SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 8, 1997
HSBC AMERICAS, INC.
(Exact name of registrant as specified in charter)
DELAWARE I-2940 22-1093160
(State or other juris- (Commission (IRS Employer
diction of incorporation) File Number) Identification No.)
ONE MARINE MIDLAND CENTER, BUFFALO, NEW YORK 14203
(Address of principal executive offices)
Registrant's telephone number, including area code: (716) 841-2424
Not Applicable
(Former name or former address,
if changed since report)
2.
Item 2. Acquisition or Disposition of Assets
As reported on Form 8-K filed March 14, 1997, HSBC Americas, Inc. (the
Company) acquired the common stock of CTUS Inc. (CTUS) effective March 1,
1997.
The required financial statements relating to the acquisition are provided
in Item 7.
Item 7. Financial Statements and Exhibits
a. Audited financial statements of CTUS Inc. are included as an Exhibit to
this Report.
b. The following pro forma combined condensed financial statements are
provided:
- Pro Forma Combined Condensed Balance Sheet of HSBC Americas, Inc. as
of December 31, 1996.
- Pro Forma Combined Condensed Income Statement of HSBC Americas, Inc.
for the year ended December 31, 1996.
- Notes to Pro Forma Combined Condensed Financial Information of HSBC
Americas, Inc.
3.
HSBC Americas, Inc.
Unaudited Pro Forma Combined Condensed
Financial Information
Effective March 1, 1997, the Company acquired the common stock of CTUS. The
transaction was accounted for under the purchase method of accounting. The
following provides the basis of presentation of the acquisition in the
Company's pro forma combined condensed financial information.
The accompanying unaudited pro forma combined condensed balance sheet as of
December 31, 1996 includes the assets and liabilities of CTUS at their
respective fair values at the date the transaction was consummated.
The accompanying unaudited pro forma combined condensed income statement for
the year ended December 31, 1996 presents the pro forma impact of the
acquisition of CTUS assuming that the acquisition had been completed as of the
beginning of the period presented.
The pro forma information is based on the historical financial statements
after giving effect to the impact of purchase accounting adjustments relating
to the acquisition. Assumptions and adjustments are set forth in the
accompanying notes made in connection with the preparation of the pro forma
combined condensed financial information. Purchase accounting adjustments to
reflect estimated fair values have been made with respect to the assets and
liabilities acquired based upon evaluations as of March 1, 1997.
The pro forma information with respect to CTUS has been prepared by the
Company's management based upon the financial statements of CTUS included
elsewhere herein and information obtained by the Company during its
investigation of the activities acquired. The pro forma financial information
should be read in conjunction with the notes thereto. This pro forma
information may not be indicative of the results that actually would have
occurred if the purchase had been consummated on the date indicated or which
may be obtained in the future. While the Company expects to achieve certain
operating cost savings as a result of the combination, no adjustment has been
included in the pro forma amounts for anticipated operating cost savings or
revenue enhancements.
<TABLE>
<CAPTION>
4.
HSBC Americas, Inc.
Pro Forma Combined Condensed Balance Sheet
December 31, 1996
(Unaudited)
(in millions)
Historical
------------------
HSBC
Americas CTUS Pro Forma Pro Forma
Inc. Inc. Ajustments Combined
---------- ----- ---------- ---------
<S> <C> <C> <C> <C>
Assets
$ $ $ (29)(1) $
Cash and due from banks 2,900 192 2 (2) 3,065
Federal funds sold and
securities purchased under
agreements to resell 1,842 (676)(3) 1,166
Trading assets 892 892
Securities 2,870 789 4 (4) 3,663
Loans 14,692 5,869 36 (4) 20,597
Less: allowance for loan loss 418 41 459
-------- ------ ------- -------
Loans, net 14,274 5,828 36 20,138
-------- ------ ------- -------
Other assets 694 298 (15)(4) 977
240 (3)
Goodwill 158 (2)(4) 396
-------- ------ ------- -------
Total assets $ 23,630 $ 7,107 $ (440) $ 30,297
======== ====== ======= =======
Liabilities and Shareholders' Equity
Liabilities
Deposits - domestic offices $ 15,937 $ 4,389 $ 12 (4) $ 20,338
- foreign offices 1,773 1,773
Federal funds purchased and
securities sold under
repurchase agreements 1,284 362 1,646
(82)(1)
Other borrowed funds 2,278 1,857 4 (4) 4,057
Interest, taxes and
other liabilities 385 118 7 (4) 510
-------- ------ ------- -------
Total liabilities 21,657 6,726 (59) 28,324
-------- ------ ------- -------
(436)(3)
2 (2)
Shareholders' Equity 1,973 381 53 (1) 1,973
-------- ------ ------- -------
Total liabilities and
shareholders' equity $ 23,630 $ 7,107 $ (440) $ 30,297
======== ====== ======= =======
See Notes to Pro Forma Combined Condensed Financial Information.
(1) Conversion to equity of CTUS Inc. debt of $82 million payable to former
parent, net of dividend paid.
(2) Income earned by CTUS Inc. during 1997 prior to purchase.
(3) Assuming liquidation of short term investments to fund acquisition,
including the related goodwill.
(4) Estimated purchase accounting adjustments to reflect fair value and
related acquisition liabilities.
</TABLE>
<TABLE>
<CAPTION>
5.
HSBC Americas, Inc.
Pro Forma Combined Condensed Income Statement
Year ended December 31, 1996
(Unaudited)
(in millions)
Historical
--------------------
HSBC
Americas CTUS Pro Forma Pro Forma
Inc. Inc. Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
$ $ $ (36) (2) $
(2) (1)
Interest income 1,612 498 (11) (3) 2,061
(7) (1)
Interest expense 650 326 6 (3) 975
-------- -------- --------- ---------
Net interest income 962 172 (48) 1,086
Provision for loan loss 65 13 - 78
-------- -------- --------- ---------
Net interest income
after provision for
loan loss 897 159 (48) 1,008
Other operating income 311 45 (2) (3) 354
-------- -------- --------- ---------
1,208 204 (50) 1,362
Operating expenses 657 147 16 (3) 820
-------- -------- --------- ---------
Income before taxes 551 57 (66) 542
Income taxes (benefit) 171 (17) (21) (4) 133
-------- -------- --------- ---------
Net income $ 380 $ 74 $ (45) $ 409
======== ======== ========= =========
See Notes to Pro Forma Combined Condensed Financial Information.
(1) Reduction of interest expense associated with $82 million debt conversion
and reduction of interest income associated with $29 million dividend
payment.
(2) Reduction of interest income on short term investments liquidated.
(3) Impact of pro forma purchase accounting adjustments.
(4) Income taxes related to applicable adjustments at 43%.
</TABLE>
6.
HSBC Americas, Inc.
Notes to Pro Forma Combined Condensed Financial Information
(Unaudited)
NOTE 1. Under the purchase agreement relating to the CTUS acquisition,
immediately prior to consummation of the acquisition of all of the common
stock of CTUS by the Company, CTUS converted senior debt owed to its parent to
equity and declared and paid a dividend to its parent, in an amount to reduce
shareholder's equity immediately prior to the acquisition to $436 million.
The Company sold a portion of its short term investments to fund the purchase
price of the CTUS common shares.
The purchase agreement also provided that at the closing of the purchase of
the CTUS common shares by the Company, the Company issued to the former parent
of CTUS and the former parent will continue to hold following the purchase, a
class of preferred shares of the Company which will provide for a contingent
dividend or redemption equal to the amount of recovery, net of taxes and costs
if any, by First Federal Savings and Loan Association of Rochester (First
Federal), a wholly owned subsidiary of CTUS, (or Marine as its successor)
resulting from the pending action against the United States government
alleging breaches by the government of contractual obligations to First
Federal following the passage of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989. The preferred shares issued had a total par
value of $100.
NOTE 2. The assumptions underlying the pro forma purchase accounting
adjustments are summarized as follows:
(a) The estimated fair value adjustments have been determined by the
Company based upon information obtained in the review of the operations
of CTUS and various assumptions deemed appropriate by the Company.
(i) Securities were valued at their estimated fair market value as
of March 1, 1997.
(ii) Loans were valued based upon interest rates as of March 1,
1997. The resulting net premium is being amortized against
income over the remaining estimated life of the portfolio
utilizing certain prepayment assumptions so as to produce a
constant yield to maturity.
(iii) Premises and equipment included in other assets were recorded
at their estimated fair value.
(iv) Mortgage servicing rights, included in other assets, represent
acquired servicing rights and were valued at fair value. The
resulting premium is being amortized against income over the
remaining life of the servicing portfolio utilizing certain
prepayment assumptions.
(v) Deposits were valued based upon interest rates for comparable
deposit liabilities as of March 1, 1997. The resulting
premiums are being amortized into interest expense over the
remaining contractual term so as to produce a constant cost to
maturity.
7.
(vi) Other borrowed funds were valued based upon interest rates for
comparable borrowed funds as of March 1, 1997. Outstandings
were reduced by amounts received in liquidation of securities.
(vii) Upon acquisition it is more likely than not that all tax
benefits of CTUS will be realized in future periods by the
combined entity. Therefore, the valuation allowance for
deferred tax assets of CTUS of $11 million was eliminated.
(viii) Employee benefit liabilities related to employee contracts and
severance costs related to the elimination of redundant
personnel costs were recorded. Liability for post retirement
benefits other than pensions was reduced to the accumulated
benefit obligation.
(ix) Liabilities for lease buyouts of facilities to be vacated were
provided.
(x) Goodwill is being amortized into expense on a straight line
basis over 15 years.
<TABLE>
<CAPTION>
(b) The purchase price is estimated to be allocated as described in the
table below:
(in millions)
<S> <C>
Cost of acquisition $676
---
Net assets acquired 436
Fair value adjustments:
Securities 4
Loans 36
Other assets
Mortgage servicing rights 7
Premises and equipment (15)
Write off of intangible assets (7)
Deposits (12)
Borrowed funds (4)
Reduction in deferred tax
valuation allowance 11
Other, net (3)
Other liabilities
Acquisition related costs (15)
---
438
---
Goodwill $238
===
</TABLE>
NOTE 3. The Pro Forma Combined Condensed Income Statement for the year ended
December 31, 1996 reflects the combination of historical operating results of
Company and CTUS and includes the necessary purchase accounting adjustments as
if the combination had taken place at the beginning of the period presented.
8.
<TABLE>
<CAPTION>
The purchase accounting adjustments used in the preparation of the Pro Forma
Combined Condensed Income Statement are summarized below:
Year Ended
December 31, 1996
-----------------
(in millions)
<S> <C>
Net income of the Company $380
Net income of CTUS Inc. 74
Pro forma adjustments
Amortization/accretion of purchase
accounting adjustments:
Loans (11)
Mortgage servicing rights (2)
Deposits (6)
Goodwill (16)
Loss of interest income on short-term
investments due to their use to fund
the purchase price (36)
Reduction in interest income/expense
associated with debt conversion net of
dividend 5
Net tax effect associated with above
adjustments excluding amortization of
goodwill 21
---
Pro forma net income $409
===
</TABLE>
NOTE 4. The following table sets forth the projected effect of purchase
accounting adjustments relating to the CTUS acquisition on the operating
results of future periods. The annual amortization of goodwill of $16 million
relating to the CTUS acquisition is not subject to deduction for Federal and
state taxes. The projected amortization and accretion is subject to change if
such assets and liabilities are subsequently sold and variations between
future prepayments assumed in the preparation of the table and those which may
actually occur.
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Amortization of:
Premium on loans $11 $10 $ 7 $ 5 $ 3
Purchased mortgage
servicing rights 2 2 1 1 1
Premium on deposits 6 6 - - -
Goodwill 16 16 16 16 16
--- --- --- --- ---
Charge to operations $35 $34 $24 $22 $20
=== === === === ===
</TABLE>
9.
(c) Exhibits
2. Stock Purchase Agreement between CT Financial Services Inc. and
HSBC Americas, Inc. dated as of August 21, 1996.
13. Audited consolidated financial statements for CTUS Inc. -
December 31, 1996 and 1995, including independent auditors' report
thereon.
23. Independent Auditors' Consent
10.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HSBC AMERICAS, INC.
(REGISTRANT)
/s/ Gerald A. Ronning
NAME: GERALD A. RONNING
TITLE: EXECUTIVE VICE PRESIDENT &
CONTROLLER
Date: May 8, 1997
EXHIBIT 2
AMENDED AND RESTATED STOCK PURCHASE AGREEMENT
between
CT FINANCIAL SERVICES INC.
("Seller")
and
HSBC AMERICAS, INC.
("Purchaser")
dated as of August 21, 1996
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
SECTION 1.01. Certain Defined Terms. . . . . . . . . . . . . . . . 1
SECTION 1.02. Additional Defined Terms . . . . . . . . . . . . . . 6
ARTICLE II
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale of CTUS Shares and
CTUS Preferred Stock . . . . . . . . . . . . . . . 8
SECTION 2.02. Purchase Price; HSAI Preferred Stock . . . . . . . . 8
SECTION 2.03. Closing. . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.04. Purchase Price Adjustment. . . . . . . . . . . . . . 9
SECTION 2.05. Certain Accounting Matters . . . . . . . . . . . . . 12
SECTION 2.06. Differential Amount Estimate . . . . . . . . . . . . 12
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
SECTION 3.01. Organization and Authority of the Seller . . . . . . 12
SECTION 3.02. CTUS Representation. . . . . . . . . . . . . . . . . 13
SECTION 3.03. Organization and Qualification of CTUS, the Company
and the Subsidiaries. . . . . . . . . . . . . . . . 13
SECTION 3.04. Capital Stock of CTUS. . . . . . . . . . . . . . . . 14
SECTION 3.05. Capital Stock of the Company and the Subsidiaries. . 14
SECTION 3.06. Consents and Approvals . . . . . . . . . . . . . . . 15
SECTION 3.07. No Conflict. . . . . . . . . . . . . . . . . . . . . 16
SECTION 3.08. CTUS Financial Statements. . . . . . . . . . . . . . 16
SECTION 3.09. Company Financial Statements . . . . . . . . . . . . 16
SECTION 3.10. Absence of Certain Changes or Events . . . . . . . . 17
SECTION 3.11. Absence of Litigation. . . . . . . . . . . . . . . . 19
SECTION 3.12. Compliance with Laws . . . . . . . . . . . . . . . . 19
SECTION 3.13. Contracts. . . . . . . . . . . . . . . . . . . . . . 19
SECTION 3.14. Reports. . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 3.15. Taxes. . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.16. Real Property. . . . . . . . . . . . . . . . . . . . 21
SECTION 3.17. Environmental Matters. . . . . . . . . . . . . . . . 22
SECTION 3.18. Employee Benefit Matters . . . . . . . . . . . . . . 22
SECTION 3.19. Labor Matters. . . . . . . . . . . . . . . . . . . . 25
SECTION 3.20. Insurance. . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3.21. Minority Shares. . . . . . . . . . . . . . . . . . . 26
SECTION 3.22. Intercompany Obligations . . . . . . . . . . . . . . 26
SECTION 3.23. Community Reinvestment Act . . . . . . . . . . . . . 26
SECTION 3.24. Brokers. . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
SECTION 4.01. Organization and Authority of the Purchaser;
Authorization and Issuance of HSAI Preferred
Stock . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 4.02. Organization of Marine . . . . . . . . . . . . . . . 27
SECTION 4.03. Consents and Approvals . . . . . . . . . . . . . . . 28
SECTION 4.04. No Conflict. . . . . . . . . . . . . . . . . . . . . 28
SECTION 4.05. Compliance with Laws . . . . . . . . . . . . . . . . 28
SECTION 4.06. Absence of Litigation. . . . . . . . . . . . . . . . 29
SECTION 4.07. Securities Law . . . . . . . . . . . . . . . . . . . 29
SECTION 4.08. Financing. . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.09. Community Reinvestment Act . . . . . . . . . . . . . 29
SECTION 4.10. Brokers. . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. Conduct of Business Prior to the Closing . . . . . . 30
SECTION 5.02. Investigation. . . . . . . . . . . . . . . . . . . . 31
SECTION 5.03. Access to Information. . . . . . . . . . . . . . . . 32
SECTION 5.04. Books and Records. . . . . . . . . . . . . . . . . . 33
SECTION 5.05. Confidentiality. . . . . . . . . . . . . . . . . . . 33
SECTION 5.06. Authorizations; Consents and Notices . . . . . . . . 34
SECTION 5.07. Pre-Closing Payments . . . . . . . . . . . . . . . . 35
SECTION 5.08. Notice of Events . . . . . . . . . . . . . . . . . . 35
SECTION 5.09. FIRREA Claim . . . . . . . . . . . . . . . . . . . . 35
SECTION 5.10. No Solicitation. . . . . . . . . . . . . . . . . . . 37
SECTION 5.11. Covenant Not to Compete. . . . . . . . . . . . . . . 37
SECTION 5.12. Environmental Audit. . . . . . . . . . . . . . . . . 38
SECTION 5.13. Minority Shares. . . . . . . . . . . . . . . . . . . 39
SECTION 5.14. FIRTPA Certificate . . . . . . . . . . . . . . . . . 39
SECTION 5.15. Further Assurances . . . . . . . . . . . . . . . . . 39
SECTION 5.16. Transition . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE VI
EMPLOYEE MATTERS
SECTION 6.01. Provision of Comparable Benefits . . . . . . . . . . 39
SECTION 6.02. Succession . . . . . . . . . . . . . . . . . . . . . 40
SECTION 6.03. Survival . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE VII
TAX MATTERS
SECTION 7.01. Tax Indemnities. . . . . . . . . . . . . . . . . . . 41
SECTION 7.02. Refunds and Tax Benefits . . . . . . . . . . . . . . 42
SECTION 7.03. Contests . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 7.04. Preparation of Tax Returns . . . . . . . . . . . . . 46
SECTION 7.05. Cooperation and Exchange of Information. . . . . . . 47
SECTION 7.06. Conveyance Taxes . . . . . . . . . . . . . . . . . . 47
SECTION 7.07. Miscellaneous. . . . . . . . . . . . . . . . . . . . 47
ARTICLE VIII
CONDITIONS TO CLOSING
SECTION 8.01. Conditions to Obligations of the Seller. . . . . . . 48
SECTION 8.02. Conditions to Obligations of the Purchaser . . . . . 49
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.01. Termination. . . . . . . . . . . . . . . . . . . . . 50
SECTION 9.02. Effect of Termination. . . . . . . . . . . . . . . . 50
SECTION 9.03. Waiver . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 9.04. Termination Fee. . . . . . . . . . . . . . . . . . . 51
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01. Non-Survival of Representations, Warranties,
Covenants and Agreements . . . . . . . . . . . . . 51
SECTION 10.02. Release and Indemnification . . . . . . . . . . . . 52
SECTION 10.03. Indemnification by the Seller . . . . . . . . . . . 52
SECTION 10.04. Prior Tax Sharing Agreements. . . . . . . . . . . . 56
SECTION 10.05. Expenses. . . . . . . . . . . . . . . . . . . . . . 56
SECTION 10.06. Federal Home Loan Bank of New York Advances . . . . 56
SECTION 10.07. Notices . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 10.08. Public Announcements. . . . . . . . . . . . . . . . 58
SECTION 10.09. Headings. . . . . . . . . . . . . . . . . . . . . . 58
SECTION 10.10. Severability. . . . . . . . . . . . . . . . . . . . 58
SECTION 10.11. Disclosure Schedule; Exhibits . . . . . . . . . . . 58
SECTION 10.12. Entire Agreement. . . . . . . . . . . . . . . . . . 58
SECTION 10.13. Assignment. . . . . . . . . . . . . . . . . . . . . 59
SECTION 10.14. No Third-Party Beneficiaries. . . . . . . . . . . . 59
SECTION 10.15. Amendment; Waiver . . . . . . . . . . . . . . . . . 59
SECTION 10.16. Governing Law . . . . . . . . . . . . . . . . . . . 59
SECTION 10.17. Counterparts. . . . . . . . . . . . . . . . . . . . 59
EXHIBITS
Exhibit 2.02 Form of Certificate of Designation for HSAI
Preferred Stock
Exhibit 2.05(b) Sample Calculation of the Audited Book Value of
the Company
Exhibit 3.08 CTUS Financial Statements
Exhibit 3.09 Company Financial Statements
Exhibit 5.01(a)(iii) Requirements for CTUS to Qualify as a "Private
Company" Under Canadian Securities Laws
Exhibit 5.09(a) Standards of Conduct for FIRREA Plaintiff
Exhibit 5.09(b) Form of Certificate of Designation for CTUS
Preferred Stock
Exhibit 5.09(d) Form of FIRREA Claim Management Agreement
AMENDED AND RESTATED STOCK PURCHASE AGREEMENT dated as of
August 21, 1996 between CT FINANCIAL SERVICES INC., a federal corporation
organized under the Laws of Canada (the "Seller"), and HSBC AMERICAS, INC.,
a Delaware corporation (the "Purchaser").
W I T N E S S E T H :
WHEREAS, the Seller owns, directly or indirectly, all of the
issued and outstanding common shares (the "CTUS Shares") of CTUS Inc.,
a Delaware corporation ("CTUS");
WHEREAS, on the date hereof, CTUS owns approximately 99% of the
issued and outstanding shares (the "Company Shares") of First Federal Savings
and Loan Association of Rochester (the "Company");
WHEREAS, prior to the Audit Date (as defined herein) CTUS intends
to issue to the Seller the CTUS Preferred Stock (as defined herein);
WHEREAS, the Seller wishes to sell to the Purchaser, and the
Purchaser wishes to purchase from the Seller, the CTUS Shares and the CTUS
Preferred Stock on the terms and conditions set forth herein and wishes to
obtain the indirect ownership of all of the issued and outstanding shares of
the Company;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements and covenants hereinafter set forth, the Seller and the Purchaser
hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Certain Defined Terms. As used in this Agreement,
the following terms shall have the following meanings:
"Affiliate" of a specified person means a person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such specified person.
"Agreed Minimum Audit Date Book Value" means an amount equal to
(a) the sum of (i) U.S.$404,000,000 and (ii) an amount equal to the excess,
if any, of (x) the Covered Period Net Earnings plus (y) the Deferred Tax
Valuation Amount over the Earnings Amount less (b) the sum of (i) the Employee
Amount and (ii) the BIF/SAIF Amount plus (c) the amount, if any, by which the
Employee Amount exceeds U.S.$16,000,000 (net of Tax benefit).
"Agreement" means this Amended and Restated Stock Purchase
Agreement dated as of August 21, 1996 (including the exhibits and schedules
hereto) and all amendments hereto made in accordance with the provisions of
Section 10.15.
"BIF/SAIF Amount" means an amount equal to any special one-time
assessment or charge (net of any Tax benefit) paid or accrued by the Company
prior to the Closing arising out of or related to any Law with respect to
insurance of deposits (as defined in the FDIA) of the Company by or through
the Savings Association Insurance Fund (SAIF), but not any regular premium
paid or accrued prior to the Closing Date, less the present value at the
Closing Date of the difference between (a) the premiums paid or accrued in
respect of the Company's deposits from the date such one-time assessment or
charge was paid or accrued through the Closing Date and (b) the premiums that
would have been paid or accrued had no such assessment or charge been paid or
accrued.
"Book Value" means the amount by which total consolidated assets
exceeds total consolidated liabilities of an entity as shown on any specified
consolidated balance sheet prepared in accordance with GAAP.
"Business" means the business of providing financial services and
related financial products and all other business which is currently being
conducted by the indicated person or entity.
"Business Day" means a day of the year on which banks are not
required or authorized to be closed in New York or Toronto.
"Chemical Substance" means any pollutant, chemical, mixture,
petroleum or any fraction thereof, asbestos or asbestos-containing material,
polychlorinated biphenyls, or any substances, materials or wastes which are
regulated under any Environmental Law.
"Code" means the Internal Revenue Code of 1986, as amended through
the date hereof.
"Covered Period Net Earnings" means the net income of the Company
from July 1, 1996 through the Audit Date (calculated without (i) deduction of
any amount in respect of the BIF/SAIF Amount and the Employee Amount and (ii)
addition of the Deferred Tax Valuation Amount) less U.S.$4,000,000, as
determined by the Company's Accountants in accordance with Section 2.04.
"Deferred Tax Valuation Amount" means an amount equal to
U.S.$5,000,000.
"Earnings Amount" means the sum of (i) the lesser of (x)
U.S.$5,300,000 multiplied by the number of months between July 1, 1996 and the
Audit Date and (y) Covered Period Net Earnings and (ii) the Deferred Tax
Valuation Amount.
"Employee Amount" means an amount (net of Tax benefit) equal to
the aggregate amount of all severance payments, benefits, bonus amounts
relating to all options, completion or stay bonuses, special and long-term
incentives paid or payable to employees or former employees of the Company or
other employment-related consideration, but only to the extent the same arise
out of or result from the transactions contemplated by this Agreement and any
amounts in respect of the foregoing whether or not paid or accrued by the
Company before the Audit Date.
"Encumbrance" means a pledge, lien, security interest, mortgage,
charge, adverse claim of ownership or use, or other encumbrance of any kind.
"Environment" means any soil, surface waters, groundwaters, stream
sediments, surface or subsurface strata, and ambient air, and any other
environmental medium.
"Environmental Laws" means all applicable federal, state, county
and local Laws or regulations relating to human health and safety, protection
of the environment or natural resources in existence on the date hereof.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"Final Determination" means, as applied to federal income taxes in
respect of any item for a Period, (i) a final, unappealable decision by a
court of competent jurisdiction with respect to such taxes, (ii) the
expiration of the time for filing a claim for refund with respect to such
taxes or, if a refund claim with respect to such taxes has been timely filed,
the expiration of the time for instituting suit in respect of such refund
claim, if no further adjustment to the items of income, gain, deduction, loss
or credit for such Period may thereafter be made, (iii) the execution by or on
behalf of the taxpayer and the IRS of a closing agreement under Section 7121
of the Code with respect to such taxes, (iv) the acceptance by the IRS of a
tender pursuant to an offer in compromise with respect to such taxes pursuant
to Section 7122 of the Code, (v) the execution of a Form 870AD with respect to
such taxes or (vi) any other final and irrevocable determination of the tax
liability with respect to such taxes of a party to this Agreement (or an
Affiliate of a party) for the Period. In the context of state or local income
taxes in respect of any item for a Period, "Final Determination" means any
final, unappealable and irrevocable determination of the tax liability of a
party to this Agreement (or an Affiliate of a party) with respect to such
taxes for the Period.
"GAAP" means generally accepted accounting principles in the
United States in effect from time to time applied consistently throughout the
period involved.
"Governmental Authority" means any Canadian or United States
federal, state, provincial or local government or any other foreign
government, or any governmental, regulatory or administrative authority,
agency or commission or any court, tribunal, or judicial or arbitral body.
"Knowledge of the Seller" or "to the Seller's knowledge" means,
with respect to matters relating to the Seller, the actual knowledge of the
senior executive officers of the Seller with respect to such matters and, in
the case of any matters relating to the Company or any of the Subsidiaries,
such knowledge as is obtainable after the Seller's due inquiry of the senior
executive officers of the Company set forth in Section 1.01 of the Seller
Disclosure Schedule.
"Law" means any U.S. or Canadian federal, state, local or foreign
statute, law, ordinance, regulation, rule, code, order, rule of any U.S. or
Canadian administrative body, other requirement or rule of law.
"Leased Property" means any real property listed in
Section 3.16(b) of the Seller Disclosure Schedule.
"Loan Property" means any property, other than single-family
residences and Real Estate Owned, securing a loan held by the Company or any
Subsidiary, or, where required by the context, the Company or any Subsidiary
is deemed by a court of competent jurisdiction to be the owner or operator of
such property.
"Loss" or "Losses" means any and all losses, liabilities,
obligations, damages, claims, awards or judgments actually suffered or
incurred by a party including legal costs and expenses to the extent provided
in Section 10.03(d), but excluding incidental, special, indirect or
consequential damages, loss of profits or similar damages.
