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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-10674
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Susquehanna Bancshares, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2201716
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
26 North Cedar St., Lititz, Pennsylvania 17543
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (717) 626-4721
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
common stock, par value $2.00 per share
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant was approximately $516,273,439 as of February 29, 2000, based
upon the closing price on the Nadsaq National Market reported for such date.
Shares of common stock held by each executive officer and director and by each
person who beneficially owns more than 5% of the outstanding common stock have
been excluded in that such persons may under certain circumstances be deemed to
be affiliates. This determination of executive officer or affiliate status is
not necessarily a conclusive determination for other purposes. The number of
shares issued and outstanding of the registrant's common stock as of February
29, 2000, was 39,296,003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held
May 26, 2000, are incorporated by reference into Part III.
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PART I
Item 1. Business
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General
Susquehanna Bancshares, Inc. ("Susquehanna") is a multi-state bank
holding company headquartered in Lititz, Pennsylvania. As of December 31, 1999,
Susquehanna operated as a super-community bank holding company with nine
commercial banks, one federal savings bank and two non-bank subsidiaries. As of
December 31, 1999, Susquehanna had consolidated assets of $4.3 billion, loans
receivable of $3.0 billion, deposits of $3.2 billion and shareholders' equity of
$404 million.
The relative sizes and profitability of Susquehanna's operating
subsidiaries as of and for the year ended December 31, 1999, are depicted in the
following table: (Dollars in Millions)
<TABLE>
<CAPTION>
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Subsidiary* Assets Percent of Total Net Income Percent of Total
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- --------------------------------------------------------- --------------- ---------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Farmers First Bank $1,080 25% $19 44%
Farmers & Merchants Bank and Trust 616 14 7 16
First National Trust Bank 301 7 4 9
Williamsport National Bank 246 6 4 9
Citizens National Bank of Southern Pennsylvania 199 5 3 7
First American National Bank of Pennsylvania 139 3 2 5
First Capitol Bank 109 3 - -
Susquehanna Bank** 1,079 25 9 21
Equity Bank, National Association*** 336 8 4 9
Founders' Bank*** 143 3 2 5
Susque-Bancshares Leasing Co., Inc. (leasing) 48 - - -
Susque-Bancshares Life Insurance Co.
(life insurance) 4 - - -
Consolidation adjustments, including
Susquehanna, Susquehanna South and
Susquehanna East) 11 1 (11) (25)
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Total $4,311 100% $43 100%
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</TABLE>
* Includes operations of wholly-owned subsidiaries.
** Subsidiary of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares
South, Inc. ("Susquehanna South"), a non-operating holding company.
*** Subsidiaries of Susquehanna's wholly-owned subsidiary, Susquehanna
Bancshares East, Inc. ("Susquehanna East"), a non-operating holding company.
Susquehanna's depository institution subsidiaries are located in
Pennsylvania, Maryland and New Jersey, and provide commercial and retail banking
services in central and south central Pennsylvania, principally in Franklin,
Lancaster, Northumberland, Snyder, Union, Columbia, York and Lycoming Counties;
in southeastern Pennsylvania principally in Montgomery, Chester and Delaware
Counties; in southwestern Pennsylvania principally in Bedford and Blair
Counties; in western Maryland, principally in Allegany, Garrett and Washington
Counties; in northwestern, central and southeastern Maryland, including Allegany
County, Washington County, Baltimore County, Baltimore City, Carroll County,
Harford County, Worcester County, Wicomico County and Anne Arundel County; and
in southern New Jersey, principally in Camden, Burlington and Gloucester
Counties.
Susquehanna's non-depository institution subsidiaries provide
commercial leasing services in Pennsylvania, New Jersey, Maryland and Delaware
and credit life insurance services in central and southeastern Pennsylvania. On
February 1, 2000, Susquehanna acquired an additional non-depository institution
subsidiary, Boston Service Company, Inc. (t/a Hann Financial Service
Corporation), which provides consumer automobile
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financing services principally in New Jersey, eastern Pennsylvania, New York and
Connecticut. On March 3, 2000, Susquehanna also acquired an additional
non-depository institution subsidiary, Valley Forge Asset Management Corp., an
asset management company which provides services principally in southeastern
Pennsylvania (Philadelphia, Bucks, Montgomery, Delaware and Chester Counties),
New Jersey and Delaware.
As a "super-community" bank holding company, Susquehanna's strategy has
been to manage its subsidiaries on a decentralized basis, allowing each
subsidiary operating in different markets to retain its name and board of
directors as well as substantial autonomy in its day to day operations.
Susquehanna believes that this strategy permits these institutions greater
flexibility to better serve their markets, increasing responsiveness to local
needs, and differentiates Susquehanna from other large competitors. Susquehanna
continues, however, to implement consolidations in selected lines of business,
operations and support functions in order to achieve greater economies of scale
and cost savings. Consistent with this philosophy, Susquehanna is continuing its
program initiated in 1997 to convert all of its subsidiaries to a uniform
computer system. Seven of its depository institution subsidiaries were converted
to this system by March 31, 1999, with the remaining three to be converted by
mid-2000. Through the formation of Susquehanna Trust & Investment Company, a
subsidiary of Farmers First Bank which became operational in May of 1999, and
selection of a uniform processing system, Susquehanna anticipates further
integration of its trust department operations. Mortgage banking operations are
also expected to undergo increased consolidation. Susquehanna also provides its
banking subsidiaries guidance in the areas of credit policy and administration,
strategic planning, investment portfolio management and other financial and
administrative services.
In October of 1999, Susquehanna determined to undertake a detailed
process change in the way Susquehanna and its subsidiaries conduct their
business. Specifically, it determined to consolidate, outsource and restructure
certain back-office operations. The goal of this effort is to improve
operational efficiencies, maximize the return on Susquehanna's investment in
technology, provide superior customer service and to provide employees with
consistent, reliable service support.
Susquehanna anticipates that detailed restructuring for all centralized
functions will be conducted to include the utilization of available technology
features, elimination of non-value added steps, documentation of detailed work
processes, productivity standards, service standards, staffing models,
coordination with Susquehanna compliance and audit personnel to ensure
consistency with company policy and revalidation of work processes post
implementation. During this process, jobs will be re-defined, processes will be
refined and some jobs will be created, relocated or eliminated. Susquehanna
subsidiaries will continue to maintain their decision-making autonomy and
individual identities. Existing boards of directors will remain in place. The
new operating environment will consolidate support functions that are currently
provided from multiple locations across the Susquehanna enterprise. Some
activities will be outsourced to specialists in their industries, and new
technology will be added. See "Management's Discussion and Analysis of Results
of Operations and Financial Conditions - Other Expenses" for further discussion.
As of December 31, 1999, Susquehanna had 130 full-time and 35 part-time
employees, and Susquehanna and its subsidiaries, on a consolidated basis, had
1,622 full-time and 300 part-time employees.
Susquehanna was incorporated in Pennsylvania in 1982. Its executive
offices are located at 26 North Cedar Street, Lititz, Pennsylvania 17543, and
its telephone number is (717) 626-4721.
Business
Susquehanna, through its subsidiaries, provides a wide range of retail
and commercial banking and financial services. Its retail banking business
strategy is to expand its deposit and other product market share through a high
level of customer service, new product offerings, application of new
technologies and delivery systems, and selective acquisitions. Susquehanna
operates an extensive branch network and has a strong market presence in its
primary markets in Pennsylvania, Maryland and New Jersey. As a result of the
development of
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broad banking relations with its customers, core deposits fund Susquehanna's
lending and investing activities almost entirely.
Susquehanna's retail banking services include checking and savings
accounts, money market accounts, certificates of deposit, individual retirement
accounts, Christmas clubs, mutual funds and annuities (see discussion below),
home equity lines of credit, residential mortgage loans, home improvement loans,
student loans, automobile loans and personal loans.
Susquehanna also offers credit cards, and in 1996 introduced a check card
in Pennsylvania and Maryland. As of December 31, 1999, there were over 89,000
active debit cards.
The acquisition of certain Maryland thrifts in 1995 and 1996 substantially
enhanced Susquehanna's mortgage origination and mortgage banking capabilities.
The consolidation in 1996 of several mortgage operations into Susquehanna
Mortgage Company (formerly known as "Atlantic First Mortgage Company"), a
mortgage subsidiary of Susquehanna Bank, further enhanced the expansion of
Susquehanna's mortgage banking operations in its Maryland and Pennsylvania
markets.
Susquehanna's consolidated commercial lending operations include
commercial, financial and agricultural lending (11% of the total loan portfolio
at December 31, 1999), real estate construction lending (9%), and commercial
mortgage lending (20%). Loans originated by each subsidiary are subject to
central review and uniform Susquehanna credit standards. Nearly all of
Susquehanna's loans are concentrated in the markets served by its subsidiary
commercial and savings banks.
Certain of Susquehanna's subsidiary depository institutions, namely Farmers
First Bank, through its subsidiary, Susquehanna Trust & Investment Company,
Citizens National Bank of Southern Pennsylvania, First National Trust Bank,
Williamsport National Bank and Farmers & Merchants Bank and Trust also render
services as trustee, executor, administrator, guardian, managing agent,
custodian and investment advisor and perform other fiduciary activities
authorized by law.
Through its subsidiary, Susque-Bancshares Life Insurance Co., Susquehanna
offers certain credit related insurance products. Susquehanna also offers
certain leasing services through its subsidiary Susque-Bancshares Leasing Co.,
Inc., and its wholly owned subsidiary, Susquebanc Lease Co. Susquehanna expanded
its leasing service capabilities through its acquisition in February of 2000 of
Hann Financial Service Corporation, which provides comprehensive consumer
automobile financing services.
In 1999, Susquehanna also acquired a less than 5% equity interest in
AExpert, Inc., and entered into an arrangement with its wholly-owned subsidiary,
AExpert Advisory, Inc. AExpert Advisory, Inc. is a registered investment advisor
and offers fee-based management account services combining its proprietary
computer-based market-timing forecasting tool with certain mutual funds.
Susquehanna and certain of its subsidiaries share the fees received by AExpert
Advisory, Inc. in connection with the accounts specifically referred to it by
them. Susquehanna's subsidiaries also have similar referral fee arrangements
with other non-affiliated investment advisors/broker-dealers. Through
Susquehanna's acquisition of Valley Forge Asset Management Corp. in March of
2000, which represented Susquehanna's first acquisition of an investment
advisory services corporation, Susquehanna and its subsidiaries expect to be
able to offer a broader range of investment advisory, asset management and
brokerage services to its customers.
On February 4, 2000, Farmers First Bank and First Capitol Bank, both
wholly-owned subsidiaries of Susquehanna, signed an Agreement and Plan of Merger
pursuant to which First Capitol Bank will be merged with and into Farmers First
Bank. Farmers First Bank will be the surviving institution in the merger and
will continue its existence as a bank and trust company under Pennsylvania law
with its present name. The merger is currently pending approval of the
Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation
(the "FDIC") and is expected to be completed in the first half of 2000.
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Susquehanna and its subsidiaries do not have any portion of their business
dependent upon a single or limited number of customers, the loss of which would
have a material adverse effect on their business; no substantial portion of
their loans or investments are concentrated within a single industry or group of
related industries. The businesses of Susquehanna and its subsidiaries are not
seasonal in nature.
Susquehanna contemplates that in the future it will evaluate and may
acquire, or may cause its subsidiaries to acquire, other banks or savings
associations or other entities permitted by applicable law. Susquehanna may
acquire state and national banks whose principal business activities are in
Pennsylvania and in states which have not opted out of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (as described below).
Susquehanna may also seek to enter businesses closely related to banking or that
are financial in nature, or to acquire existing companies already engaged in
such activities, which includes savings associations. Any acquisition by
Susquehanna may require notice to or approval of the Board of Governors of the
Federal Reserve System, the Pennsylvania Department of Banking, other regulatory
agencies and, in some instances, its shareholders.
Recent Acquisitions
Hann Financial Service Corporation. On February 1, 2000, Susquehanna
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completed the acquisition of Boston Service Company, Inc., t/a Hann Financial
Service Corporation ("Hann"), a New Jersey chartered business corporation
headquartered in Jamesburg, New Jersey. The acquisition of Hann was completed
through the exchange of 2,360,000 shares of Susquehanna common stock for all the
outstanding capital stock of Hann. The transaction qualified for pooling of
interests accounting treatment.
Hann is engaged in consumer automobile financing which involves marketing
and origination services, structuring and placement of lease financing
arrangements and retail installment sales contracts and acting as an
intermediary between automobile dealers and financial institutions.
As of February 1, 2000, the date of Susquehanna's acquisition of Hann, Hann
had total assets of $607 million, total shareholder's equity of $11 million and
serviced over $800 million in automobile related receivables.
Valley Forge Asset Management Corp. On March 3, 2000, Susquehanna completed
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the acquisition of Valley Forge Asset Management Corp. ("VFAM"), a Pennsylvania
business corporation headquartered in King of Prussia, Pennsylvania.
VFAM and its predecessor companies have been in business as a broker-dealer
and investment adviser since 1970. The firm is registered under the federal
Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. It is a
member of the National Association of Securities Dealers. All of its business
activity is related directly or indirectly to managing client investment
portfolios on a fully discretionary basis.
As of March 3, 2000, the date of Susquehanna's acquisition of VFAM, VFAM
had approximately $900 million assets under management.
Other than as described above, Susquehanna currently has no formal
commitments with respect to the acquisition of any entities, although
discussions with prospects occur on a regular and continuing basis.
Supervision and Regulation
General. Susquehanna is a bank holding company registered with the Board of
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Governors of the Federal Reserve System ("Board") and is subject to regulation
under the Bank Holding Company Act of 1956, as amended. This law (the "BHC Act")
requires prior approval of an acquisition of assets or of ownership or control
of voting shares of any bank if the acquisition would give Susquehanna more than
5% of the voting shares of any bank or bank holding company. It also imposes
restrictions, summarized below, on the assets or voting shares of non-banking
companies which Susquehanna may acquire.
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Susquehanna's commercial and federal savings bank subsidiaries are also
subject to regulation and supervision. Farmers First Bank, a state bank, is
subject to regulation and periodic examination by the Pennsylvania Department of
Banking and the FDIC. Founders' Bank and First Capitol Bank are state member
banks subject to regulation and periodic examination by the Board and the
Pennsylvania Department of Banking. Citizens National Bank of Southern
Pennsylvania, First National Trust Bank, Williamsport National Bank, First
American National Bank of Pennsylvania and Equity Bank, National Association,
are national banks and are subject to regulation and periodic examination by the
Office of the Comptroller of the Currency (the "OCC"). Farmers & Merchants Bank
and Trust, a state bank, is subject to regulation and periodic examination by
the Maryland Banking Commission and the FDIC. Susquehanna Bank, a federal
savings bank, is subject to regulation and periodic examination by the Office of
Thrift Supervision (the "OTS"). Susquehanna South is also subject to supervision
and regulation by the OTS as a savings and loan holding company. Because
Susquehanna is a bank holding company, all of its subsidiaries are subject to
examination by the Board even if not otherwise regulated by the Board.
Consistent with the requirements of the BHC Act, Susquehanna's only lines
of business in 1999 consisted of providing to its customers commercial banking,
thrift and other banking-related services and products. These included
commercial banking through its nine subsidiary banks, thrift activities through
its federal savings bank subsidiary, credit life insurance through another
subsidiary and leasing operations through an additional subsidiary. Of these
activities, however, commercial banking and savings activities accounted for
more than 97% of Susquehanna's gross revenues in each of 1998 and 1999.
Regulations governing Susquehanna and its subsidiary depository
institutions restrict extensions of credit by such institutions to Susquehanna
and, with some exceptions, the other Susquehanna affiliates. For these purposes,
extension of credit include loans and advances to and guarantees and letters of
credit on behalf of Susquehanna and such affiliates. These regulations also
restrict investments by Susquehanna's depository institution subsidiaries in the
stock or other securities of Susquehanna and the covered affiliates as well as
the acceptance of such stock or other securities as collateral for loans to any
borrower, whether or not related to Susquehanna.
Susquehanna's commercial and savings bank subsidiaries are subject to
comprehensive federal and state regulations dealing with a wide variety of
subjects, including reserve requirements, loan limitations, restrictions as to
interest rates on loans and deposits, restrictions as to dividend payments,
requirements governing the establishment of branches and numerous other aspects
of their operations. These regulations generally have been adopted to protect
depositors and creditors rather than shareholders.
Financial Modernization Legislation. In late 1999, Congress enacted the
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Gramm-Leach-Bliley Act (the "GLB Act") to modernize the legal structure of the
U.S. financial services industry. The GLB Act permits a bank holding company,
all of whose depository institution subsidiaries meet certain tests (discussed
below), to elect to become a "financial holding company" (an "FHC"). The
Susquehanna depository institutions meet these tests, and Susquehanna recently
elected to become an FHC.
As an FHC, Susquehanna will be permitted to engage, directly or through
subsidiaries, in a wide variety of activities not previously allowed to it which
are financial in nature or are incidental or complimentary to a financial
activity. Susquehanna may still engage in all of the activities previously
allowed to it, whether or not presently conducted. The new activities
additionally permitted to Susquehanna as an FHC (if it so determines to conduct
them) include, among others, insurance and securities underwriting, merchant
banking activities, issuing and selling annuities and securitized interests in
financial assets and engaging domestically in activities that bank holding
companies previously have been permitted to engage in only overseas. It is
expected that in the future other activities will be added to the permitted
list. All of these listed activities can be conducted, through an acquisition or
on a start-up basis, without prior Board approval and with only notice to the
Board after the fact.
The GLB Act also generally permits well-capitalized national banks with
proper regulatory approval (and, if state law permits, state chartered banks as
well), to form or acquire financial subsidiaries to engage in most of these same
activities, with the exception of certain specified activities (insurance
underwriting, for example) which must be conducted only at the level of the
holding company or a nonbank subsidiary.
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As an FHC, Susquehanna will generally be subject to the same regulation as
other bank holding companies, including the reporting, examination, supervision
and consolidated capital requirements of the Board. However, in some respects
the regulation is modified as a result of FHC status. For example, Susquehanna
must continue to satisfy certain conditions (discussed below) to preserve its
full flexibility as an FHC. On the other hand, as an FHC, Susquehanna, unlike
traditional bank holding companies, will be permitted to embark on several new
types of activities and several additional types of acquisitions without Board
approval and with only notice afterward. To qualify as an FHC, Susquehanna had
to certify that all of its commercial and savings bank subsidiaries were
well-capitalized and well-managed and were rated "satisfactory" or better in
their most recent Community Reinvestment Act ("CRA") examinations.
An FHC ceasing to meet these standards will be subject to a variety of
restrictions, depending on the nature of the problem. If the Board determines
that any of the FHC's subsidiary depository institutions are either not
well-capitalized or not well-managed, it must notify the FHC. Until compliance
is restored, the Board has broad discretion to impose appropriate limitations on
the FHC's activities. If compliance is not restored within 180 days, the Board
may ultimately require the FHC to divest its depository institutions.
The potential restrictions are different if the lapse pertains to the CRA
requirement. In that case, until all the subsidiary institutions are restored to
at least "satisfactory" CRA rating status, the FHC may not engage, directly or
through a subsidiary, in any of the new activities permissible under the GLB Act
nor make additional acquisitions of companies engaged in the new activities.
However, completed acquisitions and new activities and affiliations previously
begun are left undisturbed, as the GLB Act does not require divestiture for this
type of problem.
Capital Adequacy. Under the risk-based capital requirements applicable to
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them, bank holding companies must maintain a ratio of total capital to
risk-weighted assets (including the asset equivalent of certain off-balance
sheet activities such as acceptances and letters of credit) of not less than 8%
(10% to be "well-capitalized"). At least 4% out of the total capital (6% to be
well capitalized) must be composed of common stock, retained earnings,
noncumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, after deducting goodwill and certain
other intangibles ("tier 1 capital"). The remainder of total capital ("tier 2
capital") may consist of mandatory convertible debt securities and a limited
amount of subordinated debt, qualifying preferred stock and loan loss allowance.
At December 31, 1999, Susquehanna's tier 1 capital and total capital (i.e., tier
1 plus tier 2) ratios were 12.7% and 15.6%, respectively.
The Board has also established minimum leverage ratio guidelines for bank
holding companies. These guidelines mandate a minimum leverage ratio of tier 1
capital to adjusted average quarterly assets less certain amounts ("leverage
amounts") equal to 3% for bank holding companies meeting certain criteria
(including those having the highest regulatory rating). All other banking
organizations are generally required to maintain a leverage ratio of at least 3%
plus an additional cushion of 100 to 200 basis points. The Board's guidelines
also provide that bank holding companies experiencing internal growth or making
acquisitions are expected to maintain capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Board will continue to consider a
"tangible tier 1 leverage ratio" (i.e., after deducting all intangibles) in
evaluating proposals for expansion or new activities. The Board has not advised
Susquehanna of any specific minimum leverage ratio applicable to it. At December
31, 1999, Susquehanna's leverage ratio was 9.1%.
