or any inaccuracy in any of the
representations, warranties or assumptions upon which we have relied in
rendering this opinion, unless we are specifically engaged to do so. This
opinion is not binding on the Internal Revenue Service and there can be no
assurance, and none is hereby given, that the Internal Revenue Service will not
take a contrary position to one or more of the positions reflected in the
foregoing opinions, or that our opinion will be upheld by the courts if
challenged by the Internal Revenue Service. This opinion may not be relied on
in connection with any transactions other than the transactions contemplated
herein.
Sincerely,
/s/ Patton Boggs LLP
PATTON BOGGS LLP
gjs/jkw/spc
<PAGE>
EXHIBIT 23.2
[LOGO OF RYAN, BECK, & CO. APPEARS HERE]
CONSENT OF RYAN, BECK & CO.
We hereby consent to the references in the Proxy Statement to our opinion, dated
November 3, 1998, with respect to the merger of First Source Bancorp, Inc. and
Pulse Bancorp, Inc., and to our firm, respectively, and to the inclusion of such
opinion as an annex to such Proxy Statement. By giving such consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Securities and Exchange Commission thereunder.
RYAN, BECK & CO., INC.
By: /s/ David P. Downs
---------------------
David P. Downs
Senior Vice President
Livingston, NJ
October 29, 1998
<PAGE>
EXHIBIT 23.3
Sandler O'Neill
CONSENT OF SANDLER O'NEILL & PARTNERS, L.P.
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of Pulse Bancorp, Inc. (the "Company") as an Annex to the Joint Proxy
Statement/Prospectus relating to the proposed merger of the Company with and
into First Source Bancorp, Inc. contained in the Registration Statement on Form
S-4 as filed with the Securities and Exchange Commission on the date hereof,
and to the references to our firm and such opinion in such Joint Proxy
Statement/Prospectus. In giving such consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended (the "Act"), or the rules and regulations of
the Securities and Exchange Commission thereunder (the "Regulations"), nor do
we admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Act or the
Regulations.
November 3, 1998
SANDLER O'NEILL & PARTNERS, L.P.
<PAGE>
EXHIBIT 23.4
Independent Accountants' Report
The Board of Directors
First Source Bancorp, Inc.:
We consent to incorporation by reference in Amendment No. 1 to the registration
statement filed on Form S-4, dated November 3, 1998, of our report dated
February 6, 1998, relating to the consolidated statements of financial condition
of First Savings Bank, SLA and subsidiaries as of December 31, 1997 and 1996 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1997, which report is included in the December 31, 1997 Annual Report on
Form 10-K of First Source Bancorp, Inc., incorporated by reference in the
registration statement and to the reference to our firm under the heading
"Experts" in the registration statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
November 3, 1998
<PAGE>
EXHIBIT 23.5
Independent Accountants' Consent
The Board of Directors
Pulse Bancorp, Inc.:
We consent to incorporation by reference in Amendment No. 1 to the registration
statement filed on Form S-4, dated November 3, 1998, of First Source Bancorp,
Inc., of our report dated October 24, 1997, relating to the consolidated
statements of financial condition of Pulse Bancorp, Inc. and subsidiaries as of
September 30, 1996 and 1997 and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1997, which report is included in the
Annual Report on Form 10-K of Pulse Bancorp, Inc., incorporated by reference in
the registration statement and to the reference to our firm under the heading
"Experts" in the registration statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
November 3, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,680
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 489,838
<INVESTMENTS-CARRYING> 24,346
<INVESTMENTS-MARKET> 24,411
<LOANS> 644,385
<ALLOWANCE> 6,758
<TOTAL-ASSETS> 1,221,038
<DEPOSITS> 807,591
<SHORT-TERM> 11,544
<LIABILITIES-OTHER> 14,583
<LONG-TERM> 128,000
0
0
<COMMON> 317
<OTHER-SE> 259,003
<TOTAL-LIABILITIES-AND-EQUITY> 1,221,038
<INTEREST-LOAN> 23,772
<INTEREST-INVEST> 15,300
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 39,072
<INTEREST-DEPOSIT> 16,723
<INTEREST-EXPENSE> 20,527
<INTEREST-INCOME-NET> 18,545
<LOAN-LOSSES> 740
<SECURITIES-GAINS> 149
<EXPENSE-OTHER> 8,811
<INCOME-PRETAX> 11,461
<INCOME-PRE-EXTRAORDINARY> 11,461
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,218
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.23
<YIELD-ACTUAL> 3.39
<LOANS-NON> 2,377
<LOANS-PAST> 134
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,097
<CHARGE-OFFS> 82
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 6,758
<ALLOWANCE-DOMESTIC> 100
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
PULSE BANCORP, INC.
SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 16, 1998
The undersigned hereby appoints the Board of Directors of Pulse Bancorp,
Inc. ("Pulse"), with full powers of substitution, to act as attorneys and
proxies for the undersigned, to vote all shares of Common Stock of Pulse that
the undersigned is entitled to vote at the Special Meeting of Stockholders, to
be held at the Holiday Inn, Forsgate Drive, Jamesburg, New Jersey, on Wednesday,
December 16, 1998, at 9:00 a.m. ("Meeting"), and at any and all adjournments
thereof, as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSITION 1.
- --------------------------------------------------------------------------------
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR PROPOSITION 1. IF ANY OTHER BUSINESS IS PRESENTED AT THE
MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST
JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS
TO BE PRESENTED AT THE MEETING.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE USING
DARK INK ONLY
- --------------------------------------------------------------------------------
1. The approval of the Agreement and Plan of Merger, dated as of July 9, 1998,
by and between First Source Bancorp, Inc. ("First Source") and Pulse,
pursuant to which Pulse will merge with and into First Source.
In their discretion, such attorneys and proxies are authorized to vote on
any other business that may properly come before the Meeting or any
adjournments thereof.
FOR AGAINST ABSTAIN
--- ------- -------
[_] [_] [_]
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Meeting or at any
adjournments thereof and after notification to the Secretary of Pulse at the
Meeting of the stockholder's decision to terminate this proxy, then the power of
said attorneys and proxies shall be deemed terminated and of no further force
and effect.
The undersigned acknowledges receipt from Pulse prior to the execution of this
proxy of the notice of special meeting of stockholders and a joint proxy
statement/prospectus dated November 3, 1998.
Dated: Check box if planning to attend Meeting [ ]
----------------
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN
THE ENCLOSED POSTAGE-PAID ENVELOPE.
- ------------------------------------- -----------------------------------
PRINT NAME OF STOCKHOLDER SIGNATURE OF STOCKHOLDER
- ------------------------------------- -----------------------------------
PRINT NAME OF STOCKHOLDER SIGNATURE OF STOCKHOLDER
Please sign exactly as your name appears on the envelope in which this proxy was
mailed. When signing as attorney, executor, administrator, trustee or guardian,
please give your full title. If shares are held jointly, each holder should
sign.
<PAGE>
EXHIBIT 99.2
[X]PLEASE MARK VOTES
AS IN THIS EXAMPLE
SPECIAL MEETING OF STOCKHOLDERS
December 16, 1998
10:30 a.m. Eastern Time
The undersigned hereby appoints the official proxy committee of the Board of
Directors of First Source Bancorp, Inc. (the "Company"), each with full power of
substitution, to act as attorneys and proxies for the undersigned, and to vote
all shares of Common Stock of the Company which the undersigned is entitled to
vote only at the Special Meeting of Stockholders, to be held on Wednesday,
December 16, 1998 at 10:30 a.m. Eastern Time, at the Sheraton at Woodbridge
Place, 515 Route 1 South, Iselin, New Jersey, and at any and all adjournments
thereof, as follows:
1. Approval and adoption of the Agreement and Plan of
Merger, dated as of July 9, 1998 (the "Merger Agreement"), between First Source
and Pulse Bancorp, Inc. ("Pulse"), and the consummation of the transactions
contemplated thereby, including the merger of Pulse with and into First Source
and the issuance of First Source Common Stock to the holders of Pulse Common
Stock.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.
2. Approval and adoption of First Source's 1998 Stock-Based Incentive Plan (the
"Incentive Plan").
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
3. Approval and adoption of an amendment to the First Source Certificate of
Incorporation to change the name of the company to First Sentinel Bancorp, Inc.
(the "Corporate Name Amendment").
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 3.
4. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.
This proxy is revocable and will be voted as directed, but if no instructions
are specified, this proxy will be voted FOR the proposal listed. If any other
business is presented at the Special Meeting, including whether or not to
adjourn the meeting, this proxy will be voted by those named in this proxy in
their best judgment. At the present time, the Board of Directors knows of no
other business to be presented at the Special Meeting.
Please be sure to sign and date
this Proxy in the box below. Date [ ]
- ----------------------------------------------------------------
Stockholder sign above Co-Holder (if any) sign above
- --------------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
The above signed acknowledges receipt from the Company prior to the execution
of this proxy of a Notice of Special Meeting of Stockholders and of a Proxy
Statement dated relating to this meeting.
Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder may sign but only one signature
is required.