"Material Adverse Effect" means any change in, or effect on, CTUS,
the Company or the Subsidiaries, as the case may be, that is materially
adverse to the results of operations, financial condition or properties and
assets of CTUS, the Company and the Subsidiaries, taken as a whole; provided,
however, that changes or effects resulting directly or indirectly from
(i) changes in Laws or GAAP (or interpretations thereof), (ii) changes in the
general level of market interest rates, (iii) changes in the economic,
financial or market conditions affecting the banking or thrift industry
generally in the regions in which CTUS, the Company or the Subsidiaries
operate, (iv) the effect of any sale or other disposition of loans or any
other transaction affecting CTUS, the Company or the Subsidiaries to the
extent the same is made pursuant to, or as permitted or contemplated by, this
Agreement or with the Purchaser's prior written consent or at its written
direction, or (v) the announcement of this Agreement or the transactions
contemplated hereby, shall not constitute or contribute to a Material Adverse
Effect.
"Minority Shares" means any shares of the Company not owned by
CTUS on the date hereof.
"Non-Compete Area" means New York State.
"Period" means, in respect of a particular Tax, the taxable year
or any other period for which such Tax is imposed.
"Person" means any individual, partnership, firm, corporation,
limited liability company, association, trust, unincorporated organization or
other entity, as well as any syndicate or group that would be deemed to be a
person under Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended.
"Post-Closing Period" means any Period that begins after the
Closing Date, and, with respect to any Period beginning before and ending
after the Closing Date, shall mean the portion of such Period commencing on
the day following the Closing Date.
"Pre-Closing Period" means any Period that ends on or before the
Closing Date, and, with respect to any Period beginning before and ending
after the Closing Date, shall mean the portion of such Period ending on the
Closing Date.
"Purchaser Disclosure Schedule" means the Disclosure Schedule of
the Purchaser dated as of the date hereof, delivered by the Purchaser to the
Seller upon the execution and delivery of this Agreement.
"Real Estate Owned" means real estate acquired through foreclosure
or through a deed in lieu of foreclosure.
"Real Property" means any real property currently or formerly
owned (but, in the case of formerly owned property only with respect to the
period of time owned by CTUS, the Company or any Subsidiary) by CTUS, the
Company or any Subsidiary and all improvements related thereto, including but
not limited to owned branch offices, but not including Real Estate Owned or
Leased Property.
"Release" shall have the meaning as defined in or pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act.
"Returns" means any report, information statement, return,
declaration or other filing required to be supplied to any taxing authority or
jurisdiction with respect to Taxes including any amendments thereto.
"Seller Disclosure Schedule" means the Disclosure Schedule of the
Seller, dated as of the date hereof, delivered by the Seller to the Purchaser
upon the execution and delivery of this Agreement.
"Subsidiary" means each corporation, bank, savings bank,
association, partnership or other entity in which the Company owns or controls
25% or more of the voting power of all outstanding voting securities or
interests either directly or through an unbroken chain of entities as to each
of which 25% or more of the voting power of all outstanding voting securities
or interests is owned directly or indirectly by its parent; provided, however,
that as used in Article III, other than in the first sentence of
Section 3.05(b), "Subsidiary" shall not include any entity identified in
Section 3.05(b) of the Seller Disclosure Schedule as being an entity the
equity securities or interests of which (i) have been acquired through
foreclosure or (ii) are owned or controlled in a fiduciary capacity.
"Tax" or "Taxes" means all taxes, however denominated, including
any interest or penalties that may become payable in respect thereof, imposed
by any federal, state, local or foreign government or any agency or political
subdivision of any such government, which taxes shall include, without
limiting the generality of the foregoing, all net income, alternative or add-
on minimum, gross income, gross receipts, sales, use, goods and services, ad
valorem, earnings, franchise, profits, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property, excess or windfall
profit or value added tax.
"U.S.$" means United States dollars.
SECTION 1.02. Additional Defined Terms. The following additional
defined terms shall have the meanings set forth in the sections of this
Agreement listed below:
Defined Term Section Where Defined
Audit Date 2.04(a)
Audit Date Balance Sheet 2.04(a)
Audited Book Value 2.04(b)
Audited Financial Statements 3.09
Claim Deductible 10.03(b)(ii)
Closing 2.03(a)
Closing Date 2.03(a)
Company Recitals
Company Financial Statements 3.09
Company Shares Recitals
Company's Accountants 2.04(b)
Confidentiality Agreement 5.05(a)
Contest 7.03(b)
CRA 3.23
CTUS Recitals
CTUS Certificate of Designation 5.09(b)
CTUS Financial Statements 3.08
CTUS Preferred Stock 5.09(b)
CTUS Shares Recitals
Differential Amount 2.04(b)
Differential Amount Estimate 2.06
Differential Amount Schedule 2.06
Electronic Networks 5.11
FDIA 3.03(b)
FDIC 3.03(b)
FIRREA Claim 5.09(a)
FIRREA Plaintiff 5.09(a)
FIRREA Recovery 5.09(a)
FIRREA Claim Management Agreement 5.09(d)
HOLA 3.03(b)
HSAI Certificate of Designation 2.02(b)
HSAI Preferred Stock 2.02(b)
Indemnifiable Amount 10.03(b)(ii)
Indemnification Event 7.03(a)
Intercompany Obligations 3.22
IRS 3.18(b)
Maximum Aggregate Indemnity Payment Amount 10.03(b)(iii)
Merrill Lynch 3.24
OTS 3.03(a)
PBGC 3.18(e)
Plans 3.18(a)
Post-Closing Date Tax Benefit 7.02(c)
Public Voting Requirement 5.11
Purchase Price 2.02(a)
Purchaser Preamble
Purchaser Operating Approvals 4.05(a)
Purchaser's Accountants 2.04(c)
Purchaser's Required Approvals 4.03(a)
Reports 3.14
Seller Preamble
Seller Indemnified Party 10.02(b)
Seller Operating Approvals 3.12(a)
Seller's Accountants 2.04(c)
Seller's Required Approvals 3.06(a)
SLHC Act 3.03(a)
Straddle Period 7.01(c)
Subsidiary Shares 3.05(b)
Tax Liability Threshold Amount 7.01(d)
Unaudited Financial Statements 3.09
ARTICLE II
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale of CTUS Shares and CTUS Preferred
Stock. On the terms and subject to the conditions set forth in this
Agreement, the Seller agrees to sell to the Purchaser, and the Purchaser
agrees to purchase from the Seller, on the Closing Date, the CTUS Shares and
the CTUS Preferred Stock.
SECTION 2.02. Purchase Price; HSAI Preferred Stock. (a) The
purchase price (the "Purchase Price") for the CTUS Shares shall be payable in
New York in cash in the net amount of U.S.$620,000,000, free of any
withholding, deduction or adjustment of any nature whatsoever, except as
expressly provided for in Sections 2.04, 2.06 and 5.14 of this Agreement or as
required by Law. The Purchase Price shall be payable as provided in Section
2.03(c).
(b) The consideration for the CTUS Preferred Stock shall be
newly issued shares of a new series of preferred stock, par value $1.00 per
share, of the Purchaser (the "HSAI Preferred Stock") constituted by and having
terms and conditions set forth in the form of certificate of designation of
the Purchaser annexed hereto as Exhibit 2.02(b) (the "HSAI Certificate of
Designation"). The number of shares of HSAI Preferred Stock shall be equal to
the number of shares of CTUS Preferred Stock. The HSAI Preferred Stock shall
be issuable as provided in Section 2.03(c).
SECTION 2.03. Closing. (a) Subject to the terms and conditions
of this Agreement, the sale and purchase of the CTUS Shares and the CTUS
Preferred Stock contemplated hereby shall take place at a closing at the
offices of Shearman & Sterling, 599 Lexington Avenue, New York, New York (the
"Closing") at 10:00 a.m., local time, on the first Business Day of the month
following the month in which the conditions to Closing set forth in
Article VIII are first satisfied or waived (on the understanding that such
conditions shall continue to have been satisfied or waived immediately prior
to the Closing) or at such other time or on such other date or at such other
place as the Seller and the Purchaser may mutually agree upon in writing (the
day on which the Closing takes place being the "Closing Date").
(b) At the Closing, the Seller shall deliver or cause to be
delivered to the Purchaser (i) certificates evidencing the CTUS Shares and the
CTUS Preferred Stock, in each case duly endorsed in blank, in proper form for
transfer or accompanied by stock powers duly executed in blank and (ii) the
certificates and other documents required to be delivered pursuant to Section
8.02(a).
(c) At the Closing, the Purchaser shall deliver to the Seller
(i) the Purchase Price and the Differential Amount Estimate by wire transfer
in immediately available funds to no more than ten (10) accounts designated by
the Seller in writing at least two Business Days prior to the Closing Date,
(ii) certificates evidencing the HSAI Preferred Stock duly registered in the
name of the Seller or such Persons as shall have been designated by the Seller
in writing at least two Business Days prior to the Closing Date and (iii) the
certificates and other documents required to be delivered by the Purchaser
pursuant to Section 8.01(a).
SECTION 2.04. Purchase Price Adjustment. The parties hereto
acknowledge that the Purchase Price is to be adjusted as specified in this
Section 2.04 for the purposes described in Section 2.05:
(a) As promptly as practicable, but not later than 60 days after
the Closing Date, the Seller and the Purchaser shall cause CTUS to prepare and
deliver to the Seller and the Purchaser an interim consolidated balance sheet
for CTUS as of the end of the month immediately preceding the Closing Date in
a manner consistent with past practice (for ease of reference being referred
to herein as the "Audit Date Balance Sheet" and the date thereof being
referred to herein as the "Audit Date").
(b) Following preparation of the Audit Date Balance Sheet by
CTUS, the Purchaser shall cause CTUS to request the Company's independent
accountants, Deloitte & Touche LLP (the "Company's Accountants"), (i) to audit
the Audit Date Balance Sheet in accordance with generally accepted auditing
standards, (ii) to prepare a schedule to the Audit Date Balance Sheet showing
(x) the Book Value of CTUS as of the Audit Date on the basis of the Audit Date
Balance Sheet (the "Audited Book Value"), (y) the calculation of the Agreed
Minimum Audit Date Book Value on the basis of the Audit Date Balance Sheet
(including the Covered Period Net Earnings, the Earnings Amount, the Employee
Amount and the BIF/SAIF Amount) and (z) the amount, if any, by which the
Audited Book Value exceeds or is less than the Agreed Minimum Audit Date Book
Value (the "Differential Amount") and (iii) to deliver a copy of the schedule
referred to in clause (ii) above and an unqualified report stating that the
Audit Date Balance Sheet fairly presents, in all material respects, the
financial condition of CTUS as of the Audit Date and such schedule fairly
presents, in all material respects, the information contained therein, in each
case in accordance with GAAP and on a basis consistent with prior audited
balance sheets of CTUS. The Seller shall pay the fees and expenses of the
Company's Accountants in preparing the Audit Date Balance Sheet, including the
schedule thereto referred to clause (ii) above and in responding to any
questions or disputes arising in connection therewith.
(c) Within 20 Business Days following the receipt by the
Purchaser and the Seller of the Audit Date Balance Sheet, each of the Seller's
independent accountants, Price Waterhouse LLP (the "Seller's Accountants"),
and the Purchaser's independent accountants, KPMG Peat Marwick LLP (the
"Purchaser's Accountants"), shall have an opportunity to make such
investigation of the accounting, records of CTUS (and the pertinent portions
of the relevant work papers of the Company's Accountants) as any of the
Purchaser, the Seller, the Seller's Accountants and the Purchaser's
Accountants shall deem necessary and, if the Seller's Accountants or the
Purchaser's Accountants desire, to meet with the Company's Accountants to
discuss the determination of the Audited Book Value, the Agreed Minimum Audit
Date Book Value and the Differential Amount. If, within such 20 Business Day
period, the Seller's Accountants and/or the Purchaser's Accountants disagree
with the amount or calculation of any of the foregoing and/or believe that the
Audit Date Balance Sheet does not fairly present the financial condition of
CTUS, as of the Audit Date, in all material respects in accordance with GAAP,
then, in either such event, either of the Seller's Accountants and/or the
Purchaser's Accountants may provide the Company with written notice of any
such disagreement or belief (together with relevant supporting details) and
thereafter the Seller's Accountants, the Purchaser's Accountants and the
Company's Accountants shall promptly attempt to resolve any differences or
concerns that may exist, it being agreed that if such accountants shall be
unable within a period of 10 Business Days to resolve the differences and
reach agreement, then, in such event, the Purchaser and the Seller will
endeavor in good faith to resolve the differences amongst themselves during an
additional period of 10 Business Days. If, after this additional 10 Business
Day period, the Purchaser and the Seller have failed to so agree, the disputed
items shall be submitted for final resolution to an independent accounting
firm selected and agreed to by the Seller's Accountants and the Purchaser's
Accountants or, if such accountant is unavailable, to such other independent
accountant as to which the Seller and the Purchaser shall agree, which
accountant shall be instructed to apply GAAP (and no other standards unless
agreed to by both parties hereto), to attempt to resolve any such dispute and,
following any such resolution, determine whether and to what extent, if any,
the Audited Book Value or the Agreed Minimum Audit Date Book Value should be
modified or changes should be made to the Audit Date Balance Sheet, which
determination shall be required to be completed within 15 Business Days and
shall be final and binding on the parties hereto absent manifest error. The
Seller and the Purchaser shall each bear one-half of the fees and expenses of
such other independent accounting firm as is appointed, if any, by the
Purchaser and the Seller as contemplated herein.
(d) Subject to paragraph (c) above and the proviso set forth
below (and notwithstanding anything to the contrary in Section 2.02), if there
is a Differential Amount the Purchase Price shall be adjusted from the amount
actually paid by the Purchaser in accordance with Section 2.03(c), and the
Purchaser and the Seller agree to make payments to each other following the
Closing as follows:
(i) if there is a Differential Amount as a result of the
Audited Book Value being greater than the Agreed Minimum Audit
Date Book Value, then, in any such case, the Purchaser shall make
an additional payment to the Seller in respect of the Purchase
Price in an amount equal to the sum of the Differential Amount
(less the Differential Amount Estimate) and interest at the rate
of 6% per annum payable in respect of the period commencing on the
Closing Date and continuing through and including the date on
which payment in respect of the Differential Amount is made;
provided, however, if the Differential Amount Estimate exceeds the
Differential Amount, then the Seller shall make a payment to the
Purchaser in an amount equal to such difference with interest as
provided above; or
(ii) if there is a Differential Amount as a result of the
Audited Book Value being less than the Agreed Minimum Audit Date
Book Value, then, in any such case, the Seller shall refund to the
Purchaser an amount in respect of the Purchase Price in an amount
equal to the sum of the Differential Amount and interest at the
rate of 6% per annum payable in respect of the period commencing
on the Closing Date and continuing through and including the date
on which payment in respect of the Differential Amount is made;
provided, however, that in giving effect to any such increase or decrease in
the Purchase Price, the U.S. dollar amounts shall be rounded up or down to the
nearest full U.S. dollar. Any payments required to be made pursuant to this
paragraph (d) shall be made by wire transfer of immediately available funds to
the account of the Purchaser or the Seller, as the case may be, designated in
writing not later than 15 Business Days after the date on which the Audit Date
Balance Sheet is finally determined in accordance with Section 2.04(c).
(e) For purposes of this Section 2.04, the Purchaser and the
Seller have agreed that each of the accountants referred to in this Section
2.04 is to find any adjustments necessary to cause the Audit Date Balance
Sheet to be in accordance with GAAP and the schedule referred to in Section
2.04(b) to be in accordance with this Agreement; provided, however, that such
adjustments shall be (i) individual items in excess of $1,000,000 and
(ii) other items in excess of $250,000 but less than $1,000,000 that aggregate
$5,000,000 or more.
SECTION 2.05. Certain Accounting Matters. (a) In addition to
the obligation of the Purchaser to pay the Purchase Price, (i) the Seller
shall be entitled to the economic benefit of the Covered Period Net Earnings
in an average amount of up to $5,300,000 for each month between July 1, 1996
through and including the Audit Date plus the Deferred Tax Valuation Amount
but not in excess of $5,000,000, (ii) the Company shall be obligated following
the Audit Date to pay the Employee Amount to the extent not paid by the
Company prior to the Audit Date and, in the computation of the Agreed Minimum
Audit Date Book Value, the after-tax effect of any actual accrual on or prior
to the Audit Date with respect to the Employee Amount (but not in excess of
U.S.$16,000,000) shall be reversed, and (iii) the Company shall be obligated
following the Closing to accrue or pay the BIF/SAIF Amount and, to the extent
that the Company has been required on or prior to the Audit Date, to fully
expense or pay for such BIF/SAIF Amount, in the computation of the Agreed
Minimum Audit Date Book Value, and the after-tax effect of any such payment or
required accrual by the Company shall be reversed.
(b) For the avoidance of doubt, it is agreed that as a result of
Section 2.05(a), there will be an increase in the retained earnings of the
Company between the date hereof and the Audit Date which will be available for
the Seller to cause the Company to pay out as an extraordinary dividend as
contemplated by and subject to the limitations contained in Section 5.07. For
illustrative purposes, Exhibit 2.05(b) provides a sample calculation of the
Agreed Minimum Audit Date Book Value of the Company reflecting the principles
set out in Section 2.05(a).
SECTION 2.06. Differential Amount Estimate. On or about January
15, 1997, but no later than 7 days prior to the Closing Date, the Seller shall
prepare in good faith, and deliver to the Purchaser, a schedule which sets
forth an estimate of the Differential Amount (the "Differential Amount
Schedule"), in substantially the form of Exhibit 2.05(b). The estimate of the
Differential Amount (the "Differential Amount Estimate") to be set forth in
the Differential Amount Schedule shall be based on, but not limited to,
calculations of (i) the Employee Amount, (ii) the BIF/SAIF Amount, (iii)
Covered Period Net Earnings, (iv) Audited Book Value, (v) Agreed Minimum Audit
Date Book Value and (vi) any dividends theretofore paid by the Company to
CTUS. As an advance payment in respect of the Differential Amount, the
Purchaser shall pay to the Seller the Differential Amount Estimate on the
Closing Date, which Differential Amount Estimate is believed by the Company to
be approximately U.S.$40,400,000.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller represents and warrants to the Purchaser as follows:
SECTION 3.01. Organization and Authority of the Seller. The
Seller is a corporation duly organized and validly existing under the laws of
Canada and has all necessary power (corporate or otherwise) and authority to
enter into this Agreement, to carry out its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery
of this Agreement by the Seller, the performance by the Seller of its
obligations hereunder and the consummation by the Seller of the transactions
contemplated hereby have been duly authorized by all requisite corporate
action on the part of the Seller. This Agreement has been duly executed and
delivered by the Seller, and (assuming due authorization, execution and
delivery by the Purchaser) constitutes a legal, valid and binding obligation
of the Seller enforceable against the Seller in accordance with its terms,
subject to the effect of any applicable bankruptcy, reorganization,
insolvency, moratorium or similar Laws affecting creditors' rights generally
and by general principles of equity (whether considered in a proceeding at law
or in equity).
SECTION 3.02. CTUS Representation. CTUS has no direct or
indirect subsidiaries, equity investments or joint ventures except for the
Company and the Subsidiaries. CTUS is not a party to any mortgage, lease or
other agreement except as set forth in Section 3.02 of the Seller Disclosure
Schedule. As of the Closing, CTUS shall have no assets other than the Company
Shares and certain Minority Shares, and shall have no liabilities, except as
set forth on its unaudited balance sheet as of June 30, 1996 (parent only), a
copy of which has heretofore been furnished to the Purchaser and receipt of
which is hereby acknowledged. Except as disclosed in Section 3.02 of the
Seller Disclosure Schedule, since the date of its organization CTUS has not
engaged in any business or operations, except the ownership of the Company
Shares and certain Minority Shares and has never had any employees or Plans.
SECTION 3.03. Organization and Qualification of CTUS, the Company
and the Subsidiaries. (a) CTUS is (i) a corporation duly organized and
validly existing under the laws of the State of Delaware and (ii) registered
as a savings and loan holding company with the Office of Thrift Supervision
("OTS") under the Savings and Loan Holding Company Act, as amended (the "SLHC
Act"). True and complete copies of the certificate of incorporation and
bylaws (or equivalent organizational documents) of CTUS, as amended to the
date of this Agreement, have been made available for review by the Purchaser.
(b) The Company is a federally chartered stock savings and loan
association duly organized, validly existing and in good standing under the
laws of the United States of America and engages only in activities (and holds
properties only of the types) authorized by the Home Owners' Loan Act of 1933,
as amended ("HOLA") and the OTS rules and regulations thereunder and not
prohibited by HOLA or the Federal Deposit Insurance Act (the "FDIA") and the
rules and regulations promulgated by the Federal Deposit Insurance Corporation
(the "FDIC") thereunder for federal savings associations. The Company's
deposit accounts are insured to the fullest extent permitted under applicable
Law by the Savings Association Insurance Fund as administered by the FDIC.
The Company is a qualified thrift lender under section 10(m) of HOLA and is a
member of the Federal Home Loan Bank of New York. True and complete copies of
the certificate of incorporation and bylaws (or equivalent organizational
documents) of the Company, as amended to the date of this Agreement, have been
made available for review by the Purchaser.
(c) Each Subsidiary is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. True and complete copies of the certificate of incorporation
and bylaws (or equivalent organization documents) of each Subsidiary, each of
the foregoing as amended to the date of this Agreement, have been made
available for review by the Purchaser. Each Subsidiary engages only in
activities permitted for subsidiaries or service corporations, as the case may
be, of federal savings associations.
(d) Each of CTUS, the Company and each of the Subsidiaries has
the requisite power and authority to own, operate or lease the properties and
assets now owned, operated or leased by it and to carry on, in all material
respects, that portion of the Business of CTUS, the Company and the
Subsidiaries as is currently conducted by CTUS, the Company or such
Subsidiary, as the case may be. Each of CTUS, the Company and each Subsidiary
is duly qualified to do business, and is in good standing, in each
jurisdiction where the character of its properties owned, operated or leased
or the nature of its activities makes such qualification necessary, except for
such failures to be qualified and in good standing which, individually or, to
the Seller's knowledge, in the aggregate, would not have a Material Adverse
Effect.
SECTION 3.04. Capital Stock of CTUS. The Seller owns, directly
or indirectly, all of the CTUS Shares, and as of the date hereof the CTUS
Shares constitute all the issued and outstanding shares of capital stock of
CTUS. The CTUS Shares have been duly authorized and validly issued and are
fully paid and nonassessable and were not issued in violation of any pre-
emptive rights. Other than the provisions hereof relating to the CTUS
Preferred Stock, there are no outstanding options, warrants or rights of
conversion or other rights, agreements, arrangements or commitments relating
to the capital stock of CTUS obligating CTUS to issue or sell any of its
shares of capital stock. The Seller is the record and beneficial owner of the
CTUS Shares and, at the Closing Date the Seller will be the record and
beneficial owner of the CTUS Preferred Stock, in each case free and clear of
all Encumbrances except as a result of the Seller's obligation to transfer the
CTUS Shares and the CTUS Preferred Stock to the Purchaser pursuant to this
Agreement. On the Closing Date, the Seller will cause to be transferred and
delivered to the Purchaser valid title to all the CTUS Shares and the CTUS
Preferred Stock, free and clear of all Encumbrances.
SECTION 3.05. Capital Stock of the Company and the Subsidiaries.
(a) The Company Shares have been duly authorized and validly issued and are
fully paid and nonassessable and were not issued in violation of any pre-
emptive rights. The Company's issued and outstanding capital stock consists
of 23,082,429 shares of common stock, 22,925,671 of which constitute the
Company Shares. CTUS is the record and beneficial owner of all of the Company
Shares and at the Closing, assuming payment by the Purchaser of the Purchase
Price as contemplated herein, will be the record and beneficial owner of the
Minority Shares (other than those Minority Shares disclosed in Section 3.21 of
the Seller Disclosure Schedule as to which the Seller is unable, using
reasonable efforts, between the date hereof and the Closing Date to enter into
agreements or arrangements to acquire), in each case free and clear of all
Encumbrances, except as a result of the Seller's obligation to transfer the
CTUS Shares to the Purchaser pursuant to this Agreement. Except as disclosed
in Section 3.05(a) of the Seller Disclosure Schedule, as of the date hereof,
there are, and Seller has made or will make arrangements so that at the
Closing, assuming payment by the Purchaser of the Purchase Price as
contemplated herein, there will be, no outstanding options, warrants or rights
of conversion or other rights, agreements, arrangements or commitments
relating to the capital stock of the Company obligating the Company to issue
or sell any of its shares of capital stock, except as a result of the Seller's
obligation to transfer the CTUS Shares to the Purchaser pursuant to this
Agreement.
(b) Section 3.05(b) of the Seller Disclosure Schedule sets
forth, with respect to each Subsidiary, the authorized capital stock and the
number and type of its issued and outstanding shares of capital stock
(collectively, the "Subsidiary Shares"). The Subsidiary Shares constitute
all the issued and outstanding shares of capital stock of the respective
Subsidiaries. The Subsidiary Shares have been duly authorized and validly
issued and are fully paid and nonassessable and were not issued in violation
of any pre-emptive rights. There are no outstanding options, warrants or
rights of conversion or other rights, agreements, arrangements or commitments
relating to the Subsidiary Shares obligating any Subsidiary to issue or sell
any of its Subsidiary Shares. The Company owns the Subsidiary Shares issued
by the respective Subsidiaries, free and clear of all Encumbrances, except as
set forth on Section 3.05(b) of the Seller Disclosure Schedule, and except for
any restrictions on transfer to others arising out of this Agreement.
(c) Except as set forth in Section 3.05(c) of the Seller
Disclosure Schedule, there are no stockholder agreements, voting trusts,
proxies or other similar agreements or understandings in effect with respect
to the voting or transfer of any of the CTUS Shares, the Company Shares or the
Subsidiary Shares.
(d) Except as set forth in Section 3.05(d) of the Seller
Disclosure Schedule, the Company does not own more than 5% of the voting power
of all outstanding voting securities or interests of any corporation, limited
liability company, business trust, limited partnership or other entity.
SECTION 3.06. Consents and Approvals. (a) The execution and
delivery of this Agreement by the Seller does not, and the performance of this
Agreement by the Seller will not, require any consent, approval, authorization
or other action by, or filing with or notification to, any Governmental
Authority, or any other Person, except for such consents, approvals,
authorizations, actions, filings or notifications (i) as are described in
Section 3.06 of the Seller Disclosure Schedule (the "Seller's Required
Approvals"), (ii) the failure to make or obtain which would not, individually
or, to the Seller's knowledge, in the aggregate either (x) prevent or delay
the Seller from performing any of its material obligations under this
Agreement or (y) in the case of Seller's Required Approvals from Persons other
than any Governmental Authority, have a Material Adverse Effect, and (iii) as
may be necessary as a result of any facts or circumstances relating solely to
the Purchaser.
(b) The Seller has no reason to believe that it will not be able
to make or, on a timely basis, obtain all Seller's Required Approvals.
SECTION 3.07. No Conflict. Assuming all consents, approvals,
authorizations and other actions contemplated in Section 3.06 have been
obtained and all filings and notifications listed in Section 3.06 of the
Seller Disclosure Schedule have been made, and except as may result from any
facts or circumstances relating solely to the Purchaser, and except as
disclosed in Section 3.07 of the Seller Disclosure Schedule, the execution,
delivery and performance of this Agreement by the Seller does not and will not
(a) violate or conflict with the charter or by-laws or other organizational
documents of the Seller, CTUS, the Company or the Subsidiaries, (b) except as
would not (i) prevent the Seller from performing its material obligations
under this Agreement or (ii) individually or, to the Seller's knowledge, in
the aggregate, have a Material Adverse Effect, conflict with or violate any
Law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award applicable to the Seller, CTUS, the Company or the
Subsidiaries or (c) except as would not (i) prevent the Seller from performing
any of its material obligations under this Agreement or (ii) individually or,
to the Seller's knowledge, in the aggregate, have a Material Adverse Effect,
result in any breach of, or constitute a default (or event which with the
giving of notice or lapse of time, or both, would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of any Encumbrance on any of the
assets or properties of the Seller, CTUS, the Company or any of the
Subsidiaries pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument relating to
such assets or properties to which the Seller, CTUS, the Company or any of the
Subsidiaries is a party or by which any of such assets or properties is bound
or affected.