Susquehanna's subsidiary depository institutions are all subject to similar
capital standards promulgated by their respective federal regulatory agencies.
No such agency has advised any of Susquehanna's subsidiary institutions of any
specific minimum leverage ratios applicable to it.
FDICIA Capital Categories. The Federal Deposit Insurance Corporation
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Improvement Act of 1991 ("FDICIA") requires the federal regulators to take
prompt corrective action against any undercapitalized institution. FDICIA
establishes five capital categories: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Well-capitalized institutions significantly exceed the
required minimum level for each capital measure (currently, risk-based and
leverage). Adequately capitalized institutions
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include depository institutions that meet the required minimum level for each
capital measure. Undercapitalized institutions consist of those that fail to
meet the required minimum level for one or more relevant capital measures.
Significantly undercapitalized characterizes depository institutions with
capital levels significantly below the minimum requirements. Currently, all of
Susquehanna's depository institution subsidiaries qualify as well-capitalized.
Cross Guarantees. Susquehanna's subsidiary commercial and federal savings
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bank subsidiaries are also subject to cross-guaranty liability under federal
law. This means that if one FDIC-insured depository institution subsidiary of a
multi-institution bank holding company fails or requires FDIC assistance, the
FDIC may assess "commonly controlled" depository institutions for the estimated
losses suffered by the FDIC. Such liability could have a material adverse effect
on the financial condition of any assessed subsidiary institution and on
Susquehanna as the common parent. While the FDIC's cross-guaranty claim is
junior to the claims of depositors, holders of secured liabilities, general
creditors and subordinated creditors, it is superior to the claims of
shareholders and affiliates.
Source of Strength Doctrine. Under Board policy, a bank holding company is
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expected to serve as a source of financial strength to each of its subsidiary
banks and to stand prepared to commit resources to support each of them.
Consistent with this policy, the Board has stated that, as a matter of prudent
banking, a bank holding company should generally not maintain a given rate of
cash dividends unless its net income available to common shareholders has been
sufficient to fully fund the dividends and the prospective rate of earnings
retention appears to be consistent with the corporation's capital needs, asset
quality and overall financial condition.
Interstate Banking and Branching. Under the Pennsylvania Banking Code of
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1965, there is no limit on the number of banks that may be owned or controlled
by a Pennsylvania-based bank holding company and the Pennsylvania bank
subsidiaries may branch freely throughout the Commonwealth and, with Department
of Banking approval, abroad.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
eliminated substantially all state law barriers to the acquisition of banks by
out-of-state bank holding companies. The same Act generally permits the federal
banking agencies to approve merger transactions resulting in the creation of
branches by banks outside their home states and permits the OCC to authorize the
creation by national banks of branches outside their home states if the host
state into which they propose to branch has enacted authorizing legislation. Of
the middle-Atlantic states, Pennsylvania, New Jersey, Ohio and West Virginia
have enacted legislation authorizing such "de novo" branching by banks located
in states offering reciprocal treatment to their institutions. Maryland has as
well, but without the requirement of reciprocity. Delaware and New York do not
allow de novo branching by sister-state banks and require that they enter the
state through mergers of established institutions. Qualifying federal savings
associations are also generally permitted to establish interstate branches.
Liberalizing the branching laws in recent years has had the effect of increasing
competition within the markets in which Susquehanna now operates.
Regulation of Nonbank Subsidiaries. Susquehanna has four direct non-bank
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subsidiaries, all wholly-owned: Susque-Bancshares Life Insurance Company
("SBLIC"), a reinsurance company, Susque-Bancshares Leasing Co., Inc. ("SBLC"),
a leasing company, Hann, a consumer automobile financing and leasing company,
and VFAM, an investment advisory firm. SBLIC is organized under Arizona law to
operate as a credit life, health and accident reinsurer to the extent permitted
by Pennsylvania law. SBLIC is regulated by the Arizona Department of Insurance
and is subject to periodic review by that Department. SBLC is organized under
the laws of the Commonwealth of Pennsylvania and owns a single leasing company
subsidiary with commercial finance powers. Hann is organized under New Jersey
law and is also authorized to do business in Pennsylvania, New York and
Connecticut. It is regulated by Connecticut as a motor vehicle leasing company,
by Delaware as a finance or small loan agency, and by New Jersey and
Pennsylvania as a sales finance company. VFAM is organized under the laws of
Pennsylvania. It is registered with the Securities and Exchange Commission (the
"SEC") as an investment advisor under the Investment Advisers Act of 1940, and
is licensed under the state securities laws of 17 states. VFAM is also a
registered broker-dealer, is a member of the National Association of Securities
Dealers (the "NASD") and is registered in Canada as an International Advisor.
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Privacy. The new GLB Act has provisions intended to increase the level of
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privacy protection afforded to customers of financial institutions, including
the securities and insurance affiliates of such institutions, partly in
recognition of the increased cross-marketing opportunities created by the Act's
elimination of many of the boundaries previously separating various segments of
the financial services industry. Among other things, these provisions will
require institutions to have in place administrative, technical and physical
safeguards to ensure the security and confidentiality of customer records and
information, to protect against anticipated threats or hazards to the security
or integrity of such records and to protect against unauthorized access to or
use of such records that could result in substantial harm or inconvenience to a
customer. The Act will also require institutions to furnish consumers at the
outset of the relationship and annually thereafter written disclosures
concerning the institution's privacy policies. Although these provisions of the
GLB Act will result in important operational modifications within all affected
financial institutions, Susquehanna included, they are not expected to have a
material effect on the operating results of Susquehanna and its subsidiaries.
Environmental Impact Statement. Compliance by Susquehanna and its
------------------------------
subsidiaries with federal, state and local environmental protection laws during
1999 had no material effect upon capital expenditures or earnings or upon the
competitive position of Susquehanna and its subsidiaries and is also not
expected to materially affect such expenditures, earnings or competition during
2000.
Pending Legislation. From time to time, legislation is proposed for
-------------------
enactment before the United States Congress and before the Pennsylvania General
Assembly which could result in various changes in the laws and regulations
applicable to Susquehanna and its subsidiaries. It is not possible at this time
to predict if or when any such legislation might become law or the extent to
which it might affect the business or competitive status of Susquehanna and its
subsidiaries.
National Monetary Policy. In addition to being affected by general economic
------------------------
conditions, the earnings and growth of Susquehanna and its subsidiaries are
affected by the policies of regulatory authorities, including the OCC, the
Board, the FDIC, the OTS, the SEC, the NASD and state agencies. An important
function of the Board is to regulate the money supply and credit conditions.
Among the instruments used by the Board to implement these objectives are open
market operations in U.S. Government securities, adjustments of the discount
rate and changes in reserve requirements against bank deposits. These
instruments are used in varying combinations to influence overall economic
growth and the distribution of credit, bank loans, investments and deposits.
Their use may also affect interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Board have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future. The effects of such policies upon the future
business, earnings and growth of Susquehanna and its subsidiaries cannot be
predicted.
Competition
Bank and financial holding companies and their subsidiaries compete with
many institutions for deposits, loans, trust services and other banking-related
and financial services. Susquehanna and its subsidiaries are subject to
competition from less heavily regulated entities such as brokerage firms, money
market funds, consumer finance and credit card companies and other financial
services companies.
The recently enacted GLB Act has liberalized many of the regulatory
restrictions previously imposed on Susquehanna and its subsidiaries. Further
legislative proposals are pending or may be introduced which could further
effect the financial services industry. It is not possible to assess whether any
of such proposals will be enacted, and if enacted, what effect such a proposal
would have on the competitive positions of Susquehanna in its market place.
As a result of state and federal legislation enacted over the past 20
years, consolidation in the industry has continued at a rapid pace. Further, as
a result of relaxation of laws and regulations pertaining to branch banking in
the state, and the opportunity to engage in interstate banking, the
consolidation within the banking industry has had a significant competitive
effect on Susquehanna and its markets. At present, Susquehanna and its
subsidiary
9
<PAGE>
depository institutions compete with numerous super-regional institutions with
significantly greater resources and assets which conduct banking business
throughout the region.
Business Trends
Current business trends include an increasing interest rate environment, a
relatively strong and diverse local economy and continuing consumer confidence.
While conditions are presently stable, a variety of factors (e.g., any
substantial rise in the inflation or unemployment rates), may effect such
stability, both in Susquehanna's markets as well as national markets.
Susquehanna will continue its emphasis on control of funding costs and lending
rates to effectively maintain profitability. In addition, Susquehanna will seek
relationships which can generate fee income which is not directly tied to
lending relationships. Susquehanna anticipates that this approach will help
dampen its earnings fluctuations which are driven by movement in interest rates,
business and consumer loan cycles, and local economic factors.
Executive Officers
The executive officers of Susquehanna, their ages and their positions with
Susquehanna, is set forth in the following table:
<TABLE>
<CAPTION>
Name Age Title
- ---- -- -----
<S> <C> <C>
Robert S. Bolinger(1)(2) 63 Chairman of the Board and Chief Executive Officer
William J. Reuter(3) 50 President
Gregory A. Duncan(4) 44 Executive Vice President
Drew K. Hostetter(5) 45 Senior Vice President, Treasurer and Chief Financial Officer
William T. Belden(6) 50 Vice President
Frederick W. Bisbee(7) 61 Vice President
Richard M. Cloney(1) (8) 58 Vice President
Charles L. Luppert(9) 58 Vice President
Peter C. Zimmerman(10) 53 Vice President
</TABLE>
(1) Robert S. Bolinger and Richard M. Cloney are also principal executive
officers of Farmers First Bank and have been employed by that subsidiary bank in
substantially equivalent positions for more than the past five years.
(2) Mr. Bolinger has also served as a principal executive officer of
Susquehanna South since its inception in 1994, and has also been a principal
executive officer of Susquehanna East since its inception in 1997.
(3) William J. Reuter was appointed Senior Vice President of Susquehanna on
January 21, 1998 and promoted to President of Susquehanna on January 19, 2000.
He is also the principal executive officer of Farmers & Merchants Bank and Trust
and has been employed by that subsidiary bank in a substantially equivalent
position for more than the past five years. In 1996 Mr. Reuter was named an
executive officer of Susquehanna South, and in 1997, its wholly-owned
subsidiary, Susquehanna Bank.
(4) Gregory A. Duncan was also the principal executive officer of Citizens
National Bank of Southern Pennsylvania until September 1, 1999, and had been
employed by that subsidiary bank in a substantially equivalent position since
1992. He was appointed Senior Vice President - Administration, of Susquehanna on
January 21, 1998 and promoted to his current position on January 19, 2000. He
was also appointed President of SBLIC on June 14, 1999 and Secretary of SBLC on
July 15, 1998.
(5) Drew K. Hostetter was appointed Assistant Treasurer of Susquehanna in 1995,
was promoted to Treasurer in 1996 and promoted to Vice President, Treasurer and
Chief Financial Officer in 1998. He was promoted to his current position on
January 19, 2000. Mr. Hostetter was also appointed Treasurer and Assistant
Secretary of Susquebanc Lease Co. on September 17, 1998 and Assistant Treasurer
of Susquehanna East on April 18, 1997.
10
<PAGE>
Prior to joining Susquehanna, Mr. Hostetter served as Senior Vice President and
Corporate Controller of MNC Financial, Baltimore, Maryland, from 1990 to 1994.
(6) William T. Belden is also a principal executive officer of Farmers First
Bank, having been appointed as President and Chief Operating Officer in 1995 and
promoted to President and Chief Executive Officer on March 22, 1999.
(7) Frederick W. Bisbee is also the President Emeritus of First National Trust
Bank, having been appointed to that position on January 1, 2000. Prior to that,
he served as the principal executive officer of that subsidiary bank for more
than the past five years. He has also been a Vice President of SBLIC since 1992.
(8) Mr. Cloney is also a Vice President of SBLIC, having been appointed to that
position in 1984, the President of SBLC, having been appointed to that position
in 1986, and the President and Chief Executive Officer of Susquebanc Lease Co.,
a Susquehanna subsidiary, having been appointed to that position in 1988.
(9) Charles W. Luppert is also the principal executive officer of Williamsport
National Bank and has been employed by that subsidiary bank in a substantially
equivalent position for more than the past five years.
(10) Mr. Zimmerman is also an Executive Vice President of Susquehanna East,
having been appointed to that position on April 1, 1998, and the Vice Chairman
of Equity Bank, National Association, a Susquehanna subsidiary, having been
appointed to that position on April 22, 1998. He was also appointed President
and Chief Executive Officer of Susquehanna Trust & Investment Company, also a
Susquehanna subsidiary, in May of 1999. Prior to joining Susquehanna, Mr.
Zimmerman was the President and Chief Operating Officer of Financial Trust Corp.
from 1995 to 1997 and the President and Chief Executive Officer of Financial
Trust Company in 1997.
There are no family relationships among the executive officers of
Susquehanna nor are there any arrangements or understandings between any of them
and any other person pursuant to which any of them was selected an officer of
Susquehanna.
Item 2. Properties
- ------- ----------
Susquehanna reimburses its subsidiaries for space and services utilized. It
also leases office space located at Topflight Airpark, Showalter Road,
Hagerstown, Maryland for its new loan servicing center, and office space located
at 701 South Broad Street, Lititz, Pennsylvania, for its Audit, Human Resources,
Loan Review, Marketing and Sales Support departments.
Susquehanna's subsidiary depository institutions operate 120 full-service
branches, 20 limited-service branches and 38 free-standing automated teller
machines. The depository institutions own 80 of the branches and lease the
remaining 60. Ten additional locations are owned or leased by subsidiary banks
to facilitate operations and expansion. Management of Susquehanna believes that
the properties currently owned and leased by its subsidiaries are adequate for
present levels of operation.
As of December 31, 1999, the offices (including executive offices) of
Susquehanna's depository institution subsidiaries, were as follows:
<TABLE>
<CAPTION>
Executive Office Location of Offices
Subsidiary Location of Executive Office Owned/Leased (including executive office)
- ---------- ---------------------------- ------------ ----------------------------
<S> <C> <C> <C>
Farmers First Bank 9 East Main Street Owned 29 full-service and 11
Lititz, Pennsylvania limited-service banking offices
in Lancaster and York Counties,
Pennsylvania
Citizens National Bank of 35 North Carlisle Street Owned 7 full-service banking offices in
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Executive Office Location of Offices
Subsidiary Location of Executive Office Owned/Leased (including executive office)
- ---------- ---------------------------- ------------ ----------------------------
<S> <C> <C> <C>
Southern Pennsylvania Greencastle, Pennsylvania Franklin County, Pennsylvania
First National Trust Bank 400 Market Street Owned 11 full-service and 1
Sunbury, Pennsylvania limited-service banking offices
in Northumberland, Snyder,
Columbia and Union Counties,
Pennsylvania
Williamsport National Bank 329 Pine Street Owned 6 full-service and 1 limited
Williamsport, Pennsylvania service banking offices in
Lycoming County, Pennsylvania
Farmers & Merchants Bank and 59 West Washington Street Owned 22 full-service and 6 limited
Trust Hagerstown, Maryland service banking offices in
Washington, Allegany and
Garrett Counties, Maryland
Susquehanna Bank 100 West Road Leased 21 full-service banking offices
Towson, Maryland located in Baltimore City and
Baltimore, Harford, Anne
Arundel, Carroll, Worcester and
Wicomico Counties, Maryland
First American National Bank 140 East Main Street Owned 5 full-service banking offices
of Pennsylvania Everett, Pennsylvania in Bedford and Blair Counties,
Pennsylvania
Equity Bank, National 8000 Sagemore Drive Leased 11 full-service and 1
Association Suite 8101 limited-service banking offices
Marlton, New Jersey in Camden, Gloucester and
Burlington Counties, New Jersey
Founders' Bank 101 Bryn Mawr Avenue Leased 3 full-service banking offices
Bryn Mawr, Pennsylvania in Montgomery, Chester and
Delaware Counties, Pennsylvania
First Capitol Bank 2951 Whiteford Road Leased 5 full-service banking offices
York, Pennsylvania in York County, Pennsylvania
</TABLE>
The executive offices of Hann, a non-depository institution subsidiary of
Susquehanna that was acquired on February 1, 2000, are located at One Centre
Drive, Jamesburg, New Jersey. Hann leases both this facility and a second
facility located at 1051 North Black Horse Pike, Williamstown, New Jersey.
The executive offices of VFAM, another non-depository institution
subsidiary of Susquehanna that was acquired on March 3, 2000, are located at 120
South Warner Road, King of Prussia, Pennsylvania. VFAM leases this facility.
12
<PAGE>
Item 3. Legal Proceedings.
- ------ -----------------
There are no material proceedings to which Susquehanna or any of its
subsidiaries are a party or by which they, or any of them, are threatened. All
legal proceedings presently pending or threatened against Susquehanna and its
subsidiaries involve routine litigation incidental to the business of
Susquehanna or the subsidiary involved and are not material in respect to the
amount in controversy.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security holders during
the fourth quarter of 1999.
13
<PAGE>
PART II
-------
Item 5. Market for Susquehanna Capital Stock and Related Shareholder Matters.
- ------ --------------------------------------------------------------------
Susquehanna common stock is listed for quotation on the National
Association of Securities Dealers National Market System. Set forth below are
the quarterly high and low bid prices of Susquehanna's common stock as reported
on the Nasdaq National Market System for the years 1998 and 1999, and cash
dividends paid. The table represents prices between dealers and does not include
retail markups, markdowns or commissions and does not necessarily represent
actual transactions.
- --------------------------------------------------------------------------------
Price Range Per Share*
----------------------
- --------------------------------------------------------------------------------
Cash
----
Dividends
---------
Year Period Paid Low Bid High Bid
---- ------ ---- ------- --------
1998 1st Quarter $.14 $21.67 $26.00
Common
2nd Quarter .14 22.67 26.08
Common
3rd Quarter .14 17.88 26.75
Common
4th Quarter .15 15.50 22.75
Common
1999 1st Quarter $.15 $16.50 $21.25
Common
2nd Quarter .15 17.00 19.38
Common
3rd Quarter .15 15.75 18.50
Common
4th Quarter .17 14.88 18.25
Common
- ----------- ------------------- -------------- ------------- ----------------
*Prices and dividends have been adjusted to reflect Susquehanna's three-for-two
stock split paid on July 1, 1998 to shareholders of record on June 15, 1998.
As of February 29, 2000, there were 6,700 record holders of Susquehanna
common stock.
Dividends paid by Susquehanna are provided from dividends paid to it by its
subsidiaries. Susquehanna's ability to pay dividends is largely dependent upon
the receipt of dividends from its bank and savings bank subsidiaries. Both
federal and state laws impose restrictions on the ability of these subsidiaries
to pay dividends. These include the Pennsylvania Banking Code in the case of
Farmers First Bank, the Financial Institutions Article of the Annotated Code of
Maryland in the case of Farmers & Merchants Bank and Trust, the National Bank
Act in the case of First National Trust Bank, Williamsport National Bank,
Citizens National Bank of Southern Pennsylvania, Equity Bank, National
Association and First American National Bank of Pennsylvania, the Federal
Reserve Act in the case of Founders' Bank and First Capitol Bank, and the Home
Owners Loan Act in the case of Susquehanna Bank and the applicable regulations
under such laws. The net capital rules of the SEC under the Securities Exchange
Act of 1934 also limit the ability of VFAM to pay dividends to Susquehanna. In
addition to the specific restrictions, summarized below, the banking, thrift and
securities regulatory agencies also have broad authority to prohibit otherwise
permitted dividends proposed to be made by an institution regulated by them if
the agency determines that their distribution would constitute an unsafe or
unsound practice.
14
<PAGE>
The Board and the FDIC have issued policy statements which provide that, as
a general matter, insured banks and bank holding companies may pay dividends
only out of current operating earnings.
For national banks and state-chartered banks which are members of the
Federal Reserve System (like Founders' Bank and First Capitol Bank), the
approval of the applicable federal regulatory agency is required for the payment
of dividends by the bank subsidiary in any calendar year if the total of all
dividends declared by the bank in that calendar year exceeds the current year's
retained net income combined with the retained net income for the two preceding
years. "Retained net income" for any period means the net income for that period
less any common or preferred stock dividends declared in that period. Moreover,
no dividends may be paid by such bank in excess of its undivided profits
account.
Dividends payable by a Pennsylvania state-chartered bank are restricted by
the requirement that the bank set aside to a surplus fund each year at least 10%
of its net earnings until the bank's surplus equals the amount of its capital (a
requirement presently satisfied in the case of all of the Pennsylvania state
bank subsidiaries of Susquehanna). Furthermore, a Pennsylvania bank may not pay
a dividend if the payment would result in a reduction of the surplus available
to the bank.