SECTION 3.08. CTUS Financial Statements. The audited
consolidated financial statements of CTUS as of December 31, 1995 and the
unaudited consolidated financial statements of CTUS as of June 30, 1996, each
attached hereto as Exhibit 3.08 (the "CTUS Financial Statements"), have been
prepared in accordance with GAAP and fairly present in all material respects
the financial position and results of operations of CTUS as of the respective
dates thereof and for the periods covered thereby (subject, in the case of the
unaudited financial statements, to normal year-end adjustments) in conformity
with GAAP.
SECTION 3.09. Company Financial Statements. The audited
consolidated financial statements of the Company and the Subsidiaries as of
December 31, 1995 (the "Audited Financial Statements"), and the unaudited
consolidated financial statements of the Company and the Subsidiaries as of
June 30, 1996 (the "Unaudited Financial Statements"; together with the Audited
Financial Statements, the "Company Financial Statements"), each attached
hereto as Exhibit 3.09, have been prepared in accordance with GAAP and fairly
present in all material respects the financial position and results of
operations of the Company and the Subsidiaries as of the respective dates
thereof and for the periods covered thereby (subject, in the case of the
Unaudited Financial Statements, to normal year-end adjustments) in conformity
with GAAP.
SECTION 3.10. Absence of Certain Changes or Events. (a) Except
as disclosed in Section 3.10 of the Seller Disclosure Schedule, from June 30,
1996 to the date of this Agreement, the Business of CTUS, the Company and the
Subsidiaries has been conducted in the ordinary course and consistent with
past practice.
(b) From June 30, 1996 to the date of this Agreement, except as
set forth in Section 3.10 of the Seller Disclosure Schedule or as contemplated
by this Agreement, there has not been:
(i) any instances of damage, destruction or loss to any of the
assets or properties of CTUS, the Company or any Subsidiary which,
either individually or in the aggregate, have had a Material Adverse
Effect;
(ii) except in the ordinary course of business in connection with
advances from the Federal Home Loan Bank of New York, any material
Encumbrance of any kind created by CTUS, the Company or any Subsidiaries
or, to the knowledge of the Seller, created by any third party or by
operation of Law on any property or asset (whether tangible or
intangible) of CTUS, the Company or any Subsidiary;
(iii) any establishment, amendment to or increase in any bonus,
insurance, severance, compensation, fringe benefit, welfare, deferred
compensation, pension, retirement, profit sharing, stock option
(including, without limitation, any grant of any stock options, stock
appreciation rights, performance awards or restricted stock awards),
stock purchase or other employee benefit plans applicable to current or
former employees, directors or consultants of CTUS, the Company or any
Subsidiary (or with respect to which CTUS, the Company or any Subsidiary
may have any liability), or other increase in the compensation payable
or to become payable to any officer, director, employee or consultant of
CTUS, the Company or any Subsidiary, except, in any case described
above, (x) in the ordinary course of business consistent with past
practice or (y) as may be required by applicable Law;
(iv) any employment, consulting, stay bonus, severance or similar
agreement entered into, amended, renewed or terminated with any officer,
employee, director or consultant of CTUS, the Company or any Subsidiary
(or with respect to which CTUS, the Company or any Subsidiary may have
any liability);
(v) any sale, assignment, transfer, lease or other disposition
or agreement to sell, assign, transfer, lease or otherwise dispose of
any of the fixed assets of CTUS, the Company or any Subsidiary having an
aggregate value exceeding U.S.$1,000,000;
(vi) any acquisition (by merger, consolidation, or acquisition of
stock or assets) by CTUS, the Company or any Subsidiary of any
corporation, partnership or other business organization or division
thereof;
(vii) except in the ordinary course of business in respect of
deposits taken, advances from the Federal Home Loan Bank of New York,
sales of securities with agreements to repurchase and endorsement of
instruments in the course of collection, (x) any incurrence by the
Company or any Subsidiary of any indebtedness for borrowed money, (y)
any issuance by the Company or any Subsidiary of any debt securities or
(z) any assumption, granting, guarantee or endorsement of, or other
accommodation arrangement making the Company or any Subsidiary
responsible for, the obligations of any individual or legal entity
(other than the Company or another Subsidiary), in the case of (x), (y)
and (z) above, having an aggregate value exceeding U.S.$1,000,000;
(viii) any change in any method of accounting or accounting
practice used by the Company or any Subsidiary, other than changes
required by GAAP or regulatory accounting requirements;
(ix) any reclassification, combination, split, subdivision or any
redemption, repurchase or other acquisition of the capital stock of, or
other equity interests in, CTUS, the Company or any Subsidiary, any
declaration or payment of any dividends or distributions (whether in
cash, securities or other property) with respect to the shares of the
Company, any issuance or sale of additional shares of the capital stock
of, or other equity interests in, CTUS, the Company or any Subsidiary or
securities convertible into or exchangeable for such shares or equity
interests, or issuance or granting of any options, warrants, calls,
subscription rights or other rights of any kind to acquire additional
shares of such capital stock, such other equity interests, or such
securities;
(x) any amendment of organizational or governing documents of
CTUS (except as provided in Section 5.09 with respect to the CTUS
Preferred Stock), the Company or any Subsidiary or any alteration or
restructuring of the capitalization of CTUS, the Company or any
Subsidiary;
(xi) any Material Adverse Effect; or
(xii) except for this Agreement, any agreement to take any actions
specified in this Section 3.10.
SECTION 3.11. Absence of Litigation. Except as disclosed in
Section 3.11 of the Seller Disclosure Schedule, there are no claims, actions,
proceedings or investigations pending or, to the Seller's knowledge,
threatened against the Seller, CTUS, the Company or any Subsidiary, or any of
their respective assets or properties, before any court, arbitrator or
administrative, governmental or regulatory authority that, individually or, to
the Seller's knowledge, in the aggregate, would have a Material Adverse Effect
or which seek to delay, prevent or restrict the consummation of the
transactions contemplated hereby. None of CTUS, the Company or any Subsidiary
or any of their respective assets or properties is subject to any order, writ,
judgment, injunction, decree, determination or award that would have a
Material Adverse Effect.
SECTION 3.12. Compliance with Laws. (a) Except as disclosed in
Section 3.12 of the Seller Disclosure Schedule, and except as would not have a
Material Adverse Effect or a material adverse effect on the Seller's ability
to perform its obligations under this Agreement, (i) each of CTUS, the Company
and the Subsidiaries has obtained or made all permits, licenses, approvals,
authorizations, registrations, qualifications and filings with and under all
U.S. and foreign laws, authorities and agencies that are required to enable it
to carry on its Business as currently conducted (the "Seller Operating
Approvals"), (ii) all Seller Operating Approvals are in full force and effect
and no suspension of such Seller Operating Approvals has been threatened in
writing and (iii) none of CTUS, the Company or any Subsidiary is in violation
of any applicable Law.
(b) None of the Seller, CTUS, the Company or any of the
Subsidiaries is subject to any cease and desist order, written agreement or
memorandum of understanding with, is a party to any commitment letter or
similar undertaking to, is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any
extraordinary board resolution at the request of, any Governmental Authority
charged with the supervision or regulation of thrifts or thrift holding
companies or engaged in the insurance of thrift deposits.
SECTION 3.13. Contracts. Except as disclosed in Section 3.13 of
the Seller Disclosure Schedule, none of CTUS, the Company or any of the
Subsidiaries is, or has received written notice that any other party thereto
is, in default of any contract, agreement, commitment, arrangement, lease,
insurance policy or other instrument to which CTUS, the Company or any
Subsidiary is a party or by which CTUS, the Company or any of the
Subsidiaries, or any of their assets, business or operations, may be bound or
affected except for such defaults which individually or, to the Seller's
knowledge, in the aggregate would not have a Material Adverse Effect.
SECTION 3.14. Reports. Except as disclosed in Section 3.14 of
the Seller Disclosure Schedule, the Seller, CTUS, the Company and each
Subsidiary have filed all reports, registrations and statements, together with
any required amendments thereto, that it was required to file with the OTS,
the FDIC and any other applicable banking authorities (the "Reports"). As of
their respective dates, the Reports complied in all material respects with all
the rules and regulations promulgated by the OTS, the FDIC or other applicable
banking authorities, as the case may be. Copies of all the Reports have been
made available for review by the Purchaser.
SECTION 3.15. Taxes. Except as set forth in Section 3.15 of the
Seller Disclosure Schedule or except as would not have a Material Adverse
Effect:
(a) Each of CTUS, the Company and each Subsidiary has filed, or
has had filed on its behalf, in a timely manner (within any applicable
extension periods) with the appropriate taxing authority all Returns
with respect to Taxes of CTUS, the Company and each of the Subsidiaries
other than those Returns on which an immaterial amount of Taxes would
properly be shown;
(b) All such Returns are true, complete and accurate in all
material respects;
(c) All material Taxes due and payable by or with respect to
CTUS, the Company and the Subsidiaries have been paid in full or have
been provided for in the books and records of CTUS, the Company or the
Subsidiaries, as the case may be, in accordance with GAAP;
(d) There are no outstanding agreements or waivers extending the
statutory period of limitations applicable to any federal, state, local
or foreign income or other material Returns required to be filed by or
with respect to CTUS, the Company or any of the Subsidiaries;
(e) None of the Returns of or with respect to CTUS, the Company
or any of the Subsidiaries is currently being audited or examined by any
taxing authority;
(f) No deficiency for any income Taxes has been assessed with
respect to CTUS, the Company or any of the Subsidiaries that has not
been abated or paid in full;
(g) The federal income tax returns of CTUS, the Company and each
of the Subsidiaries have been audited and settled, or are closed to
assessment, for all years through 1991;
(h) There is no claim or assessment outstanding, or, to the
Seller's knowledge, threatened against CTUS, the Company or any of the
Subsidiaries for any alleged deficiency in Taxes, and to the Seller's
knowledge there are no audits or investigations with respect to any
liability of CTUS, the Company or any of the Subsidiaries for Taxes;
(i) Each of CTUS, the Company and each of the Subsidiaries has
to the extent material withheld from its employees (and timely paid to
the appropriate taxing authority) the required amounts for all periods
since 1991 in compliance with all tax withholding provisions of
applicable federal, state, local and foreign Laws (including, without
limitation, income, social security and employment tax withholding);
(j) Each of CTUS, the Company and each of the Subsidiaries has
to the extent material withheld (and timely paid to the appropriate
taxing authority) the required amounts for all periods since 1991 in
compliance with all tax withholding provisions of applicable federal,
state, local and foreign Laws other than provisions relating to employee
withholding (including, without limitation, withholding) of tax on
dividends, interest and royalties and similar income earned by
nonresident aliens and foreign corporations and withholding of tax on
dispositions of United States real property interest);
(k) The Seller has furnished or made available to the Purchaser
complete and accurate copies of all federal, state and local income and
franchise tax returns, and any amendments thereto, filed by CTUS, the
Company and the Subsidiaries for taxable years ending 1993 and 1994;
(l) There is no contract or agreement in existence under which
CTUS, the Company or the Subsidiaries have, or may at any time in the
future have, an obligation to contribute to the payment of any portion
of a Tax (or pay any amount calculated with reference to any portion of
a Tax) determined on a consolidated, combined or unitary basis with
respect to a group of corporations of which CTUS was not the common
parent corporation; and
(m) No consent has been filed relating to CTUS or the Company
pursuant to Section 341(f) of the Code.
SECTION 3.16. Real Property. Each parcel of real property,
including without limitation those properties set forth on Section 3.16(a) of
the Seller Disclosure Schedule (which lists owned properties) and Section
3.16(b) of the Seller Disclosure Schedule (which lists leased properties),
owned or leased by the Company or any Subsidiary is owned or leased, free and
clear of all Encumbrances, except (a) as disclosed in Section 3.16(a) or
Section 3.16(b) of the Seller Disclosure Schedule, (b) with respect to liens
for Taxes and assessments not yet payable, (c) with respect to liens for
Taxes, assessments and charges and other claims, the validity of which is
being contested in good faith by appropriate proceedings and which are also
identified in Section 3.16(c) of the Seller Disclosure Schedule, and (d) with
respect to imperfections of title and other Encumbrances, the existence of
which, individually and in the aggregate, would not have a Material Adverse
Effect.
SECTION 3.17. Environmental Matters. Except as set forth in
Section 3.17 of the Seller Disclosure Schedule or except as would not have a
Material Adverse Effect:
(a) CTUS, the Company and each Subsidiary are and have been in
compliance with all applicable Environmental Laws;
(b) There is no suit, claim, action or proceeding pending or, to
the knowledge of the Seller, threatened, before any Governmental
Authority or other forum in which CTUS, the Company or any Subsidiary
has been or, with respect to threatened proceedings, is reasonably
likely to be named as a defendant (i) for alleged noncompliance
(including by any predecessor) with an Environmental Law or (ii)
relating to the Release into or presence in the Environment of any
Chemical Substance;
(c) To the knowledge of the Seller, there are no facts or
circumstances which would provide a reasonable basis for any suit,
claim, action or proceeding as described in Section 3.17(b);
(d) To the knowledge of the Seller, there has been no release of
a Chemical Substance in, on, under or affecting any Real Property,
Leased Property, Real Estate Owned or Loan Property;
(e) None of the Real Properties or, to the knowledge of the
Seller, none of the Leased Properties, Real Estate Owned or Loan
Properties, is on the National Priority List (NPL) or the Comprehensive
Environmental Response Compensation and Liability Information System
(CERCLIS), or is the subject of any investigation, remediation or
cleanup of any contamination or potential contamination;
(f) None of the Real Properties is subject to, or as a result of
this transaction would be subject to, the requirements of the New Jersey
Industrial Site Recovery Act or the New Jersey Environmental Cleanup
Responsibility Act or, to the knowledge of the Seller, to any other
state or local Environmental Laws which require notice, disclosure,
cleanup or approval prior to transfer of such assets, properties,
businesses or operations or which would impose liens on such assets,
properties, businesses or operations; and
(g) Seller does not participate in the management of any Loan
Property within the meaning of 40 C.F.R. Section 300.1100(c).
SECTION 3.18. Employee Benefit Matters. (a) Section 3.18(a) of
the Seller Disclosure Schedule contains a true and complete list as of the
date of this Agreement of all employee benefit plans and all bonus, stock
option, stock purchase, incentive, deferred compensation, retiree medical or
other welfare plans or life insurance, supplemental retirement, severance or
other employee benefit plans, programs, arrangements, agreements, commitments
or payroll practices, in each case that are maintained by the Company and/or
the Subsidiaries or to which the Company and/or the Subsidiaries contribute,
that benefit or relate to current or former employees of CTUS, the Company
and/or the Subsidiaries, or with respect to which CTUS, the Company and/or the
Subsidiaries may incur any liability (including, without limitation, "employee
benefit plans" within the meaning of Section 3(3) of ERISA, salary
continuation for disability, sick leave, employment agreements, consulting
agreements, incentive compensation plans, company awards and executive
compensation plans) (collectively, the "Plans").
(b) With respect to each Plan, the Seller has delivered or made
available to the Purchaser a true and correct copy of the following documents
relating to the Plans, as applicable; (i) the most recent annual report
(Form 5500) filed or required to be filed with the Internal Revenue Service
(the "IRS"); (ii) the Plan document and all amendments thereto; (iii) the
trust agreement or funding vehicle and all amendments thereto; (iv) the
Summary Plan Description and any Summary of Material Modification required
under ERISA; (v) the most recent actuarial report or valuation relating to any
Plan subject to Title IV of ERISA or any other defined benefit Plan; (vi) the
most recent determination letter, if any, issued by the IRS with respect to
any Plan intended to be qualified under Section 401(a) of the Code; (vii) all
material, written communications to employees or former employees within the
past three years relating to any Plan or any other communication in the past
five years that was materially inconsistent with any Plan document or that
could cause the Company to incur significant liability; and (viii) written
descriptions of all non-written plans.
(c) Except as set forth in Section 3.18(c) of the Seller
Disclosure Schedule, the Plans that are intended to qualify under Section
401(a) of the Code are so qualified, the trusts maintained pursuant thereto
are exempt from federal taxation under Section 501 of the Code and have
received a determination letter from the IRS to that effect and, to the
Seller's knowledge, no event has occurred with respect to the operation of the
Plans which could cause the loss of such qualification or exemption or the
imposition of any material liability, penalty or tax under ERISA or the Code.
(d) Neither the Company nor any of the Subsidiaries nor any of
its or their ERISA Affiliates (meaning any trade or business, whether or not
incorporated, under common control with the Seller, CTUS, the Company or the
Subsidiaries within the meaning of Section 414(b), (c), (m) or (o) of the
Code) has contributed or been obligated to contribute within the six-year
period ending on the Closing Date to any multiemployer plan which is described
in Section 4001(a)(3) of ERISA. None of the Plans are or have been subject to
Section 4063 or 4064 of ERISA.
(e) Except as set forth in Section 3.18(e) of the Seller
Disclosure Schedule, there has been no "reportable event" as that term is
defined in Section 4043 of ERISA and the regulations thereunder with respect
to any Plans subject to Title IV of ERISA (nor will the transactions
contemplated by this Agreement result in the occurrence of a reportable event
described in Section 4043(c)(9), (10), (11), (12) or (13) of ERISA), nor has
there been any event requiring disclosure under Sections 4041(c)(3)(C) and
4063(a) of ERISA, excluding reportable events for which notice has been waived
by the Pension Benefit Guaranty Corporation (the "PBGC").
(f) Except as set forth in Section 3.18(f) of the Seller
Disclosure Schedule, neither CTUS, the Company, the Subsidiaries, the Seller
nor any "party in interest" or "disqualified person" with respect to any Plan,
nor any Plan has engaged in a "prohibited transaction" within the meaning of
Section 4975 of the Code or Section 406 of ERISA which would result in a
material liability to it.
(g) Neither CTUS, the Company nor any of the Subsidiaries nor
any of the ERISA Affiliates has any outstanding liability or is expected to
incur any liability under or arising out of Title IV of ERISA to the PBGC, to
a trust established under Section 4041 or 4042 of ERISA or to a trustee
appointed under Section 4042 of ERISA, to any Plan or to any other Person
(other than premiums due the PBGC, which premiums have been paid when due).
(h) With respect to each Plan, all contributions and premiums
required by Law or by the terms of any Plan or any agreement related thereto
have been timely made (without regard to any waivers granted with respect
thereto), no accumulated funding deficiency (whether or not waived) or
liquidity shortfall exists with respect to any Plan subject to Section 412 of
the Code or Section 302 of ERISA, all amounts properly accrued to date or as
of the Closing Date as liabilities of CTUS, the Company or any Subsidiary that
have not been paid have been properly recorded on the books of CTUS, the
Company or the Subsidiary, as the case may be, and each payment required to be
made by any Plan has been made when due and none of the assets of CTUS, the
Company nor any of the Subsidiaries are the subject of any lien arising under
Section 302(f) of ERISA or Section 412(n) of the Code, and neither CTUS, the
Company nor any of the Subsidiaries have been required to post security
pursuant to Section 307 of ERISA or Section 401(a)(29) of the Code and, to the
Seller's knowledge, facts do not exist which could be expected to give rise to
such a lien or such posting of security.
(i) Each of the Plans has been maintained, in form and
operation, in all material respects, in accordance with its terms and all
provisions of applicable Law, including, without limitation, ERISA and the
Code. CTUS, the Company and each Subsidiary have complied in all material
respects with the notice and continuation requirements of Section 4980B of the
Code.
(j) Except as set forth in Section 3.18(j) of the Seller
Disclosure Schedule, there are no material pending or, to the Seller's
knowledge, threatened claims, or lawsuits which have been asserted or
instituted (and, to the Seller's knowledge, there are no facts or
circumstances on which any such claims or lawsuits could be based) with regard
to any of the Plans (other than claims for benefits made in the ordinary
course of administration of the Plans).
(k) Except as disclosed in Section 3.18(k) of the Seller
Disclosure Schedule, the consummation of the transactions contemplated by this
Agreement will not: (i) entitle any employee, former employee or any other
person to any payment or (ii) accelerate the time of payment or vesting or
increase the amount of compensation payable to any person or (iii) otherwise
result in any "parachute payment" within the meaning of Section 280G of the
Code.
(l) No event has occurred, or is expected to occur, as a result
of or in connection with the transactions contemplated by this Agreement, in
connection with which CTUS, the Company, any Subsidiary or any ERISA
Affiliate, directly or indirectly, could be subject to any material liability
under ERISA, the Code or any other Law applicable to any Plan, including,
without limitation, Section 4971, 4975 or 4976 of the Code or Section 406,
502(i), 502(l) or 4069 of ERISA, or under any agreement or Law pursuant to or
under which CTUS, the Company, the Subsidiaries or any ERISA Affiliate has
agreed to indemnify or is required to indemnify any person against liability
incurred under, or for a violation of or failure to satisfy the requirements
of, any such agreement, instrument or Law.
(m) Except as set forth in Section 3.18(m) of the Seller
Disclosure Schedule, no Plan provides benefits, including death or medical
benefits (whether or not insured) with respect to any current or former
employee of CTUS, the Company or any Subsidiary beyond his or her retirement
or other termination of service (other than (i) coverage mandated by
applicable Law, (ii) retirement or death benefits under any employee pension
plan, (iii) disability benefits under any welfare plan that have been fully
provided for by insurance or otherwise, (iv) deferred compensation benefits
accrued as liabilities on the books of CTUS, the Company or the Subsidiaries
or (v) benefits in the nature of severance pay).
(n) Except as disclosed in writing by the Company to the OTS
with no objection from the OTS, each employment agreement entered into by
CTUS, the Company or the Subsidiaries complies with OTS Regulation Section
563.39, the compensation of officers, directors and employees of CTUS, the
Company and the Subsidiaries complies with OTS Regulation Section 563.161(b),
and the compensation arrangements of CTUS, the Company and the Subsidiaries
are consistent with OTS Regulatory Bulletin RB27a.
(o) Except as described in Section 3.18(o) of the Seller
Disclosure Schedule, there is no announced plan, promise or legally binding
commitment to create any additional Plans or to amend or modify any existing
Plan.
(p) There has been no material adverse change in the funding
status of the First Federal Savings and Loan Association of Rochester Pension
Plan from the status reflected in such plan's actuarial report dated as of
January 1, 1995.
SECTION 3.19. Labor Matters. None of CTUS, the Company nor any
of the Subsidiaries is party to any labor agreements with respect to its
employees with any labor organization, group or association and no labor
organization or group of employees has made a pending demand for recognition,
and there is no organizing activity involving the employees of CTUS, the
Company or the Subsidiaries pending, or, to the Seller's knowledge,
threatened, by any labor organization or group of employees. Except as
disclosed in Section 3.19 of the Seller Disclosure Schedule, or as would not
have a Material Adverse Effect as of the date of this Agreement, (a) there is
no unfair labor practice charge or complaint against the Company or any of the
Subsidiaries pending, or to the Seller's knowledge threatened, before the
National Labor Relations Board, any comparable state agency or any other
Governmental Authority, (b) there is no labor strike, labor disturbance, work
stoppage or other material labor dispute pending or to the Seller's knowledge
threatened against the Company or any of the Subsidiaries and (c) there are no
complaints, charges or claims pending or, to the Seller's knowledge,
threatened for which the Seller, CTUS or the Company has received notice,
based on, arising out of, in connection with or otherwise related to the
employment by CTUS, the Company or the Subsidiaries of any of their employees,
including any claim relating to employment discrimination, equal pay, employee
safety and health, wages and hours or workers' compensation. Except as
disclosed in Section 3.19 of the Seller Disclosure Schedule, each of the
Company and each Subsidiary is in material compliance with all applicable Laws
respecting employment practices, terms and conditions of employment and wages
and hours.
SECTION 3.20. Insurance. Except as set forth in Section 3.20 of
the Seller Disclosure Schedule, all material properties and risks of CTUS, the
Company and the Subsidiaries are covered by valid and currently effective
insurance policies or binders of insurance or programs of self-insurance in
such types and amounts as are consistent with customary practices and
standards of companies engaged in businesses and operations similar to those
of CTUS, the Company and the Subsidiaries.
SECTION 3.21. Minority Shares. The Seller has entered into such
arrangements and/or agreements as shall be necessary to cause CTUS to be the
record and beneficial owner of all of the outstanding Minority Shares as of
the Closing Date, except as disclosed in Section 3.21 of the Seller Disclosure
Schedule. Certificates evidencing all of the Minority Shares, other than
those disclosed in Section 3.21 of the Seller Disclosure Schedule, are being
held in escrow by the Company pending delivery of the same to CTUS on the
Closing Date.
SECTION 3.22. Intercompany Obligations. Except as disclosed in
Section 3.22 of the Seller Disclosure Schedule, as of the date hereof, there
are no intercompany agreements or arrangements between CTUS, the Company and
the Subsidiaries, on the one hand, and the Seller or any of its Affiliates, on
the other hand (the "Intercompany Obligations").
SECTION 3.23. Community Reinvestment Act. The Company (a)
received a rating of "outstanding" in its most recent examination with respect
to the Community Reinvestment Act (the "CRA") and (b) has not been notified in
writing with respect to supervisory concerns regarding its compliance with the
CRA or, to the extent applicable, the New York Community Reinvestment Act.
SECTION 3.24. Brokers. Except for Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"), no broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Seller. The Seller is solely
responsible for the fees and expenses of Merrill Lynch.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Seller as follows:
SECTION 4.01. Organization and Authority of the Purchaser;
Authorization and Issuance of HSAI Preferred Stock. (a) The Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all necessary power (corporate or
otherwise) and authority to enter into this Agreement, to carry out its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement by the Purchaser, the performance
by the Purchaser of its obligations hereunder and the consummation by the
Purchaser of the transactions contemplated hereby have been duly authorized by
all requisite corporate action on the part of the Purchaser. This Agreement
has been duly executed and delivered by the Purchaser, and (assuming due
authorization, execution and delivery by the Seller) constitutes a legal,
valid and binding obligation of the Purchaser enforceable against the
Purchaser in accordance with its terms, subject to the effect of any
applicable bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting creditors' rights generally and by general principles of equity
(whether considered in a proceeding at law or in equity). The Purchaser
directly owns all of the issued and outstanding shares of capital stock of
Marine.
(b) The authorized capital stock of the Purchaser includes ten
million (10,000,000) shares of the par value of $1.00 each designated
"Preferred Stock" which may be issued from time to time in one or more series
by resolution of the Board of Directors of the Purchaser. At the date hereof,
an aggregate of 1,916,950 of such shares of Preferred Stock are issued and
outstanding. Subject to delivery to the Purchaser of certificates for the
CTUS Preferred Stock as contemplated by Section 2.03(b), the shares of HSAI
Preferred Stock will be duly and validly authorized and issued, fully paid and
non-assessable and have the relative rights, privileges and preferences set
forth in the HSAI Certificate of Designation.
SECTION 4.02. Organization of Marine. Marine is a New York State
chartered commercial bank, duly organized, validly existing, and in good
standing under the laws of the State of New York, and has the requisite
corporate power and authority to own its assets and carry on its business as
currently conducted. The deposits of Marine are insured to the fullest extent
permitted under applicable law by the Bank Insurance Fund of the FDIC.
SECTION 4.03. Consents and Approvals. (a) The execution and
delivery of this Agreement by the Purchaser do not, and the performance of
this Agreement by the Purchaser will not, require any consent, approval,
authorization or other action by, or filing with or notification to, any
Governmental Authority, or any other Person, except for such consents,
approvals, authorizations, actions, filings or notifications (i) as are
described in Section 4.03 of the Purchaser Disclosure Schedule (the
"Purchaser's Required Approvals"), (ii) the failure to make or obtain which
would not, individually or in the aggregate, prevent or delay the Purchaser
from performing any of its material obligations under this Agreement and
(iii) as may be necessary as a result of any facts or circumstances relating
solely to the Seller.