A Maryland state-chartered bank may pay dividends out of undivided profits
or, with the approval of the Maryland Bank Commissioner, from surplus in excess
of 100% of required capital stock. If, however, the surplus of a Maryland bank
is less than 100% of its required capital stock, cash dividends may not be paid
in excess of 90% of net earnings.
As indicated above, Susquehanna looks to distributions from Susquehanna
Bank (along with the other Susquehanna operating subsidiaries) as the source of
funds to distribute as dividends. However, federal regulations impose
restrictions on dividend payments by savings institutions which converted from
the mutual to stock form of ownership and were federally insured at the time of
the conversion, as was the case with the two predecessors of Susquehanna Bank,
the former Atlantic Federal Savings Bank ("Atlantic Federal") and Reisterstown
Federal Savings Bank ("Reisterstown Federal"). Upon their conversion to stock
form, mutual savings institutions are required by regulation to establish a
"liquidation account" by restricting a portion of their net capital for the
benefit of eligible savings account holders who continue to maintain their
savings accounts with the institution after the conversion. In the event of a
subsequent complete liquidation of the institution (and only in such event),
each savings account holder who continues to maintain a savings account would be
entitled to receive a distribution from the liquidation account after payment to
all creditors, but before any liquidation distribution with respect to the
institution's capital stock. This account is proportionally reduced for any
decreases in the eligible holder's savings accounts. Susquehanna Bank has
succeeded to the liquidation account obligations of Atlantic Federal and
Reisterstown Federal.
Under federal regulations, savings institutions such as Atlantic Federal
and Reisterstown Federal which have converted from mutual form may not declare
or pay a cash dividend on common stock if the dividend would cause the
institution's capital to be reduced below the amount required for the
maintenance of the liquidation account or for regulatory capital requirements
generally.
Savings associations such as Susquehanna Bank are subject to federal
regulatory limitations on the amount of cash dividends they may pay, depending
on the level of their regulatory capital in relation to regulatory capital
requirements. At present, Susquehanna Bank may, after notice to but without
approval of the OTS, make capital distributions during a calendar year of up to
100% of its year to date net income plus such additional amounts as would not
reduce by more than one-half its surplus capital at the beginning of the
calendar year, or, if greater, 75% of its net income for the most recent
four-quarter period. However, the OTS has overriding authority to prohibit an
otherwise permissible cash dividend proposed to be made by a federal savings
bank if the OTS determines that the distribution would result in an unsafe or
unsound practice.
The capital requirements applicable to federal savings banks require them
to maintain tangible capital of at least 1.5% of adjusted total assets, a
leverage ratio or core capital of at least 3% of adjusted total assets, and
overall risk-based capital of at least 8% of total risk-weighted assets. For
these purposes, tangible capital consists of
15
<PAGE>
common stockholder's equity net of certain intangible assets phased out over
several years, and core capital consists of tangible capital augmented by
"supervisory" goodwill and certain other items. The risk-based capital
requirement involves the risk weighting of various classes of assets (including
the asset equivalent of certain commitments and obligations) and is comparable
to the risk-based capital regimen applicable to banks.
The capital rules applicable to federal savings banks include provisions
intended to measure the sensitivity of the institution's portfolio market values
to hypothetical shifts in market interest rates. If interest rate risk is found
to exist at levels above certain thresholds prescribed by these rules, an
additional level of capital is required. Susquehanna Bank has not to date been
required to maintain additional capital as a result of the interest rate risk
component of the risk-based capital rule.
Within the regulatory restrictions described above, each of the commercial
and federal savings bank subsidiaries of Susquehanna presently has the ability
to pay dividends and at December 31, 1999, $56.8 million in the aggregate was
available for dividend distributions during calendar 2000 to Susquehanna from
its commercial and savings bank subsidiaries without regulatory approval.
Susquehanna presently expects that cash dividends will continue to be paid by
its subsidiaries in the future at levels comparable with those of prior years.
16
<PAGE>
Item 6. Selected Financial Data.
- ------ -----------------------
See Page 18.
17
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
Dollars in thousands, except per share
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 299,770 $ 300,842 $ 282,011 $ 269,313 $ 222,475
Interest expense 138,848 142,713 126,852 120,959 97,563
Net interest income 160,922 158,129 155,159 148,354 124,912
Provision for loan and lease losses 7,200 5,333 4,731 4,989 5,323
Other income 39,979 31,188 24,651 22,900 17,775
Other expenses 131,882 118,064 112,763 117,099 94,424
Income before taxes 61,819 65,920 62,316 49,166 42,940
Net income 43,397 45,163 42,734 33,260 30,523
Cash dividends declared on common stock 22,918 20,132 18,371 16,226 13,156
Dividend payout ratio 52.8% 44.6% 43.0% 48.8% 43.1%
Per Common Share Amounts*
- -----------------------------------------------------------------------------------------------------------------------------------
Net income--basic $ 1.17 $ 1.22 $ 1.18 $ 0.92 $ 0.93
--diluted 1.17 1.21 1.17 0.92 0.93
Cash dividends declared on common stock 0.62 0.57 0.55 0.52 0.49
Financial Ratios
- -----------------------------------------------------------------------------------------------------------------------------------
Return on average total assets 1.04% 1.13% 1.18% 0.96% 1.07%
Return on average stockholders' equity 10.73 11.62 12.13 10.14 11.27
Net interest margin 4.27 4.36 4.72 4.72 4.85
Average stockholders' equity to average assets 9.66 9.70 9.74 9.46 9.48
Tangible Operating Results
- -----------------------------------------------------------------------------------------------------------------------------------
Tangible net income $ 46,372 $ 47,415 $ 45,709 $ 36,077 $ 31,750
Tangible earnings per share 1.25 1.29 1.26 1.00 0.97
Return on tangible average shareholders' equity 12.48% 13.41% 15.46% 13.31% 12.93%
Return on tangible average assets 1.12 1.19 1.26 1.04 1.11
Year-End Balances
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $4,310,606 $4,176,026 $3,762,469 $3,558,414 $3,034,182
Investment securities 912,048 951,744 723,745 729,234 766,073
Loans and leases, net of unearned income 2,995,152 2,847,185 2,714,779 2,483,371 1,967,061
Deposits 3,180,520 3,216,879 3,041,466 2,933,301 2,511,104
Total borrowings 674,921 513,177 294,758 229,574 158,676
Stockholders' equity 404,390 402,081 373,906 337,040 317,002
Selected Share Data*
- -----------------------------------------------------------------------------------------------------------------------------------
Common shares outstanding (period end) 37,023 36,902 36,915 36,035 35,511
Average common shares outstanding--basic 36,960 36,868 36,296 35,989 32,645
--diluted 37,137 37,188 36,551 36,067 32,714
At December 31:
Book value per share $ 10.92 $ 10.91 $ 10.14 $ 9.38 $ 8.95
Market price per common share 15.88 20.47 25.50 15.39 11.78
Common stockholders 6,719 6,661 6,237 5,693 5,759
</TABLE>
* Amounts adjusted for the three-for-two stock splits in July 1997 and 1998.
18
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations
- ------ -------------------------------------------------------------
and Financial Condition
-----------------------
See Pages 20-34.
19
<PAGE>
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following pages of this report present management's discussion and analysis
of the consolidated financial condition and results of operations of Susquehanna
Bancshares, Inc., including its subsidiaries: Farmers First Bank; Farmers &
Merchants Bank and Trust; First American National Bank of Pennsylvania; First
Capitol Bank; First National Trust Bank; Williamsport National Bank; Citizens
National Bank of Southern Pennsylvania; Susquehanna Bancshares East, Inc. and
its commercial bank subsidiaries Equity Bank, N.A., and Founders' Bank;
Susquehanna Bancshares South, Inc. and its savings bank subsidiary Susquehanna
Bank; Susque-Bancshares Leasing Co., Inc.; and Susque-Bancshares Life Insurance
Company.
Certain statements in this document may be considered to be "forward-looking
statements" as that term is defined in the U.S. Private Securities Litigation
Reform Act of 1995, such as statements that include the words "expect,"
"estimate," "project," "anticipate," "should," "intend," "probability," "risk,"
"target," "objective," and similar expressions or variations on such
expressions. In particular, this document includes forward-looking statements
relating, but not limited to, Susquehanna's potential exposures to various types
of market risks, such as interest rate risk and credit risk. Such statements are
subject to certain risks and uncertainties. For example, certain of the market
risk disclosures are dependent on choices about key model characteristics and
assumptions and are subject to various limitations. By their nature, certain of
the market risk disclosures are only estimates and could be materially different
from what actually occurs in the future. As a result, future income gains and
losses could materially differ from those that have been estimated. Other
factors that could cause actual results to differ materially from those
estimated by the forward-looking statements contained in this document include,
but are not limited to, general economic conditions in market areas which
Susquehanna has significant business activities or investments; the monetary and
interest rate policies of the Board of Governors of the Federal Reserve System;
inflation; deflation; unanticipated turbulence in interest rates; changes in
laws, regulations and taxes; changes in competition and pricing environments;
natural disasters; the inability to hedge certain risks economically; the
adequacy of loss reserves; acquisitions or restructurings; technological
changes; changes in consumer spending and saving habits; and the success of
Susquehanna in managing the risks involved in the foregoing.
RESULTS OF OPERATIONS
Summary of 1999 Compared to 1998
Several significant transactions occurred which affected the comparability of
Susquehanna's financial performance for the years ended December 31, 1999 and
1998. These transactions are described in the following paragraphs.
On January 24, 2000, Susquehanna announced that it recognized $10.8 million
of pre-tax special charges relating to the consolidation of Susquehanna's back
office operations and a special bonus. The restructure charge of $7.4 million
represents severance, employee and employment assistance services, consulting,
and asset write-offs related to a reduction in the work force. This reduction in
the work force should result in an estimated net annual savings of $6.0 million,
of which approximately 50% will be realized in the year 2000 with 100%
realization in years after 2000. The special bonus is awarded to Susquehanna
employees (excluding executive and senior management) for extraordinary efforts
in 1999.
On January 4, 1999, Susquehanna acquired First Capitol Bank, a Pennsylvania
commercial bank with $111 million in assets and $93 million in deposits at the
acquisition date. Susquehanna issued 1,055,247 shares of its common stock to the
shareholders of First Capitol based upon an exchange ratio of 2.028 shares of
Susquehanna common stock for each outstanding share of First Capitol. The
transaction was accounted for under the pooling-of-interests method of
accounting; accordingly, the consolidated financial statements have been
restated to include the consolidated accounts of First Capitol for all periods
presented.
On December 16, 1998, Susquehanna acquired Cardinal Bancorp, Inc.
("Cardinal"), a Pennsylvania bank holding company with $138 million in assets
and $114 million in deposits at the acquisition date. Susquehanna issued
2,027,296 shares of its common stock to the shareholders of Cardinal based upon
an exchange ratio of 2.048 shares of Susquehanna common stock for each
outstanding share of Cardinal. The transaction was accounted for under the
pooling-of-interests method of accounting; accordingly, the consolidated
financial statements have been restated to include the consolidated accounts of
Cardinal for all periods presented.
Susquehanna's net income for the year ended December 31, 1999, decreased to
$43.4 million, or 4% below 1998 net income of $45.2 million. Excluding the
special charges noted above, Susquehanna's net income for 1999 would have been
$51.0 million, or a 13% increase over annual 1998 earnings. Susquehanna's
earnings performance was affected by significant growth in non-interest income
resulting primarily from the purchase of certain insurance-related products,
such as bank-owned life insurance ("BOLI"), and a one-time $3.3 million pre-tax
gain on the sale of two branch offices. Non-interest income increased $8.8
million, or 28%, in 1999 over 1998.
Diluted earnings per common share ("EPS"), were $1.17 in 1999 compared to
$1.21 in 1998. Excluding the special
20
<PAGE>
charges noted above, Susquehanna's diluted EPS would have been $1.37 for 1999,
13% higher than 1998 diluted EPS. Return on average assets ("ROA") and return on
average equity ("ROE") decreased from 1.13% and 11.62%, respectively, in 1998 to
1.04% and 10.73%, respectively, in 1999. Excluding the special charges noted
above, Susquehanna's ROA and ROE for 1999 would have been 1.22% and 12.60%,
respectively.
During 1995 and 1996, Susquehanna acquired two Maryland savings banks under
the purchase method of accounting. These purchase transactions created an
intangible asset, goodwill, of $34 million, which significantly affects
Susquehanna's earnings and financial ratios. Goodwill amortization is a non-cash
charge to earnings. Tangible net income is actual net income increased by the
tax-effected amortization of those intangible assets that are deducted from
equity in determining Tier 1 capital.
For 1999, tangible net income, earnings per share, ROA and ROE were $46.4
million, $1.25, 1.12% and 12.48%, respectively, compared to actual net income,
basic earnings
TABLE 1--Distribution of Average Assets, Liabilities, and Stockholders' Equity
Interest Rates and Interest Differential--Tax Equivalent Basis
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Average Rate Average Rate Average Rate
Assets Balance Interest % Balance Interest % Balance Interest %
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 49,673 $ 2,420 4.87 $ 80,924 $ 4,289 5.30 $ 75,408 $ 4,131 5.48
Investment securities:
Taxable 811,255 50,394 6.21 766,342 48,578 6.34 594,467 37,604 6.33
Tax-advantaged 116,037 8,189 7.06 122,691 8,731 7.12 120,261 8,598 7.15
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 927,292 58,583 6.32 889,033 57,309 6.45 714,728 46,202 6.46
- ----------------------------------------------------------------------------------------------------------------------------------
Loans (net of unearned income):
Taxable 2,848,901 238,740 8.38 2,708,037 238,946 8.82 2,546,473 231,755 9.10
Tax-advantaged 49,380 4,451 9.01 54,612 5,077 9.30 47,098 4,511 9.58
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 2,898,281 243,191 8.39 2,762,649 244,023 8.83 2,593,571 236,266 9.11
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 3,875,246 304,194 7.85 3,732,606 305,621 8.19 3,383,707 286,599 8.47
==================================================================================================================================
Allowance for loan losses (36,530) (36,206) (36,228)
All other non-earning assets 348,450 308,171 271,012
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 4,187,166 $ 4,004,571 $ 3,618,491
==================================================================================================================================
Liabilities &
Stockholders' Equity
Deposits:
Interest-bearing demand $ 966,906 $ 27,901 2.89 $ 900,160 $ 28,795 3.20 $ 805,808 $ 25,401 3.15
Savings 444,938 8,172 1.84 449,022 10,102 2.25 463,609 11,732 2.53
Time 1,337,536 69,940 5.23 1,361,984 75,807 5.57 1,342,077 73,717 5.49
Other borrowings 477,050 25,354 5.31 377,287 20,707 5.49 163,476 8,757 5.36
Long-term debt 95,000 7,481 7.87 91,370 7,302 7.99 90,000 7,245 8.05
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 3,321,430 $ 138,848 4.18 3,179,823 $142,713 4.49 2,864,970 $126,852 4.43
- ----------------------------------------------------------------------------------------------------------------------------------
Demand deposits 421,055 390,231 351,311
Other liabilities 40,132 45,889 49,942
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,782,617 3,615,943 3,266,223
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 404,549 388,628 352,268
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities & equity $ 4,187,166 $ 4,004,571 $ 3,618,491
==================================================================================================================================
Net interest income/yield on
average earning assets $ 165,346 4.27 $ 162,908 4.36 $159,747 4.72
==================================================================================================================================
</TABLE>
For purposes of calculating loan yields, the average loan volume includes
nonaccrual loans. For purposes of calculating yields on tax-advantaged interest
income, the taxable equivalent is made to equate tax-advantaged interest on the
same basis as taxable interest. The marginal tax rate is 35%.
21
<PAGE>
per share, ROA and ROE of $43.4 million, $1.17, 1.04% and 10.73%, respectively.
Excluding the special charges, tangible net income, EPS, ROA and ROE were $53.9
million, $1.46, 1.30% and 14.51%, respectively. Tangible net income, earnings
per share, ROA and ROE for 1998 were $47.4 million, $1.29, 1.19% and 13.41%,
respectively.
Net Interest Income--Taxable Equivalent Basis
The major source of operating revenues is net interest income, which rose to a
level of $160.9 million in 1999, $2.8 million, or 2%, above the $158.1 million
attained in 1998. The net interest margin, on a tax equivalent basis, declined
to 4.27% during 1999 from 4.36% in 1998.
Net interest income is the income which remains after deducting from total
income generated by interest-earning assets the interest expense attributable to
the acquisition of the funds required to support interest-earning assets. Income
from interest-earning assets includes income from loans and leases, income from
investment securities, and income from short-term investments. The amount of
interest income is dependent upon many factors including the volume of
interest-earning assets, the general level of interest rates, the dynamics of
the change in interest rates, and levels of non-performing loans. The cost of
funds varies with the amount of funds necessary to support interest-earning
assets, the rates paid to attract and hold deposits, rates paid on borrowed
funds, and the levels of non-interest-bearing demand deposits and equity
capital.
Table 1 presents average balances, taxable equivalent interest income and
expenses and yields earned or paid on these assets and liabilities of
Susquehanna. For purposes of calculating taxable equivalent interest income,
tax-advantaged interest has been adjusted using a marginal tax rate of 35% in
order to equate the yield to that of taxable interest rates. Net interest income
as a percentage of net interest income and other income was 80%, 84%, and 86%
for the twelve months ended December 31, 1999, 1998, and 1997, respectively.
Table 2 illustrates that the decline in interest income in 1999 compared with
1998 was attributed to interest rates. The average growth in interest-earning
assets of $143 million in 1999 over 1998 was due to a $136 million increase in
loans and a $38 million increase in the investment portfolio. As shown in Table
1, the tax equivalent yield on interest-earning assets for 1999 declined to
7.85% from 8.19% in interest 1998. This decline was primarily due to lower
reinvestment rates on loans and investments, and market forces impacting product
pricing. Table 2 illustrates the decline in interest expense in 1999 compared
with 1998
<TABLE>
<CAPTION>
TABLE 2--Changes in Net Interest Income--Tax Equivalent Basis
- ------------------------------------------------------------------------------------------------------------------------------------
1999 Versus 1998 1998 Versus 1997
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Dollars in thousands Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Short-term investments $ (1,546) $ (323) $ (1,869) $ 295 $ (137) $ 158
Investment securities:
Taxable 2,805 (989) 1,816 10,895 79 10,974
Tax-advantaged (471) (71) (542) 173 (40) 133
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,334 (1,060) 1,274 11,068 39 11,107
Loans (net of unearned income):
Taxable 12,112 (12,318) (206) 14,401 (7,210) 7,191
Tax-advantaged (475) (151) (626) 702 (136) 566
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 11,637 (12,469) (832) 15,103 (7,346) 7,757
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 12,425 $(13,852) $ (1,427) $ 26,466 $ (7,444) $ 19,022
====================================================================================================================================
Interest Expense
Deposits:
Interest-bearing demand $ 2,045 $ (2,939) $ (894) $ 3,013 $ 381 $ 3,394
Savings (91) (1,839) (1,930) (360) (1,270) (1,630)
Time (1,342) (4,525) (5,867) 1,101 989 2,090
Other borrowings 5,320 (673) 4,647 11,730 220 11,950
Long-term debt 287 (108) 179 109 (52) 57
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,219 (10,084) (3,865) 15,593 268 15,861
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin $ 6,206 $ (3,768) $ 2,438 $ 10,873 $ (7,712) $ 3,161
====================================================================================================================================
</TABLE>
Changes which are due in part to volume and in part to rate are allocated in
proportion to their relationship to the amounts of changes attributed directly
to volume and rate.
22
<PAGE>
1998 was primarily attributed to interest rates. Increased levels of demand
deposits and a general reduction in all rates paid for interest-bearing deposits
and borrowings were the primary reasons for the $3.9 million decrease in
interest expense. The average funding costs declined to 4.18% in 1999 compared
with 4.49% in 1998, as increased levels of lower cost interest-bearing demand
deposits outpaced the declines in savings and time deposit balances.
As a result of the preceding comments, Susquehanna's net interest margin, on
a taxable equivalent basis, declined from 4.36% in 1998 to 4.27% in 1999.
Variances do occur in the net interest margin as an exact repricing of assets
and liabilities is not possible. A further explanation of the impact of asset
and liability repricing is found in the Market Risks section of this discussion.
Provision and Allowance for Loan and Lease Losses
Susquehanna's provision for loan and lease losses is based upon management's
quarterly loan portfolio review. The purpose of the review is to assess loan
quality, identify impaired loans, analyze delinquencies, ascertain loan growth,
evaluate potential charge-offs and recoveries, and assess general economic
conditions in the markets its affiliates serve.
Commercial and real estate loans and leases are rated by loan officers and,
periodically, by loan review personnel. Consumer and residential real estate
loans are generally reviewed in the aggregate as they are of relative small
dollar size and homogeneous in nature.
In addition to economic conditions, loan portfolio diversification,
delinquency, and historic loss experience, consideration is also given to
examinations performed by the regulatory authorities.
To determine the allowance and corresponding provision, the amount required
for specific allocation is first determined. For all types of commercial loans
and leases and construction loans, this amount is based upon specific borrower
data determined by reviewing individual non-performing, delinquent, or
potentially troubled credits. In addition, a general allocation is also
determined using the same criteria applied to the total commercial portfolio.
Consumer and residential real estate allowances, which may include specific
allocations, generally are based upon recent charge-off and delinquency history,
other known trends, and expected losses over the remaining lives of these loans,
as well as the condition of local, regional, and national economies.
The unallocated portion of the allowance is the amount which, when added to
these allocated amounts, brings the total to the amount deemed adequate by
management at that time. This unallocated portion is available to absorb losses
sustained anywhere within the loan portfolio. Table 10 presents this allocation.
The loan and lease portfolio represents loans and leases made primarily
within Susquehanna's market area which includes central and southeastern
Pennsylvania, Maryland, southern New Jersey, and to a lesser extent,
southwestern Pennsylvania, Delaware, West Virginia, northern Virginia, and the
southern tier of New York state.
Determining the level of the allowance for possible loan and lease losses at
any given period is difficult, particularly during deteriorating or uncertain
economic periods. Management must make estimates using assumptions and
information which is often subjective, and changing rapidly. The review of the
loan portfolio is a continuing event in light of a changing economy and the
dynamics of the banking and regulatory environment. In management's opinion, the
allowance for loan and lease losses is adequate at December 31, 1999. As
illustrated in Table 3, the provision for loan and lease losses was $7.2 million
for 1999 compared to $5.3 million in 1998. This increase was due to a growing
loan portfolio and increased charge-offs. Net charge-offs, as seen in Table 3,
were $6.1 million in 1999 compared with $5.7 million in 1998. As a result, the
allowance for loan and lease losses at December 31, 1999, was 1.26% of
period-end loans and leases, or $37.2 million compared with 1.27% or $36.2
million at December 31, 1998. The allowance for loan and lease losses as a
percentage of non-performing loans decreased from 167% at December 31, 1998 to
164% at December 31, 1999.
Should the economic climate no longer continue to improve or begin to
deteriorate, borrowers may experience difficulty, and the level of
non-performing loans and assets, charge-offs, and delinquencies could rise and
require further increases in the provision.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for possible loan and lease
losses. They may require additions to allowances based upon their judgments
about information available to them at the time of examination.
It is the policy of Susquehanna not to renegotiate the terms of a loan simply
because of a delinquency status. Rather, a loan is transferred to non-accrual
status if it is not well secured and in the process of collection, and is
delinquent in payment of either principal or interest beyond 90 days. Interest
income received on non-performing loans in 1999 and 1998 was $0.5 million and
$0.9 million, respectively. Interest income which would have been recorded on
these loans under the original terms was $1.9 million and $2.3 million for 1999
and 1998, respectively. At December 31, 1999, Susquehanna had no outstanding
commitments to advance additional funds with respect to these non-performing
loans.
Table 3 is an analysis of the provision levels as well as the activity in the
allowance for loan and lease losses for the past five years. Table 4 reflects
the five-year history of non-performing assets and loans contractually past due
90 days and still accruing. Total non-performing assets at December 31, 1999 and
1998, of $27.5 and $26.4 million, respectively, includes $4.7 million in other
real estate acquired through foreclosure. Non-performing assets as a percentage
of period-end loans and other real estate owned was 0.93% at December 31, 1999,
unchanged from Decem-
23
<PAGE>
ber 31, 1998
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property served as
collateral or the fair market value of the property as determined by a current
appraisal less estimated costs to sell (fair value). Prior to foreclosure,
<TABLE>
<CAPTION>
TABLE 3--Provision and Allowance for Loan and Lease Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan and lease losses, January 1 $ 36,158 $ 36,481 $ 35,704 $ 31,564 $ 27,798
Allowance acquired in business combination 0 0 1,460 4,229 3,323
Change in fiscal year 0 0 0 0 (8)
Additions to provision for loan and lease losses
charged to operations 7,200 5,333 4,731 4,989 5,323
Loans and leases charged off during the year:
Commercial, financial, agricultural, and leases 3,128 2,039 1,612 1,944 2,145
Real estate--mortgage 2,050 1,657 1,355 2,124 1,683
Consumer 3,188 3,413 3,820 2,686 2,367
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 8,366 7,109 6,787 6,754 6,195
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously
charged-off:
Commercial, financial, agricultural, and leases 550 428 413 601 320
Real estate--mortgage 812 182 71 100 200
Consumer 879 843 889 975 803
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 2,241 1,453 1,373 1,676 1,323
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 6,125 5,656 5,414 5,078 4,872
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, December 31 $ 37,233 $ 36,158 $ 36,481 $ 35,704 $ 31,564
====================================================================================================================================
Average loans and leases outstanding $ 2,898,281 $ 2,762,649 $ 2,593,571 $ 2,395,371 $ 1,878,693
Period-end loans and leases 2,955,152 2,847,185 2,714,779 2,483,371 1,967,061
Net charge-offs as a percentage of average loans
and leases 0.21% 0.20% 0.21% 0.21% 0.26%
Allowance as a percentage of period-end loans
and leases 1.26 1.27 1.34 1.44 1.60
====================================================================================================================================
TABLE 4--Non-Performing Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Loans contractually past due
90 days and still accruing $ 10,160 $ 10,529 $ 7,169 $ 9,059 $ 5,651
====================================================================================================================================
Non-performing assets:
Nonaccrual loans:
Commercial, financial, agricultural,
and leases $ 1,510 $ 1,659 $ 934 $ 2,299 $ 3,213
Real estate--mortgage 20,989 18,409 21,995 17,665 19,502
Consumer 271 343 622 477 574
Restructured loans -- 1,258 93 6,429 6,873
Other real estate owned 4,703 4,745 4,547 7,849 6,483
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 27,473 $ 26,414 $ 28,191 $ 34,719 $ 36,645
====================================================================================================================================
Total non-performing assets as a percentage
of period-end loans and leases and other
real estate owned 0.93% 0.93% 1.04% 1.39% 1.86%
====================================================================================================================================
Allowance for loan and lease losses as a
percentage of non-performing loans 164% 167% 154% 133% 105%
====================================================================================================================================
</TABLE>
24
<PAGE>
the recorded amount of the loan is reduced, if necessary, to fair value by
charging the allowance for loan losses. Subsequent to foreclosure, gains or
losses on the sale of real estate acquired through foreclosure are recorded in
operating income and any losses determined as a result of periodic valuations
are charged to other operating expense.
Loans with principal and/or interest delinquent 90 days or more which are
still accruing interest were $10.2 million at December 31, 1999, down from the
$10.5 million at December 31, 1998. Although the economy is stable, softness in
certain areas of the economy may adversely affect certain borrowers and may
cause additional loans to become past due beyond 89 days or be placed on
nonaccrual status because of uncertainty of receiving full payment of either
principal or interest on these loans.
Potential problem loans consist of loans which are performing but for which
potential credit problems have caused Susquehanna to place them on its
internally monitored loan list. At December 31, 1999, such loans, not included
in Table 4, amounted to $32.5 million. Depending upon the state of the economy
and the impact thereon to these borrowers, as well as future events such as
regulatory examination assessment, these loans and others not currently so
identified could be classified as non-performing assets in the future.
Other Income
Non-interest income, recorded as other income, consists of: service charges on
deposit accounts; commissions; fees received for credit cards, travelers' check
sales, and money orders; fees for trust services; income generated from bank-
owned life insurance and reinsurance activities; gains and losses on security
transactions; net gains on sales of mortgages; net gains on sales of other real
estate owned; and other miscellaneous income, such as safe deposit box rents and
gains on the sale of branch offices. Other income as a percentage of net
interest income and other income was 20%, 16%, and 14% for 1999, 1998, and 1997,
respectively.
Non-interest income increased $8.8 million or 28%, in 1999 over 1998. Service
charges on deposit accounts were up $1.5 million or 17%. Gain on sale of
mortgage loans decreased $1.5 million, as loans originated for sale were $95
million less than 1998. During the third quarter of 1999, Susquehanna sold two
of its branch locations in Elkton, Md., and a pre-tax gain of $3.3 million was
realized as a result of that sale. Merchant credit card fees increased $2.4
million over 1998 as Susquehanna's merchant program expanded over the prior
year. Income on bank-owned life insurance increased $1.2 million in 1999 over
1998, as Susquehanna purchased an additional $50.0 million of insurance in the
second quarter of 1999. Gains on the sale of investment securities were $0.9
million higher in 1999 compared with 1998.
Other Expenses
Non-interest expenses are categorized into six main groupings:
employee-related expenses, which include salaries,
TABLE 5--Analysis of Other Expenses
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Advertising, marketing,
and public relations $ 3,789 $ 3,781 $ 3,444
Audits and examinations 723 933 945
Communications 2,689 2,559 2,065
Directors' fees 1,212 1,337 1,320
Legal and professional 4,678 5,597 2,492
Life Insurance Company
related expenses 924 679 970
Other real estate 1,089 1,083 814
Outside services 3,692 3,192 3,219
PA shares/capital stock tax 2,407 2,295 2,155
Postage and delivery 3,317 3,030 2,728
Stationery and supplies 3,132 2,971 2,785
FDIC insurance 769 729 760
Credit card assessments 3,122 984 822
All other 12,106 8,958 8,445
- --------------------------------------------------------------------------------
Total $43,649 $38,128 $32,964
================================================================================
fringe benefits, and employment taxes; occupancy expenses, which include
depreciation, rents, maintenance, utilities, and insurance; equipment expenses,
which include depreciation, rents, and maintenance; amortization of intangible
assets; restructuring charges; and other expenses (detailed in Table 5) incurred
in operating Susquehanna's business.
Non-interest expense increased $13.8 million, or 12%, in 1999 over 1998,
primarily due to a special $7.4 million pre-tax restructure charge relating to
the consolidation of back office operations.
Salaries and employee benefits, excluding bonuses, increased $2.1 million, or
4%, from 1998 to 1999. Susque-hanna's annual bonus program, based upon certain
financial benchmarks, earned zero in 1999 and $3.6 million in 1998. However, due
to extraordinary efforts by employees during 1999 related to mergers, systems
conversions and Year 2000 computer preparations, Susquehanna's Board of
Directors approved a special bonus for all Susquehanna employees excluding
executive and senior management. This bonus, including related benefits, totals
$3.4 million.
Charges for occupancy and equipment remained stable with only a slight
increase in 1999 over 1998. Amortization of intangible assets declined $1.0
million in 1999 from 1998 as certain intangibles have reached the end of their
amortization period. The $7.4 million restructuring charge represents severance,
employee and employment assistance services, consulting, and asset write-offs
related to a reduction in the work force. This reduction in the work force
should result in an annual, estimated net savings of $6.0 million of which
approximately 50% will be realized in 2000 and 100% realized in years after
2000. All other expenses increased $5.5 million, (see Table 5), with increases
in credit card assessments of $2.1 million, amortization of
25
<PAGE>
capitalized data processing systems conversion costs of $2.2 million, and data
processing and related communications charges of $0.6 million.
Income Taxes
Susquehanna's effective tax rate for 1999 was 29.80% compared to 31.49% in 1998.
The effective rate for 1999 was reduced because of increased levels of
tax-advantaged income. Since 1997, Susquehanna purchased $110 million of
insurance-related products and recognized $4.9 million and $3.4 million in 1999
and 1998, respectively, of tax-advantaged income from the increase in cash
surrender values and insurance proceeds.
As tax-advantaged loans and securities continue to mature, and the
opportunities for investment in additional tax-advantaged enterprises become
less attractive due to certain provisions of the Tax Reform Act of 1986,
effective tax rates may increase in the years ahead.
Susquehanna recognizes deferred tax liabilities for taxable temporary
differences (the difference between financial and tax bases), and deferred tax
assets for deductible temporary differences. Management believes the deferred
tax assets recognized at December 31, 1999, will be realized in future tax
returns. While the ultimate realization of deferred tax assets is dependent on
future taxable income, taxable income in prior carry-back years and future
reversals of existing taxable temporary differences are sufficient to offset the
future reversals of deductible temporary differences without implementing any
tax strategies or assuming future taxable income.
FINANCIAL CONDITION
Investment Securities
Susquehanna follows SFAS 115 "Accounting for Certain Investments in Debt and
Equity Securities." This accounting pronouncement requires the segregation of
investment securities into three categories, each having a distinct accounting
treatment.
Securities identified as "held-to-maturity" continue to be carried at their
amortized cost, and, except for limited circumstances, may not be sold prior to
maturity. Securities identified as "available-for-sale" must be reported at
their market or "fair" value and the difference between that value and their
amortized cost recorded in the equity section, net of taxes. As a result, total
equity of Susquehanna was negatively impacted by $19.6 million as the
"unrealized gains or losses for available-for-sale securities net of taxes,"
changed from a positive $6.0 million at December 31, 1998, to a negative $13.6
million at December 31, 1999. Securities identified as "trading account
securities" are marked-to-market with the change recorded in the income
statement.
Presently, Susquehanna does not engage in trading activity, but does engage
in active portfolio management which requires the majority of its security
portfolio to be identified as "available-for-sale." While SFAS 115 requires
segregation into "held-to-maturity" and "available-for-sale" categories (see
Table 6), it does not change Susquehanna's policy concerning the purchase of
only high-quality securities. Strategies employed address liquidity, capital
adequacy, and net interest margin considerations which then determine the
assignment of purchases into these two categories. Table 7 illustrates the
maturities of these security portfolios and the weighted average yields based
upon amortized costs. Yields are shown on a tax equivalent basis assuming a 35%
federal income tax rate. At December 31, 1999, Susquehanna held no securities of
one issuer, other than U.S. Government obligations, where the aggregate book
value exceeded ten percent of stockholders' equity.
Loans
Table 8 presents the loans outstanding, by type of loan, for the past five
years. Loan growth for 1999 was 5%, or $148 million, over 1998. Loan growth in
1999 was realized in all major loan types, except construction loans. Consumer
loans increased $50 million, leases increased $45 million, mortgages increased
$27 million, and commercial loans grew by $26 million. As noted in Table 11,
Susquehanna's loan portfolio contains no significant concentrations other than
geographic locations and housing developments.
Susquehanna's banking subsidiaries have historically reported a significant
amount of loans secured by real estate, as depicted in Table 8. Many of these
loans have real estate collateral taken as additional security not related to
the acquisition of the real estate pledged. Open-end home equity loans amounted
to $96 million at year end and an additional $186 million was lent against
junior liens on residential properties. Senior liens on one- to four- family
residential properties totaled $875 million, and much of the
<TABLE>
<CAPTION>
TABLE 6--Carrying Value of Investment Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Available- Held-to- Available- Held-to- Available- Held-to-
Dollars in thousands for-Sale Maturity for-Sale Maturity for-Sale Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 16,683 $ 0 $ 67,955 $ 500 $121,633 $ 750
U.S. Government agencies 338,990 0 215,966 55,810 268,078 0
State and municipal 69,599 32,070 71,990 0 34,824 75,882
Other securities 17,682 0 35,392 25 72,672 50
Mortgage-backed securities 399,428 1,020 466,534 3,502 112,741 6,420
Equity securities 36,576 0 34,070 0 26,011 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $878,958 $ 33,090 $891,907 $ 59,837 $635,959 $ 83,102
====================================================================================================================================
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
TABLE 7--Investment Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Within After 1 Year but After 5 Years but After
Dollars in thousands 1 Year Within 5 Years Within 10 Years 10 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Available-for-Sale
U.S. Treasury
Fair value $ 13,425 $ 3,258 $ 16,683
Amortized cost 13,414 3,244 16,658
Yield 6.07% 5.92% 6.04%
U.S. Government agencies
Fair value $ 2,249 $328,277 $ 5,426 $ 3,038 $338,990
Amortized cost 2,253 335,181 5,567 3,040 346,041
Yield 5.45% 6.34% 7.45% 7.66% 6.36%
Corporate debt securities
Fair value $ 1,266 $ 14,448 $ 995 $ 973 $ 17,682
Amortized cost 1,264 14,590 980 961 17,795
Yield 6.78% 6.79% 7.05% 6.49% 6.79%
Mortgage-backed securities
Fair value $ 1,760 $ 3,511 $ 24,118 $370,039 $399,428
Amortized cost 1,769 3,539 24,525 384,484 414,317
Yield 6.38% 6.49% 6.59% 6.49% 6.50%
State and municipal securities
Fair value $ 2,943 $ 53,913 $ 7,383 $ 5,360 $ 69,599
Amortized cost 2,933 54,274 7,437 5,492 70,136
Yield 7.19% 6.58% 7.48% 7.45% 6.77%
Equity securities
Fair value $ 36,576
Amortized cost 34,588
Yield 7.20%
Held-to-Maturity
Mortgage-backed securities
Fair value $ 1,011 $ 1,011
Amortized cost 1,020 1,020
Yield 6.49% 6.49%
State and municipal securities
Fair value $ 14,229 $ 10,888 $ 2,331 $ 5,002 $ 32,450
Amortized cost 14,192 10,780 2,168 4,930 32,070
Yield 6.77% 7.42% 10.18% 7.87% 7.40%
Total Securities
Fair value $ 35,872 $415,306 $ 40,253 $384,412 $912,419
Amortized cost 35,825 422,628 40,677 398,907 932,625
Yield 6.44% 6.30% 6.97% 6.29% 6.10%
</TABLE>
$605 million in loans secured by non-farm, non-residential properties
represented collateralization of operating lines, or term loans that finance
equipment, inventory, or receivables. Loans secured by farmland totaled $39
million, while loans secured by multifamily residential properties totaled $49
million at December 31, 1999.
Table 9 represents the maturity of commercial, financial, and agricultural
loans as well as real estate construction loans. These loans with maturities
after 2000 consist of $150 million with fixed rate pricing and $150 million with
variable rate pricing.
Deposits
Susquehanna's deposit base is consumer-oriented, consisting of time deposits,
primarily certificates of deposit of various terms, interest-bearing demand
accounts, savings accounts, and demand deposits. The average amounts of deposits
by type are summarized in Table 12. Susquehanna does not rely upon time deposits
of $100,000 or more as a principal source of funds as they represent only 6% of
total deposits. Table 13 presents a breakdown by maturity of time deposits of
$100,000 or more as of December 31, 1999.
Market Risks
The types of market risk exposures generally faced by banking entities include
interest rate risk, liquidity risk, equity market price risk, foreign currency
risk, and com-
27
<PAGE>
<TABLE>
<CAPTION>
TABLE 8--Loan and Lease Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage Percentage
of Loans to of Loans to
Dollars in thousands Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 327,670 10.9% $ 301,385 10.6%
Real estate--construction 255,054 8.5 256,451 9.0
Real estate--mortgage 1,850,375 61.8 1,821,485 64.0
Consumer 395,566 13.2 346,180 12.2
Leases 166,487 5.6 121,684 4.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total $2,995,152 100.0% $2,847,185 100.0%
====================================================================================================================================
<CAPTION>
TABLE 9--Loan Maturity and Interest Sensitivity
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Under One One to Five Over Five
Maturity Year Years Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $141,654 $115,212 $ 70,804 $327,670
Real estate--construction 141,561 85,529 27,964 255,054
- ------------------------------------------------------------------------------------------------------------------------------------
$283,215 $200,741 $ 98,768 $582,724
====================================================================================================================================
Rate sensitivity of loans with maturities greater than 1 year:
Variable rate $149,957
Fixed rate 149,552
- ------------------------------------------------------------------------------------------------------------------------------------
$299,509
====================================================================================================================================
<CAPTION>
TABLE 10--Allocation of Allowance for Loan and Lease Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 5,773 $ 5,212 $ 5,184 $ 4,700 $ 5,122
Real estate--construction 6,018 5,937 5,994 5,810 2,480
Real estate--mortgage 8,000 8,014 7,698 7,632 7,151
Consumer 6,981 5,500 5,225 5,020 3,918
Leases 1,881 1,375 1,125 1,097 602
Unused commitments 2,937 2,366 2,558 1,656 2,063
Unallocated 5,643 7,754 8,697 9,789 10,228
- ------------------------------------------------------------------------------------------------------------------------------------
Total $37,233 $36,158 $36,481 $35,704 $31,564
====================================================================================================================================
</TABLE>
modity price risk. Due to the nature of its operations, only interest rate risk
and liquidity risk are significant to Susquehanna.
Liquidity and interest rate risk are related but distinctly different from
one another. The maintenance of adequate liquidity--the ability to meet the cash
requirements of its customers and other financial commitments--is a fundamental
aspect of Susquehanna's asset/liability management strategy. Susquehanna's
policy of diversifying its funding sources--purchased funds, repurchase
agreements, and deposit accounts--allows it to avoid undue concentration in any
single financial market and also to avoid heavy funding requirements within
short periods of time. At December 31, 1999, Susquehanna's subsidiary banks and
savings bank have an unused line of credit available to them from the Federal
Home Loan Bank for more than $600 million.