(b) The Purchaser has no reason to believe that it will not be
able to make or, on a timely basis, obtain all the Purchaser's Required
Approvals.
SECTION 4.04. No Conflict. Assuming all consents, approvals,
authorizations and other actions contemplated in Section 4.03 have been
obtained and all filings and notifications listed in Section 4.03 of the
Purchaser Disclosure Schedule have been made and, except as may result from
any facts or circumstances relating solely to the Seller, the execution,
delivery and performance of this Agreement by the Purchaser do not and will
not (a) violate or conflict with the charter or by-laws or other
organizational documents of the Purchaser, (b) except as would not prevent the
Purchaser from performing its material obligations under this Agreement,
conflict with or violate any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award applicable to the Purchaser, or
(c) except as would not prevent the Purchaser from performing any of its
material obligations under this Agreement, result in any breach of, or
constitute a default (or event which with the giving of notice or lapse of
time, or both, would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of any Encumbrance on any of the assets or properties of the
Purchaser pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument relating to
such assets or properties to which the Purchaser or any of its respective
subsidiaries is a party or by which any of such assets or properties is bound
or affected.
SECTION 4.05. Compliance with Laws. (a) (i) Each of the
Purchaser, Marine and each subsidiary of Marine has or has obtained or made
all permits, licenses, approvals, authorizations, registrations,
qualifications and filings with and under all U.S. and foreign laws,
authorities and agencies that are required to enable it to carry on its
Business as currently conducted (the "Purchaser Operating Approvals"),
(ii) all the Purchaser Operating Approvals are in full force and effect, and
no suspension of such Purchaser Operating Approvals has been threatened in
writing and (iii) none of the Purchaser, Marine or any subsidiary of Marine is
in violation of any applicable Law, except for such failures to obtain or have
in full force and effect such Purchaser Operating Approvals, such suspensions
of Purchaser Operating Approvals and such violations of Law as would not
individually or, to the best of the Purchaser's knowledge, in the aggregate
prevent the Purchaser from performing its material obligations under this
Agreement.
(b) None of the Purchaser, Marine or any subsidiary of Marine is
subject to any cease and desist order, written agreement or memorandum of
understanding with, is a party to any commitment letter or similar undertaking
to, is subject to any order or directive by, or is a recipient of any
extraordinary supervisory letter from, or has adopted any extraordinary board
resolution at the request of, any Governmental Authority charged with the
supervision or regulation of banks or bank holding companies or engaged in the
insurance of thrift deposits which would have a material adverse effect on the
Purchaser's ability to perform its obligations under this Agreement.
SECTION 4.06. Absence of Litigation. There are no claims,
actions, proceedings or investigations pending or, to the Purchaser's
knowledge, threatened against the Purchaser, Marine or any subsidiary of
Marine, or any of its or their assets or properties, before any court,
arbitrator or administrative, governmental or regulatory authority which seek
to delay, prevent or restrict the consummation of the transactions
contemplated hereby.
SECTION 4.07. Securities Law. The Purchaser understands and
agrees that it may not sell or dispose of any of the CTUS Shares or the
Company Shares other than pursuant to an effective registration statement
under the Securities Act of 1933, as amended, or pursuant to an available
exemption therefrom.
SECTION 4.08. Financing. The Purchaser currently has, and at the
Closing will continue to have, all funds necessary to satisfy all of its
obligations hereunder and to consummate the transactions contemplated by this
Agreement on the terms set forth herein, and its ability to consummate such
transactions is not dependent or conditional upon receipt of financing from
any third party.
SECTION 4.09. Community Reinvestment Act. Marine received a
rating of "satisfactory" in its most recent examination with respect to the
CRA. Marine has not been notified in writing with respect to supervisory
concerns regarding its compliance with the CRA or, to the extent applicable,
the New York Community Reinvestment Act.
SECTION 4.10. Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Purchaser or any of its affiliates.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. Conduct of Business Prior to the Closing. (a)
Except as otherwise provided or contemplated herein or in Section 5.01(a) of
the Seller Disclosure Schedule, the Seller agrees that, between the date
hereof and the Closing Date and without the prior written consent of the
Purchaser:
(i) it will not permit CTUS, the Company or the Subsidiaries to
conduct their Businesses other than in all material respects in the
ordinary course and consistent with prior practice;
(ii) it will cause CTUS, the Company and each Subsidiary to use
reasonable efforts to preserve substantially intact the business
organization of their respective Businesses, to keep available to the
Purchaser the services of the employees of the Company and each
Subsidiary (but the Seller shall have no liability to the Purchaser for
the failure to keep the services of any employees who voluntarily resign
from employment by the Company or the Subsidiaries) and to use
reasonable efforts to preserve the current relationships with their
respective customers, suppliers and other persons with which they have
significant business relationships;
(iii) it will not permit CTUS (except as provided in Section 5.09,
with respect to the CTUS Preferred Stock, and in Exhibit 5.01(a)(iii),
with respect to satisfying such requirements as are necessary for CTUS
to qualify as a "private company" for purposes of Canadian securities
laws) the Company or any Subsidiary to amend their respective charters,
by-laws or similar organizational documents or merge or consolidate, or
obligate themselves to do so, with or into any other entity;
(iv) it will cause the Board of Directors of CTUS to approve the
transfer of the CTUS Shares and the CTUS Preferred Stock to HSAI by
resolution;
(v) it will not permit either CTUS, the Company or a Subsidiary:
(x) to change its accounting methods, principles or practices (other
than such changes required by GAAP or by applicable Law), (y) to
establish or increase any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards, or restricted stock awards),
stock purchase or other employee benefit plan, or otherwise increase the
compensation payable or to become payable to any officers or employees
of either CTUS, the Company or a Subsidiary, except in the ordinary
course of business consistent with past practice or as may be required
by applicable Law or applicable collective bargaining agreements or (z)
enter into any employment or severance agreement with any of its
employees or establish, adopt, enter into or amend any collective
bargaining agreement; and
(vi) it will not permit CTUS, the Company or a Subsidiary to
adopt any new Plan or to amend, modify or terminate any Plan (or commit,
promise or communicate any intention to adopt any new Plan or amend,
modify or terminate any Plan), except as may be required by Law.
(b) Notwithstanding anything to the contrary in this Agreement
and for the purpose of facilitating the establishment or maintenance of an
insured depository institution and operation of a thrift or banking business
in the United States, at any time on or prior to the Closing, CTUS may, with
the consent of the Purchaser (which consent shall not be unreasonably
withheld), but subject to compliance with all applicable Law, cause the
Company to either (i) sell, transfer, assign or otherwise dispose of, to the
Seller, or such of the Seller's Affiliates as the Seller shall have the right
to determine up to U.S.$5,000,000 in fair market value of mortgage and other
residential real estate or similar assets of the Company identified by the
Seller together with the assumption by any such transferee of an equivalent
amount of non-deposit liabilities of the Company so long as, after giving
effect to the foregoing, the Book Value of the Company shall not be diminished
by an amount greater than U.S.$5,000,000 from the amount thereof immediately
prior to any such action or (ii) sell, transfer, assign or otherwise dispose
of all of the Company's assets and liabilities to a newly-established insured
depository institution to be owned by CTUS (other than the limited amount of
assets and liabilities contemplated in the preceding clause (i) and the FIRREA
Claim) and thereafter transfer ownership of all of the Company Shares to the
Seller and/or such of the Seller's Affiliates as the Seller may designate, in
which event the purchase and sale contemplated hereunder shall, without any
further action on the part of the parties hereto, be deemed to be amended to
relate solely to the CTUS Shares and the CTUS Preferred Stock and, indirectly,
the shares of the newly-established insured depository institution
contemplated herein.
SECTION 5.02. Investigation. (a) The Purchaser acknowledges and
agrees that it (i) has made its own inquiry and investigation into, and, based
thereon, has formed an independent judgment concerning, CTUS, the Company and
the Subsidiaries, (ii) has been furnished with or given adequate access to
such information about CTUS, the Company and the Subsidiaries and the
respective Businesses of CTUS, the Company and the Subsidiaries as it has
requested, and (iii) will not assert any claim against the Seller, CTUS or the
Company (except as contemplated or otherwise permitted by this Agreement) or
any of their directors, officers, employees, agents, stockholders, affiliates,
consultants, investment bankers, attorneys or representatives, or hold the
Seller, CTUS or the Company or any such persons liable, for any inaccuracies,
misstatements or omissions with respect to information (other than, in the
case of the Seller, with respect to the representations, warranties and
information contained in this Agreement, including the Seller Disclosure
Schedule or in any certificate or other document delivered to the Purchaser
which certificate or other document was prepared in connection with the sale
of the CTUS Shares and the CTUS Preferred Stock) furnished by the Seller or
such persons concerning the Seller, CTUS, the Company and the Subsidiaries or
the Businesses of CTUS, the Company and the Subsidiaries.
(b) In connection with the Purchaser's investigation of CTUS,
the Company and the Subsidiaries and the Businesses of CTUS, the Company and
the Subsidiaries, the Purchaser received from the Seller certain estimates,
projections and other forecasts for CTUS, the Company and the Subsidiaries,
and certain plan and budget information. The Purchaser acknowledges that
there are uncertainties inherent in attempting to make such estimates,
projections, forecasts, plans and budgets, that the Purchaser is familiar with
such uncertainties, that the Purchaser is taking full responsibility for
making its own evaluation of the adequacy and accuracy of all estimates,
projections, forecasts, plans and budgets so furnished to it, and that the
Purchaser will not assert any claim against the Seller or any of its
affiliates or any of their directors, officers, employees, agents,
stockholders, affiliates, consultants, investment bankers, attorneys or
representatives, or hold the Seller or any such persons liable with respect
thereto except as otherwise permitted under Section 10.03. Accordingly, the
Seller makes no representation or warranty with respect to any estimates,
projections, forecasts, plans or budgets referred to in this section other
than as contemplated in Sections 3.08 and 3.09.
SECTION 5.03. Access to Information. (a) From the date hereof
until the Closing Date, upon reasonable notice, the Seller shall, and shall
cause CTUS and each of CTUS', the Company's and the Subsidiaries' officers,
directors, employees, auditors and agents to, (i) afford the officers,
employees and authorized agents and representatives of the Purchaser
reasonable access, during normal business hours, to the offices, properties,
books and records of CTUS, the Company and the Subsidiaries and (ii) furnish
to the officers, employees and authorized agents and representatives of the
Purchaser such additional financial and operating data and other information
regarding the assets, properties, goodwill and Business of CTUS, the Company
and the Subsidiaries as the Purchaser may from time to time reasonably
request; provided, however, that such investigation shall not unreasonably
interfere with any of the Business or operations of the Seller, CTUS, the
Company, the Subsidiaries or any Affiliate of the Seller; and provided further
that the Seller, CTUS, the Company and any Subsidiary shall not be required to
breach or violate any confidentiality obligation contained in a written
agreement, binding on any of the Seller, CTUS, the Company and any Subsidiary.
(b) In order to facilitate the resolution after the Closing of
any claims made by or against or incurred by the Seller prior to the Closing
arising out of or relating to its ownership of CTUS, the Company or any of the
Subsidiaries, the Purchaser shall (i) afford the officers, employees and
authorized agents and representatives of the Seller reasonable access, during
normal business hours, to the offices, properties, books and records of the
Purchaser, CTUS, the Company and the Subsidiaries, (ii) furnish to the
officers, employees and authorized agents and representatives of the Seller
such additional financial and other information regarding CTUS, the Company
and the Subsidiaries and the Businesses of CTUS, the Company and the
Subsidiaries as the Seller may from time to time reasonably request and
(iii) to the extent it does not unreasonably interfere with the discharge of
their regular duties make available to the Seller, the employees of CTUS, the
Company and the Subsidiaries whose assistance, testimony or presence is
necessary to assist the Seller in evaluating any such claims and in defending
such claims, including the presence of such persons as witnesses in hearings
or trials for such purposes; provided, however, that such investigation shall
not unreasonably interfere with the business or operations of the Purchaser,
CTUS, the Company, the Subsidiaries or any Affiliate of the Purchaser or in
the case of CTUS, the Company and the Subsidiaries, their respective
successors; provided further that the Seller shall pay all out-of-pocket costs
of the Purchaser, CTUS, the Company, the Subsidiaries or in the case of CTUS,
the Company and the Subsidiaries, their respective successors and such
employees incurred in connection with any such investigation and shall
reimburse the Purchaser, CTUS, the Company, the Subsidiary or in the case of
CTUS, the Company and the Subsidiaries, their respective successors by which
each such employee is employed on a per diem basis based on the annual salary
and benefits, fully costed, of all employees if, in the aggregate, such
employees are required to devote more than fifty hours to responding to
requests from the Seller pursuant to this Section 5.03(b).
SECTION 5.04. Books and Records. (a) From the Closing Date
until six years from the Closing Date or such longer period, if any, as is
required by applicable Law relating to the Businesses and activities of CTUS,
the Company and the Subsidiaries, the Purchaser agrees that it shall preserve
and keep all books and records of CTUS, the Company and the Subsidiaries
relating to the Pre-Closing Period. Prior to expiration of six years from the
Closing Date, before disposing of any of such books and records, the Purchaser
shall give the Seller at least 90 calendar days' prior written notice of the
proposed destruction specifying in reasonable detail in the manner currently
employed by the Company to catalog their books and records the books and
records to be disposed of, and the Seller shall be given an opportunity, at
its cost and expense, to remove and retain all or any part of such books and
records as the Seller may select. During such 90-day period, duly authorized
representatives of the Seller shall, upon reasonable notice, have access
thereto during normal business hours to examine, inspect and copy such books
and records.
(b) If, in order properly to prepare documents required to be
filed with Governmental Authorities or its financial statements, it may be
necessary that either of the parties hereto or any successors be furnished
with additional information relating to CTUS, the Company and the Subsidiaries
or their respective Businesses, and such information is in the possession of
the other party hereto, such other party agrees to use its best efforts to
furnish such information to such party, at the cost and expense of the party
being furnished such information.
SECTION 5.05. Confidentiality. (a) The terms of the letter
agreement dated as of June 17, 1996 (the "Confidentiality Agreement") between
Merrill Lynch, on behalf of the Seller, and the Purchaser are hereby
incorporated by reference and shall continue in full force and effect, except
as inconsistent with the terms of this Agreement and provided that, if this
Agreement shall terminate, as provided herein, the Confidentiality Agreement
shall remain in full force and effect.
(b) Except to the extent disclosure is required by Law, or in
response to any governmental or regulatory authority, or in connection with
any litigation relating to an alleged breach of this Agreement, each party
shall maintain the confidentiality of all information obtained from the other
party hereto other than information that is otherwise publicly available and
shall use such information only for purposes reasonably related to this
Agreement and the transactions contemplated hereby. If this Agreement is
terminated, each of the parties hereto agrees to return promptly upon request
all documents received from the other party that contain or embody information
subject to this paragraph.
(c) The Seller acknowledges that, from and after the Closing,
all proprietary and confidential information of CTUS, the Company and the
Subsidiaries shall be and become the property of the Purchaser, and the Seller
agrees that it will not, and it will not permit any of its Affiliates to, use
or disseminate such information for any purpose whatsoever.
SECTION 5.06. Authorizations; Consents and Notices. (a) Each
party hereto shall use reasonable efforts to obtain all authorizations,
consents, orders and approvals of, and to give all notices to and make all
filings with, all Governmental Authorities and other third parties that may be
or become necessary for such party's execution and delivery of, and the
performance of such party's obligations pursuant to, this Agreement and will
cooperate fully with the other party in promptly seeking to obtain all such
authorizations, consents, orders and approvals, giving such notices, and
making such filings. The Purchaser acknowledges that it shall be solely
responsible for obtaining the Purchaser's Required Approvals, and the Seller
agrees to use reasonable efforts to assist the Purchaser in obtaining the
Purchaser's Required Approvals on or prior to the Closing Date. The Seller
acknowledges that it will be solely responsible for obtaining the Seller's
Required Approvals and the Purchaser agrees to use reasonable efforts to
assist the Seller in obtaining the Seller's Required Approvals on or prior to
the Closing Date. The parties hereto acknowledge that time shall be of the
essence in this Agreement and agree not to take any action that will have the
effect of unreasonably delaying, impairing or impeding the receipt of any
required authorizations, consents, orders or approvals.
(b) The Purchaser and its subsidiaries will use reasonable
efforts to assist the Seller in obtaining at or prior to the Closing any
consents of third parties (other than Governmental Authorities) under any
lease or contract to which the Company or any Subsidiary is a party, which
consent is in the reasonable judgment of the Seller necessary or advisable in
connection with the transactions contemplated by this Agreement, including,
without limitation, (i) providing to such third parties (A) guarantees by the
Purchaser of the obligations of CTUS, the Company or any Subsidiary under the
subject lease or contract and (B) such financial statements and other
financial information with respect to the Purchaser as such third parties may
reasonably request and (ii) agreeing to such adjustments to the terms of the
subject lease or contract as would not, individually or in the aggregate, have
a Material Adverse Effect.
SECTION 5.07. Pre-Closing Payments. At or prior to the Closing
Date, the Seller shall have the right, and shall have the right to cause CTUS,
the Company and the Subsidiaries, to terminate all of the Intercompany
Obligations, it being understood that (a) at the Seller's discretion the
Seller shall (to the extent permitted by applicable Law and regulation) cause
the Company to pay one or more extraordinary dividends to CTUS at least
sufficient to allow CTUS to satisfy or repay any Intercompany Obligations and,
subject to regulatory approval, to pay a dividend or dividends such that,
after giving effect thereto, the Book Value as of the date which is expected
to be the Audit Date is not less than the Agreed Minimum Audit Date Book Value
on such date and (b) to facilitate the transactions contemplated herein, the
Seller may, but shall not be obligated to, cause CT North America L.L.C. to
forgive, convert or otherwise restructure in accordance with applicable Law
the intercompany debt in an amount of approximately U.S.$82,200,000 owed to it
by CTUS so long as the foregoing shall result in an increase to the Book Value
of CTUS in an amount not less than the aggregate outstanding principal amount
of such debt and any accrued interest thereon; provided, however, that (i) the
Seller shall give the Purchaser five Business Days' prior written notice of
any transaction described in this Section 5.07 specifying in reasonable detail
the actions to be taken, (ii) after giving effect to the transactions
described in such notice, the Book Value of CTUS shall be the Agreed Minimum
Audit Date Book Value on such date and (iii) any Taxes arising from the
payment of any dividend or the forgiveness, conversion or restructuring of any
debt as contemplated in this Section 5.07 shall be expressly deemed to accrue,
arise and be payable during a Pre-Closing Period. In accordance with this
Section 5.07, on or prior to December 30, 1996 the Company paid a dividend in
the amount of U.S.$32,000,000, notice of which dividend pursuant to the terms
of this Section 5.07 is hereby acknowledged by the Purchaser.
SECTION 5.08. Notice of Events. The Seller and the Purchaser
shall promptly notify each other of any event or circumstance which shall
occur prior to the Closing which shall constitute a breach of a representation
or warranty or a covenant or agreement of either the Seller or the Purchaser,
such that it is reasonably likely that the conditions set forth in Section
8.01(a) or Section 8.02(a), as the case may be, will be incapable of being
satisfied by the Closing Date.
SECTION 5.09. FIRREA Claim. (a) Assuming that the action
contemplated in Section 5.01(b)(ii) shall not have been taken and
notwithstanding anything herein to the contrary, the parties hereto agree (i)
that any recovery (the "FIRREA Recovery") on the litigation filed by the
Company in the United States Court of Federal Claims styled First Federal
Savings and Loan Association of Rochester v. United States, No. 95-517C (Fed.
Cl. filed August 7, 1995), and any claim, right or administrative or judicial
proceeding comprising, arising out of, or resulting from, that litigation (any
such claim, right or proceeding is referred to herein as the "FIRREA Claim")
shall be for the account of the Seller, (ii) that the Seller shall have the
sole and exclusive right to direct the prosecution , including without
limitation the settlement thereof, of the FIRREA Claim for and on behalf of
the Purchaser, the Company and/or any successor in interest thereto which
holds the FIRREA Claim (the "FIRREA Plaintiff"), (iii) that the FIRREA
Plaintiff shall take all action reasonably requested by the Seller from time
to time with respect to the FIRREA Claim, it being understood and agreed that,
in furtherance thereof, the FIRREA Plaintiff's actions shall be subject to the
conditions set forth in Exhibit 5.09(a), (iv) that the FIRREA Plaintiff shall
be under no obligation whatsoever to take any action in respect of the FIRREA
Claim in the absence of direction from the Seller, (v) that the FIRREA
Plaintiff shall take no action subsequent to the Closing with respect to the
FIRREA Claim that reasonably can be expected to adversely affect the
likelihood, timing, nature, or amount of any such recovery and (vi) that the
Seller shall pay all costs and expenses of prosecution of the FIRREA Claim at
the direction of the Seller, including, without limitation, all costs and
expenses of the FIRREA Plaintiff, the Purchaser or any subsidiary of the
Purchaser incurred in connection therewith, including, without limitation, all
fees and disbursements of counsel to the FIRREA Plaintiff chosen by Seller as
provided in Section 5.09(c).
(b) In furtherance of the foregoing (and without in any way
intending to limit the right and ability of the Seller and the Purchaser to
consider and agree on other appropriate courses of action, including any
action or arrangement that is intended to maximize or preserve the value of
the FIRREA Claim to the Seller, the Purchaser understands and agrees that,
prior to the Closing, the Seller shall cause CTUS to amend its organizational
documents to provide for the issuance of, and to cause CTUS to issue by way of
dividend or otherwise, shares of a new class of non-voting preferred stock
(the "CTUS Preferred Stock") having the terms and conditions set forth in the
form of the certificate of designation (the "CTUS Certificate of Designation")
annexed hereto as Exhibit 5.09(b). Notwithstanding the foregoing, (x) at any
time prior to the Closing, the Company shall have the right, without the
consent of the Purchaser, to transfer the FIRREA Claim to the Seller, any of
its Affiliates or a newly-created or existing Subsidiary of the Company and
the right to transfer the shares of any such Subsidiary to the Seller, or any
of its Affiliates and (y) at any time following the Closing, at the request of
the Seller, the Purchaser shall transfer or cause the FIRREA Plaintiff to
transfer the FIRREA Claim to the Seller or such Affiliate of the Seller as the
Seller shall designate.
(c) So long as, following the Closing, the FIRREA Claim shall be
held in the name of the FIRREA Plaintiff, (i) the Seller shall have the right
to direct the FIRREA Plaintiff with respect to the prosecution of the FIRREA
Claim, through counsel of the Seller's own choosing, at the Seller's own
expense, and (ii) the FIRREA Claim shall not be collected, settled,
compromised, abandoned or otherwise resolved by the FIRREA Plaintiff except on
terms and conditions to which the Seller shall have provided its express
written consent. Subject to clauses (a)(iii), (a)(iv) and (a)(vi) above, the
Purchaser shall cooperate and, following the Closing, for so long as the
FIRREA Plaintiff is a subsidiary of the Purchaser, shall cause the FIRREA
Plaintiff, CTUS and/or the appropriate Subsidiaries to cooperate fully
(including joining as a party) in the prosecution of such FIRREA Claim. For
so long as the FIRREA Plaintiff is a subsidiary of the Purchaser, the
Purchaser shall promptly empower, and shall cause the FIRREA Plaintiff
promptly to empower (by power of attorney and such other documentation as may
be necessary and appropriate), such representatives of the Seller as the
Seller may designate to represent the FIRREA Plaintiff in the FIRREA Claim,
including the power to enter into any settlement or compromise concerning such
claim.
(d) Immediately prior to the Closing, the Seller, the Company
and the Purchaser shall each execute and deliver a FIRREA Claim Management
Agreement, dated as of the Closing Date, substantially in the form annexed
hereto as Exhibit 5.09(d) (the "FIRREA Claim Management Agreement").
SECTION 5.10. No Solicitation. Except for the individuals listed
on Section 5.10 of the Seller's Disclosure Schedule, the Seller agrees that,
from the date hereof until the expiration of the two-year period following the
Closing (a) the Seller shall not, directly or indirectly, solicit or induce
any employee of CTUS, the Company or the Subsidiaries to leave such employment
and become an employee of the Seller or any of its Affiliates and (b) the
Purchaser, CTUS, the Company and the Subsidiaries shall not, directly or
indirectly, solicit or induce any employee of the Seller or any Affiliate of
the Seller to leave such employment and become an employee of the Purchaser,
CTUS, the Company or the Subsidiaries or any of their Affiliates; provided,
however, that nothing in this Section 5.10 shall prohibit the Seller or any of
its Affiliates or the Purchaser, CTUS, the Company or the Subsidiaries or any
of their Affiliates from employing any person (i) who contacts them on his or
her initiative and without any direct or indirect solicitation by the Seller
or any of their Affiliates or the Purchaser, CTUS, the Company or the
Subsidiaries or any of their Affiliates, as the case may be, or (ii) after
expiration of the two-year period following the Closing Date.
SECTION 5.11. Covenant Not to Compete. The Seller and its
subsidiaries shall not (a) for a three-year period commencing on the Closing
Date, establish a savings and loan association operating in the Non-Compete
Area, (b) commencing on the Closing Date, utilize the name or current logos of
the Company or use in any way any proprietary customer list or other similar
record of the Company as of the Closing Date or (c) for a three-year period
commencing on the date hereof, open or establish any new permanent offices or
branches of a physical nature or any physical proprietary ATM system (which
for greater certainty excludes any shared electronic, telephonic or computer-
related networks, ATM system, Interac or internet systems ("Electronic
Networks")) for deposit-gathering activities within the Non-Compete Area;
provided, however, that nothing herein shall in any way limit the ability of
the Seller or any of any such subsidiaries, including, without limitation, any
new savings and loan association, savings bank, commercial bank or commercial
or consumer lending company hereafter established by or for the benefit of the
Seller or any of its Affiliates, to (w) establish a permanent head office or
other place of business within the Non-Compete Area, but only if required for
the Seller to obtain a license or charter to establish and/or operate an
insured depository institution (as defined in the FDIA) to enable the Seller,
in its discretion, to continue to operate a banking or thrift business in the
United States, or (x) subject to compliance with clause (b) above, solicit
deposits from any location outside the Non-Compete Area by any means or from
within the Non-Compete Area by electronic means, computer-related or
telephonic activity, whether or not through Electronic Networks, or
(y) subject to compliance with clause (b) above, offer or solicit loans or
other financial products or other services whether or not within the
Non-Compete Area or (z) acquire any Person that has an existing permanent
office, branch or branches of a physical nature or physical proprietary ATM
system (excluding any Electronic Networks) for deposit-gathering, lending or
other financial services activities within the Non-Compete Area which competes
with the Company within the Non-Compete Area. Notwithstanding the foregoing,
(A) in the event of an assignment contemplated in Section 10.13, the
restriction imposed by this Section 5.11 shall not bind the assignee but shall
continue solely to bind CT Financial Services Inc. and its subsidiaries and
(B) the restrictions imposed on the Seller and its subsidiaries under clauses
(a) and (c) above shall automatically cease to be of any further force and
effect and the Seller and its subsidiaries shall have no further obligation
hereunder to the Purchaser or any of its subsidiaries in the event that at any
time during such three-year period, from the Closing Date, in the case of
clause (a), or from the date hereof, in the case of clause (c):
(i) there is a "change in control" of the Seller, Canada Trustco
Mortgage Company or The Canada Trust Company (whether directly or
indirectly through a change in control of the direct or indirect
controlling shareholder of the Seller, Canada Trustco Mortgage Company
or The Canada Trust Company) which shall be deemed to have occurred if
any Person or combination of Persons other than a Person currently
controlling any of the foregoing through any transaction or series of
transactions (whether by purchase, merger, consolidation, amalgamation
or otherwise) beneficially acquiring, directly or indirectly, (x) 75% or
more of the issued and outstanding voting securities or shares of the
Seller or The Canada Trust Company, or (y) 75% or more of the issued and
outstanding voting securities or shares of Canada Trustco Mortgage
Company until such date (currently June 1, 1997) as the Canada Trustco
Mortgage Company is required to satisfy the 35% or other specified
public voting requirement (the "Public Voting Requirement") under the
Loan and Trust Companies Act (Canada) or (z) after the satisfaction of
the Public Voting Requirement, 65% (or such other percentage of voting
shares remaining after the Public Voting Requirement has been met) of
the issued and outstanding voting securities or shares of Canada Trustco
Mortgage Company; or
(ii) there is a sale, transfer, assignment or other disposition
of all or substantially all of the assets of the Seller, Canada Trustco
Mortgage Company or The Canada Trust Company through any transaction or
a series of transactions to a Person or combination of Persons other
than a Person currently controlling any of the foregoing.