However, liquidity is not entirely dependent on increasing Susquehanna's
liability balances. Liquidity can also be generated from maturing or readily
marketable assets. The carrying value of investment securities maturing within
one year amounted to $36 million at December 31, 1999.
28
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of Loans to of Loans to of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 327,598 12.1% $ 272,442 11.0% $ 251,573 12.8%
231,120 8.5 230,212 9.3 190,895 9.7
1,761,763 64.9 1,629,559 65.6 1,232,352 62.6
329,876 12.2 296,613 11.9 269,450 13.7
64,422 2.3 54,545 2.2 22,791 1.2
- ------------------------------------------------------------------------------------------------------------------------------------
$2,714,779 100.0% $2,483,371 100.0% $1,967,061 100.0%
====================================================================================================================================
</TABLE>
TABLE 11--Loan Concentrations
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania, New Jersey, and Maryland. At December 31, 1999,
Susquehanna's portfolio included the following concentrations:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Total As a % of % Nonperforming
Dollars in thousands Permanent Construction All Other Amount Total Loans in each category
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Housing developments $ 70,260 $225,694 $13,283 $309,237 10.3 1.3
Office buildings and warehouses 133,003 14,138 1,867 149,008 5.0 0.0
Retailing 89,862 2,565 44,003 136,430 4.6 0.9
Agricultural 39,838 427 18,911 59,176 2.0 0.6
Manufacturing 29,779 0 24,621 54,400 1.8 8.4
Hotels/motels 34,328 2,559 10,926 47,813 1.6 0.0
</TABLE>
These maturing investments represent 4% of total investment securities. Cash and
due from banks amounted to $145 million and short-term investments amounted to
$18 million, which represent additional sources of liquidity.
Closely related to the management of liquidity is the management of interest
rate risk. Interest rate risk focuses on maintaining stability in the net
interest margin, an important factor in earnings growth. Interest rate
sensitivity is the matching or mismatching of the maturity and rate structure of
the interest-bearing assets and liabilities. It is the objective of management
to control the difference in the timing of the rate changes for these assets and
liabilities to preserve a satisfactory net interest margin. In doing so,
Susquehanna endeavors to maximize earnings in an environment of changing
interest rates. However, there is a lag in maintaining the desired matching
because the repricing of products does occur at varying time intervals.
Susquehanna employs a variety of methods to monitor interest rate risk. By
dividing the assets and liabilities into three groups--fixed rate, floating
rate, and those which reprice only at management's discretion--strategies are
developed which are designed to minimize exposure to interest rate fluctuations.
Management also utilizes gap analysis to evaluate rate sensitivity at a given
point in time.
Table 14 illustrates Susquehanna's estimated interest rate sensitivity and
periodic and cumulative gap positions as calculated at December 31, 1999 and
1998. These estimates include anticipated paydowns on mortgage-backed securities
and certain assumptions regarding core deposits. An institution with more assets
repricing than liabilities over a given time frame is considered asset
sensitive, and one with more liabilities repricing than assets is consid-
TABLE 12--Average Deposit Balances
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Demand deposits $ 421,055 $ 390,231 $ 351,311
Interest-bearing
demand deposits 966,906 900,160 805,808
Savings deposits 444,938 449,022 463,609
Time deposits 1,337,536 1,361,984 1,342,077
- --------------------------------------------------------------------------------
Total $3,170,435 $3,101,397 $2,962,805
================================================================================
TABLE 13--Deposit Maturity
- --------------------------------------------------------------------------------
Maturity of time deposits of $100 or more at December
31, 1999
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Three months or less $ 66,621
Over three months through six months 37,752
Over six months through twelve months 43,948
Over twelve months 41,705
- --------------------------------------------------------------------------------
Total $190,026
================================================================================
29
<PAGE>
<TABLE>
<CAPTION>
TABLE 14--Balance Sheet Gap Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1-3 3-12 1-3 Over 3
At December 31, 1999 months months years years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Short-term investments $ 17,689 $ 17,689
Investments 41,067 $ 96,746 $ 273,186 $ 501,049 912,048
Loans and leases, net of unearned income 1,827,043 449,271 389,370 329,468 2,995,152
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,885,799 $ 546,017 $ 662,556 $ 830,517 $3,924,889
====================================================================================================================================
Liabilities
Interest-bearing demand $ 612,453 $ 178,411 $ 82,455 $ 78,584 $ 951,903
Savings 315,759 42,101 31,871 31,281 421,012
Time 286,086 480,556 214,629 206,254 1,187,525
Time in denominations of $100 or more 72,317 83,847 17,268 16,594 190,026
Total borrowings 314,832 149,250 210,839 674,921
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,601,447 $ 784,915 $ 495,473 $ 543,552 $3,425,387
====================================================================================================================================
Interest Sensitivity Gap:
Periodic $ 284,352 $ (238,898) $ 167,083 $ 286,965
Cumulative 45,454 212,537 499,502
Cumulative gap as a percentage of
earning assets 7% 1% 5% 13%
- ------------------------------------------------------------------------------------------------------------------------------------
1-3 3-12 1-3 Over 3
At December 31, 1998 months months years years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 83,063 $ 83,063
Investments 67,423 $ 150,662 $ 228,949 $ 504,901 951,935
Loans and leases, net of unearned income 1,703,185 438,106 371,763 334,132 2,847,186
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,853,671 $ 588,768 $ 600,712 $ 839,033 $3,882,184
====================================================================================================================================
Liabilities
Interest-bearing demand $ 490,690 $ 104,776 $ 192,764 $ 209,488 $ 997,718
Savings 222,314 75,209 75,151 76,156 448,830
Time 579,240 581,047 4,744 4,741 1,169,772
Time in denominations of $100 or more 45,715 123,421 1,825 200 171,161
Total borrowings 141,448 11,810 17,891 342,028 513,177
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,479,407 $ 896,263 $ 292,375 $ 632,613 $3,300,658
====================================================================================================================================
Interest Sensitivity Gap:
Periodic $ 374,264 $ (307,495) $ 308,337 $ 206,420
Cumulative 66,769 375,106 581,526
Cumulative gap as a percentage of
earning assets 10% 2% 10% 15%
</TABLE>
ered liability sensitive. An asset sensitive institution will generally benefit
from rising rates, and a liability sensitive institution will generally benefit
from declining rates. Sus-quehanna currently has a positive gap position
(asset-sensitive) at one year and, therefore, would be negatively affected by a
decline in interest rates. See Table 16 for the estimated net interest income
effect of Susquehanna's positive gap position.
In addition to periodic gap reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in interest
rates, management also utilizes a quarterly report prepared for Susquehanna by
independent third-party consultants based on information provided by Susquehanna
which measures Susquehanna's exposure to interest rate risk. The model
calculates the income effect and the present value of assets, liabilities, and
equity at current interest rates, and at hypothetical higher and lower interest
rates at one percent intervals. The income effect and present value of each
major category of financial instrument is calculated by the model using
estimated cash flows based on prepayments, early withdrawals, and weighted
average contractual rates and
30
<PAGE>
<TABLE>
<CAPTION>
TABLE 15--Balance Sheet Shock Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Base
Dollars in thousands Present
At December 31, 1999 -2% -1% Value 1% 2%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 144,562 $ 144,562 $ 144,548 $ 144,534 $ 144,534
Short-term investments 17,691 17,689 17,689 17,689 17,687
Investment securities:
Held-to-maturity 36,598 34,984 33,461 32,027 30,674
Available-for-sale 932,544 906,389 878,958 852,306 824,614
Loans net of unearned income 2,969,042 2,945,163 2,923,709 2,906,701 2,902,792
Other assets 275,980 275,980 275,980 275,980 275,980
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 4,376,417 $ 4,324,767 $ 4,274,345 $ 4,229,237 $ 4,196,281
====================================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 415,513 $ 411,840 $ 408,410 $ 405,114 $ 403,865
Interest-bearing 2,787,660 2,761,592 2,736,328 2,712,028 2,693,073
Total borrowings 716,559 693,893 672,786 653,110 634,740
Other liabilities 70,447 61,282 50,776 40,413 30,242
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,990,179 3,928,607 3,868,300 3,810,665 3,761,920
Total economic equity 386,238 396,160 406,045 418,572 434,361
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 4,376,417 $ 4,324,767 $ 4,274,345 $ 4,229,237 $ 4,196,281
====================================================================================================================================
Economic equity ratio 9% 9% 9% 10% 10%
Value at risk $ (19,807) $ (9,885) -- $ 12,527 $ 28,316
% Value at risk -5% -2% -- 3% 7%
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Base
Present
At December 31, 1998 -2% -1% Value 1% 2%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 117,450 $ 117,450 $ 117,439 $ 117,428 $ 117,428
Short-term investments 83,071 83,063 83,063 83,063 83,055
Investment securities:
Held-to-maturity 66,500 63,687 61,020 58,512 56,145
Available-for-sale 942,778 919,441 892,811 867,068 841,676
Loans net of unearned income 2,939,204 2,918,314 2,894,817 2,871,542 2,849,045
Other assets 211,752 211,752 211,752 211,752 211,752
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 4,360,755 $ 4,313,707 $ 4,260,902 $ 4,209,365 $ 4,159,101
====================================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 415,850 $ 410,333 $ 405,183 $ 400,274 $ 397,829
Interest-bearing 2,850,564 2,822,582 2,795,357 2,779,230 2,766,489
Total borrowings 570,331 546,138 523,610 502,606 482,990
Other liabilities 60,892 52,969 43,889 34,931 26,140
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,897,637 3,832,022 3,768,039 3,717,041 3,673,448
Total economic equity 463,118 481,685 492,863 492,324 485,653
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 4,360,755 $ 4,313,707 $ 4,260,902 $ 4,209,365 $ 4,159,101
====================================================================================================================================
Economic equity ratio 11% 11% 12% 12% 12%
Value at risk $ (29,745) $ (11,178) -- $ (539) $ (7,210)
% Value at risk -6% -2% -- 0% -1%
</TABLE>
31
<PAGE>
terms. For present value calculations, the model also considers discount rates
for similar financial instruments. The resulting present value of longer-term
fixed-rate financial instruments are more sensitive to change in a higher or
lower market interest rate scenario, while adjustable-rate financial instruments
largely reflect only a change in present value representing the difference
between the contractual and discounted rates until the next interest rate
repricing date.
A substantial portion of Susquehanna's loans and mortgage-backed securities
are residential mortgage loans containing significant imbedded options which
permit the borrower to prepay the principal balance of the loan prior to
maturity ("prepayments") without penalty. A loan's propensity for prepayment is
dependent upon a number of factors, including, the current interest rate, the
interest rate on the loan, the financial ability of the borrower to refinance,
the economic benefit to be obtained from refinanc-ing, availability of
refinancing at attractive terms, as well as economic and other factors in
specific geographic areas which affect the sales and price levels of residential
property. In a changing interest rate environment, prepayments may increase or
decrease on fixed- and adjustable-rate loans depending on the current relative
levels and expectations of future short- and long-term interest rates. Since a
significant portion of Susquehanna's loans are variable rate loans, prepayments
on such loans generally increase when long-term interest rates fall or are at
historically low levels relative to short-term interest rates, making fixed-rate
loans more desirable.
Investment securities, other than those with early call provisions, generally
do not have significant imbedded options and repay pursuant to specific terms
until maturity. While savings and checking deposits generally may be withdrawn
upon the customer's request without prior notice, a continuing relationship with
customers resulting in
<TABLE>
<CAPTION>
TABLE 16--Net Interest Income Shock Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Base
Dollars in thousands Present
At December 31, 1999 -2% -1% Value 1% 2%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Short-term investments $ 982 $ 1,290 $ 1,597 $ 1,904 $ 2,212
Investments 56,098 57,054 57,786 58,482 59,045
Loans and leases 208,505 234,103 260,144 284,142 310,029
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 265,585 292,447 319,527 344,528 371,286
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand and savings 16,470 27,269 37,910 48,398 58,735
Time 64,589 69,607 74,599 79,584 85,059
Total borrowings 36,783 42,611 48,519 54,502 60,572
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 117,842 139,487 161,028 182,484 204,366
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 147,743 $ 152,960 $ 158,499 $ 162,044 $ 166,920
====================================================================================================================================
Net interest income at risk $ (10,756) $ (5,539) -- $ 3,545 $ 8,421
% Net interest income at risk -7% -3% -- 2% 5%
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Base
Present
At December 31, 1998 -2% -1% Value 1% 2%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Short-term investments $ 1,954 $ 2,635 $ 3,291 $ 3,930 $ 4,554
Investments 59,642 61,352 62,571 63,758 64,913
Loans and leases 214,268 231,222 247,655 263,985 280,201
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 275,864 295,209 313,517 331,673 349,668
Interest expense:
Interest-bearing demand and savings 26,492 34,797 42,049 49,136 56,946
Time 55,879 63,703 71,449 79,149 86,829
Total borrowings 23,197 24,339 25,481 26,616 27,758
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 105,568 122,839 138,979 154,901 171,533
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 170,296 $ 172,370 $ 174,538 $ 176,772 $ 178,135
====================================================================================================================================
Net interest income at risk $ (4,242) $ (2,168) -- $ 2,234 $ 3,597
% Net interest income at risk -2% -1% -- 1% 2%
</TABLE>
32
<PAGE>
future deposits and withdrawals is generally predictable, resulting in a
dependable and uninterruptible source of funds. Time deposits generally have
early withdrawal penalties, while term FHLB borrowings and subordinated notes
have prepayment penalties which discourage customer withdrawal of time deposits
and prepayment of FHLB borrowings and subordinated notes prior to maturity.
Susquehanna's loans and mortgage-backed securities are primarily indexed to
the national interest indices. When such loans and mortgage-backed securities
are funded by interest-bearing liabilities which are determined by other
indices, primarily deposits and FHLB borrowings, a changing interest rate
environment may result in different levels of changes in the different indices,
resulting in disproportionate changes in the value of, and the net earnings
generated from, Susquehanna's financial instruments. Each index is unique and is
influenced by different external factors; therefore, the historical
relationships in various indices may not be indicative of the actual change
which may result in a changing interest rate environment.
Tables 15 and 16 reflect the estimated income effect and present value of
assets, liabilities, and equity calculated using certain assumptions determined
by Susquehanna as of December 31, 1999 and 1998, at current interest rates and
at hypothetical higher and lower interest rates of one and two percent. As noted
in Table 15, the economic equity at risk is only five percent at an interest
rate change of minus two percent, while Table 16 discloses that net interest
income at risk is seven percent at an interest rate change of minus two percent.
Capital Adequacy
Risk-based capital ratios focus upon credit risk. Assets and certain off-balance
sheet items are segmented into one of four broad-risk categories and weighted
according to the relative percentage of credit risk assigned by the regulatory
authorities. Off-balance sheet instruments are converted into a balance sheet
credit equivalent before being assigned to one of the four risk-weighted
categories. To supplement the risk-based capital ratios, the regulators issued a
minimum leverage ratio guideline (Tier 1 capital as a percentage of average
assets less excludable intangibles).
Capital elements are segmented into two tiers. Tier 1 capital represents
shareholders' equity reduced by excludable intangibles, while total capital
represents Tier 1 capital plus certain allowable long-term debt, the portion of
the allowance for loan losses equal to 1.25% of risk-adjusted assets, and 45% of
the unrealized gain on equity securities.
The maintenance of a strong capital base at both the parent company level as
well as at each bank affiliate is an important aspect of Susquehanna's
philosophy. Table 17 illustrates these capital ratios for each bank and savings
bank subsidiary and Susquehanna on a consolidated basis. Susquehanna and each of
its banking and savings bank subsidiaries have leverage and risk-weighted ratios
well in excess of regulatory minimums, and each entity is considered "well
capitalized" under regulatory guidelines.
Impact of the Year 2000
Issue The "Year 2000 Issue" dealt with computer programs having been written
using two digits rather than four to define the applicable year (i.e., date-
sensitive software or date-sensitive hardware recognizing a date using "00" as
the Year 1900 rather than the Year 2000.
Based on system assessments, Susquehanna determined that it was necessary to
modify or replace portions of its software and hardware so that its computer
systems would properly utilize dates beyond December 31, 1999. Susque-hanna has
determined that as a result of its modifications to existing software and
hardware and conversions to new
TABLE 17--Capital Adequacy
- --------------------------------------------------------------------------------
At December 31, 1999
- --------------------------------------------------------------------------------
Tier I Capital Total Capita Leverage
Ratio (A) Ratio (B) Ratio (C)
- --------------------------------------------------------------------------------
Required Ratio 4.00% 8.00% 4.00%
Citizens National Bank of Southern Pennsylvania 12.23 13.25 8.14
Equity Bank, N.A. 10.78 12.03 7.57
Farmers First Bank 12.28 13.53 10.75
Farmers & Merchants Bank and Trust 11.08 11.74 7.76
First American National Bank of Pennsylvania 18.22 19.14 12.96
First Capitol Bank 10.96 12.21 8.74
First National Trust Bank 14.42 15.68 8.37
Founders' Bank 11.18 12.43 7.97
Susquehanna Bank 10.30 14.86 6.76
Williamsport National Bank 17.51 18.77 12.50
Total Susquehanna 12.70% 15.56% 9.11%
================================================================================
(A) Tier I capital divided by year-end risk-adjusted assets, as defined by the
risk-based capital guidelines.
(B) Total capital divided by year-end risk-adjusted assets.
(C) Tier I capital divided by average total assets less disallowed intangible
assets.
33
<PAGE>
software and hardware, the Year 2000 Issue has been successfully mitigated.
The total cost of the Year 2000 and systems conversion projects was
approximately $12.0 million. Of the total project's cost, $7.8 million was
attributable to the purchase of new software and hardware which was capitalized.
The remaining $4.2 million was expensed as incurred during 1998 ($2.7 million)
and 1999 ($1.5 million).
Summary of 1998 Compared to 1997
Several significant transactions occurred which have affected the comparability
of Susquehanna's financial performance for the years ended December 31, 1998 and
1997. These transactions are described in the following paragraphs.
On February 28, 1997, Susquehanna completed the acquisition of ATCORP, Inc.
("AI"), a New Jersey bank holding company with $210 million in assets and $186
million in deposits at the acquisition date. Susquehanna issued one share (prior
to Susquehanna's stock splits) of common stock to the shareholders of AI for
each of the 771,750 outstanding common shares of AI. The transaction was
accounted for under the pooling-of-interests method of accounting; accordingly,
the consolidated financial statements have been restated to include the
consolidated accounts of AI for all periods presented.
Also on February 28, 1997, Susquehanna completed the acquisition of Farmers
Banc Corp ("FBC"), a New Jersey bank holding company with $88 million in assets
and $77 million of deposits at the acquisition date. Susquehanna issued 692,398
shares of common stock (prior to Susquehanna's stock splits) to the shareholders
of FBC based on an exchange ratio of 2.281 shares (prior to Susquehanna's stock
splits) of Susquehanna common stock for each outstanding share of FBC. The
transaction was accounted for under the pooling-of-interests method of
accounting; accordingly, the consolidated financial statements have been
restated to include the consolidated accounts of FBC for all periods presented.
On May 1, 1997, Susquehanna combined its three savings banks located in and
around Baltimore, Md., into one savings bank named Susquehanna Bank. As a result
of this combination, there was a reduction in the work force of Susquehanna Bank
with related severance packages. Consequently, Susquehanna recorded pre-tax
severance of $1.3 million in 1997 related to these reductions. The annual
pre-tax cost savings related to these reductions approximates $1.3 million.
On July 31, 1997, Susquehanna acquired Founders' Bank ("Founders'"), Bryn
Mawr, Pa., through an exchange of 560,353 shares (prior to the 1998 stock split)
of Susque-hanna common stock to the shareholders of Founders' based on an
exchange ratio of 0.566 shares of Susquehanna common stock for each share of
Founders' outstanding capital stock. The transaction was accounted for under the
pooling-of-interests method of accounting. At the time of the acquisition,
Founders' reported total assets of $103 million. Results of operations for
Founders' prior to the acquisition were not significant to Susquehanna's
consolidated financial statements, and, accordingly, Susquehan-na's prior period
consolidated financial statements have not been restated for Founders'.
On December 16, 1998, Susquehanna acquired Cardinal Bancorp, Inc., a
Pennsylvania bank holding company with $138 million in assets and $114 million
in deposits at the acquisition date. Susquehanna issued 2,027,296 shares of its
common stock to the shareholders of Cardinal, based upon an exchange ratio of
2.048 shares of Susquehanna common stock for each outstanding share of Cardinal.
The transaction was accounted for under the pooling-of-interests method of
accounting; accordingly, the consolidated financial statements have been
restated to include the consolidated accounts of Cardinal for all periods
presented.