SECTION 5.12. Environmental Audit. Between the date hereof and
the Closing Date, in the event that, at the time of foreclosure on any real
property securing any loan, the Seller has actual knowledge that any Chemical
Substance was or is present, manufactured, generated, used, recycled,
reclaimed, released, stored, treated or disposed of at, in or from such
property, the Seller shall (a) provide notice thereof to the Purchaser, (b) at
the written request and expense of the Purchaser, conduct an environmental
audit prior to foreclosure to the extent that doing so will not adversely
affect such foreclosure and (c) provide the results of such audit to, and
consult with, the Purchaser regarding the significance of such audit prior to
foreclosure on any such property.
SECTION 5.13. Minority Shares. Between the date hereof and the
Closing Date, the Seller shall attempt to enter into such arrangements and/or
agreements with the holders of the Minority Shares listed in Section 3.21 of
the Seller Disclosure Schedule, on terms disclosed or made available to the
Purchaser, as shall be necessary for CTUS to acquire at its sole cost and
expense all of the outstanding Minority Shares as of the Closing Date.
SECTION 5.14. FIRTPA Certificate. The Seller shall provide the
Purchaser with a certificate that, as of the Closing Date, the CTUS Shares do
not constitute a U.S. real property interest within the meaning of Section
1445 of the Code, such certification to satisfy the requirements of Treasury
regulation Sections 1.897-2(h) and 1.1445-2(c)(3). If such certificate is not
received, the Purchaser shall be entitled to withhold 10 percent of the
purchase price as required by Section 1445 of the Code.
SECTION 5.15. Further Assurances. Each party shall cooperate
with the other, and execute and deliver, or use its best efforts to cause to
be executed and delivered, all such other instruments, including instruments
of conveyance, assignment and transfer, and take all such other actions
consistent with the terms of this Agreement, as such party may reasonably be
requested to take by the other party hereto from time to time, in order to
effectuate the provisions and purposes of this Agreement and the transactions
contemplated hereby.
SECTION 5.16. Transition. Each party shall cooperate with the
other during the period from the date hereof to the Closing Date to effectuate
the purposes of this Agreement and the transactions contemplated hereby and
shall negotiate in good faith and in a commercially reasonable manner to
resolve any issues which may arise during such period in order to enable the
transactions contemplated hereby to be consummated.
ARTICLE VI
EMPLOYEE MATTERS
SECTION 6.01. Provision of Comparable Benefits. (a) The
Purchaser agrees that, for a period of one year after the Closing Date, the
Purchaser shall (or shall cause any other appropriate subsidiary of the
Purchaser to) provide each employee and each former employee of the Company
and the Subsidiaries who was an employee of the Company or the Subsidiaries on
the Closing Date with benefits (including, without limitation, welfare
benefits) that are comparable in the aggregate, in the good faith
determination of the Purchaser, to the benefits generally provided by the
Purchaser to its own similarly situated employees. Consistent with providing
comparable benefits for one year as is set forth above, nothing in this
Section shall affect the Purchaser's ability to determine the benefits to
provide to any employee or former employee, or restrict the Purchaser's
ability to terminate, modify or amend any Plan, program, arrangement or fringe
benefit or to terminate, modify or amend the terms and conditions of
employment of any individual. In no event shall the arrangements set forth
herein in any way remove or diminish the Purchaser's obligation to comply
with, and to provide benefits to the extent required by, Section 4980B of the
Code with respect to any former employee of the Company or its Subsidiaries.
(b) With regard to those former employees of the Company or the
Subsidiaries who are receiving retiree health benefits as of the Closing Date,
for a period of one year following the Closing Date, the Purchaser agrees to
elect either to continue the retiree health benefits such former employees
were receiving immediately prior to the Closing Date or to provide such former
employees with the retiree health benefits provided from time to time to
similarly situated retirees of the Purchaser.
(c) To the extent service is relevant for vesting or benefit
calculations or allowances (including, without limitation, entitlement to
vacation and sick days) under any plan or arrangement maintained by the
Purchaser in which employees or former employees of the Company or
Subsidiaries who were employed by the Company or the Subsidiaries on the
Closing Date participate, and to the extent permitted by applicable Law, in
order to provide the benefits described in paragraph (a) above, such plan or
arrangement shall credit employees with service on or prior to the Closing
Date with the Company or any of the Subsidiaries, if and to the same extent
such service was credited under comparable plans of the Company or the
Subsidiaries prior to the Closing Date in which such employees participated;
provided, however, that the Purchaser shall have the right to offset the
amount of any accrued benefit under any of the Purchaser's defined benefit
pension plans in which an employee participates, by the accrued benefit under
any defined benefit pension plan sponsored by the Company or its Subsidiaries
as of the Closing Date. Nothing herein shall require any such service to be
credited to the extent it would result in an employee receiving duplicate
benefits.
SECTION 6.02. Succession. In the event the Purchaser, CTUS, the
Company or any of the Subsidiaries or any of their respective 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 all or substantially all of its properties and assets
to any person, then, and in each such case, proper provision shall be made so
that the successors and assigns of the Purchaser, CTUS, the Company or the
Subsidiaries, as the case may be, shall assume the obligations set forth in
this Article VI.
SECTION 6.03. Survival. This Article VI shall survive the
Closing as provided in Section 10.01.
ARTICLE VII
TAX MATTERS
SECTION 7.01. Tax Indemnities. (a) Subject to Section 7.01(d),
the Seller shall indemnify the Purchaser and its Affiliates and hold them
harmless from and against any liability for Taxes (other than conveyance
taxes, which are allocated pursuant to Section 7.06) (i) imposed on CTUS, the
Company and the Subsidiaries in respect of their income, business, property or
operations for any Pre-Closing Period, (ii) attributable to any change in
accounting method employed by CTUS, the Company or any Subsidiary prior to the
Closing Date, (iii) attributable to discharge of indebtedness, if any, that
may result from any capital contributions by the Seller (or any Affiliate of
the Seller) to CTUS, the Company or any Subsidiary of any intercompany
indebtedness owed by CTUS, the Company or any Subsidiary to the Seller (or any
Affiliate of the Seller) or (iv) attributable to the issuance or redemption of
the CTUS Preferred Stock and the receipt of the FIRREA Recovery (to the extent
not taken into account in determining the distribution(s) in respect of the
HSAI Preferred Stock)(but only to the extent that the amount of such Taxes is
in excess of the amount accrued for Taxes (including for greater certainty any
reserve for bad debts) in the books and records of CTUS, the Company and the
Subsidiaries as of the Closing Date); provided, however, that no indemnity
shall be provided under this Agreement for any Taxes resulting from (x) a
breach by the Purchaser of its obligations under this Agreement, (y) a
reduction in any net operating loss, capital loss or tax credit carryover
allocable to CTUS, the Company, or any Subsidiary or (z) any transaction of
CTUS, the Company or any Subsidiary occurring after the Closing on the Closing
Date.
(b) From and after the Closing Date, the Purchaser, its
Affiliates, CTUS and the Company shall indemnify the Seller and its Affiliates
and hold them harmless from and against all Taxes imposed on or with respect
to CTUS, the Company or its Subsidiaries that are not subject to
indemnification pursuant to paragraph (a) of this Section 7.01.
(c) Any Taxes for a Period beginning before the Closing Date and
ending after the Closing Date (a "Straddle Period") shall be apportioned
between the Seller and the Purchaser, in the case of real and personal
property taxes, and franchise taxes not based on gross or net income, capital
(including net worth or long-term debt) or gross or net assets, on a per diem
basis and, in the case of other Taxes (including sale and transfer Taxes not
described in Section 7.06), shall be determined based on the actual operation
of CTUS, the Company and the Subsidiaries, as the case may be, during the
portion of such period that is a Pre-Closing Period and the portion of such
period that is a Post-Closing Period. Each such Pre-Closing Period and Post-
Closing Period shall be deemed to be a Period subject to the provisions of
Sections 7.01(a) and 7.01(b) above. Notwithstanding the foregoing, in the
case of any Tax based upon or measured by capital (including net worth or
long-term debt), gross or net assets or intangibles, the amount of such Tax
allocated to the Pre-Closing Period shall be computed by reference to the
average level of such items during the Pre-Closing Period; provided, however,
that such method shall apply only where the relevant Law requires the use of
average amounts and, in such a case, the frequency and method of averaging
shall be as required by such Law. In any other event, the amount of such Tax
shall be computed by reference to the level of such items on the Audit Date.
(d) The respective indemnification obligations of the Purchaser
and the Seller pursuant to this Section 7.01 shall not be effective until the
aggregate dollar amount of all Taxes which would otherwise be payable pursuant
to this Article VII by such party exceeds U.S.$250,000 (the "Tax Liability
Threshold Amount") and then only to the extent such aggregate amount exceeds
the Tax Liability Threshold Amount.
(e) Payment by an indemnitor of any amount due under this
Section 7.01 shall be made within 30 days following written notice by the
indemnitee that payment of such amounts to the appropriate tax authority is
due, provided that the indemnitor shall not be required to make any payment
earlier than two days before it is due to the appropriate tax authority. If
the Seller receives an assessment or other notice of Taxes due with respect to
CTUS, the Company or any of its Subsidiaries for any Pre-Closing Period for
which the Seller is not responsible, in whole or in part, pursuant to
paragraph (a) of this Section 7.01 because all or a part of such Tax does not
exceed the amount accrued for Taxes in the books and records of CTUS, the
Company and its Subsidiaries as of the Closing Date, and the Seller pays such
Tax, then the Purchaser, CTUS or the Company shall pay to the Seller, in
accordance with the first sentence of this Section 7.01(e), the amount of such
Tax for which the Seller is not responsible under Section 7.01(a). In the
case of a Tax that is contested in accordance with the provisions of Section
7.03, payment of such Tax to the appropriate tax authority will not be
considered to be due earlier than the date of a Final Determination with
respect to such Tax.
SECTION 7.02. Refunds and Tax Benefits. (a) The Purchaser shall
promptly pay to the Seller any refund or credit (including any interest paid
or credited with respect thereto) received by the Purchaser, CTUS, the Company
or any Subsidiary of Taxes relating to Pre-Closing Periods or attributable to
an amount paid by or on behalf of the Seller under Section 7.01 or 5.09 but
only if and to the extent that the aggregate amount of refunds and credits
exceeds the aggregate amount that is included as an asset in respect of Taxes
on the Audit Date Balance Sheet (not taking account of any aggregate valuation
allowances against deferred tax assets remaining after giving effect to the
Deferred Tax Valuation Amount) (reduced by any Taxes thereon); provided,
however, that payments with respect to credits shall be made no earlier than
the time at which such credit reduces or could reduce the Tax liability of the
Purchaser and its Affiliates, including CTUS, the Company or any Subsidiary.
In the event that any refund or credit of Taxes for which a payment has been
made pursuant to this Section 7.02 is subsequently reduced or disallowed, the
Seller shall indemnify and hold harmless the payor for any Tax liability,
including interest, assessed against such payor by reason of the reduction or
disallowance. The Purchaser shall, if the Seller so requests and at the
Seller's expense, cause the relevant entity to file for and obtain any refund
to which the Seller is entitled under this Section 7.02. Subject to
Section 7.03, the Purchaser shall permit the Seller to control (at the
Seller's expense) the prosecution of any such refund claim, and shall cause
the relevant entity to authorize by appropriate power of attorney such persons
as the Seller shall designate to represent such entity with respect to such
refund claim. The obligations of the Purchaser pursuant to this Section
7.02(a) shall not be effective until the aggregate dollar amount of all
amounts refunded and credited exceeds $250,000, and then only to the extent
that such aggregate amount exceeds $250,000.
(b) In the event and to the extent that the Seller receives a
refund or credit of federal, state or local taxes for any Pre-Closing Period
attributable solely to the carryback of losses, credits or similar items
arising in any Post-Closing Period and attributable to CTUS, the Company or
any Subsidiary, the Seller shall promptly pay to the Purchaser the amount of
such refund or credit, together with any interest paid or credited with
respect thereto. In the event that any refund or credit of Taxes for which a
payment has been made pursuant to this Section 7.02(b) is subsequently reduced
or disallowed, the Purchaser shall indemnify and hold harmless the payor for
any Tax liability, including interest, assessed by reason of the reduction or
disallowance.
(c) Any amount otherwise payable by the Seller under Section
7.01 shall be reduced by any Tax benefit realized by the Purchaser, CTUS, the
Company, any Subsidiary or any of their Affiliates in a Post-Closing Period (a
"Post-Closing Date Tax Benefit") as a result of either an adjustment to Taxes
for which the Seller is responsible under Section 7.01 (such as a timing
adjustment resulting in a Tax deduction for CTUS, the Company or any
Subsidiary for a Post-Closing Period) or a Tax deduction resulting from an
indemnifiable payment of Taxes. The amount of any Post-Closing Date Tax
Benefit shall be computed at the maximum applicable marginal statutory tax
rate in effect at the time of computation. Post-Closing Date Tax Benefits
determined to be substantially likely to be realized not later than the
taxable year during which an indemnity payment is determined to be due shall
be considered to be realized currently for purposes of netting against such
indemnity payment hereunder. If a payment is made by the Seller in accordance
with Section 7.01, and if in a subsequent taxable year an actual Post-Closing
Date Tax Benefit is realized by the Purchaser, CTUS, the Company, any
Subsidiary or any of their Affiliates (that was not previously taken into
account pursuant to the preceding sentence to reduce an amount otherwise
payable by the Seller under Section 7.01), the Purchaser, CTUS, the Company,
any such Subsidiary or any such Affiliate shall pay to the Seller at the time
of such realization the amount of such Post-Closing Date Tax Benefit to the
extent that the Post-Closing Date Tax Benefit would have resulted in a
reduction in the amount paid by the Seller under Section 7.01 if the
Post-Closing Date Tax Benefit had been obtained in the year of such payment.
Subject to the foregoing a Post-Closing Date Tax Benefit will be considered to
be realized for purposes of this Section 7.02 at the time that it is reflected
on a Tax return of the Purchaser, CTUS, the Company, any Subsidiary or any of
their Affiliates.
SECTION 7.03. Contests. (a) After the Closing Date, the
Purchaser shall notify the Seller in writing promptly and in any event within
30 days of the commencement of any Tax audit or administrative or judicial
proceeding or of any demand or claim on the Purchaser, CTUS, the Company or a
Subsidiary (an "Indemnification Event"), which could give rise to a claim for
indemnification under Section 7.01. Such notice shall contain factual
information (to the extent known to the Purchaser, CTUS, the Company or a
Subsidiary) with respect to the Indemnification Event in reasonable detail and
shall include copies of any notice or other document received from any taxing
authority in respect thereof. If the Purchaser fails to give the Seller
notice within a reasonable period of time or in sufficient detail to apprise
the Seller of the nature of the claim (in each instance taking into account
the facts and circumstances with respect to such claim), the Seller shall not
be liable under this Agreement for such claim to the extent, if any, that the
rights of the Seller with respect to such claim are actually prejudiced.
(b) Subject to Section 7.03(d) below, the Seller may elect to
direct, through counsel of its own choosing and at its own expense, any audit,
claim for refund and administrative or judicial proceeding involving any Tax
Periods with respect to which indemnity may be sought from the Seller under
Sections 7.01 or 5.09 (any such audit, claim for refund or proceeding is
referred to herein as a "Contest"). If the Seller elects to direct a Contest,
it shall within 30 calendar days of receipt of the notice of the
Indemnification Event relating to such Contest notify the Purchaser of its
intent to do so and, if requested by the Purchaser, the Seller shall furnish
to the Purchaser in due course, as a condition to further pursuing such
Contest, an opinion of the Seller's independent tax counsel to the effect that
the Seller has a reasonable basis to pursue such Contest. If the Purchaser or
an Affiliate is requested (or, if an election by the Seller is not timely
made, shall determine) to pay the Tax claimed and sue for a refund, the Seller
shall make a tentative indemnity payment to the party making such payment. In
the case of any Contest, the Purchaser or its Affiliate, as the case may be,
shall not make payment of the Tax in question for at least 30 days (or such
shorter period as may be required by applicable law) after the giving of
notice to the Seller of its intention to do so (and if the Seller has elected
to direct the Contest shall not make payment unless requested by the Seller),
shall give to the Seller any information reasonably requested by the Seller
relating to such Contest and otherwise shall cooperate with the Seller in good
faith in order to contest effectively any such Contest, and to the extent not
inconsistent with the Purchaser's or its Affiliates' control over the portion
of proceedings that relate to issues other than those subject to this
indemnity (as described below), shall permit the Seller to control such
proceedings relating to any Contest. The Seller shall, on demand, reimburse
all "out of pocket" costs and expenses which the Purchaser or its Affiliate
may incur in connection with such Contest (but not in connection with
exercising the right of attendance described below), including, without
limitation, reasonable attorneys' and accountants' fees and disbursements.
The Purchaser or its duly appointed representatives shall be allowed to attend
all meetings between the Seller and the taxing authority in question and shall
be provided with copies of all correspondence and documents relating to such
Contest. If the Seller fails to notify the Purchaser of its election as
herein provided, then until receiving notification as to the Seller's
intentions, the Purchaser, CTUS, the Company and/or the appropriate Subsidiary
shall take such reasonable steps as may be prudent and within its capacity
(with due allowance being given to the circumstances) to preserve the right of
the relevant entity to contest the asserted Tax liability, may pay, compromise
or contest, such asserted Tax liability and shall be reimbursed by the Seller
for the reasonable cost of outside professionals and outside disbursements
incurred pursuant to this sentence to the extent attributable to a Tax
liability indemnifiable by the Seller hereunder. However, in each such case,
neither the Purchaser nor CTUS nor the Company nor the Subsidiary may settle
or compromise any asserted Tax liability over the objection of the Seller;
provided, however, that consent to settlement or compromise shall not be
unreasonably withheld. If the Purchaser, CTUS, the Company or any Subsidiary
assumes control of a Contest with respect to Taxes pursuant to the foregoing,
provided that the Seller has acted in good faith, the Seller shall retain the
right, at any time thereafter and immediately upon notice to the entity that
shall have assumed control of such Contest, to assume itself, at the Seller's
expense, sole direction and control of such Contest, as set forth above. If
the Seller chooses to direct the Contest, the Purchaser shall promptly empower
and shall cause CTUS, the Company and/or the appropriate Subsidiaries promptly
to empower (by power of attorney and such other documentation as may be
necessary and appropriate) such representatives of the Seller as it may
designate to represent the Purchaser, CTUS, the Company and/or the
Subsidiaries in the Contest insofar as the Contest involves an asserted Tax
liability for which the Seller could be liable under Section 7.01.
(c) The Seller may cause such a Contest to be prosecuted to a
determination in a court of initial jurisdiction and, if the Seller shall have
furnished the Purchaser with an opinion of independent tax counsel to the
effect that there is a reasonable basis to appeal the determination of any
court, the Seller may cause such Contest to be prosecuted to a determination
in an appellate court. Notwithstanding any other provision of this
Section 7.03 the Seller shall not settle, compromise or abandon without the
Purchaser's prior written consent any Contest which would materially and
adversely affect the Tax liability of the Purchaser or its Affiliates in any
Post-Closing Period (including material adverse changes resulting from the
imposition of income Tax deficiencies, the reduction of asset basis or cost
adjustments, the lengthening of any amortization or depreciation periods or
the denial of amortization or depreciation deductions) determined taking into
account the then present value of any Tax benefits available to the Purchaser,
CTUS, the Company or any Subsidiary by reason of any such settlement (taken
into account as and when the Purchaser reasonably believes such Tax benefits
could be utilized to reduce the Tax liability of the Purchaser, CTUS, the
Company or any Subsidiary). Such consent shall not be unreasonably withheld.
(d) With respect to Contests relating to any Post-Closing Period
(including any Contest relating to, or arising out of, any FIRREA Recovery
described in Section 5.09) the Purchaser shall control all proceedings taken
in connection with such Contests except that the Seller shall control such
proceedings to the extent that they relate to a matter in respect of which the
Seller has indemnified the Purchaser under Section 7.01 or 5.09 (including,
for greater certainty, any Tax proceedings with respect to a matter that could
affect the amount of any amounts to be paid to the holder(s) of the CTUS
Preferred Stock and the HSAI Preferred Stock pursuant to the terms of the CTUS
Preferred Stock and HSAI Preferred Stock, respectively); provided, however,
that if the Seller shall request in writing in a timely manner and furnish the
Purchaser an opinion of independent tax counsel to the effect that the Seller
has a reasonable basis to pursue such Contest, the Seller may cause such
Contest to be prosecuted to a determination in a court of initial
jurisdiction; and, provided further that if the Seller shall request in
writing in a timely manner and furnish the Purchaser an opinion of independent
tax counsel to the effect that the Seller has a reasonable basis to appeal the
determination of any court, the Seller may cause such Contest to be prosecuted
to a determination in an appellate court.
(e) If, after actual receipt by the Purchaser or its Affiliates
of an amount paid by the Seller as a tentative indemnity pursuant to paragraph
(b), the extent of the liability of the Purchaser or its Affiliates with
respect to the indemnified matter shall be established by a Final
Determination, the Purchaser or its Affiliates, as the case may be, shall
promptly pay to the Seller all or the portion of any refund received by or
credited to the Purchaser or its Affiliates with respect to the indemnified
matter (together with any interest paid or credit thereon by the taxing
authority) plus (i) the amount of the Tax savings, if any, realized by the
Purchaser or its Affiliates as a result of such payment, and (ii) interest at
the rate which shall be applicable under section 6621(a)(1) of the Code in
respect of federal income taxes and at the rate provided by applicable law in
respect of other Taxes from time to time from the date of actual collection by
the Purchaser or its Affiliates of such refund (and any such interest thereon)
to the date of payment to the Seller hereunder.
(f) Nothing contained herein shall require the Purchaser or its
Affiliates, as the case may be, (i) to pursue a Contest which it would not
otherwise be required to pursue pursuant to this Agreement or (ii) to permit
the Seller to control any such Contest, if the Purchaser shall waive the
payment by the Seller of any amount that might otherwise be payable by the
Seller hereunder by way of indemnity in respect of such Contest. Upon any
such waiver, the Purchaser or its Affiliates, as the case may be, shall repay
to the Seller any payments made with respect to such Contest pursuant to
Section 7.03(b) above together with interest at the rate which shall be
applicable under section 6621(a)(1) of the Code from time to time from the
date the payment was paid by the Seller to the date of repayment by the
Purchaser or its Affiliate.
SECTION 7.04. Preparation of Tax Returns. The Seller shall
prepare and timely file, or cause to be prepared and timely filed, all Returns
relating to CTUS, the Company and the Subsidiaries that are due (taking into
account any applicable extension periods) no more than 30 days after the
Closing Date. The Purchaser shall prepare and timely file or cause CTUS and
the Company and the Subsidiaries to prepare and timely file all Returns
relating to CTUS and the Company or any of the Subsidiaries that are due
(taking into account any applicable extension period) more than 30 days after
the Closing Date. Returns required to be filed by the Purchaser in respect of
a Pre-Closing Period shall be prepared on a basis consistent with those
prepared for prior tax years unless a different treatment of any item is
required by an intervening change in Law. The Purchaser shall furnish the
Seller with a copy of any Return prepared by it for a Pre-Closing Period at
least 20 days before the anticipated filing date thereof and, in preparing
such Returns, shall accept any comments made by the Seller with respect to any
issue or item which could give rise to a claim for indemnification; provided,
however, that this sentence shall not apply in respect of any comments for
which the Seller does not provide the Purchaser, if so requested in writing to
do so, with an opinion of counsel to the effect that there is a reasonable
basis for Seller's comment.
SECTION 7.05. Cooperation and Exchange of Information. Following
the Closing, the Seller and the Purchaser shall provide each other, and the
Purchaser shall cause CTUS and the Company to provide the Seller, with such
cooperation and information as reasonably may be requested in filing any Tax
Return, amended return or claim for refund, determining a liability for Taxes
or a right to a refund of Taxes or participating in or conducting any audit or
other proceeding in respect of Taxes. Such cooperation and information shall
include providing copies of relevant Tax Returns or portions thereof, together
with accompanying schedules and related work papers and documents relating to
rulings or other determinations by taxing authorities. Each of the Seller,
the Purchaser and the Company shall make its employees available on a mutually
convenient basis to provide explanations of any documents or information
provided hereunder. The Seller, on the one hand, and the Purchaser, CTUS and
the Company, on the other, shall each retain all Returns, schedules and work
papers and all material records or other documents that are in its possession
immediately following the Closing, or created by or on behalf of it
thereafter, relating to Tax matters of CTUS, the Company and the Subsidiaries
for the taxable period of each relevant jurisdiction first ending after the
Closing Date and for all prior taxable periods until the later of (i) the
expiration of the statute of limitations of the taxable periods to which such
returns and other documents relate, without regard to extensions except to the
extent notified by the other party in writing of such extensions for the
respective Tax periods, or (ii) eight years following the due date (without
extension) for such returns. Any information obtained under this Section 7.05
shall be kept confidential, except as may be otherwise necessary in connection
with the filing of Returns or claims for refund or in conducting an audit or
other proceeding.
SECTION 7.06. Conveyance Taxes. Notwithstanding any provision
herein to the contrary, the Seller agrees to assume liability for and to pay a
maximum of U.S.$500,000 of all sales, use, transfer, stamp, stock transfer,
withholding, real property transfer or gains, registration, recording taxes or
fees, or any similar Taxes or fees incurred as a result of the sale of the
transactions contemplated hereby, and the Purchaser agrees to assume liability
for and to pay any such Taxes in excess of such amount.
SECTION 7.07. Miscellaneous. (a) The parties agree that all
payments made under this Article VII, under any other indemnity provision
contained in this Agreement, and for any misrepresentations or breach of
warranties or covenants shall constitute adjustments to the Purchase Price and
that they shall report all such payments on that basis in all Returns filed
with any taxation authority for purposes hereof. If, contrary to the intent
of the parties as expressed in the preceding sentence, any indemnity payment
made pursuant to this Agreement is treated as taxable income of the recipient,
then the payor shall indemnify and hold harmless the recipient from any
liability for Taxes attributable to the receipt of such payment.
(b) Except as expressly provided otherwise and except for the
representations contained in Sections 3.15 and 3.18 of this Agreement, this
Article VII shall be the sole provision governing Tax matters and indemnities
therefor under this Agreement.
(c) For purposes of this Article VII, all references to the
Purchaser, the Seller, CTUS, the Company or the Subsidiaries include
successors in interest, whether by operation of Law or otherwise.
(d) The covenants and agreements of the parties hereto contained
in this Article VII shall survive the Closing and shall remain in full force
and effect until the expiration of all statutes of limitations with respect to
any Taxes that would be indemnifiable by the Seller under Section 7.01(a) of
this Agreement or by the Purchaser under Section 7.01(b) of this Agreement.