Susquehanna's net income for the year ended December 31, 1998, increased to
$45.2 million, or 6%, above 1997 net income of $42.7 million. Susquehanna's
earnings performance was affected by significant growth in non-interest income
resulting primarily from an increase in mortgage-banking activities and the
purchase of certain insurance-related products, such as bank-owned life
insurance ("BOLI"). Non-interest income increased $6.5 million, or 27%, in 1998
over 1997.
Diluted earnings per common share were $1.21 in 1998 compared to $1.17 in
1997. ROA and ROE decreased from 1.18% and 12.13%, respectively, in 1997 to
1.13% and 11.62%, respectively, in 1998.
During 1995 and 1996, Susquehanna acquired two Maryland savings banks under
the purchase method of accounting. These purchase transactions created an
intangible asset, goodwill, of $34 million, which significantly affects
Susquehanna's earnings and financial ratios.
Goodwill amortization is a non-cash charge to earnings. For 1998, tangible net
income, earnings per share, ROA and ROE were $47.4 million, $1.29, 1.19% and
13.41%, respectively, compared to actual net income, basic earnings per share,
ROA and ROE of $45.2 million, $1.22, 1.13% and 11.62%, respectively. Tangible
net income, earnings per share, ROA and ROE for 1997 were $45.7 million, $1.26,
1.26% and 15.46%, respectively. Tangible net income is actual net income
increased by the tax-effected amortization of those intangible assets which are
deducted from equity in determining Tier 1 capital.
34
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The following consolidated financial statements of Susquehanna are
submitted herewith:
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C>
Consolidated Balance Sheets at December 31, 1999 and 1998................... 36
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997.................................. 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997.................................. 38
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998, and 1997.............. 39
Notes to Consolidated Financial Statements.................................. 40
Report of Independent Accountants........................................... 56
Summary of Quarterly Financial Data......................................... 57
</TABLE>
35
<PAGE>
Consolidated Balance Sheets
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 144,548 $ 113,210
Short-term investments 17,689 83,063
Investment securities available-for-sale 878,958 891,907
Investment securities held-to-maturity
(Fair values of $33,461 and $61,019) 33,090 59,837
Loans and leases, net of unearned income 2,995,152 2,847,185
Less: Allowance for loan and lease losses 37,233 36,158
- --------------------------------------------------------------------------------
Net loans 2,957,919 2,811,027
- --------------------------------------------------------------------------------
Premises & equipment (net) 54,404 55,566
Accrued income receivable 23,763 22,774
Bank-owned life insurance 108,105 53,736
Other assets 92,130 84,906
- --------------------------------------------------------------------------------
Total assets $4,310,606 $4,176,026
================================================================================
Liabilities
Deposits:
Noninterest-bearing $ 430,054 $ 433,133
Interest-bearing 2,750,466 2,783,746
- --------------------------------------------------------------------------------
Total deposits 3,180,520 3,216,879
- --------------------------------------------------------------------------------
Short-term borrowings 207,507 104,531
FHLB borrowings 372,414 313,636
Long-term debt 95,000 95,010
Other liabilities 50,775 43,889
- --------------------------------------------------------------------------------
Total liabilities 3,906,216 3,773,945
- --------------------------------------------------------------------------------
Commitments and contingencies (Note 17)
Stockholders' Equity
Preferred stock, $1.80 series A cumulative
convertible (no par value) authorized
5,000,000 shares; issued and out-
standing--none -- --
Common stock ($2.00 par value), authorized
100,000,000 shares; issued: 37,034,094
and 36,967,572 at December 31, 1999 and
1998, respectively 74,068 73,935
Surplus 62,589 61,882
Retained earnings 281,522 261,043
Accumulated other comprehensive income net
of taxes of ($6,961) and $3,225 at
December 31, 1999 and 1998, respectively (13,616) 6,004
Less: Treasury stock (11,641 and 65,050
common shares at cost at December 31, 1999
and 1998, respectively) 173 783
- --------------------------------------------------------------------------------
Total stockholders' equity 404,390 402,081
- --------------------------------------------------------------------------------
Total liabilities & stockholders' equity $4,310,606 $4,176,026
================================================================================
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Consolidated Statements of Income
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Dollars in thousands, except per share
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Interest Income
Interest and fees on loans and leases $241,633 $242,300 $234,687
Interest on investment securities 55,717 54,253 43,193
Interest on short-term investments 2,420 4,289 4,131
- --------------------------------------------------------------------------------
Total interest income 299,770 300,842 282,011
- --------------------------------------------------------------------------------
Interest Expense
Interest on deposits 106,013 114,704 110,850
Interest on short-term borrowings 8,574 5,477 4,778
Interest on long-term debt 24,261 22,532 11,224
- --------------------------------------------------------------------------------
Total interest expense 138,848 142,713 126,852
- --------------------------------------------------------------------------------
Net interest income 160,922 158,129 155,159
Provision for loan and lease losses 7,200 5,333 4,731
- --------------------------------------------------------------------------------
Net interest income after provision for
loan and lease losses 153,722 152,796 150,428
- --------------------------------------------------------------------------------
Other Income
Service charges on deposit accounts 10,054 8,570 7,186
Other service charges, commissions, and
fees 4,419 4,184 3,742
Income from fiduciary-related activities 4,028 3,958 3,675
Gain on sale of mortgages 3,427 4,923 2,820
Income from bank-owned life insurance 4,528 3,374 1,122
Other income 12,545 6,104 5,840
Investment security gains 978 75 266
- --------------------------------------------------------------------------------
Total other income 39,979 31,188 24,651
- --------------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 60,545 58,994 61,217
Net occupancy expense 9,010 8,958 8,281
Furniture and equipment expense 7,790 7,452 6,008
Amortization of intangible assets 3,476 4,532 4,293
Restructuring charge 7,412 0 0
Other expenses 43,649 38,128 32,964
- --------------------------------------------------------------------------------
Total other expenses 131,882 118,064 112,763
- --------------------------------------------------------------------------------
Income before income taxes 61,819 65,920 62,316
Provision for income taxes 18,422 20,757 19,582
- --------------------------------------------------------------------------------
Net Income $ 43,397 $ 45,163 $ 42,734
================================================================================
Per share information:
Basic earnings $ 1.17 $ 1.22 $ 1.18
Diluted earnings 1.17 1.21 1.17
Cash dividends 0.62 0.57 0.55
Average shares outstanding:
Basic 36,960 36,868 36,296
Diluted 37,137 37,188 36,551
================================================================================
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
Consolidated Statements of Cash Flows
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 43,397 $ 45,163 $ 42,734
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and accretion 11,628 9,492 11,338
Provision for loan and lease losses 7,200 5,333 4,731
Gain on sale of branch offices (3,352) 0 0
Gain on securities transactions (978) (75) (266)
Gain on sale of loans (3,427) (4,923) (2,820)
Gain/(loss) on sale of other real estate
owned 6 (274) (327)
Mortgage loans originated for resale (187,017) (282,073) (155,138)
Sale of mortgage loans originated for resale 203,158 273,707 150,932
(Increase)/decrease in accrued interest
receivable (989) 691 (695)
Increase in accrued interest payable 734 1,255 2,268
Increase/(decrease) in accrued expenses and
taxes payable 2,635 (2,018) (1,683)
Other, net 9,226 2,073 4,181
- --------------------------------------------------------------------------------------
Net cash provided by operating activities 82,221 48,351 55,255
- --------------------------------------------------------------------------------------
Investing Activities
Proceeds from the sale of available-for-
sale securities 47,719 37,933 83,471
Proceeds from the maturity of investment
securities 264,783 360,343 257,675
Purchase of available-for-sale securities (302,763) (625,038) (310,933)
Purchase of held-to-maturity securities 0 0 (1,373)
Net increase in loans and leases (174,148) (133,109) (156,260)
Capital expenditures (5,400) (7,722) (7,226)
Net cash received on sale of branch deposits (22,381) 0 0
Purchase of insurance products (50,000) (9,438) (50,000)
Net cash and cash equivalents acquired in
acquisition 0 0 3,579
Other, net 0 0 137
- --------------------------------------------------------------------------------------
Net cash used for investing activities (242,190) (377,031) (180,930)
- --------------------------------------------------------------------------------------
Financing Activities
Net increase/(decrease) in deposits (13,978) 175,413 18,589
Net increase in short-term and FHLB
borrowings 161,754 205,014 60,107
Proceeds from issuance of long-term debt 0 10,000 0
Repayment of long-term debt (10) (5,018) (17)
Proceeds from issuance of common stock 1,372 1,675 1,410
Cash paid for treasury stock (287) (742) 0
Dividends paid (22,918) (20,132) (18,371)
Other, net 0 26 (43)
- --------------------------------------------------------------------------------------
Net cash provided by financing activities 125,933 366,236 61,675
- --------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash
equivalents (34,036) 37,556 (64,000)
Cash and cash equivalents at January 1 196,273 158,717 222,717
- --------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 162,237 $ 196,273 $ 158,717
======================================================================================
Cash and cash equivalents:
Cash and due from banks $ 144,548 $ 113,210 $ 106,913
Short-term investments 17,689 83,063 51,804
- --------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 162,237 $ 196,273 $ 158,717
======================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
38
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998, and 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Dollars in thousands, Common Retained Comprehensive Treasury Total
except per share data Stock Surplus Earnings Income Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 32,678 $ 92,647 $211,327 $ 643 $ (255) $337,040
Net income 42,734 42,734
Change in unrealized gain on securities, net of
taxes of $2,021 and reclassification
adjustment of $266 3,376 3,376
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 42,734 3,376 46,110
Transfer of retained earnings 14 (14) 0
Stock issued under employee benefit plans 411 922 1,333
Effect of three-for-two stock split 16,206 (16,167) 39
Acquisition of Founders' Bank 1,121 6,497 336 (194) 7,760
Cash paid for fractional shares of
acquired entities (5) (5)
Cash dividends declared:
By pooled entities (672) (672)
Per common share of $0.55 (17,699) (17,699)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 50,416 83,908 236,012 3,825 (255) 373,906
Net income 45,163 45,163
Change in unrealized gain on securities, net of
taxes of $954 and reclassification
adjustment of $75 2,179 2,179
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 45,163 2,179 47,342
Stock issued under employee benefit plans 12 325 214 551
Effect of three-for-two stock split 23,507 (22,346) 1,161
Purchase of treasury stock (742) (742)
Cash paid for fractional shares of acquired entities (5) (5)
Cash dividends declared:
By pooled entities (847) (847)
Per common share of $0.57 (19,285) (19,285)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 73,935 61,882 261,043 6,004 (783) 402,081
Net income 43,397 43,397
Change in unrealized loss on securities, net of
taxes of $(10,186) and reclassification
adjustment of $978 (19,620) (19,620)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 43,397 (19,620) 23,777
Stock issued under employee benefit plans (includes
related tax benefit of $365) 133 707 897 1,737
Purchase of treasury stock (287) (287)
Cash dividends declared:
Per common share of $0.62 (22,918) (22,918)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 74,068 $ 62,589 $281,522 $(13,616) $ (173) $404,390
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Notes to Consolidated Financial Statements
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in thousands, except as noted and per share data)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Susquehanna Bancshares, Inc. and
subsidiaries ("Susquehanna") conform to generally accepted accounting principles
and to general practices in the banking industry. The more significant policies
follow:
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of Susquehanna and its wholly-owned subsidiaries: Farmers
First Bank and subsidiaries ("Farmers"), Farmers & Merchants Bank and Trust and
subsidiaries ("F&M"), First American National Bank of Pennsylvania ("FANB"),
First Capitol Bank ("First Capitol"), First National Trust Bank ("First
National"), Williamsport National Bank ("Williamsport"), Citizens National Bank
of Southern Pennsylvania ("Citizens"), Susquehanna Bancshares East, Inc. and
subsidiaries ("Susquehanna East"), Susquehanna Bancshares South, Inc. and
subsidiaries ("Susquehanna South"), Susque-Bancshares Life Insurance Co.
("SBLIC"), and Susque-Bancshares Leasing Company, Inc. and subsidiary ("SBLC"),
as of and for the years ended December 31, 1999, 1998, and 1997. All material
intercompany transactions have been eliminated.
Income and expenses are recorded on the accrual basis of accounting except
for trust and certain other fees which are recorded principally on the cash
basis. This does not materially affect the results of operations or financial
position of Susquehanna.
Nature of Operations. Susquehanna is a multi-financial institution which
operates nine commercial banks and one savings bank based upon the sound
principles of super-community banking. These subsidiaries provide financial
services from 140 branches located in central and southeastern Pennsylvania,
Maryland, and southern New Jersey. In addition, Susquehanna operates two
non-bank subsidiaries that provide leasing and credit insurance services.
Susquehanna's primary source of revenue is derived from loans to customers, who
are predominately small- and middle-market businesses and middle-income
individuals.
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
materially from those estimates.
Purchase Method of Accounting. Net assets of companies acquired in purchase
transactions are recorded at the fair value at the date of acquisition. Core
deposit and other intangible assets are amortized on a straight-line basis over
10 years. The excess of purchase price over the fair value of net assets
acquired (goodwill) is amortized on a straight-line basis generally over 15
years. The unamortized amount of goodwill was $31,106 and $34,101 at December
31, 1999 and 1998, respectively.
Consolidated Statements of Income. Included in the consolidated Statements of
Income is a $7.4 million restructuring charge. The restructuring plan was
approved by Susquehanna's Board of Directors and communicated to employees in
the fourth quarter of 1999. The following summarizes the components of that
charge as accrued in the fourth quarter of 1999.
- --------------------------------------------------------------------------------
Expense
- --------------------------------------------------------------------------------
Employee severance benefits $3,170
Professional fees related to reduction in work force 2,850
Employment services for terminated employees 660
Asset disposals/write-downs 732
- --------------------------------------------------------------------------------
Total restructuring costs $7,412
================================================================================
Consolidated Statement of Cash Flows. Interest paid on deposits, short-term
borrowings, and long-term debt was $138,114 in 1999, $141,733 in 1998, and
$124,558 in 1997. Income taxes paid were $16,409 in 1999, $19,805 in 1998, and
$17,286 in 1997. Amounts transferred to other real estate owned were $7,342 in
1999, $8,408 in 1998, and $5,516 in 1997.
On July 30, 1997, Susquehanna acquired Founders' Bank, Bryn Mawr, Pa., using
the pooling-of-interests method. Results of operations for Founders' prior to
the acquisition were not material to Susquehanna's consolidated results and,
therefore, prior periods were not restated.
Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash
equivalents includes cash due from banks, and short-term investments. Short-term
investments consist of interest-bearing deposits in other banks, federal funds
sold, and money market funds with an original maturity of three months or less.
Investment Securities. Susquehanna classifies debt and equity securities as
either "held-to-maturity" or "available-for-sale." Susquehanna does not have any
securities classified as "trading" at December 31, 1999, or 1998. Investments
for which management has the intent, and Susquehanna has the ability, to hold
to maturity are carried at the lower of cost or market adjusted for amortization
of premium and accretion of discount. Amortization and accre-
40
<PAGE>
tion are calculated principally on the interest method. All other securities are
classified as "available-for-sale" and reported at fair value. Changes in
unrealized gains and losses for "available-for-sale" securities are recorded as
a component of shareholders' equity.
Securities classified as "available-for-sale" include investments management
intends to use as part of its asset/ liability management strategy, and that may
be sold in response to changes in interest rates, resultant prepayment risk, and
other factors. Realized gains and losses on the sale of securities are
recognized using the specific identification method and are included in Other
Income in the Consolidated Statements of Income.
Allowance for Loan and Lease Losses. The loan and lease loss provision charged
to operating expense reflects the amount deemed appropriate by management to
produce an adequate reserve to meet the present and foreseeable risk
characteristics of the loan and lease portfolio. Loan and lease losses are
charged directly against the allowance for loan and lease losses, and recoveries
on previously charged-off loans and leases are added to the allowance.
Susquehanna considers a loan to be impaired, based upon current information
and events, if it is probable that Susquehanna will be unable to collect the
scheduled payments of principal or interest according to the contractual terms
of the loan agreement. Larger groups of small-balance loans, such as residential
mortgage and installment loans, are collectively evaluated for impairment. Only
commercial loans exceeding $100 are individually evaluated for impairment. An
insignificant delay or shortfall in the amounts of payments, when considered
independent of other factors, would not cause a loan to be rendered impaired.
Insignificant delays or shortfalls may include, depending on specific facts and
circumstances, those that are associated with temporary operational downturns or
seasonal delays.
Management performs periodic reviews of Susquehanna's loan portfolio to
identify impaired loans. The measurement of impaired loans is based on the
present value of expected future cash flows discounted at the historical
effective interest rate, except that all collateral-dependent loans are measured
for impairment based on the fair value of the collateral.
Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is considered
probable. When an impaired loan or portion of an impaired loan is determined to
be uncollectible, the portion deemed uncollectible is charged against the
related valuation allowance, and subsequent recoveries, if any, are credited to
the valuation allowance.
Depreciable Assets. Buildings, leasehold improvements, and furniture and
equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is computed primarily by the straight-line method over the
estimated useful lives of the related property as follows: buildings, 40 years;
and furniture and equipment, 3 to 20 years. Leasehold improvements are amortized
over the shorter of the lease term or 10 to 20 years. Maintenance and normal
repairs are charged to operations as incurred, while additions and improvements
to buildings and furniture and equipment are capitalized. Gain or loss on
disposition is reflected in operations.
Long-lived assets and certain intangible assets are evaluated for impairment
by management on an ongoing basis. An impairment may occur whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
Other Real Estate. Other real estate property acquired through foreclosure or
other means is recorded at the lower of its carrying value, or fair value, of
the property at the transfer date less estimated selling costs. Costs to
maintain other real estate are expensed as incurred.
Interest Income on Loans and Leases. Interest income on commercial, consumer,
and mortgage loans is recorded on the interest method. Interest income on
installment loans is recorded on the sum-of-the-years digits and the actuarial
methods. Loan fees and certain direct loan origination costs are being deferred
and the net amount amortized as an adjustment to the related loan yield on the
interest method, generally over the contractual life of the related loans.
Nonaccrual loans are those on which the accrual of interest has ceased and
where all previously accrued and unpaid interest is reversed. Loans, other than
consumer loans, are placed on nonaccrual status when principal or interest is
past due 90 days or more and the loan is not well collateralized and in the
process of collection, or immediately, if, in the opinion of management, full
collection is doubtful. Interest accrued but not collected as of the date of
placement on nonaccrual status is reversed and charged against current income.
Susquehanna does not accrue interest on impaired loans. While a loan is
considered impaired or on nonaccrual status, subsequent cash payments received
either are applied to the outstanding principal balance or recorded as interest
income, depending upon management's assessment of the ultimate collectibility of
principal and interest. In any case, the deferral or non-recognition of interest
does not constitute forgiveness of the borrower's obligation. Consumer loans are
recorded in accordance with the Uniform Retail Classification regulation.
Generally, the regulation requires that consumer loans are charged off to the
allowance for loan losses when they become 120 days or more past due.
Federal Income Taxes. Deferred income taxes reflect the temporary tax
consequences on future years of differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the difference is expected to reverse.
Earnings Per Share. All share, per share, and option data in these financial
statements have been adjusted to give effect to the three-for-two stock splits
of 1998 and 1997.
41
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
Common Shares Outstanding
- --------------------------------------------------------------------------------
Balance, January 1, 1997 15,922,939
Stock issued under employee benefit plans 24,997
Exercise of stock-warrants of pooled entity 36,008
Effect of three-for-two stock split 7,982,333
Acquistion of Founders' Bank 560,354
- --------------------------------------------------------------------------------
Balance, December 31, 1997 24,526,631
Stock issued under employee benefit plans 27,167
Exercise of stock-warrants of pooled entity 76,814
Effect of three-for-two stock split 12,304,910
Purchase of treasury stock (33,000)
- --------------------------------------------------------------------------------
Balance, December 31, 1998 36,902,522
Stock issued under employee benefit plans 134,931
Purchase of treasury stock (15,000)
Balance, December 31, 1999 37,022,453
================================================================================
Recent Accounting Pronouncements. During 1998, Susquehanna adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130), which established standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains, and losses).
SFAS 130 requires all items required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Comprehensive income includes a reclassification adjustment for net realized
investment gains included in net income of $978, $75, and $266 for the years
ended December 31, 1999, 1998, and 1997, respectively. The new standard requires
only additional disclosures in the consolidated financial statements; it does
not affect Susquehanna's financial position or results of operations.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS 131"), in 1997. SFAS 131 establishes standards for
disclosures about products, services, geographic areas, and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Management has reviewed SFAS 131 and determined that Susquehanna has one
qualifying segment and therefore no additional disclosure is required.
During 1998, Susquehanna also adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" (SFAS No. 132), which revises employers' disclosures
about pensions and other Post-retirement benefit plans. It standardizes the
disclosure requirements for pensions and other Post-retirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were under previous pronouncements.
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." SFAS 133 establishes standards for recording derivative
financial instruments on the balance sheet at their fair value. This Statement
requires that changes in the fair value of derivatives be recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. As amended, this Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Management anticipates
that the adoption of SFAS 133 will not have a material effect on Susquehanna's
financial condition or results of operations.
SFAS 134 "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," requires that after a securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interest based on its ability and
intent to sell or hold those investments. This Statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by non-mortgage
banking enterprises. The Statement was effective for the first fiscal quarter of
1999 and did not have a material effect on Susquehanna's financial condition or
results of operations.
- --------------------------------------------------------------------------------
2. Completed Acquisitions
On January 4, 1999, Susquehanna completed the acquisition of First Capitol Bank
("FCB"), a Pennsylvania commercial bank company with $111 million in assets and
$93 million in deposits at the acquisition date. Susquehanna issued 2.028 shares
of common stock to the shareholders of FCB for each of the 520,393 outstanding
common shares of FCB. The transaction is accounted for under the
pooling-of-interests method of accounting; accordingly, the consolidated
financial statements have been restated to include the consolidated accounts of
FCB for all periods presented.
Previously reported information has been restated as follows:
42
<PAGE>
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
Susquehanna FCB Susquehanna
As Reported As Reported Restated
- --------------------------------------------------------------------------------
Net interest income $154,190 $ 3,939 $158,129
Provision for loan and lease losses 5,247 86 5,333
Other income 30,921 267 31,188
Other expense 113,206 4,858 118,064
- --------------------------------------------------------------------------------
Income before taxes 66,658 (738) 65,920
Taxes 21,084 (327) 20,757
- --------------------------------------------------------------------------------
Net income $ 45,574 $ (411) $ 45,163
================================================================================
Earnings per share: Basic $ 1.27 $ 1.22
Diluted $ 1.26 $ 1.21
Average shares outstanding: Basic 35,859 1,009 36,868
Diluted 36,179 1,009 37,188
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Susquehanna FCB Susquehanna
As Reported As Reported Restated
- --------------------------------------------------------------------------------
Net interest income $151,392 $ 3,767 $155,159
Provision for loan and lease losses 4,557 174 4,731
Other income 24,374 277 24,651
Other expense 109,832 2,931 112,763
- --------------------------------------------------------------------------------
Income before taxes 61,377 939 62,316
Taxes 19,315 267 19,582
- --------------------------------------------------------------------------------
Net income $ 42,062 $ 672 $ 42,734
================================================================================
Earnings per share: Basic $ 1.19 $ 1.18
Diluted $ 1.18 $ 1.17
Average shares outstanding: Basic 35,413 883 36,296
Diluted 35,628 923 36,551
- --------------------------------------------------------------------------------
3. Short-Term Investments
The book value of short-term investments and weighted average interest rates on
December 31, 1999 and 1998, were as follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Book Book
Value Rates Value Rates
- --------------------------------------------------------------------------------
Interest-bearing deposits
in other banks $ 4,817 3.99% $18,151 4.66%
Federal funds sold 3,418 4.52 51,258 4.75
Money market funds 9,454 5.30 13,654 5.10
- --------------------------------------------------------------------------------
Total $17,689 $83,063
================================================================================
43
<PAGE>
- --------------------------------------------------------------------------------
4. Investment Securities
The amortized cost and fair values of investment securities at December 31, 1999
and 1998, are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
At December 31, 1999 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-Sale:
U.S. Treasury $ 16,658 $ 49 $ 24 $ 16,683
U.S. Government agencies 346,041 36 7,087 338,990
State and municipal 70,136 201 738 69,599
Corporate debt securities 17,795 52 165 17,682
Mortgage-backed securities 414,317 47 14,936 399,428
Equity securities 34,588 1,988 0 36,576
- --------------------------------------------------------------------------------------------
$899,535 $ 2,373 $22,950 $878,958
- --------------------------------------------------------------------------------------------
Held-to-Maturity:
State and municipal $ 32,070 $ 388 $ 8 $ 32,450
Mortgage-backed securities 1,020 0 9 1,011
- --------------------------------------------------------------------------------------------
$ 33,090 $ 388 $ 17 $ 33,461
- --------------------------------------------------------------------------------------------
Total investment securities $932,625 $ 2,761 $22,967 $912,419
============================================================================================
- --------------------------------------------------------------------------------------------
At December 31, 1998
- --------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury $ 67,043 $ 912 $ 0 $ 67,955
U.S. Government agencies 214,841 1,249 124 215,966
State and municipal 70,417 1,649 76 71,990
Corporate debt securities 34,993 399 0 35,392
Mortgage-backed securities 466,005 856 327 466,534
Equity securities 29,379 4,701 10 34,070
- --------------------------------------------------------------------------------------------
$882,678 $ 9,766 $ 537 $891,907
- --------------------------------------------------------------------------------------------
Held-to-Maturity:
U.S. Treasury $ 500 $ 0 $ 0 $ 500
U.S. Government agencies 55,810 1,155 0 56,965
Corporate debt securities 25 0 0 25
Mortgage-backed securities 3,502 27 0 3,529
- --------------------------------------------------------------------------------------------
$ 59,837 $ 1,182 $ 0 $ 61,019
- --------------------------------------------------------------------------------------------
Total investment securities $942,515 $10,948 $ 537 $952,926
============================================================================================
</TABLE>
44
<PAGE>
At December 31, 1999 and 1998, investment securities with a carrying value of
$463,071 and $291,285 respectively, were pledged to secure public funds and for
other purposes as required by law.
There were no investment securities whose ratings were less than investment
grade at December 31, 1999 or 1998.
The amortized cost and fair values of U.S. Treasury, government agency, state
and municipal, corporate debt, and mortgage-backed securities, at December 31,
1999, by contractual maturity, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Securities Available-for-Sale:
Within one year $ 21,633 $ 21,643
After one year but within
five years 410,828 403,407
After five years but within
ten years 38,509 37,922
After ten years 393,977 379,410
- --------------------------------------------------------------------------------
864,947 842,382
- --------------------------------------------------------------------------------
Securities Held-to-Maturity:
Within one year $ 14,192 $ 14,229
After one year but within
five years 11,800 11,899
After five years but within
ten years 2,168 2,331
After ten years 4,930 5,002
- --------------------------------------------------------------------------------
33,090 33,461
- --------------------------------------------------------------------------------
Total debt securities $898,037 $875,843
================================================================================
</TABLE>
The gross realized gains and gross realized losses on investment securities
transactions are summarized below. During 1999, 1998, and 1997, certain
securities classified as held-to-maturity were called for early redemption by
the issuer. The results of those transactions are recorded in the corresponding
category.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
- --------------------------------------------------------------------------------
<S> <C> <C>
For the year ended December 31, 1999
- --------------------------------------------------------------------------------
Gross gains $998 $ 1
Gross losses 18 3
- --------------------------------------------------------------------------------
Net gains $980 $ (2)
================================================================================
For the year ended December 31, 1998
- --------------------------------------------------------------------------------
Gross gains $210 $ 0
Gross losses 133 2
- --------------------------------------------------------------------------------
Net gains $ 77 $ (2)
================================================================================
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
Gross gains $687 $ 1
Gross losses 419 3
- --------------------------------------------------------------------------------
Net gains $268 $ (2)
================================================================================
</TABLE>
Interest earned on investment securities for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Taxable $50,485 $48,587 $37,605
Tax-advantaged 5,232 5,666 5,588
- --------------------------------------------------------------------------------
Total $55,717 $54,253 $43,193
================================================================================
</TABLE>
45
<PAGE>
- --------------------------------------------------------------------------------
5. Loans and Leases
At December 31, loans and leases, net of unearned income ($37,233 at December
31, 1999, and $26,293 at December 31, 1998), were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial,
and agricultural $ 327,670 $ 301,385
Real estate--construction 255,054 256,451
Real estate--mortgage 1,850,375 1,821,485
Consumer 395,566 346,180
Leases 166,487 121,684
- --------------------------------------------------------------------------------
Total $2,995,152 $2,847,185
================================================================================
</TABLE>
Certain directors and executive officers of Susquehanna and its affiliates,
including their immediate families and companies in which they are principal
owners (more than 10%), were indebted to banking subsidiaries. In the opinion of
management, such loans are consistent with sound banking practices and are
within applicable regulatory bank lending limitations. Susquehanna relies on the
directors and executive officers for the identification of their associates.
The activity of loans to such persons whose balance exceeded $60 during 1999,
1998, and 1997 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance--January 1 $27,225 $27,740 $29,653
Additions 28,273 20,379 12,477
Deductions:
Amounts collected 24,657 20,894 11,971
Other changes 5,134 0 (2,419)
- --------------------------------------------------------------------------------
Balance--December 31
Current $35,975 $27,225 $27,740
================================================================================
</TABLE>
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania, New Jersey, and Maryland. Susquehanna has no
concentration of loans to borrowers in any one industry, or related industry,
which exceeds 10% of total loans with the exception of housing developments.
An analysis of impaired loans at December 31, 1999 and 1998, is presented as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans without a related
reserve $11,491 $ 9,437
Impaired loans with a reserve 1,460 3,571
- --------------------------------------------------------------------------------
Total impaired loans $12,951 $13,008
================================================================================
Reserve for impaired loans $ 532 $ 591
================================================================================
</TABLE>
An analysis of impaired loans for the years ended Decem- ber 31, 1999 and 1998
is presented as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Average balance of impaired loans $10,560 $11,869
Interest income on impaired loans
(cash basis) 134 242
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
6. Allowance for Loan and Lease Losses
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance--January 1 $ 36,158 $ 36,481 $ 35,704
Allowance acquired in
business combination 0 0 1,460
Provision charged to
operating expenses 7,200 5,333 4,731
- --------------------------------------------------------------------------------
43,358 41,814 41,895
- --------------------------------------------------------------------------------
Charge-offs (8,366) (7,109) (6,787)
Recoveries 2,241 1,453 1,373
- --------------------------------------------------------------------------------
Net charge-offs (6,125) (5,656) (5,414)
- --------------------------------------------------------------------------------
Balance--December 31 $ 37,233 $ 36,158 $ 36,481
================================================================================
</TABLE>
46
<PAGE>
- --------------------------------------------------------------------------------
7. Premises and Equipment
Property, buildings, and equipment, at December 31, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 8,393 $ 8,504
Buildings 45,346 45,321
Furniture and equipment 51,184 54,172
Leasehold improvements 6,321 6,461
Land improvements 1,136 1,148
- --------------------------------------------------------------------------------
112,380 115,606
- --------------------------------------------------------------------------------
Less: accumulated depreciation
and amortization 57,976 60,040
- --------------------------------------------------------------------------------
$ 54,404 $ 55,566
================================================================================
</TABLE>
Depreciation and amortization expense charged to operations amounted to
$6,652 in 1999, $5,808 in 1998, and $5,468 in 1997.
All subsidiaries lease certain banking branches and equipment under operating
leases which expire on various dates through 2011. Renewal options are available
for periods up to 20 years. Minimum future rental commitments under
non-cancellable leases, as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Operating Leases
- --------------------------------------------------------------------------------
<S> <C>
2000 $ 3,058
2001 2,730
2002 2,396
2003 2,070
2004 1,898
Subsequent years 7,582
- --------------------------------------------------------------------------------
$19,734
================================================================================
</TABLE>
Total rent expense charged to operations amounted to $3,320 in 1999, $3,113
in 1998, and $2,915 in 1997.
- --------------------------------------------------------------------------------
8. Deposits
Deposits at December 31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing:
demand $ 430,054 $ 433,133
Interest-bearing:
Interest-bearing demand 951,904 997,718
Savings 421,012 448,865
Time 1,187,524 1,166,002
Time of $100 or more 190,026 171,161
- --------------------------------------------------------------------------------
Total deposits $3,180,520 $3,216,879
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
9. Borrowings
Short-Term Borrowings
Short-term borrowings and weighted average interest rates, at December 31, were
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities sold under repurchase agreements $179,278 5.02% $ 98,694 4.46%
Treasury tax and loan notes 14,010 4.54 4,837 5.00
Federal funds purchased 14,219 5.07 1,000 5.43
- ---------------------------------------------------------------------------------------------
$207,507 $104,531
=============================================================================================
</TABLE>
47
<PAGE>
Federal Home Loan Bank Borrowings
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Due 1999, 4.50% to 6.30% $ 0 $ 36,420
Due 2000, 4.05% to 6.16% 107,325 55,000
Due 2001, 5.27% to 6.33% 13,750 2,250
Due 2002, 5.30% to 6.08% 10,000 26,000
Due 2003, 5.69% to 5.98% 115,500 116,300
Due 2004, 4.65% 15,000 0
Due 2006, 6.65% 788 875
Due 2008, 5.43% to 5.50% 75,000 75,000
Due 2009, 5.30% to 5.34% 33,000 0
Due 2011, 3.25% 85 90
Due 2012, 3.25% 155 164
Due 2013, 5.94% 210 222
Due 2014, 5.00% to 6.51% 1,057 1,077
Due 2018, 6.00% 347 238
Due 2019, 4.50% 197 0
- --------------------------------------------------------------------------------
$372,414 $313,636
================================================================================
</TABLE>
Susquehanna subsidiary banks are members of the Federal Home Loan Banks
("FHLB") of Atlanta, New York, and Pittsburgh and, as such, can take advantage
of the FHLB program for overnight and term advances at published daily rates.
Under the terms of a blanket collateral agreement, advances from the FHLB are
collateralized by qualifying first mortgages. In addition, all of the
subsidiaries' stock in the FHLB is pledged as collateral for such debt. Advances
available under this agreement are limited by available and qualifying
collateral and the amount of FHLB stock held by the borrower.
Under this program Susquehanna subsidiaries have lines of credit available to
them totalling $1.0 billion and $691 million, of which $372 million and $314
million were outstanding at December 31, 1999 and 1998, respectively. At
December 31, 1999, Susquehanna subsidiaries could borrow an additional $633
million based on qualifying collateral. Such additional borrowings would require
the subsidiaries to increase their investment in FHLB stock by approximately $12
million.
Long-Term Debt
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Installment note due June 2, 1999 $ 0 0.00% $ 10 9.00%
Term note due July 19, 2003 10,000 6.09 10,000 6.09
Subordinate notes due February 1, 2005 50,000 9.00 50,000 9.00
Senior notes due February 1, 2003 35,000 6.30 35,000 6.30
- ------------------------------------------------------------------------------------
$95,000 $95,010
====================================================================================
</TABLE>
The installment note was a demand note with a final maturity of June 2, 1999.
The term note is payable with interest only payments being made until
maturity. This note is guaranteed by Susquehanna.
On February 9, 1995, Susquehanna issued $50 million of its 9.00% subordinated
notes due 2005. The proceeds were used to retire $10 million in short-term
borrowings and the balance was used for acquisitions and for general corporate
purposes.
On January 29, 1996, Susquehanna issued $35 million of its 6.30% senior notes
due 2003. The proceeds were used for acquisitions and general corporate
purposes.
48
<PAGE>
- --------------------------------------------------------------------------------
10. Income Taxes
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 19,009 $ 17,250 $ 17,286
Deferred (587) 3,507 2,296
- --------------------------------------------------------------------------------
Total $ 18,422 $ 20,757 $ 19,582
================================================================================
</TABLE>
The provision for income taxes differs from the amount derived from applying
the statutory income tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rates $ 21,637 $ 23,079 $ 21,801
Tax-advantaged income (2,857) (3,144) (2,963)
Other, net (358) 822 744
- --------------------------------------------------------------------------------
Total $ 18,422 $ 20,757 $ 19,582
================================================================================
</TABLE>
Accounting for income taxes requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax return. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
The components of the net deferred tax asset as of December 31 were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Reserve for loan losses $ 13,429 $ 13,406 $ 13,004
Accrued pension expense 1,180 1,314 1,473
Deferred directors' fees 564 811 760
Deferred compensation 775 451 177
Nonaccrual loan interest 1,398 1,078 1,065
Core deposit intangible 101 25 490
Purchase accounting 493 449 (519)
Unrealized investment
(gains) and losses 6,961 (3,225) (2,425)
Other assets 4,835 1,248 1,147
Deferred tax liabilities:
Deferred loan costs (1,914) (404) 817
FHLB stock dividends (395) (395) (395)
Premises and equipment (2,208) (2,160) (2,178)
Operating lease income, net (8,490) (6,770) (4,731)
Recapture of savings banks'
bad debt reserve (344) (598) (1,016)
Other liabilities (2,551) (2,169) (301)
- --------------------------------------------------------------------------------
Net deferred income tax assets $ 13,834 $ 3,061 $ 7,368
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
11. Financial Instruments with Off-Balance Sheet Risk
Susquehanna is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to orginate loans and standby letters
of credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the consolidated
statement of condition. The contract or notional amount of those instruments
reflects the extent of involvement Susquehanna has in particular classes of
financial instruments.
Susquehanna's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for loan commitments and standby
letters of credit is represented by the contractual amount of these instruments.
Susquehanna uses the same credit policies for these instruments as it does for
on-balance sheet instruments.
Standby letters of credit are conditional commitments issued by Susquehanna
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment does not necessarily represent
future cash requirements. Susquehanna evaluates each customer's creditworthiness
on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by Susquehanna upon
extension of credit, is based on management's credit evaluation of the borrower.
Financial instruments with off-balance sheet risk at December 31, 1999 and
1998, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Contractual 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Standby letters of credit $ 36,426 $ 34,711
Commitments to originate loans 136,257 93,746
Unused portion of home equity
and credit card lines 188,043 175,331
Other unused commitments,
principally commercial
lines of credit 418,387 381,866
</TABLE>
49
<PAGE>
- --------------------------------------------------------------------------------
12. Fair Value of Financial Instruments
Susquehanna's estimated fair value information about financial instruments is
presented below. Some of this information is presented whether it is recognized
in the Consolidated Balance Sheet or not, and if it is practicable to estimate
that value. Fair value is best determined by values quoted through active
trading markets.
Active trading markets are characterized by numerous transactions of similar
financial instruments between willing buyers and willing sellers. Because no
active trading market exists for various types of financial instruments, many of
the fair values disclosed were derived using present value discounted cash flow
or other valuation techniques. As a result, Susquehanna's ability to actually
realize these derived values cannot be assured.
The estimated fair values disclosed herewith may vary significantly between
institutions based on the estimates and assumptions used in the various
valuation methodologies. The disclosure requirements exclude disclosure of
nonfinancial assets such as buildings as well as certain financial instruments
such as leases.
Susquehanna also has several intangible assets which are not included in the
fair value disclosures such as mortgage servicing rights, customer lists, and
core deposit intangibles. Accordingly, the aggregate estimated fair values
presented do not represent the underlying value of Susquehanna. The following
methods and assumptions were used to estimate the fair value of each class of
financial instrument.
Cash and Due from Banks and Short-Term Investments. The fair value of cash and
due from banks and short-term investments is deemed to be the same as their
carrying value.
Investment Securities. The fair value of investment securities is estimated
based on quoted market prices, where available. When quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
Loans. Variable rate loans which do not expose Susquehanna to interest rate
risk have a fair value that equals their carrying value, discounted for
estimated future credit losses. The fair value of fixed rate loans was based
upon the present value of projected cash flows. The discount rate was based upon
the U.S. Treasury yield curve, adjusted for credit risk.
Deposits. The fair values of demand, interest-bearing demand, and savings
deposits are the amounts payable on demand at the balance sheet date. The
carrying value of variable rate time deposits represents a reasonable estimate
of fair value. The fair value of fixed rate time deposits is based upon the
discounted value of future cash flows expected to be paid at maturity. Discount
rates are calculated off the U.S. Treasury yield curve.
Short-Term Borrowings. The carrying amounts reported in the balance sheet
represent a reasonable estimate of fair value since these liabilities mature in
less than one year.
Long-Term Debt. Fair values were based upon quoted rates of similar instruments,
issued by banking companies with similar credit ratings.
Off-Balance Sheet Items. The fair value of unused commitments to lend and
standby letters is deemed to be the same as their carrying value.