ARTICLE VIII
CONDITIONS TO CLOSING
SECTION 8.01. Conditions to Obligations of the Seller. The
obligations of the Seller to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment, at or prior to the Closing, of
each of the following conditions:
(a) Representations and Warranties; Covenants. The
representations and warranties of the Purchaser contained in this
Agreement shall be true and correct in all material respects as of the
Closing with the same force and effect as if made as of the Closing,
other than such representations and warranties as are made as of another
date, and all the covenants contained in this Agreement to be complied
with by the Purchaser on or before the Closing shall have been complied
with in all material respects, and the Seller shall have received a
certificate of the Purchaser to such effect signed by a duly authorized
officer of the Purchaser;
(b) No Orders or Litigation. No Governmental Authority shall
have enacted, issued, promulgated, enforced or entered any statute,
rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent), which is in effect
preventing or prohibiting consummation of any of the transactions
contemplated by this Agreement (nor shall any proceeding for any such
statute, rule, regulation, order, decree or injunction be pending), nor
shall there be any proceeding initiated or pending by any Governmental
Authority or any other Person seeking the prevention or prohibition of
the consummation of any of the transactions contemplated by this
Agreement or money damages as a result thereof, including any actions to
be taken by either party pursuant hereto, except for any such proceeding
pending or threatened by a Person (other than a Governmental Authority)
seeking only money damages; provided, however, that the provisions of
this Section 8.01(b) shall not apply if the Seller has directly or
indirectly solicited or encouraged any such action; and provided further
that the Seller may invoke this condition, only if it shall have used
its reasonable efforts to have any such order vacated;
(c) Approvals and Consents. The Seller's Required Approvals
shall have been made or obtained and any waiting period (and any
extension thereof) with respect thereto shall have expired or terminated
(except where the failure to obtain any such Seller's Required Approval
from a Person other than a Governmental Authority would not result in a
Material Adverse Effect) and all such Seller's Required Approvals shall
still be in effect; and
(d) FIRREA Claim Management Agreement. The Purchaser shall have
executed and delivered the FIRREA Claim Management Agreement.
SECTION 8.02. Conditions to Obligations of the Purchaser. The
obligations of the Purchaser to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment, at or prior to the
Closing, of each of the following conditions:
(a) Representations and Warranties; Covenants. The
representations and warranties of the Seller contained in this Agreement
shall be true and correct as of the Closing (without regard to any
Material Adverse Change/Effect exceptions, thresholds or knowledge
qualifiers contained therein) with the same force and effect as if made
as of the Closing, other than such representations and warranties as are
made as of another date (including Section 3.10(b)) and except for such
inaccuracies as, individually or in the aggregate, do not have a
Material Adverse Effect, and all material covenants contained in this
Agreement to be complied with by the Seller on or before the Closing
shall have been complied with in all material respects, and the
Purchaser shall have received a certificate of the Seller to such effect
signed by a duly authorized officer of the Seller;
(b) No Orders or Litigation. No Governmental Authority shall
have enacted, issued, promulgated, enforced or entered any statute,
rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent), which is in effect
preventing or prohibiting consummation of any of the transactions
contemplated by this Agreement (nor shall any proceeding for any such
statute, rule, regulation, order, decree or injunction be pending), nor
shall there be any proceeding initiated or pending by any Governmental
Authority or any other Person seeking the prevention or prohibition of
the consummation of any of the transactions contemplated by this
Agreement or money damages as a result thereof, including any actions to
be taken by either party pursuant hereto, except for any such proceeding
pending by a Person (other than a Governmental Authority) seeking only
money damages; provided, however, that the provisions of this
Section 8.02(b) shall not apply if the Purchaser has directly or
indirectly solicited or encouraged any such action; and provided further
that the Purchaser may invoke this condition only if it shall have used
its reasonable efforts to have any such order vacated;
(c) Approvals and Consents. The Purchaser's Required Approvals
shall have been made or obtained and any waiting period (and any
extension thereof) with respect thereto shall have expired or terminated
(except where the failure to obtain any such Purchaser's Required
Approval from a Person other than a Governmental Authority would not
result in a Material Adverse Effect) and all such Purchaser's Required
Approvals shall still be in effect; and
(d) FIRREA Claim Management Agreement. The Seller and the
Company shall have executed and delivered the FIRREA Claim Management
Agreement.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.01. Termination. This Agreement may be terminated at
any time prior to the Closing:
(a) by the mutual written consent of the Seller and the
Purchaser; or
(b) by either the Seller or the Purchaser, if the Closing shall
not have occurred prior to the date one year after the date of this
Agreement; provided, however, that the right to terminate this Agreement
under this Section 9.01(b) shall not be available to any party whose
failure to fulfill any obligation under this Agreement shall have been
the cause of, or shall have resulted in, the failure of the Closing to
occur prior to such date.
Time shall be of the essence in this Agreement.
SECTION 9.02. Effect of Termination. In the event of termination
of this Agreement as provided in Section 9.01, this Agreement shall forthwith
become void and there shall be no liability on the part of any party hereto
(i) except as set forth in Section 5.05 and Section 10.05 and (ii) nothing
herein shall relieve either party from liability for any willful breach
hereof.
SECTION 9.03. Waiver. At any time prior to the Closing, any
party hereto may (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 or (c) waive compliance with any of the
agreements or conditions contained herein.
SECTION 9.04. Termination Fee. In the event that the Seller
unilaterally terminates this Agreement by repudiating its obligations in
writing following the acceptance of an unsolicited offer for the acquisition
(whether by purchase of shares or assets, merger or otherwise) of CTUS, the
Company and the Subsidiaries, the Seller shall promptly pay to or on behalf of
the Purchaser $35,000,000, payable in immediately available funds to an
account designated by the Purchaser. The Purchaser acknowledges that, upon
receipt of such payment, the Purchaser shall be deemed to have waived all
claims, demands, damages and causes of action, and shall have no further
recourse, against the Seller pursuant to this Agreement, and the Seller shall
have no further obligation to the Purchaser or any other Person pursuant to
this Agreement.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01. Non-Survival of Representations, Warranties,
Covenants and Agreements. The representations, warranties, covenants and
agreements contained herein shall be deemed to be conditions to the purchase
and sale of the CTUS Shares and CTUS Preferred Stock as contemplated in
Sections 8.01(a) and 8.02(a) and, following the Closing and/or the termination
of this Agreement pursuant to Section 9.01, shall not survive, shall expire,
be terminated and extinguished and the Purchaser's sole and exclusive remedy
for breach of any representation or warranty by the Seller hereunder or
failure by the Seller to comply with its covenants shall be (a) to exercise
its rights under the indemnity provided pursuant to Section 7.01 in the case
of any matter relating to Taxes and (b) in the case of any other matter,
including any matters covered by any representations and warranties of the
Seller contained herein (other than relating to Taxes, which shall be subject
only to indemnification as contemplated in clause (a) above), solely to
exercise its rights to indemnification under Section 10.03; provided, however,
that (i) consistent with the foregoing, following the Closing the
representations and warranties contained in Sections 3.02, 3.03, 3.04, 3.05,
3.10, 3.11 and 3.17 (but only to the extent set forth in Section 10.03 hereof)
shall remain in full force and effect for eighteen months solely for purposes
of providing the basis for the indemnity contemplated in Section 10.03, (ii)
the covenants and agreements set forth in Sections 4.08, 5.02, 5.03(b), 5.04,
5.05, 5.09, 5.10 and 5.11 and Articles VI, VII and X, shall remain in full
force and effect for the applicable periods specified in such Sections or
Articles or, if in any such case no such period is specified, until the
applicable period under the statute of limitations therefor has expired and
(iii) following termination of the Agreement, the covenants and agreements set
forth in Sections 9.02 and 10.05 shall survive until the applicable statute of
limitations thereof has expired.
SECTION 10.02. Release and Indemnification. (a) The Purchaser
agrees to use its reasonable efforts (not including prepayment or
renegotiation of the terms of any indebtedness) to cause the Seller or any
Affiliate of the Seller (other than CTUS, the Company or the Subsidiaries) to
be absolutely and unconditionally released on or effective as of the Closing
Date from each liability and other obligation, direct or indirect, primary or
secondary, for the payment of money or otherwise, including purchase or
indemnification, guarantees or performance bonds, in respect of any
outstanding indebtedness or contingent liabilities of CTUS, the Company, or
the Subsidiaries, or issued for the account of or on behalf of a customer of
CTUS, the Company of the Subsidiaries. The Purchaser agrees to continue to
use its reasonable efforts after the Closing Date to relieve the Seller and
its Affiliates of any such liabilities or obligations that are not released or
otherwise discharged on or effective as of the Closing Date. The Seller
agrees promptly upon demand to reimburse the Purchaser, CTUS, the Company or a
Subsidiary, as the case may be, for all out-of-pocket costs and expenses
incurred by it in securing any such release or discharge.
(b) The Purchaser shall indemnify and hold harmless the Seller
and each of its Affiliates, officers, directors, employees, successors and
assigns (each, a "Seller Indemnified Party") for any and all liabilities,
obligations, losses, damages, claims, costs and expenses, interest, awards,
judgments and penalties (including, without limitation, reasonable attorneys'
and consultants' fees and expenses) suffered or incurred by them (including,
without limitation, any claim, action, proceeding or investigation brought or
otherwise initiated by any of them) to the extent arising solely out of, or
resulting from, the conduct of the Businesses by CTUS, the Company or the
Subsidiaries or the Purchaser following the Closing or the operations of CTUS,
the Company or the Subsidiaries or the Purchaser subsequent to the Closing;
provided, however, that the foregoing shall not apply to any transaction
entered into between any Seller Indemnified Party and the Purchaser, CTUS, the
Company or any subsidiary of the Purchaser subsequent to the Closing.
SECTION 10.03. Indemnification by the Seller. (a) Subject to
the procedures set forth in this Section 10.03, the Seller shall indemnify the
Purchaser, its Affiliates, officers, directors, employees, successors and
assigns and hold the Purchaser harmless for Losses (other than with respect to
Taxes the indemnity for which is solely and exclusively as provided in Article
VII) which relate to a matter or circumstance arising prior to the Closing
Date and which are discovered and communicated in writing to the Seller within
eighteen months from the Closing Date (or, in the case of any matter covered
by clauses (i) and (ii) below, the end of the applicable statute of
limitations period) solely with respect to Losses arising out of:
(i) any transaction contemplated by this Agreement relating to
the Minority Shares, including, but not limited to, any liability with
respect to any payment required by law to be made by the Purchaser
and/or its Affiliates subsequent to the Closing to those holders of
Minority Shares that shall not have sold their shares, options and/or
other similar interests in the Company to the Seller prior to the
Closing as contemplated in Section 5.13;
(ii) the prosecution of the FIRREA Claim in accordance with the
directions of the Seller on the condition that the Purchaser strictly
complies with the Seller's instructions in accordance with the standards
contained in Section 5.09;
(iii) any fraudulent activity of employees of the Seller not
disclosed to the Purchaser in the Seller Disclosure Schedule (or
otherwise in writing) that is not otherwise covered by insurance (but
subject to any deductibles applicable thereto); and
(iv) any breach of the representations and warranties contained
in Sections 3.02, 3.03, 3.04, 3.05, 3.11 and 3.17 (subject to the
knowledge qualifiers set forth therein but, excluding, for purposes of
this Section 10.03, any Material Adverse Effect qualifier set forth
therein), and in the case of Section 3.10 certain clauses thereof,
consisting solely of (A) clause (b)(i) to the extent relating to fixed
assets, (B) clause (b)(ii) to the extent relating to Encumbrances on
Real Property but, for the avoidance of doubt, excluding any other
properties or assets and (C) clauses (b)(iii), (b)(iv), (b)(v), (b)(vi),
(b)(ix) and (b)(x).
(b) Notwithstanding anything in the Agreement to the contrary,
the obligation of the Seller to indemnify the Purchaser shall be subject to
the following limitations:
(i) for purposes of calculating the amount of any Loss (A) in
the case of a Loss arising out of or in connection with a claim asserted
by a third party against the Purchaser, a Loss shall not be required to
be indemnified hereunder until the earlier of (x) such time as the
Purchaser is required by judicial action or otherwise to pay the Loss
(or any portion thereof) to such third party or (y) a liability is
conclusively established rather than when payment is claimed by such
third party, (B) in the case of any other Loss, such Loss shall not be
required to be indemnified hereunder until such time as liability is
reasonably demonstrated by the Purchaser to the Seller rather than when
payment is claimed by the Purchaser except as otherwise provided for in
paragraph (e) of this Section 10.03, and (C) the amount of a Loss shall
be reduced by:
(1) the amount of the reserve (if any) of such Loss or
category of Loss in the Company's financial statements, as the
case may be, but any such reserved Losses shall not be included in
the Claim Deductible (as defined below);
(2) the financial effect of any Tax benefit obtainable as
a result of the recognition of such Loss as contemplated in
paragraph (c) below;
(3) the amount of any insurance proceeds and any
indemnity, contribution or other similar payment in fact
recoverable by the Purchaser or any Affiliate from any third party
with respect thereto; and
(4) the amount of any Loss that results from or arises out
of actions taken by the Purchaser, the Company or their respective
Affiliates after the Closing Date (other than with respect to the
defense or settlement of claims relating to periods prior to the
Closing Date);
it being understood and agreed that the Purchaser shall take, and
following the Closing shall cause the Company to take, all reasonable
steps to mitigate their Losses upon and after becoming aware of any
event which could reasonably be expected to give rise to any Losses;
(ii) the indemnification obligations of the Seller pursuant to
this Section 10.03 shall not be effective with respect to any Loss, as
the case may be, unless (x) in the case of any Loss associated with any
matter described in clause (a)(i) or (a)(ii) above, the amount of each
such Loss exceeds U.S.$1,000, (y) in the case of any Loss arising out of
a breach of the representation and warranty in Section 3.02, the amount
of each such Loss exceeds U.S.$10,000 and (z) in the case of any Loss
arising out of clause (a)(iii) above or a breach of the representations
and warranties listed in clause (a)(iv) above (other than Section 3.02),
the amount of each such Loss exceeds U.S.$2,500,000 (each, a "Claim
Deductible"), it being understood and agreed that only the amount of any
such Loss that exceeds the Claim Deductible shall be covered by the
indemnity covered in this Section 10.03 and shall be referred to herein
as the "Indemnifiable Amount" with respect to such Loss; and
(iii) the maximum aggregate payment that the Seller shall be
liable to pay out under this Section 10.03 in respect of any Loss or all
Losses (other than in respect of any Loss arising out of the matters set
forth in clauses (a)(i) and (a)(ii) above) in the aggregate whether in
respect of the Indemnified Amounts or otherwise shall be U.S.$60,000,000
(the "Maximum Aggregate Indemnity Payment Amount").
(c) The amount of any Tax benefit shall be computed at the
maximum applicable marginal statutory tax rate in effect at the time of
computation. Tax benefits determined to be substantially likely to be
realized not later than the taxable year during which an indemnity payment is
determined to be due shall be considered to be realized currently for purposes
of netting against such indemnity payment hereunder. If a payment is made by
the Seller in accordance with this Section 10.03, and if in a subsequent
taxable year an actual Tax benefit is realized by the Purchaser, CTUS, the
Company, any Subsidiary or any of their Affiliates (that was not previously
taken into account to reduce an amount otherwise payable by the Seller under
Section 10.03), the Purchaser, CTUS, the Company, any such Subsidiary or any
such Affiliate shall pay to the Seller at the time of such realization the
amount of such Tax benefit to the extent that the Tax benefit would have
resulted in a reduction in the amount paid by the Seller under this Section
10.03 if the Tax benefit had been obtained in the year of such payment.
Subject to the foregoing, a Tax benefit will be considered to be realized for
purposes of this Section 10.03 at the time that it is reflected in a Tax
Return of the Purchaser, CTUS, the Company, any Subsidiary or any of their
Affiliates.
(d) For purposes of determining the Seller's liability under
this Section 10.03, the Purchaser shall have the right initially to undertake
the defense, appeal or settlement of any claim, assertion, event or proceeding
for which indemnity is provided for hereunder; provided, however, that (i)
prior to the Purchaser undertaking the defense, appeal or settlement of any
claim, assertion, event or proceeding for which indemnity may be available
pursuant hereto the Seller shall have the right to undertake such defense,
appeal or settlement at its own cost and expense and, if the Seller shall not
have undertaken any such defense, appeal or settlement, Seller shall have the
right to consult, through counsel of its own choosing, on such defense, appeal
or settlement negotiations at its own expense and (ii) in the event that,
prior to or following the undertaking by the Purchaser of the defense, appeal
or settlement of any claim, assertion, event or proceeding for which indemnity
may be available pursuant hereto, the Seller determines that the defense,
appeal or settlement of a third party claim by the Purchaser is likely to
result in an increase in the Seller's liability under the indemnity provided
for herein, then the Seller shall be entitled to undertake the defense,
appeal, prosecution or settlement negotiations at its own cost and expense.
All legal fees and expenses regarding the defense of any claim, assertion,
event or proceeding by or in respect of a third party as to which the
Purchaser may request indemnification shall be includable in the definition
of "Loss" contained herein subject to the limitation on the Maximum Aggregate
Indemnity Payment Amount set forth herein, it being understood and agreed,
however, that (i) the Seller shall fully reimburse the Purchaser and/or its
subsidiaries for legal fees and expenses incurred in retaining counsel to
provide assistance in connection with the prosecution of the FIRREA Claim, in
accordance with the requirements of Section 5.09 and the FIRREA Claim
Management Agreement, so long as the Seller shall have approved in advance the
selection and retention of such counsel and (ii) the Seller shall fully
reimburse the Purchaser and/or its subsidiaries for reasonable legal fees and
expenses incurred in connection with any litigation relating to the Minority
Shares not acquired by the Seller prior to the Closing.
(e) In no event shall the Purchaser settle any claim or demand
(or part thereof) for which indemnification may be sought hereunder without
the prior written consent of the Seller (which consent shall not be
unreasonably withheld and which shall be deemed to have been given absent a
response within 10 Business Days from the date of receipt by the Seller of the
relevant notice), and the Seller shall not, without the prior written consent
of the Purchaser (which shall not be unreasonably withheld and which shall be
deemed to have been given absent a response within 10 Business Days from the
date of receipt by the Purchaser of the relevant notice), effect any
settlement of any pending or threatened proceeding in respect of which the
Purchaser is or could have been a party and indemnity could have been sought
hereunder by the Purchaser unless (i) such proceeding involves only monetary
claims and (ii) the settlement includes an unconditional release of the
Purchaser from all liability in respect of such claims.
(f) In the event the Seller shall make a payment hereunder, the
Seller shall be deemed to be subrogated fully to the rights of the Purchaser
against any and all third parties.
(g) Except as set forth in this Agreement, the Seller is not
making any representation, warranty, covenant or agreement with respect to the
matters contained herein. Anything herein to the contrary notwithstanding, no
breach of any representation, warranty, covenant or agreement contained herein
shall give rise to any right on the part of the Purchaser, after the
consummation of the purchase and sale of the CTUS Shares and the Minority
Shares contemplated hereby, to rescind this Agreement or any of the
transactions contemplated hereby and the Purchaser hereby acknowledges and
agrees that, as contemplated in Section 10.01, from and after the Closing, its
sole and exclusive remedy with respect to any and all claims relating to or
arising out of this Agreement shall be pursuant to the indemnification
provisions set forth in this Section 10.03. In furtherance of the foregoing,
the Purchaser hereby waives, from and after the Closing, to the fullest extent
permitted under applicable Law, any and all other rights, claims and causes of
action it (or, after the Closing, any Company) may have against the Seller or
its officers, directors, employees, agents, representatives and Affiliates
relating to the subject matter of this Agreement; provided, however, that,
except as otherwise contemplated in Section 9.04, the foregoing waiver shall
not preclude legal action by the Purchaser for knowing misrepresentation by
the Seller or willful noncompliance by the Seller with the terms of this
Agreement.
SECTION 10.04. Prior Tax Sharing Agreements. This Agreement
terminates and supersedes any and all other tax sharing or allocation
agreements in effect on the date hereof as between the Seller or any
predecessor or Affiliate (other than an identified Affiliate for which CTUS is
a common parent corporation) thereof on the one hand, and CTUS, the Company
and any of the Subsidiaries on the other hand, for all taxes imposed by any
federal, state, foreign or local government or taxing authority, regardless of
the Period for which such taxes are imposed.
SECTION 10.05. Expenses. Except as otherwise provided in
Sections 2.04, 5.03(b), 5.09, 5.12, 5.13, 7.03(b) and 7.06, all costs and
expenses, including, without limitation, fees and disbursements of counsel,
financial advisors and accountants, incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such costs and expenses, whether or not the Closing shall have occurred.
SECTION 10.06. Federal Home Loan Bank of New York Advances.
Notwithstanding anything herein to the contrary, it is understood and agreed
by the Seller and Purchaser that solely with respect to any of the advances
to, or maintained by, the Company on the Closing Date from the Federal Home
Loan Bank of New York, the Purchaser shall pay and be responsible for any fees
and expenses of any kind or nature, arising out of or resulting from the
consummation of the transactions contemplated by this Agreement or any
repayment or prepayment or change in any of the terms of any such advances and
such fees and expenses shall not be used in any adjustment pursuant to Section
2.04, Section 2.05 or otherwise or in any way become payable or suffered in
any way by the Seller or the Company.
SECTION 10.07. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be given or
made (and shall be deemed to have been duly given or made upon receipt) by
delivery in person, by courier service, by cable, by telecopy, by telegram, by
telex or by registered or certified mail (postage prepaid, 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):
(a) if to the Seller:
CT Financial Services Inc.
Canada Trust Tower
161 Bay Street, 35th Floor
Toronto, Ontario M5J 2T2
Attention: Diane E. Walker, Esq.
Senior Vice President,
Law & Governmental Relations
Telecopy: (416) 361-5465
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attention: Stuart K. Fleischmann, Esq.
Telecopy: (212) 848-7179
(b) if to the Purchaser:
One Marine Midland Center
24th Floor
Buffalo, New York 14203
Attention: Philip S. Toohey, Esq.
General Counsel and Secretary
Telecopy: (716) 841-5391
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: James F. Munsell, Esq.
Telecopy: (212) 225-3999
SECTION 10.08. Public Announcements. Unless otherwise required
by stock exchanges, regulatory agencies or under any Law, no party to this
Agreement shall make any public announcements in respect of this Agreement or
the transactions contemplated herein or otherwise communicate with any news
media without prior notification to the other party, and the parties shall
cooperate as to the timing and contents of any such announcement.
SECTION 10.09. Headings. 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.
SECTION 10.10. Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any rule
of Law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated hereby be
consummated as originally contemplated to the greatest extent possible.
SECTION 10.11. Disclosure Schedule. Disclosure of information by
the Seller in any portion of the Seller Disclosure Schedule, and disclosure of
information by the Purchaser in any portion of the Purchaser Disclosure
Schedule, shall be deemed disclosure in any other portion of the Seller
Disclosure Schedule or the Purchaser Disclosure Schedule, as the case may be.
SECTION 10.12. Entire Agreement. This Agreement and the FIRREA
Claim Management Agreement constitute the entire agreement of the parties
hereto with respect to the subject matter hereof and supersede all prior
agreements and undertakings, both written and oral, other than the
Confidentiality Agreement between the Seller and the Purchaser with respect to
the subject matter hereof and except as otherwise expressly provided herein.
SECTION 10.13. Assignment. This Agreement may not be assigned by
either party hereto without the consent of the other party hereto (whether by
operation of law or otherwise unless specifically provided herein); provided,
however, that the Seller may transfer or assign any or all of its CTUS Shares,
the CTUS Preferred Stock and/or any or all of its rights and obligations under
this Agreement, in whole or in part, to Imasco Limited or any direct or
indirect subsidiary of Imasco Limited or the Seller so long as (i) CT
Financial Services Inc., shall remain liable for all of such assignee's
obligations under this Agreement and (ii) the representations and warranties
made at Closing shall be deemed to have been made by CT Financial Services
Inc. except that, to the extent the CTUS Shares or the CTUS Preferred Stock
are assigned to any assignee, Section 3.04 shall be revised to reflect the
transfer of record and beneficial ownership to such assignee, and Section 5.11
which, for the avoidance of doubt, shall only be a covenant of CT Financial
Services, Inc. and by no other Person, including any permitted assignee as
contemplated herein.
SECTION 10.14. No Third-Party Beneficiaries. Except as provided
in Article VII and Sections 5.02(a) and 10.02, this Agreement is for the sole
benefit of the parties hereto and their permitted assigns and nothing herein,
express or implied, is intended to or shall confer upon any other person or
entity any legal or equitable right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.
SECTION 10.15. Amendment; Waiver. This Agreement may not be
amended or modified except by an instrument in writing signed by the Seller
and the Purchaser. Waiver of any term or condition of this Agreement shall
only be effective if in writing and shall not be construed as a waiver of any
subsequent breach or a waiver of any other term or condition of this
Agreement.
SECTION 10.16. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the Laws of New York applicable to
contracts executed in and to be performed in that State. All actions and
proceedings arising out of or relating to this Agreement shall be heard and
determined in a New York state or federal court sitting in the Southern
District of New York, and the parties hereto hereby irrevocably submit to the
exclusive jurisdiction of such courts in any such action or proceeding and
irrevocably waive the defense of an inconvenient forum to the maintenance of
any such action or proceeding.
SECTION 10.17. Counterparts. This Agreement may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, including via telecopier, each of which when executed shall be
deemed to be an original but all of which taken together shall constitute one
and the same agreement.<PAGE>
IN WITNESS WHEREOF, the Seller and the Purchaser have caused this
Agreement to be executed as of the date first written above by their
respective officers thereunto duly authorized.
CT FINANCIAL SERVICES INC.
By: /s/ W. Edmund Clark
By: /s/ Paul Derksen
HSBC AMERICAS, INC.
By: /s/ James H. Cleave
By: /s/ Philip S. Toohey
EXHIBIT 13
CTUS AND SUBSIDIARIES
Consolidated Financial Statements for the
Years Ended December 31, 1996 and 1995
and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of Directors
CTUS
We have audited the accompanying consolidated balance sheet of CTUS and
subsidiaries as of December 31, 1996 and the related consolidated statements
of income, changes in stockholder's equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The consolidated
financial statements for the year ended December 31, 1995 were audited by
other auditors whose report dated January 12, 1996 on those statements
included an explanatory paragraph that described the adoption of a new
accounting pronouncement discussed in Note 1 to the consolidated financial
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1996 consolidated financial statements present fairly, in
all material respects, the financial position of CTUS and subsidiaries as of
December 31, 1996, and results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting
principles.
As described in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards (SFAS)
No. 122, Accounting for Mortgage Servicing Rights, on January 1, 1996.
/s/ Deloitte & Touche LLP
January 10, 1997
<TABLE>
<CAPTION>
CTUS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(Amounts in thousands except share amounts)
- ------------------------------------------------------------------------------
ASSETS 1996 1995
<S> <C> <C>
Cash and cash equivalents $ 192,345 $ 227,185
Securities available for sale, at fair value 83 629,395
Securities held to maturity 788,829 300,460
Loans 5,868,882 5,777,051
Less: Allowance for loan losses 40,740 38,842
--------- ---------
Net loans 5,828,142 5,738,209
Federal Home Loan Bank stock, at cost 92,125 85,838
Accrued interest receivable 43,912 44,291
Premises and equipment, net 52,844 56,785
Mortgage servicing rights, at lower of cost or fair value 74,342 74,113
Other assets 34,529 40,444
--------- ---------
TOTAL ASSETS $7,107,151 $7,196,720
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Deposits $4,268,377 $4,210,502
Advances from Federal Home Loan Bank 1,767,698 1,710,955
Securities sold under agreements to repurchase 361,559 570,648
Collateralized mortgage obligations 7,165 8,531
Senior and subordinated debt 82,000 82,000
Advances from borrowers for taxes and insurance 120,267 125,799
Accrued interest payable 48,357 47,566
Other liabilities 68,008 126,861
Minority interest in subsidiary 2,946 2,710
--------- ---------
Total liabilities 6,726,377 6,885,572
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 10,000 shares authorized;
100 shares issued and outstanding - -
Additional paid in capital 163,000 163,000
Retained earnings 220,910 146,714
Unrealized gain (loss) on securities available for sale,
net of tax (benefit) expense of ($3,623) and $1,858 (3,136) 1,434
--------- ----------
Total stockholder's equity 380,774 311,148
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $7,107,151 $7,196,720
========= =========
See notes to consolidated financial statements.