The following table represents the carrying amount and estimated fair value
of Susquehanna's financial instruments at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 144,548 $ 144,548 $ 113,210 $ 113,210
Short-term investments 17,689 17,689 83,063 83,063
Investment securities 912,048 912,419 951,744 952,926
Loans, net of unearned income and allowance 2,793,313 2,923,709 2,690,668 2,772,868
Liabilities:
Deposits 3,180,520 3,176,336 3,216,879 3,225,168
Short-term borrowings 207,507 207,507 104,531 104,531
FHLB borrowings 372,414 372,559 313,636 320,037
Long-term debt 95,000 95,379 95,010 102,040
</TABLE>
50
<PAGE>
- --------------------------------------------------------------------------------
13. Benefit Plans
Susquehanna maintains a single non-contributory pension plan that covers
substantially all full-time employees. In addition, Susquehanna offers life
insurance and other benefits to its retirees. A summary of the plans at December
31 is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- -----------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 39,605 $ 35,549 $ 3,251 $ 2,888
Service cost 1,916 1,529 146 116
Interest cost 2,505 2,238 212 197
Plan participants' contributions 0 0 66 72
Amendments 21 (3,936) 32 120
Actuarial (gain)/loss (7,709) 2,860 (437) 36
Acquisitions 0 2,345 0 0
Benefits paid (1,187) (980) (171) (178)
- -----------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 35,151 $ 39,605 $ 3,099 $ 3,251
- -----------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year $ 44,600 $ 37,496 $ 0 $ 0
Actual return on plan assets 3,939 2,734 0 0
Acquisitions 0 3,789 0 0
Employer contributions 0 0 105 106
Plan participants' contributions 0 0 66 72
Benefits paid (1,187) (980) (171) (178)
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 47,352 $ 43,039 $ 0 $ 0
- -----------------------------------------------------------------------------------------------------
Funded status $ 12,202 $ 3,434 $ (3,099) $ (3,251)
Unrecognized net actuarial gain (13,306) (4,363) (1,131) (722)
Unrecognized prior service cost (2,562) (2,861) 386 395
Unrecognized transition asset (481) (548) 1,477 1,590
- -----------------------------------------------------------------------------------------------------
Accrued benefit cost $ (4,147) $ (4,338) $ (2,367) $ (1,988)
=====================================================================================================
<CAPTION>
Components of Net Periodic Benefit
Expense /(Income)
- -------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 1,916 $ 1,529 $ 1,959 $ 146 $ 116 $ 92
Interest cost 2,505 2,238 2,216 212 197 191
Expected return on plan assets (3,962) (3,332) (2,707) 0 0 0
Amortization of prior service cost (277) (279) 102 41 27 24
Amortization of transition asset (68) (67) (86) 113 113 113
Amortization of net actuarial gain (305) (322) (326) (28) (36) (42)
- -------------------------------------------------------------------------------------------------------------
Net periodic benefit expense/(income) $ (191) $ (233) $ 1,158 $ 484 $ 417 $ 378
=============================================================================================================
Weighted-Average Assumptions at Year-End
Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
Expected return on plan assets 9.00% 9.00% 9.00% 0.00% 0.00% 0.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
</TABLE>
The plan assets were invested principally in U.S. Government securities and
listed stocks and bonds including 31,751 and 30,697 shares of Susquehanna common
stock at December 31, 1999 and 1998, respectively.
Susquehanna maintains a 401(k) savings plan which allows employees to invest
a percentage of their earnings, matched up to a certain amount specified by
Susquehanna. Contributions to the savings plan which are included in salaries
and benefits expense amounted to $1,192 in 1999, $1,213 in 1998, and $1,007 in
1997.
51
<PAGE>
Susquehanna offers an Employee Stock Purchase Plan ("ESPP"), which allows
employees to purchase Susquehanna common stock up to 5% of their salary at
discount to the market price, through payroll deductions.
Susquehanna implemented a nonqualified Equity Compensation Plan (the
"Compensation Plan"), in 1997, under which Susquehanna may grant options to its
employees and directors for up to 1,462,500 shares of common stock. Under the
Compensation Plan, the exercise price of each option equals the market price of
the company's stock on the date of grant, and an option's maximum term is 10
years. Options are granted upon approval of the Board of Directors and typically
vest one-third at the end of years three, four, and five. The option prices
range from a low of $6.44 to a high of $24.75.
On January 1, 1996, Susquehanna adopted SFAS 123 and as permitted by SFAS
123, Susquehanna has chosen to apply APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for the
Compensation Plan. Accordingly, no compensation cost has been recognized for
options granted under the Compensation Plan.
For purposes of disclosure, the fair value of each option granted is
estimated on the date of grant using the Black-Scholes option-pricing model
based upon the assumptions noted below. Option data noted below has been
adjusted for the three-for-two stock splits of 1998 and 1997. The pro forma
effects on net income include both the Compensation Plan and the ESPP.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 892,870 $15.36 676,151 $12.22 566,523 $11.33
Granted 294,117 18.19 224,219 24.75 120,878 16.47
Exercised 92,362 7.81 7,500 13.00 11,250 13.00
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,094,625 $16.76 892,870 $15.36 676,151 $12.22
==================================================================================================================================
Outstanding at end of year:
Granted prior to 1997 459,507 $11.96 547,773 $11.28 555,273 $11.30
Granted 1997 116,782 16.69 120,878 16.47 120,878 16.47
Granted 1998 224,219 24.75 224,219 24.75 0 0
Granted 1999 294,117 18.19 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,094,625 $16.76 892,870 $15.36 676,151 $12.22
==================================================================================================================================
Options exercisable at year-end:
Granted prior to 1997 233,314 $10.96 208,485 $ 8.47 215,985 $ 9.25
Granted 1997 69,534 16.18 73,629 15.85 73,629 15.85
Granted 1998 0 0 0 0 0 0
Granted 1999 0 0 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 302,848 $12.16 282,114 $10.40 289,614 $10.46
==================================================================================================================================
Weighted average remaining contractual maturity
of options outstanding at year-end:
Granted prior to 1997 6 years
Granted 1997 7 years
Granted 1998 8 years
Granted 1999 9 years
- ----------------------------------------------------------------------------------------------------------------------------------
Total 7 years
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Dollars Per Share Dollars Per Share Dollars Per Share
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average fair value of
options granted during the year $1,321 $4.49 $1,348 $6.01 $521 $4.31
Fair value disclosures (pro forma) effect on:
Net income (328) (484) (428)
Basic earnings per share (0.01) (0.01) (0.01)
Diluted earnings per share (0.01) (0.01) (0.01)
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value assumptions:
Dividend yield 3.0% 3.0% 3.0%
Expected volatility 22.0% 22.0% 20.0%
Risk-free interest rate 5.7% 5.5% 6.7%
Expected term 7 years 7 years 7 years
</TABLE>
- --------------------------------------------------------------------------------
14. Susquehanna Bancshares, Inc. (Parent Only) Condensed Balance Sheets
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
Assets
Cash in subsidiary bank $ 247 $ 746
Short-term investments 0 62
Investment in consolidated
subsidiaries at equity in net assets 485,166 476,604
Other investment securities 2,920 5,275
Premises and equipment (net) 320 215
Other assets 7,588 11,308
- --------------------------------------------------------------------------------
Total assets $ 496,241 $ 494,210
================================================================================
Liabilities
Long-term debt $ 85,000 $ 85,000
Accrued taxes and expenses payable 6,851 7,129
- --------------------------------------------------------------------------------
Total liabilities 91,851 92,129
- --------------------------------------------------------------------------------
Equity
Preferred stock (no par) 0 0
Common stock ($2 par value) 74,068 73,935
Surplus 62,589 61,882
Retained earnings 281,522 261,043
Accumulated other comprehensive
income, net of taxes (13,616) 6,004
Less: Treasury stock at cost 173 783
- --------------------------------------------------------------------------------
Total stockholders' equity 404,390 402,081
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 496,241 $ 494,210
================================================================================
- --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. (Parent Only) Condensed Statements of Income
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Income
Dividends from subsidiaries $ 35,814 $ 68,266 $ 28,611
Interest, dividends, and gains
on sales of investment
securities 959 231 191
Interest and management
fee from subsidiaries 3,408 4,137 4,115
- --------------------------------------------------------------------------------
Total income 40,181 72,634 32,917
- --------------------------------------------------------------------------------
Expenses
Interest expense 6,864 6,864 6,861
Recurring charges 3,410 0 0
Other expenses 7,145 4,036 4,096
- --------------------------------------------------------------------------------
Total expenses 17,419 10,900 10,957
- --------------------------------------------------------------------------------
Income before taxes, and
equity in undistributed
income of subsidiaries 22,762 61,734 21,960
Income taxes (1,470) 241 (386)
Equity in undistributed
income of subsidiaries 19,165 (16,330) 20,388
- --------------------------------------------------------------------------------
Net Income $ 43,397 $ 45,163 $ 42,734
================================================================================
53
<PAGE>
- --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. (Parent Only) Condensed Statements of Cash
Flows
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Operating Activities
Net income $ 43,397 $ 45,163 $ 42,734
Adjustment to reconcile net
income to cash provided
by operating activities:
Depreciation and
amortization 357 313 158
Equity in undistributed
income of
subsidiaries and
income of subsidiaries
accrued not received (19,165) 16,330 (20,388)
Increase in other assets (651) (5,752) (520)
Increase/(decrease) in
accrued expenses
payable (278) 1,271 602
Other, net (959) 0 0
- --------------------------------------------------------------------------------
Net cash provided from
operating activities 22,701 57,325 22,586
- --------------------------------------------------------------------------------
Investing Activities
Purchase of investment securities (500) 0 (8,489)
Proceeds from the sale/
maturities of investment
securities 1,089 8,500 0
Capital expenditures (204) (179) (72)
Net infusion of investment
in subsidiaries (1,814) (46,006) (1,200)
- --------------------------------------------------------------------------------
Net cash used for investing
activities (1,429) (37,685) (9,761)
- --------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of
common stock $ 1,372 $ 51 $ 619
Dividends paid (22,918) (20,132) (18,371)
Cash paid for treasury stock (287) (742) 0
Other, net 0 32 (43)
- --------------------------------------------------------------------------------
Net cash used for financing
activities (21,833) (20,291) (17,795)
- --------------------------------------------------------------------------------
Net decrease in cash and
cash equivalents (561) (651) (4,970)
Cash and cash equivalents at
January 1 808 1,459 6,429
- --------------------------------------------------------------------------------
Cash and cash equivalents at
December 31 $ 247 $ 808 $ 1,459
================================================================================
Cash and cash equivalents:
Cash in subsidiary bank $ 247 $ 746 $ 794
Short-term investments 0 62 665
- --------------------------------------------------------------------------------
Cash and cash equivalents at
December 31 $ 247 $ 808 $ 1,459
================================================================================
- --------------------------------------------------------------------------------
15. Earnings Per Share
<TABLE>
<CAPTION>
The following table sets forth the calculation of basic and diluted earnings per
share for the years ended below:
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share:
Income available to common
stockholders $43,397 36,960 $1.17 $45,163 36,868 $1.22 $42,734 36,296 $1.18
Effect of diluted securities:
Stock options outstanding 177 320 255
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income available to common
stockholders and assumed
conversion $43,397 37,137 $1.17 $45,163 37,188 $1.21 $42,734 36,551 $1.17
===================================================================================================================================
</TABLE>
54
<PAGE>
- --------------------------------------------------------------------------------
16. Regulatory Restrictions of Banking Subsidiaries
Susquehanna is limited by regulatory provisions in the amount it can receive in
dividends from its banking subsidiaries. Accordingly, at December 31, 1999,
$56,819 is available for dividend distribution to Susquehanna in 2000 from its
banking subsidiaries.
Included in cash and due from banks are balances required to be maintained by
banking subsidiaries on deposit with the Federal Reserve. The amounts of such
reserves are based on percentages of certain deposit types and totalled $2,231
and $5,807 at December 31, 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
17. Contingent Liabilities
Susquehanna is party to various legal proceedings incidental to its business.
Certain claims, suits, and complaints arising in the ordinary course of business
have been filed or are pending against Susquehanna. In the opinion of
management, all such matters are adequately covered by insurance or, if not
covered, are without merit or are of such kind, or involve such amounts, as
would not have a material effect on the financial position, results of
operations, and cash flows of Susquehanna, if disposed of unfavorably.
- --------------------------------------------------------------------------------
18. Subsequent Events
On February 1, 2000, Susquehanna completed the acquisition of Boston Service
Company, Inc. (t/a Hann Financial Service Corporation) ("Hann"), a closely held
consumer automobile financing company, for 2,360,000 shares of Susquehanna
common stock. Hann, headquartered in Jamesburg, New Jersey, originates
high-quality automobile loans and leases in the New Jersey, eastern
Pennsylvania, New York, and Connecticut market areas. Hann services more than
$800 million in automobile-related receivables.
The acquisition of Hann will be accounted for under the pooling-of-interests
method of accounting. Pro forma information that gives effect of the acquisition
of Hann is as follows:
Pro forma: Susquehanna and Hann
- -----------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------
Net interest income and
other income $212,245 $196,843 $188,251
Net income 44,182 46,804 44,770
Earning per share--basic $ 1.12 $ 1.19 $ 1.16
--diluted 1.12 1.18 1.15
On March 3, 2000, Susquehanna completed the acquisition of Valley Forge Asset
Management Corp., King of Prussia, Pa. ("VFAM"), and its holding company, Valley
Forge Investment Companies, Inc., for $12.7 million. VFAM provides investment
advisory services and, at the time of the acquisition, had approximately $900
million in assets under management. The acquisition of VFAM will be accounted
for under the purchase method of accounting. Under the purchase method of
accounting, the purchase price is allocated to the respective assets acquired
and liabilities assumed based on their estimated fair values, net of applicable
income tax effects. Goodwill of approximately $9.0 million was created in this
transaction and will be amortized to other operating expense on a straight-line
basis over 25 years. In this transaction, there is also contingent cash payments
totalling $6.0 million. These contingent cash payments are based upon certain
earnings targets and will be recorded as goodwill if earned.
55
<PAGE>
PriceWaterhouseCoopers LLP
One South Market Square
Harrisburg, PA 17101-9916
Telephone (717) 231-5900
Facsimile (717) 232-5672
Report of Independent Accountants
To the Board of Directors and Stockholders
of Susquehanna Bancshares, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows present fairly, in all material respects, the financial position of
Susquehanna Bancshares, Inc. (Susquehanna) and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of Susquehanna's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 24, 2000, except as to
Note 18 which is as of March 3, 2000
56
<PAGE>
Summary of Quarterly Financial Data
The unaudited quarterly results of operations for the years ended December 31,
1999 and 1998, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except
per share 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter Ended Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $76,876 $75,257 $74,176 $73,461 $75,435 $75,897 $75,649 $73,861
Interest expense 36,231 34,978 33,508 34,131 35,639 36,209 35,928 34,937
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 40,645 40,279 40,668 39,330 39,796 39,688 39,721 38,924
Provision for loan and lease losses 2,986 1,496 1,294 1,424 1,427 1,375 1,262 1,269
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan and lease losses 37,659 38,783 39,374 37,906 38,369 38,313 38,459 37,655
- ------------------------------------------------------------------------------------------------------------------------------------
Other income 10,956 13,771 7,919 7,333 7,700 7,890 8,392 7,206
Other expenses 42,872 30,989 29,902 28,119 30,407 29,225 29,784 28,648
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,743 21,565 17,391 17,120 15,662 16,978 17,067 16,213
Applicable income taxes 1,185 6,711 5,176 5,350 4,775 5,400 5,580 5,002
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,558 $14,854 $12,215 $11,770 $10,887 $11,578 $11,487 $11,211
====================================================================================================================================
Earnings per common share: Basic $ 0.12 $ 0.40 $ 0.33 $ 0.32 $ 0.30 $ 0.31 $ 0.31 $ 0.30
Diluted 0.12 0.40 0.33 0.32 0.29 0.31 0.31 0.30
</TABLE>
Market for Susquehanna Capital Stock
Since November 5, 1985, Susquehanna common stock has been listed for quotation
on the National Association of Securities Dealers National Market System. Set
forth below are the high and low sales prices of Susquehanna's common stock as
reported on the Nasdaq National Market System for the years 1999 and 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------
Quarterly Quarterly
Market Price Dividend Market Price Dividend
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $21.25-$16.50 $0.15 $26.00-$21.67 $0.14
Second Quarter $19.38-$17.00 $0.15 $26.08-$22.67 $0.14
Third Quarter $18.50-$15.75 $0.15 $26.75-$17.88 $0.14
Fourth Quarter $18.25-$14.88 $0.17 $22.75-$15.50 $0.15
</TABLE>
Common stock prices and dividends have been adjusted to reflect Susquehanna's
three-for-two stock splits of 1999 and 1998.
57
<PAGE>
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.
- ------ --------------------------------------------------------------------
There has been no change in Susquehanna's principal accountants in over
two years. There have been no disagreements with such principal accountants on
any matters of accounting principles, practices, financial statement disclosure,
auditing scope or procedures.
58
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of Susquehanna.
- ------- -----------------------------------------------
The information required by this Item will be included in Susquehanna's
Proxy Statement for its 2000 Annual Meeting of Shareholders (the "2000 Proxy
Statement") in the Election of Directors section and the Director and Executive
Officer Compensation section, each of which sections is incorporated herein by
reference.
Item 11. Executive Compensation
- ------- ----------------------
The information required by this Item will be included in the 2000
Proxy Statement in the Director and Executive Officer Compensation section, and
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The information required by this Item will be included in the 2000
Proxy Statement in the Principal Holders of Voting Securities and Holdings of
Management section, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
The information required by this Item will be included in the 2000
Proxy Statement in the Certain Relationships and Related Transaction section,
and is incorporated herein by reference.
59
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
- ------- --------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements. See Item 8 of this report for the
consolidated financial statements of Susquehanna and its
subsidiaries (including the index to financial statements).
(2) Financial Statement Schedules. Not Applicable.
(3) Exhibits. A list of the Exhibits to this Form 10-K is set forth
on the Exhibit Index immediately preceding such exhibits.
(b) Report on Form 8-K.
(1) Susquehanna filed a Current Report on form 8-K, dated November
17, 1999, to report the execution of a definitive Share Exchange
Agreement, dated November 17, 1999, to acquire all of the
outstanding stock of Boston Service Company, Inc. (t/a Hann
Financial Service Corporation), filed pursuant to Item 5.
(2) Susquehanna filed a Current Report on Form 8-K, dated December
23, 1999, to report the execution of a definitive Stock Purchase
Agreement with Valley Forge Asset Management Corp. ("VFAM") and a
definitive Agreement and Plan of Reorganization with Valley Forge
Investment Company, Inc. ("VFICO"), to acquire all of the
outstanding stock of VFAM and VFICO, filed pursuant to Item 5.
(c) Exhibits. The exhibits required to be filed as part of this report pursuant
to Item 601 of Regulation S-K are filed herewith or incorporated by
reference.
(d) Financial Statement Schedule. None Required.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SUSQUEHANNA BANCSHARES, INC.
By:/s/ Robert S. Bolinger
----------------------
Robert S. Bolinger, Chairman of the
Board and Chief Executive Officer
Dated: March 20, 2000
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Report has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert S. Bolinger Chairman of the Board, Chief Executive March 20, 2000
- ------------------------------------ Officer and Director
(Robert S. Bolinger)
/s/ Drew K, Hostetter Sr. Vice President, Treasurer March 20, 2000
- ------------------------------------ and Chief Financial Officer
(Drew K. Hostetter)
/s/ William J. Reuter President and Director March 20, 2000
- ------------------------------------
(William J. Reuter)
/s/ Richard M. Cloney Vice President and Director March 22, 2000
- ------------------------------------
(Richard M. Cloney)
/s/ James G. Apple Director March 20, 2000
- ------------------------------------
(James G. Apple)
/s/ Trudy B. Cunningham Director March 20, 2000
- ------------------------------------
(Trudy B. Cunningham)
/s/ John M. Denlinger Director March 20, 2000
- ------------------------------------
(John M. Denlinger)
/s/ Owen O. Freeman, Jr. Director March 21, 2000
- ------------------------------------
(Owen O. Freeman, Jr.)
/s/ Henry H. Gibbel Director March 20, 2000
- ------------------------------------
(Henry H. Gibbel)
/s/ Marley R. Gross Director March 21, 2000
- ------------------------------------
(Marley R. Gross)
/s/ T. Max Hall Director March 20, 2000
- ------------------------------------
(T. Max Hall)
</TABLE>
61
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
SUSQUEHANNA BANCSHARES, INC.
Form 10-K, December 31, 1999
[SIGNATURES CONTINUED]
Signature Title Date
- --------- ----- ----
/s/ Edward W. Helfrick Director March 22, 2000
- ------------------------------------
(Edward W. Helfrick)
/s/ C. William Hetzer, Jr. Director March 20, 2000
- ------------------------------------
(C. William Hetzer, Jr.)
/s/ Guy W. Miller, Jr. Director March 22, 2000
- ------------------------------------
(Guy W. Miller, Jr.)
/s/ George J. Morgan Director March 23, 2000
- ------------------------------------
(George J. Morgan)
/s/ Clyde R. Morris Director March 20, 2000
- ------------------------------------
(Clyde R. Morris)
/s/ Roger V. Wiest Director March 20, 2000
- ------------------------------------
(Roger V. Wiest)
[END OF SIGNATURE PAGES]
62
<PAGE>
EXHIBIT INDEX
Exhibit Numbers Description and Method of Filing
- --------------- --------------------------------
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession.
(i) Share Exchange Agreement dated as of November 17, 1999 by
among Susquehanna, Boston Service Company, Inc. (t/a Hann
Financial Service