</TABLE>
-2-
<TABLE>
<CAPTION>
CTUS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Amounts in thousands)
- -----------------------------------------------------------------------------
1996 1995
<S> <C> <C>
INTEREST INCOME:
Loans - interest and fees $429,942 $396,178
Securities 45,889 67,492
Cash equivalents 7,648 7,569
Other 14,892 9,964
------- -------
Total interest income 498,371 481,203
------- -------
INTEREST EXPENSE:
Deposits 179,256 172,177
Federal Home Loan Bank advances 114,260 100,183
Securities sold under agreements to repurchase 24,113 33,181
Other borrowings 9,166 9,330
------- -------
Total interest expense 326,795 314,871
------- -------
Net interest income before provision 171,576 166,332
PROVISION FOR LOAN AND MORTGAGE-BACKED
SECURITY LOSSES 12,616 15,756
------- -------
Net interest income after provision 158,960 150,576
------- -------
OTHER OPERATING INCOME:
Loan fees 6,371 5,166
Loan servicing income, net 13,363 11,376
Customer service fees 15,225 14,685
Net gain on sale of mortgage loans and securities 3,416 6,194
Other 6,706 5,939
------- -------
Total other operating income 45,081 43,360
------- -------
OTHER OPERATING EXPENSES:
Employee compensation and benefits 58,984 59,206
Office occupancy and equipment 22,109 23,048
General and administrative 25,894 25,520
Marketing 2,806 3,800
Deposit insurance premiums 9,674 10,831
Savings Association Insurance Fund assessment 26,692 -
------- -------
Total other operating expenses 146,159 122,405
------- -------
Minority interest in net income of subsidiary 554 280
------- -------
INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE 57,328 71,251
INCOME TAX (BENEFIT) EXPENSE (16,868) 29,043
------- -------
NET INCOME $ 74,196 $ 42,208
======= =======
See notes to consolidated financial statements.
</TABLE>
-3-
<TABLE>
<CAPTION>
CTUS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Amounts in thousands)
- -----------------------------------------------------------------------------------
Common Net
Stock Unrealized
and Gain(Loss) on
Additional Securities
Paid Retained Available for
In Capital Earnings Sale Total
---------- -------- ------------- -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $163,000 $104,506 $(1,030) $266,476
Net income, 1995 - 42,208 - 42,208
Net change in unrealized gain (loss)
on securities available for sale, net
of tax effect of $1,858 - - 2,464 2,464
------- ------- ----- -------
BALANCE, DECEMBER 31, 1995 163,000 146,714 1,434 311,148
Net income, 1996 74,196 74,196
Net change in unrealized gain (loss)
on securities available for sale, net
of tax effect of $(3,623) - - (5,107) (5,107)
Amortization of unrealized loss,
subsequent to reclassification of
securities from available for
sale to held to maturity - - 537 537
------- ------- ------ ------
BALANCE, DECEMBER 31, 1996 $163,000 $220,910 $(3,136) $380,774
======= ======= ====== =======
See notes to consolidated financial statements.
</TABLE>
-4-
<TABLE>
<CAPTION>
CTUS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Amounts in thousands)
- -----------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 74,196 $ 42,208
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion 23,641 22,325
Provision for loan and mortgage-backed security losses 12,616 15,756
Deferred income taxes (4,608) (4,991)
Net gain on sale of mortgage loans and securities (3,416) (6,194)
Loan fees and discounts deferred - net (8,183) (13,710)
Decrease (increase) in mortgage loans held for sale - net 40,638 (77,920)
Net change in:
Other assets and accrued interest receivable 6,294 (8,172)
Other liabilities and accrued interest payable (53,453) 41,178
Other items (392) 788
---------- ----------
Net cash provided by operating activities 87,333 11,268
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of portfolio loans 191,020 84,665
Proceeds from sales of securities available for sale 147,089 143,028
Principal payments of loans for portfolio 1,678,249 835,279
Investments in loans (2,001,773) (1,659,142)
Purchases of securities available for sale (198,795) (49,000)
Purchases of securities held to maturity - (20,000)
Increase in servicing rights (12,122) (36,132)
Purchase of FHLB stock, net (6,287) (10,213)
Purchase of premises and equipment, net (13,973) (10,311)
Proceeds from maturities of and principal collected
on securities 191,799 224,250
---------- ---------
Net cash used in investing activities (24,793) (497,576)
---------- ---------
(Continued)
</TABLE>
-5-
<TABLE>
<CAPTION>
CTUS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(Amounts in thousands)
- -----------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 57,875 179,305
Proceeds from FHLB advances 2,727,689 2,242,489
Payments on FHLB advances (2,666,957) (2,038,236)
(Decrease) increase in securities sold under agreement
to repurchase (209,089) 72,571
Increase in subordinated debt - 29,000
Net (decrease) increase in advances from borrowers for
taxes and insurance (5,532) 14,388
Decrease in collateralized mortgage obligations (1,366) (1,387)
--------- ---------
Net cash (used in) provided by financing activities (97,380) 498,130
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (34,840) 11,822
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 227,185 215,363
--------- ---------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 192,345 $ 227,185
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 325,976 $ 293,023
--------- ---------
Income taxes $ 39,913 $ 22,595
--------- ---------
NON CASH INVESTING ACTIVITIES:
Change in net unrealized (loss) gain on securities
available for sale $ (4,570) $ 2,464
--------- ---------
Transfer of foreclosed real estate $ 23,845 $ 19,547
--------- ---------
Transfer of investments from available for sale to
held to maturity $ 600,000 $ -
--------- ---------
Transfer of investments from held to maturity to
available for sale $ - $ 684,823
--------- ---------
See notes to consolidated financial statements.
(Concluded)
</TABLE>
-6-
CTUS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- -----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The Company's primary business consists of
attracting deposits from the general public and originating residential
mortgage loans. The Company also undertakes mortgage banking activities,
in selling mortgage loans to private investors and governmental agencies,
and servicing a significant amount of mortgage loans for others. The
Company's principal market for deposit products is New York State, while
its' market for residential mortgage loan products is nationwide. The
Company serves as a financial intermediary by gathering funds from a
variety of sources and investing such funds in loans and other investments
with the objective of maximizing the interest differential received within
acceptable risk parameters. The Subsidiary of the Company is a Federally
regulated savings and loan association and as such is subject to
regulatory capital requirements administered by the Federal banking
agencies. As of its most recent notification from bank regulators the
Subsidiary is classified as well capitalized under the regulatory capital
requirements and the Subsidiary has not received any notification that has
changed that classification. The Subsidiary meets all of its regulatory
requirements as of December 31, 1996 as follows: Tier 1 Leverage 5.88%,
Tier 1 Risk-Based 11.90%, Total Risk-Based Capital 12.63% and Tangible
Capital 5.88%. The minimum requirements as of December 31, 1996 are as
follows: Tier 1 Leverage 3.0%, Tier 1 Risk-Based 6.0%, Total Risk-Based
Capital 8.0% and Tangible Capital 1.5%.
Basis of Presentation - CTUS, a unitary thrift holding company (the
"Company"), is the parent of First Federal Savings and Loan Association of
Rochester and subsidiaries (the "Subsidiary") and is owned by CT Financial
Services, Inc. (the "Parent").
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its Subsidiary. All significant
intercompany accounts and transactions have been eliminated.
Cash Equivalents - Cash equivalents consist of federal funds sold,
certificates of deposit and funds due from banks. For purposes of the
statements of cash flows, all highly liquid debt instruments with original
maturities of three months or less are considered cash equivalents.
Securities - The Company classifies its debt securities as either
available for sale or held to maturity, as the Company does not hold any
securities considered to be trading.
Held to maturity securities are those that the Company has the positive
intent and ability to hold to maturity. Held to maturity securities are
recorded at cost, adjusted for the amortization or accretion of premiums
or discounts.
Available for sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, are excluded from
earnings and are reported as a separate component of stockholder's equity
until realized.
-7-
A decline in the fair value of any security below cost that is deemed
other than temporary is charged to earnings resulting in the establishment
of a new cost basis for the security.
Interest income includes interest earned on the securities and the
amortization of premiums and accretion of discounts of the related
securities as an adjustment to yield using the effective interest method.
Realized gains or losses on securities sold are recognized on the trade
date using the specific identification method.
Loans - Loans are stated at the principal amount outstanding adjusted for
unearned discounts, unamortized premiums and net deferred fees. Loan
origination fees and certain direct origination costs are deferred and
amortized over the contractual life of the related loans using the
interest method.
Mortgage Banking Activities - Mortgage loans held for sale are recorded at
the lower of aggregate cost or estimated fair value. Net unrealized
losses are recognized through a valuation allowance by charges to
earnings.
Gains and losses on loan sales are recognized on trade date and are
determined by the difference between net sales proceeds and the carrying
value of the mortgage loans sold. When servicing is retained, an
additional gain or loss may be recognized based upon the net present value
of expected amounts to be received or paid resulting from the difference
between the contractual interest rates received from the borrowers and the
rates paid to the buyers excluding a normal loan servicing fee,
securitization fees and costs, and considering estimated prepayments on
such loans. The resulting excess loan interest income (excess loan
servicing fees capitalized) is amortized over the estimated remaining life
of the loans using a method approximating the interest method.
The cost of acquiring the right to service mortgage loans is capitalized
and amortized in proportion to and over the period of estimated net
servicing income.
Fees related to the servicing of mortgage loans for the benefit of others
are determined on the basis of loans serviced and are recorded as income
when payments are received.
The Company adopted Statement of Financial Accounting Standards No. 122,
Accounting for Mortgage Servicing Rights, on January 1, 1996. Mortgage
servicing rights ("MSR") represent the cost of acquiring the right to
service mortgage loans. These costs are initially capitalized and
subsequently amortized in proportion to, and over the period of, estimated
net loan servicing income. SFAS 122 requires that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans
for others that have been acquired through either the purchase or
origination of a loan. A mortgage banking enterprise that sells or
securitizes those loans with servicing rights retained should allocate the
total cost of the mortgage loans to the mortgage servicing rights and the
loans based on their relative fair values. Additionally, SFAS 122
requires that MSR's be reported on the Consolidated Balance Sheet at the
lower of cost or fair value. The Company is required to assess its
capitalized MSR's for impairment based upon the fair value of the rights.
MSR's are stratified based upon one or more of the predominant risk
characteristics of the underlying loans. Impairment is recognized through
a valuation allowance for each impaired stratum. The provisions of the
Statement were applied prospectively beginning in fiscal 1996. The
ongoing impact of SFAS 122 is dependent upon, among other things, the
volume of loan originations, the general levels of market interest rates
and the rate of estimated loan prepayments. Accordingly, management is
unable to predict with any reasonable certainty what effect SFAS 122 will
have on the Company's future results of operations or its financial
condition. SFAS 122 prohibits restatement of prior years financial
statements.
Allowance for Loan Losses - The Company's provision for loan losses
charged to operations is based upon management's evaluation of the loan
portfolio. The allowance for loan losses is maintained at an amount
management deems adequate to provide for potential loan losses considering
the character of the
-8-
loan portfolio, economic conditions, analysis of specific loans and
historical loss experience. While management uses available information
to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for loan losses. Such
agencies may require the Company to recognize additions to the allowance
based on their judgments about information available to them at the time
of their examination.
The accrual of interest on impaired loans is discontinued when loans are
contractually ninety days past due or in management's opinion, the
borrower may be unable to meet payments as they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed. Income
is subsequently recognized only to the extent cash payments are received
and the principal balance is expected to be recovered. Such loans are
restored to an accrual status only if the loan is brought contractually
current and the borrower has demonstrated the ability to make future
payments of principal and interest.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 114, Accounting for Creditors for Impairment of a Loan as
amended by FASB Statement No. 118, Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures on January 1, 1995. The
Statement provides guidance in defining and measuring loan impairment. A
loan is considered impaired when, based on current information and events,
it is probable that a creditor will be unable to collect all amounts of
principal and interest under the original terms of the agreement.
Accordingly, the Company measures certain impaired commercial mortgage
loans based on the present value of expected future cash flows, discounted
at the loan's effective interest rate or, at the loan's observable market
price or fair value of collateral. The Statement does not apply to large
groups of small balance, homogeneous loans that are collectively evaluated
for impairment. The adoption of this statement did not have a material
impact on the Company's 1995 consolidated financial statements.
Premises and Equipment - Premises and equipment are recorded at acquired
cost less accumulated depreciation. Depreciation and amortization are
calculated primarily using the straight-line method over the estimated
useful lives of the depreciable asset. The lives used to compute
depreciation and amortization are 30 to 50 years for buildings, the lesser
of the lease term or estimated useful life for leasehold improvements, and
5 to 10 years for equipment.
Foreclosed Real Estate - Foreclosed real estate represents property
acquired through, or in lieu of, foreclosure. At acquisition, foreclosed
real estate is valued at the lower of fair value or the carrying amount,
including related costs incurred to acquire the property at acquisition.
Subsequent to acquisition, foreclosed real estate is carried at the lower
of the carrying amount or fair value less estimated costs to sell.
Foreclosed real estate is included in other assets.
Financial Instruments - The Company holds various derivative financial
instruments to hedge exposure to fluctuating interest rates. The Company
is not an issuer of any financial instrument derivatives.
Interest-Rate Exchange Agreements. Interest-rate exchange agreements
(swaps) used in asset/liability management activities are accounted for
using the accrual method. Net interest income (expense) resulting from
the differential between exchanging floating and fixed-rate interest
payments is recorded on a current basis. Gains or losses, if any, on
terminated swaps used in asset/liability management activities are
deferred and amortized into interest income or expense over the original
maturity period of the swap.
Interest Rate Caps. Premiums paid for interest rate caps are
capitalized and amortized into interest expense over the contractual
terms of the cap. Interest received under the terms of the caps is
accrued and recorded as a reduction of interest expense.
-9-
Options. Option premiums paid are capitalized and amortized to income
over the exercise period of the option, while realized gains on
exercised options are deferred and amortized over the term of the
expected benefit.
Other Off-Balance-Sheet Instruments. In the ordinary course of business
the Company has entered into off-balance-sheet financial instruments
consisting of commitments to extend credit and forward commitments to
sell securitized loans. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred
or received.
Although off-balance sheet derivative financial instruments do not
expose the Company to credit risk equal to the notional amount, the
Company is exposed to credit risk to the extent of the fair value gain
of an off-balance sheet derivative financial instrument if the
counterparty fails to perform. The Company minimizes the credit risk in
these instruments by dealing only with highly rated counterparties who
have credit ratings of investment grade as rated by the major rating
agencies. Each transaction is specifically approved for applicable
credit exposure.
Securities Sold under Agreements to Repurchase - The Company enters into
sales of mortgage-backed securities under agreements to repurchase. These
agreements are financing transactions, and as a result, sales proceeds are
treated as borrowings and reflected as liabilities in the consolidated
balance sheets. The amount of the securities underlying the agreements
remains in the asset account. The securities underlying the agreements
were delivered to dealers who arranged the transactions. The dealers may
have sold, loaned or otherwise disposed of the securities to other parties
in the normal course of their operations, and have agreed to return
substantially identical securities to the Company at the maturity of these
agreements.
Income Taxes - Deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are reflected
at currently enacted income tax rates applicable to the period in which
the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income taxes.
On August 20, 1996, legislation was signed into law which repealed the
percentage of taxable income method tax bad debt deduction available for
thrift institutions. This repeal is effective for the Subsidiary's
taxable year beginning January 1, 1996. In addition, the legislation
requires the Subsidiary to include in taxable income its bad debt reserves
in excess of its base year reserve over a 6-8 year period depending upon
the maintenance of certain loan origination levels. Since the percentage
of taxable income method tax bad debt deduction and the corresponding
increase in the tax bad debt reserve in excess of the base year have been
treated as temporary differences pursuant to SFAS 109, this change in tax
law will have no effect on the Company's future consolidated statement of
operations.
On July 30, 1996, New York State ("the State") enacted legislation,
effective January 1, 1996, which generally retains the percentage of
taxable income method tax bad debt deduction and does not require the
Subsidiary to recapture into income its excess tax bad debt reserves over
its base year reserve for New York State tax purposes. The effect of this
State tax legislation was to reduce the State tax liability by
approximately $2 million which is shown as a reduction of income tax
expense. At present, New York City has not officially stated whether the
recently enacted State tax legislation will be adopted.
Other Standards - The Company maintains compensation plans which provide
for grants of stock options to officers. As described in Note 16, the
Company currently follows Accounting Principles Board Opinion No. 25
(Opinion 25), Accounting for Stock Issued to Employees in accounting for
its plans. In October 1995, the FASB issued Statement No. 123 entitled
Accounting for Stock-Based Compensation which encourages, but does not
require, companies to use a fair value based method of accounting for
-10-
stock-based employee compensation plans. Under this method, compensation
cost is measured as of the date stock awards are granted based on the fair
value rather than the intrinsic value of the award, and such cost is
recognized over the service period, which is usually the vesting period.
The Company has elected to continue using the intrinsic value based method
under Opinion 25. Pro forma disclosures of net income, as if the fair
value based method had been applied, have been included in these financial
statements.
In June 1996, the FASB issued Statement No. 125 Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.
Statement 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a financial-
components approach that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. Statement 125 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and will
be applied prospectively. The FASB has issued FASB Statement 127 that
defers the effective date of certain provisions of Statement 125 related
to secured borrowings and collateral, repurchase agreements, dollar-rolls,
securities lending, and similar transactions until after December 31,
1997. Adoption of this Statement and the impact on the financial
condition or results of operations has not been evaluated by the Company
at this time.
Reclassifications - Reclassifications are made to prior year financial
statements whenever necessary to conform with the current year
presentation.
<TABLE>
<CAPTION>
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of December 31, 1996 and 1995 follows
(amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Federal funds sold-overnight $ 53,025 $ 77,025
Federal funds sold-term 30,000 65,800
Time deposits 31,000 -
Other interest bearing accounts 28,940 26,813
------- -------
142,965 169,638
Cash 49,380 57,547
------- -------
$192,345 $227,185
======= =======
</TABLE>
3. SECURITIES
The amortized costs and estimated fair values of securities as of
December 31, 1996 and 1995 follows (amounts in thousands):
-11-
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
December 31, 1996 Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury notes $166,550 $ 149 $ - $166,699
Mortgage-backed securities:
FHLMC 284,679 948 1,083 284,544
FNMA 200,496 546 301 200,741
GNMA 13,218 142 - 13,360
Conventional 123,886 1,251 6,001 119,136
------- ----- ----- -------
Total securities held to maturity $788,829 $3,036 $7,385 $784,480
======= ===== ===== =======
Securities available for sale:
Equity securities $ 83 $ - $ - $ 83
------- ----- ----- -------
Total securities available for sale $ 83 $ - $ - $ 83
======= ===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
December 31, 1995 Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury bills $ 4,964 $ 12 $ - $ 4,976
U.S. Treasury notes 45,038 199 10 45,227
U.S. Government and agency
bonds 24 - - 24
Mortgage-backed securities:
FHLMC 128,064 797 249 128,612
FNMA 54,685 141 152 54,674
GNMA 207 17 - 224
Conventional 67,478 8 1,448 66,038
------- ----- ----- -------
Total securities held to maturity $300,460 $1,174 $1,859 $299,775
======= ===== ===== =======
Securities available for sale:
U.S. Treasury notes $ 29,018 $ 224 $ - $ 29,242
Mortgage-backed securities:
Conventional 94,145 1,255 - 95,400
FHLMC 285,877 2,047 728 287,196
FNMA 201,919 870 1,362 201,427
GNMA 15,705 210 - 15,915
------- ----- ----- -------
Total debt securities 626,664 4,606 2,090 629,180
Equity securities:
Other securities 215 - - 215
------- ----- ----- -------
Total securities available for sale $626,879 $4,606 $2,090 $629,395
======= ===== ===== =======
</TABLE>
In August of 1996, mortgage-backed and Treasury securities classified as
available for sale with a fair value of approximately $600,000,000 were
transferred to held to maturity. The reclassification was undertaken due
to a change in management intent (facilitated by the pending sale of the
Company as discussed in Note 20). The securities were transferred to held
to maturity at their fair value, which reflects their new carrying value.
Stockholder's equity reflected an unrealized loss of $3,700,000 (net of
-12-
taxes), as of the date of transfer. The unrealized loss, and
corresponding discount included in the carrying value, are being amortized
over the expected life of the securities.
In November of 1995, under the one-time opportunity allowed by the
Financial Accounting Standards Board ("FASB") to reassess the designation
of securities, the Company transferred securities with an amortized cost
of $684,823,465 and a fair value of $690,293,630 from held to maturity to
available for sale. As provided in the FASB guidance, the one-time
transfer does not call into question management's ability and intent to
hold securities to maturity.
Proceeds from the sale of securities available for sale for the years
ended December 31, 1996 and 1995 were $141,853,000 and $143,028,000
respectively. Gross gains and (gross losses) realized on these sales of
securities available for sale were $1,558,000 and $896,000 respectively,
for the year ended December 31, 1996 and $3,974,000 and $-0-, respectively,
for the year ended December 31, 1995.
GNMA, FHLMC and FNMA mortgage-backed certificates with a carrying value of
$282,747,000 and $545,910,000 at December 31, 1996 and 1995 were sold
under agreements to repurchase (See Note 10).
FHLMC mortgage-backed certificates with a carrying value of $7,760,000 and
$9,230,000 at December 31, 1996 and 1995 were pledged as collateral for
the collateralized mortgage obligations issued by the Company (See Note
11).
<TABLE>
<CAPTION>
The amortized cost and estimated fair value of debt securities at
December 31, 1996 by contractual maturity follows (amounts in thousands):
Held to Maturity Available for Sale
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
One year or less $ 59,926 $ 59,896 $ 83 $ 83
After one year through five years 433,177 432,895 - -
After five years through ten years 91,398 91,414 - -
After ten years 204,328 200,275 - -
------- ------- --- ---
$788,829 $784,480 $ 83 $ 83
======= ======= === ===
</TABLE>
-13-
<TABLE>
<CAPTION>
4. LOANS
A summary of loans as of December 31, 1996 and 1995 follows (amounts in
thousands):
1996 1995
---- ----
<S> <C> <C>
Mortgage loans:
Conventional
One to four family residential-fixed $ 156,133 $ 199,878
One to four family residential-variable 4,801,829 4,697,820
Commercial and construction 421,390 401,125
FHA insured and VA guaranteed 87,965 106,015
--------- ---------
Total mortgage loans 5,467,317 5,404,838
--------- ---------
Other loans:
Second mortgage 230,101 220,952
Home improvement 6,222 7,557
Student 92,959 82,629
Other consumer 26,142 23,117
--------- ---------
Total other loans 355,424 334,255
--------- ---------
Total loans 5,822,741 5,739,093
Allowance for loan losses (40,740) (38,842)
Unearned net loan premiums and fees 46,141 37,958
--------- ---------
Loans, net $5,828,142 $5,738,209
========= =========
</TABLE>
The interest rates on adjustable-rate residential mortgage loans held in
the Company's portfolio generally float at designated spreads above
indices based on U.S. Treasury securities. The loans are generally
subject to caps on increases in the rate of interest. Adjustable-rate
loans may provide for initial rates of interest below the rates that would
prevail if the market rate indices used for repricing were applied
initially. Adjustable-rate mortgages pose potential additional risks,
primarily because as interest rates rise, the mortgage payments by the
borrowers rise as a result of periodic repricing, increasing the potential
for default.
<TABLE>
<CAPTION>
The following summarizes activity in the allowance for loan losses for the
years ended December 31, 1996 and 1995 (amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of year $ 38,842 $ 35,373
Provision for loan losses 12,300 15,336
Loans charged-off (12,881) (14,020)
Recoveries 2,479 2,153
------- -------
Balance, end of year $ 40,740 $ 38,842
======= =======
</TABLE>
The principal balance of residential mortgage loans not accruing interest
as of December 31, 1996 and 1995 amounted to $26,975,000 and $32,857,000.
The effect on interest income for non-accrual residential loans was
$2,388,000 and $2,942,000 for the years ended December 31, 1996 and 1995.
-14-
At December 31, 1996 and 1995, impaired commercial mortgage loans were
$3,677,000 and $4,536,000 and the total allowance for loan losses related
to these loans was $2,325,000 and $2,797,000, respectively. Commercial
mortgage loans with modified payment terms were immaterial at December 31,
1996 and 1995. The effect on interest income of impaired loans was not
material to the consolidated financial statements in 1996 and 1995. The
Company is not committed to lend additional funds to these borrowers.
As of December 31, 1996, approximately 24.7% of the outstanding principal
balance of the Company's residential mortgage loan portfolio was located
in New York State, 8.8% in Michigan, 8.6% in Maryland, 8.6% in Virginia
and 8.5% in New Jersey. The balance was secured by properties located in
44 states, with no other state or territory accounting for 6.7% or more of
the portfolio. As of December 31, 1996, approximately 83.7% of the
outstanding principal balance of the Company's portfolio of multi-family,
commercial and construction mortgage loans was secured by properties
located in New York State, and 11.6% in New Jersey. The balance was
secured by properties located in 16 states, with no other state accounting
for 1.6% or more of the portfolio.
<TABLE>
<CAPTION>
Total non-performing mortgage loans (including residential, commercial,
and construction real estate loans) by geographic region as of
December 31, 1996 and 1995 follows (amounts in thousands):
December 31
1996 1995
----------------- -----------------
Amount % Amount %
------ -- ------ --
<S> <C> <C> <C> <C>
New York $14,621 47.7 $20,678 55.3
New Jersey 4,812 15.7 5,011 13.4
Connecticut 2,514 8.2 4,151 11.1
All other states 8,705 28.4 7,553 20.2
------ ----- ------ -----
TOTAL $30,652 100.0 $37,393 100.0
====== ===== ====== =====
</TABLE>
5. MORTGAGE BANKING ACTIVITIES
Mortgage loans includes loans held for sale (which are principally
residential loans) of $55,336,000 and $95,974,000 as of December 31, 1996
and 1995. Proceeds from the sale of loans held for sale were $714,674,000
and $439,714,000 for the years ended December 31, 1996 and 1995. Net gain
(loss) on sales of loans was $2,700,000 and $2,220,000 for the years ended
December 31, 1996 and 1995. No significant income statement impact is
anticipated from the disposition of the loans held for sale.
Loans serviced for others, amounting to $6.2 billion and $6.1 billion at
December 31, 1996 and 1995 are not included in the consolidated financial
statements. Custodial escrow balances maintained in connection with the
foregoing loan servicing were $83,178,255 and $87,143,932 at December 31,
1996 and 1995.
-15-
<TABLE>
<CAPTION>
The following analysis reflects the changes in mortgage servicing rights
acquired (purchased) for the years ended December 31, 1996 and 1995
(amounts in thousands):
<S> <C>
Carrying Value December 31, 1994 $ 46,293
Additions 36,132
Amortization (8,312)
-------
Carrying Value December 31, 1995 74,113
Additions 12,122
Amortization (11,815)
Net change in valuation allowance (78)
-------
Carrying Value, December 31, 1996 $ 74,342
=======
</TABLE>
<TABLE>
<CAPTION>
The fair value of MSR's as of December 31, 1996 was $95,050,000. Fair
value is estimated by discounting the net servicing income to be received
over the estimated servicing term using a current market rate. The
significant risk characteristic of the underlying loans used to stratify
MSR's for impairment measurement was loan type. The activity in the
valuation allowance for the year ended December 31, 1996 follows (amounts
in thousands):
<S> <C>
Valuation allowance, January 1, 1996 $ -
Net additions (reductions) 78
Writedowns -
--
Valuation allowance, December 31, 1996 $78
==
</TABLE>
In June 1995, the Company, through the Subsidiary, acquired the
outstanding common stock of Sibley Mortgage Corporation (Sibley) for $20
million in cash. Sibley's primary business was the origination, purchase,
sale and servicing of residential and multi-family loans. The acquisition
was recorded using the purchase method of accounting. Accordingly,
purchased mortgage servicing rights of $14.3 million and goodwill of $4.2
million were recorded. Goodwill is being amortized on a straight-line
method over 10 years.
<TABLE>
<CAPTION>
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable as of December 31, 1996 and 1995 follows
(amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Loans $37,344 $37,048
Securities 3,781 6,126
Other assets 2,787 1,117
------ ------
$43,912 $44,291
====== ======
</TABLE>
-16-
<TABLE>
<CAPTION>
7. PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31, 1996 and 1995
follows (amounts in thousands):
1996 1995
<S> <C> <C>
Land $ 3,369 $ 3,369
Office buildings 30,040 30,117
Furniture and equipment 44,741 41,575
Leasehold improvements 16,147 15,272
------- -------
94,297 90,333
Less accumulated depreciation and amortization (41,453) (33,548)
------- -------
$ 52,844 $ 56,785
======= =======
Depreciation and amortization expense was $9,654,000 and $9,361,000 for
the years ended December 31, 1996 and 1995.
</TABLE>
<TABLE>
<CAPTION>
8. DEPOSITS
A summary of deposits and interest rates as of December 31, 1996 and 1995
follows (amounts in thousands):
1996 1995
----------------------- -----------------------
Year End Year End
Interest Interest
Amount Rate Amount Rate
------ -------- ------ --------
<S> <C> <C> <C> <C>
Demand deposits and
NOW accounts $ 378,792 0.81% $ 389,423 0.78%
--------- ---- --------- ----
Passbook, statement and
club accounts 973,341 2.77 1,048,225 2.95
Insured money market funds 531,187 3.68 509,021 3.71
--------- ---- --------- ----
1,504,528 3.09 1,557,246 3.20
--------- ---- --------- ----
Certificates of deposit maturing:
12 months or less 1,945,082 5.48 1,842,879 5.89
13-24 months 323,518 6.00 201,238 5.97
25 months or longer 116,457 6.10 219,716 6.21
--------- ---- --------- ----
2,385,057 5.58 2,263,833 5.93
--------- ---- --------- ----
$4,268,377 4.28 $4,210,502 4.44
========= ==== ========= ====
Jumbo certificates of deposit were $268,457,000 and $210,961,000 at
December 31, 1996 and 1995.
</TABLE>
-17-
<TABLE>
<CAPTION>
Interest expense on deposits for the years ended December 31, 1996 and
1995 follows (amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Demand deposits and NOW accounts $ 3,024 $ 3,444
Passbook, statement and club accounts 28,626 33,286
Insured money market funds 19,619 17,793
Certificates of deposit 128,205 119,488
Interest on swaps, net (218) (1,834)
------- -------
$179,256 $172,177
======= =======
</TABLE>
<TABLE>
<CAPTION>
9. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of New York as of December 31,
1996 and 1995 consisted of the following (amounts in thousands):
1996 1995
------------------------------- -------------------------------
Weighted Average Weighted Average
Due Date Amount Interest Rate Amount Interest Rate
-------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C>
1996 $ - - $ 889,742 5.97%
1997 1,218,956 5.87% 378,161 6.25
1998 457,864 6.48 352,174 6.68
1999 8,500 7.94 8,500 7.94
2000 50,000 6.07 50,000 6.07
2001 20,518 6.95 25,518 6.95
2002 702 2.67 702 2.67
2004 5,000 6.65 - -
2005 5,500 6.35 5,500 6.35
2006 256 6.02 256 6.02
2007 402 6.45 402 6.45
--------- ---------
$1,767,698 $1,710,955
========= =========
</TABLE>
The Company has pledged qualifying collateral, primarily mortgage loans,
with a market value of at least 110% of the amount of the advances. The
Company has an available line of credit with Federal Home Loan Bank of New
York equal to 30% of total assets exclusive of withdrawal advances. The
Company is required to hold stock in the Federal Home Loan Bank of New
York in an amount equal to the greater of 5% of the outstanding advance
balance or 1% of eligible mortgage loans.
10. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Securities sold under agreements to repurchase as of December 31, 1996 and
1995 were $361,559,000 and $570,648,000, respectively. These securities
are collateralized by mortgage-backed securities with a fair value of
$282,441,000 and $545,227,000 at December 31, 1996 and 1995.
-18-
The securities sold under agreements to repurchase had a weighted average
borrowing rate of 5.44% and 6.04% for the years ended December 31, 1996
and 1995. Such borrowings had an average outstanding balance of
approximately $447,649,000 from Board report year-to-date average and
$545,928,000 for the years ended December 31, 1996 and 1995 with the
maximum amounts outstanding at any month end during these periods of
approximately $621,602,000 and $611,883,000. All such borrowings mature
within one year.
11. COLLATERALIZED MORTGAGE OBLIGATIONS
In April and August 1986, First Federal Capital Corporation, a wholly
owned subsidiary of the Subsidiary issued collateralized mortgage bonds
("Bonds") of $12,496,000 and $19,542,000. The Bonds are general
obligations of the corporation and are collateralized by a pledge of FHLMC
mortgage-backed certificates with a carrying value of $7,760,000 and
$9,230,000 at December 31, 1996 and 1995. All payments received on the
pledged mortgage-backed securities, net of certain costs, must be applied
to repay the Bonds. It is expected that the actual life of the Bonds will
be less than their stated maturity. A schedule of the Bonds outstanding
as of December 31, 1996 and 1995 follows (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
Stated Stated
Maturity Amount Rate Amount Rate
-------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
January, 2000 $1,918 7.33% $2,864 7.33%
September, 2002 2,607 7.89 3,231 7.89
October, 2006 2,640 7.27 2,436 7.27
----- -----
$7,165 $8,531
===== =====
</TABLE>
<TABLE>
<CAPTION>
12. SENIOR AND SUBORDINATE DEBT
Senior and subordinate debt is comprised of three notes payable to CT
North America L.L.C, amounts outstanding as of December 31, 1996 and 1995
follow (amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Floating Rate Unsecured Senior Capital Note due April 25, 1997.
Interest only payable semi-annually, based on the current six month
LIBOR rate plus 4.5% $25,000 $25,000
Fixed Rate Unsecured Subordinate Capital Note due March 25, 2003
Interest only payable semi-annually. Interest fixed at 8.25%.
Obligation is subordinate to obligation under Floating Rate
Unsecured Senior Capital Note 28,000 28,000
Floating Rate Unsecured Senior Capital Note due March 10, 2005.
Interest only payable semi-annually, based on the current six month
LIBOR rate plus 1.0% 29,000 29,000
------ ------
$82,000 $82,000
====== ======
The senior and subordinate debt of $82,000,000 was paid in full on
January 2, 1997.
</TABLE>
-19-
<TABLE>
<CAPTION>
13. INCOME TAXES
The components of the provision for income tax (benefit) expense charged
to operations for the years ended December 31, 1996 and 1995 are as
follows (amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Current:
Federal $ 18,661 $ 25,196
State and local 4,171 8,838
IRS and State audit settlements (39,797) -
------- -------
(16,965) 34,034
Deferred:
Federal (776) (4,290)
State and local 873 (701)
------- -------
97 (4,991)
------- -------
$(16,868) $ 29,043
======= =======
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Expected Federal Statutory Rate to Actual Rate - The
(benefit) provision for federal income taxes from continuing operations is
based on income before taxes at the statutory rate of 35% for the years
ended December 31, 1996 and 1995 adjusted for the following differences
(amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Income tax at statutory rate $ 20,065 $24,938
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of Federal benefit 3,581 5,289
IRS and state audit settlements (39,797) -
Change in valuation allowance for deferred tax assets (801) (1,164)
NYS tax bad debt legislation (1,889) -
Other differences 1,973 (20)
------- ------
(Benefit) provision for income taxes $(16,868) $29,043
======= ======
</TABLE>
-20-
<TABLE>
<CAPTION>
Deferred Taxes - The tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and liabilities at
December 31, 1996 and 1995 are presented below (amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Loan valuation allowance $ 18,839 $ 18,743
Intangible asset amortization 4,485 3,092
Compensation and benefits 6,099 5,001
Purchase accounting - discounts 1,590 4,116
Net unrealized loss on securities available for sale 1,765 -
Fixed assets 608 1,331
------- -------
Total gross deferred tax assets 33,386 32,283
Less valuation allowance (15,945) (16,747)
------- -------
Net deferred tax assets 17,441 15,536
------- -------
Deferred tax liabilities:
Tax bad debt reserve 10,901 10,844
Deferred origination income 131 544
Loan servicing rights 5,676 2,849
Purchase accounting - premiums 6,745 9,477
Net unrealized gain on securities available for sale - 1,082
Other 862 2,222
------- -------
Total gross deferred tax liabilities 24,315 27,018
------- -------
Net deferred tax liability, included in other liabilities $ 6,874 $ 11,482
======= =======
</TABLE>
The net change in the valuation allowance for deferred tax assets was a
decline of $801,000 and $1,164,000 for the years ended December 31, 1996
and 1995, respectively.
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income within
the carryback period. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax assets will not be
realized. In assessing the continuing need for a valuation allowance,
management considers the scheduled reversal of the deferred tax
liabilities, the level of historical taxable income and projected future
taxable income over the periods in which the temporary differences
comprising the deferred tax assets will be deductible.
The net deferred tax liability includes $1,765,000 of deferred tax benefit
that has been provided for the change in the valuation reserve on
securities available for sale. This deferred tax asset was recorded as an
adjustment to equity and was not recorded as a component of the tax
provision.
The Company maintains a tax reserve for bad debts for Federal, New York
State and New York City on which no deferred taxes have been provided
pursuant to SFAS 109 in the amounts of $3,460,698, $37,333,000 and
$3,460,698, respectively. Generally, the Company will not be required to
recapture these amounts into taxable income unless one of the following
events occur: 1) the Subsidiary makes distributions in excess of its tax
earnings and profits including dividends and distributions in liquidation;
2) the Subsidiary redeems its stock; 3) the Subsidiary fails to qualify as
a Bank; 4) there is a change in the tax law.
-21-
The Company has been audited by the Internal Revenue Service through the
year ended December 31, 1991 with the net settlement of that audit
reflected above as a component of the income tax benefit. The IRS is
currently auditing the years ended December 31, 1992 through and including
December 31, 1994. The Company does not expect any significant adjustment
to taxable income as reported to result from this audit.
The Company has been audited by the State of New York through the year
ended December 31, 1993 with the net settlement of that audit reflected
above as a component of the income tax benefit.
14. FINANCIAL INSTRUMENTS
Interest Rate Swaps - Interest rate swaps entitle the Company to receive
variable interest payments based on specified spreads over various London
Interbank Bid and Offer Rates (LIBOR), in exchange for fixed interest
payments. The following summarizes the terms and characteristics of
interest rate swaps as of December 31, 1995 (dollar amounts in thousands).
<TABLE>
<CAPTION>
All swaps outstanding at December 31, 1995 matured during 1996.
1995
----
<S> <C>
Carrying amount (including accrued interest) $(822)
Fair value $242
Hedged item 3 Month CD's
Notional amount $85,000
Original term to maturity 3 Years
Weighted average maturity 3 Months
Weighted average interest rate receivable 5.81%
Weighted average interest rate payable 4.69%
</TABLE>
Net interest income from interest rate swaps for the years ended
December 31, 1996 and 1995 was $218,068 and $1,834,478 which is included
in interest expense on deposits.
<TABLE>
<CAPTION>
Interest Rate Caps - Interest rate caps entitle the Company to receive
interest payments in exchange for payment of a premium, provided the 3
month LIBOR rate exceeds the cap rate. The following summarizes the terms
and characteristics of the cap agreements as of December 31, 1996 and 1995
(dollar amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Carrying amount (including accrued interest) $ 8,511 $ 5,329
Fair value $ 3,933 $ 2,663
Notional amount $930,000 $550,000
Weighted cap rate 6.73% 5.56%
Weighted term to maturity 2 years 1 year
</TABLE>
The Company recognized interest income of $2,850,000 for the year ended
December 31, 1996 and $4,408,000 in 1995. Amortized premiums for the
years ended December 31, 1996 and 1995 were $3,800,000 and $4,333,000.
The income received and amortized premium expense were included in
interest expense on FHLB advances.
-22-
<TABLE>
<CAPTION>
Put Options - The Company purchases put options on Eurodollar futures
contracts, in order to offset for the potential effect of rising rates on
interest margin. Eurodollar futures are indexed to LIBOR. The following
summarizes the terms and characteristics of the put options as of
December 31, 1996 and 1995 (dollar amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Carrying amount (including net deferred gains) $403 $917
Fair value $141 $148
Instrument underlying put option Eurodollar futures Eurodollar futures
Contract amount $1,550,000 $1,875,000
Option expiration dates December 15, 1997 March 17, 1997
Strike price 92.75 to 93.75 92.25 to 95.75
</TABLE>
The amount of option premiums amortized and charged to income for the
years ended December 31, 1996 and 1995 was $6,509,000 and $6,512,000.
Amortized gains from sold option contracts were $1,793,000 in 1996 and
$3,685,000 in 1995 and were offset against interest expense on FHLB
advances. Unamortized premiums at December 31, 1996 and 1995 were
$560,000 and $928,000. Unamortized gains at December 31, 1996 and 1995
were $157,000 and $11,000.
<TABLE>
<CAPTION>
Call Options - The Company purchases call options on Eurodollar futures
contracts and Treasury Notes, in order to offset for the potential effect
of falling rates on interest margin. Eurodollar futures are indexed to
LIBOR. The following summarizes the terms and characteristics of the call
options as of December 31, 1996 (dollar amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Carrying amount (including net deferred gains) $522 $(812)
Fair value $74 $3,364
Instrument underlying call option Eurodollar futures Eurodollar futures
and Treasury Notes and Treasury Notes
Contract amount $2,850,000 $1,432,000
Option expiration dates June 16, 1997 June 17, 1996
Strike price 95.25 to 95.50 93.25 to 95.50
</TABLE>
The amount of option premiums amortized and charged to income for the
years ended December 31, 1996 and 1995 was $3,276,000 and $992,000.
Amortized gains from sold option contracts in 1996 and 1995 were
$3,524,000 and $1,211,000. Unamortized premiums at December 31, 1996 and
1995 were $522,000 and $728,000. Unamortized gains at December 31, 1996
and 1995 were $-0- and $1,540,000.
15. EMPLOYEE BENEFITS
Retirement Plans - The Company has a non-contributory defined benefit
pension plan covering substantially all employees. The plan provides
pension benefits that are based on each employee's years of service and
average compensation prior to retirement. The Company's funding policy is
to contribute annually at least the minimum required by law. Plan assets
are invested in the general account and certain separate accounts of The
New England Company and Manning and Napier.
-23-
<TABLE>
<CAPTION>
For the years ended December 31, 1996 and 1995, the net pension cost is
summarized as follows (amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Service cost $ 1,498 $ 1,042
Interest cost 2,429 2,498
Return on plan assets (2,952) (2,415)
Net amortization and deferral (240) (115)
------ ------
Net periodic pension cost $ 735 $ 1,010
====== ======
</TABLE>
<TABLE>
<CAPTION>
The following schedule reconciles the funded status of the plan as of
December 31, 1996 and 1995 (amounts in thousands):
1996 1995
------------------------- -----------------------
<S> <C> <C> <C> <C>
Estimated fair value of plan assets $ 40,023 $ 32,296
Benefit obligations:
Vested benefit obligation (29,160) (25,215)
------- -------
Accumulated benefit obligation (31,208) (25,827)
------- -------
Projected benefit obligation (36,688) (32,068)
Unrecognized net loss 1,127 4,434
Unrecognized prior service cost (576) (705)
Remaining unrecognized net
transition asset - (111)
------- -------
Net pension asset recognized
in the consolidated balance
sheet as of December 31, 1996
and 1995 $ 3,886 $ 3,846
======= =======
</TABLE>
<TABLE>
<CAPTION>
Certain assumptions utilized in the calculation summarized in the table
above are as follows:
1996 1995
---- ----
<S> <C> <C>
Assumed discount rate 7.25% 8.25%
Assumed rate of compensation increase 5.00% 6.00%
Expected long term rate of return on plan assets 8.25% 8.25%
</TABLE>
The Company also has a 401(K) Salary Reduction Profit Sharing Plan in
which substantially all employees are eligible to participate. Total
expense for this plan was $820,876 and $746,734 for the years ended
December 31, 1996 and 1995.
The Company maintains certain non qualified retirement plans (i.e.,
Supplemental Employee Retirement Plan and Directors Retirement Plan) for
key officers and directors. Certain of these plans are funded annually,
and the net periodic pension cost recorded for these plans was $356,598
and $304,672 for the years ended December 31, 1996 and 1995.
Post Retirement Benefits - The Company sponsors a defined benefit post
retirement medical plan that covers all of its full time employees. All
employees who retire on or after age 55 with 5 years of service are
eligible. Employees are required to contribute a portion of the premium
based on their age and service at retirement. Spouses pay the full
premium. The plan is not funded. Upon adoption of SFAS No. 106, the
Company recorded the entire accumulated post retirement benefit obligation
on May 1, 1991.
-24-
<TABLE>
<CAPTION>
Net periodic postretirement benefit cost for the years ended December 31,
1996 and 1995 included the following components (amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Service cost - benefits attributed to service
during the period $ 265 $472
Interest cost 335 519
Net amortization and deferral (225) (95)
---- ---
Net periodic postretirement benefit cost $ 375 $896
==== ===
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the plan's status reconciled with the
amount shown in the Company's financial statements at December 31, 1996
and 1995 (amount in thousands):
1996 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retired employees $(2,493) $(1,544)
Active employees (2,446) (5,123)
------ ------
Unfunded accumulated benefit obligation in excess
of plan assets (4,939) (6,667)
Unrecognized net gain (3,339) (1,464)
Unrecognized prior service cost (437) (473)
------ ------
Accrued postretirement medical benefit cost $(8,715) $(8,604)
====== ======
</TABLE>
For measurement purposes, a 10.0% annual rate of increase in the per
capita cost of health care benefits for retirees was assumed for 1996.
The rate was assumed to decrease gradually to 5.50% by 2005 and remain at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rates by 1% in each year would increase the
accumulated postretirement benefit obligation at December 31, 1996 by
$670,000, and the net periodic postretirement benefit cost by $135,000 for
the year then ended.
The weighted average discount rate used in determining the accumulated
postretirement obligation was 7.50% for 1996 and 8.25% for 1995.
16. STOCK OPTION PLANS AND STOCK GRANT
On May 8, 1991, the Subsidiary adopted a Non-qualified Stock Option Plan
(the "Plan") for its officers. On that date, options were granted to
purchase 1,004,900 shares of common stock at an exercise price equal to
the net book value per share at date of grant. The plan provides for
subsequent additional awards of stock options based on a formula linked to
compensation increases. The basis of subsequent options purchased is
based on the net book value per share at date of grant. Subsequent to
exercise, the optionee may sell the shares back to the Subsidiary at a
price equal to the current net book value per share. The right to
exercise options granted is phased in over a seven year vesting schedule.
As of December 31, 1996, 1,040,395 share options were outstanding and
become exercisable according to the following schedule:
-25-
<TABLE>
<CAPTION>
Date of Exercisability Aggregate Number Exercisable
---------------------- ----------------------------
<S> <C>
May 8, 1997 907,045
May 8, 1998 950,320
May 8, 1999 983,080
May 8, 2000 1,009,630
May 8, 2001 1,029,070
May 8, 2002 1,040,395
</TABLE>
<TABLE>
<CAPTION>
The following is a summary of the changes in options outstanding during
1996 and 1995:
Weighted
Average Redemption
Number Option Price Price
of Shares per Share per Share
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1994 1,002,155 $10.57 $14.93
Granted 73,700 15.49 -
Exercised (43,295) 11.68 15.57
Terminated (52,970) 12.31 -
--------- ----- -----
Outstanding at December 31, 1995 979,590 10.79 16.84
Granted 75,500 17.20 -
Exercised (1,480) 15.49 17.09
Terminated (13,215) 15.34 -
--------- ----- -----
Outstanding at December 31,1996 1,040,395 $11.19 $20.19
========= ===== =====
</TABLE>
<TABLE>
<CAPTION>
The following summarizes the pro forma net income as if the fair value
method of accounting for stock-based compensation plans (as described in
SFAS 123) had been utilized:
For the Year Ended For the Year Ended
(amounts in thousands) December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Net income (as reported) $74,196 $42,208
Proforma net income $74,391 $42,237
</TABLE>
The fair value of the 1996 and 1995 option grants were estimated using the
Black Scholes Options Pricing Method using the following assumptions:
dividend yield of 1.62% and 1.78%, risk-free interest rate of 6.60% and
7.053% and an expected life of 10 and 10 years, respectively.
On May 8, 1991 the Subsidiary also issued 199,487 shares of common stock
to senior officers, at the book value per share at date of grant. The
grantee may sell the stock back to the Subsidiary at a price equal to
current net book value per share. The initial cost of the stock grant was
included as a merger cost and represents the initial minority interest.
Shares issued and outstanding at December 31, 1996 and 1995 were 156,758
and 156,758 respectively.
The cost of both plans is recognized based on the increased value of all
shares granted. The increased value of both plans, which has been
recorded as compensation expense, was $4,220,129 for the year ended
December 31, 1996 and $1,917,594 for 1995.
-26-
<TABLE>
<CAPTION>
17. COMMITMENTS AND CONTINGENCIES
At December 31, 1996 and 1995, the Company had commitments outstanding
generally for up to 90 days, to originate and purchase loans and
commitments to sell loans as follows (amounts in thousands):
1996 1995
---- ----
<S> <C> <C>
Commitments outstanding to originate and purchase loans $166,570 $330,030
Commitments to sell loans 88,582 164,319
Commitments to purchase mortgage-backed securities - 25,000
</TABLE>
Substantially all commitments to originate and purchase loans (net of
commitments to sell loans) are for adjustable rate loans with the initial
interest rate fixed at the commitment date.
<TABLE>
<CAPTION>
The Company leases certain premises and equipment under various non-
cancelable operating lease agreements. At December 31, 1996, the total
future minimum rental commitments, exclusive of amortization of premiums
arising from recapitalization, are as follows (amounts in thousands):
<S> <C>
1997 $ 3,664
1998 3,535
1999 3,270
2000 2,936
2001 2,538
Later Years 14,895
</TABLE>
The total rental expense was $6,980,265 for the year ended December 31,
1996 and $7,187,442 for 1995.
In the conduct of business, the Company is involved in various litigation
matters. Management of the Company, based on its review with counsel of
the development of these matters, is of the opinion that the ultimate
disposition of these litigation matters should not have a materially
adverse effect on the financial position of the Company.
18. SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, the President signed into law an omnibus
appropriations act for fiscal year 1997 that included, among other things,
the recapitalization of the Savings Association Insurance Fund ("SAIF") in
a section entitled the Deposit Insurance Funds Act of 1996. The Act
included a provision where all insured depository institutions would be
charged a one-time special assessment on their SAIF assessable deposits
as of March 31, 1995. The Company recorded a pre-tax charge of
$26,691,979, which represented 65.7 basis points of the March 31, 1995
assessable deposits. This charge was recorded upon enactment on
September 30, 1996, and later paid on November 29, 1996.
19. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Securities - Fair values for securities are based on quoted market prices
or dealer quotes, where available. Where quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
-27-
Loans - The fair values of adjustable rate residential real estate loans
are determined using an option based pricing model. The cash flows are
discounted using a rate comprised of an option adjusted spread and the
appropriate term rate. The option adjusted spread includes an additional
spread over that of ARM securities to compensate for the added risk
associated with whole loans.
The fair values of fixed rate residential, second mortgage loans, consumer
loans and commercial mortgages are estimated using a discounted cash flow
approach, using the appropriate index plus a spread.
Delinquent loans (not in foreclosure) are valued using the method noted
above and loans delinquent more than 30 days but less than 91 days
delinquent, are reduced by an allocated amount of required general
valuation allowances. The fair value of loans currently in foreclosure is
estimated to approximate carrying value, as such loans are generally
carried at net realizable value.
Mortgage Servicing Rights - Fair value is estimated by discounting the net
servicing income to be received over the estimated servicing term using a
current market rate.
Deposits - The fair value of demand deposits, passbook savings accounts,
and certain money market accounts is the amount payable on demand at the
reporting date. The fair value of fixed maturity certificates of deposit
is estimated using a discounted cash flow approach that applies current
market rates (prevailing CD rates) to a schedule of aggregated expected
monthly maturities on time deposits.
Advances from Federal Home Loan Bank - The carrying value of variable rate
advances approximates fair value. The fair value of fixed rate advances
is estimated using a discounted cash flow approach, that applies the
current incremental advance borrowing rate.
Collateralized Mortgage Obligations - The fair value of these instruments
is estimated using a discounted cash flow approach that applies current
market rates for similarly traded instruments.
Senior and Subordinated Debt - The carrying value of the variable rate
instrument, which reprices every six months, approximates fair value. The
fair value of the fixed rate instrument is estimated using a discounted
cash flow approach that applies a current market rate for similar
securities.
Interest Rate Swaps, Caps and Options - The fair value of interest rate
swaps and interest rate caps are obtained from dealer quotes. These
values represent current settlement prices. The fair value of options is
also obtained from dealer quotes.
Other Financial Instruments - Based on the characteristics of cash and
cash equivalents, FHLB stock, accrued interest receivable and payable,
securities sold under agreements to repurchase, advances from borrowers
for taxes and insurance and the commitments to purchase or sell loans and
securities, the carrying value approximates fair value.
-28-
<TABLE>
<CAPTION>
The following table presents the carrying value and the estimated fair
values of the aforementioned Company's financial instruments as of
December 31, 1996 and 1995 are as follows (amounts in thousands):
1996 1995
------------------------ -------------------------
(2) (2)
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets:
Securities $ 788,912 $ 784,563 $ 929,855 $ 929,170
Loans, net of loss allowances 5,828,14 5,994,605 5,738,209 5,908,304
Mortgage servicing rights 74,342 95,050 74,113 79,642
Financial Liabilities:
Deposits 4,268,377 4,270,249 4,210,502 4,221,482
Advances from Federal Home
Loan Bank 1,767,698 1,778,913 1,710,955 1,723,322
Collateralized mortgage
obligations 7,165 8,477 8,531 10,467
Off-balance sheet financial
instruments: (1)
Interest rate swaps:
Net receivable - - 277 272
Net payable - - (1,099) (30)
Interest rate caps 8,511 3,933 5,329 2,663
Option premiums 925 215 105 3,512
(1) Amounts reflected under "carrying amount" represent accruals or
deferred income (expense) arising from those unrecognized financial
instruments.
(2) Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
</TABLE>
20. STOCK PURCHASE AGREEMENT
On August 21, 1996, CT Financial Services, Inc.("CT Financial") and HSBC
Americas, Inc. ("HSBC") entered into an agreement whereby HSBC will
purchase all of the outstanding stock of CTUS Inc., the holding company of
First Federal Savings and Loan Association of Rochester. The proposed
transaction is subject to the approval of the Federal Reserve Bank of New
York, the New York State Banking Department and the United States Office
of Thrift Supervision. The transaction is expected to close in the first
quarter of 1997. Due to the uncertainty of obtaining regulatory approval,
no final accruals, contingencies or other adjustments that would be
associated with the approved transaction have been reflected in these
financial statements.
-29-
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
HSBC Americas, Inc.
We consent to the incorporation by reference in Amendment no. 1 to Registration
Statement no. 333-5801 on Form S-3 of HSBC Americas, Inc. of our report dated
January 10, 1997 (relating to the consolidated financial statements of CTUS and
subsidiaries for the year ended December 31, 1996) appearing in the Report on
Form 8-K of HSBC Americas, Inc. and expresses an unqualified opinion, refers to
the report of other auditors on the consolidated financial statements for the
year ended December 31, 1995, and includes an explanatory paragraph that
describes the adoption of a new accounting pronouncement.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
May 8, 1997
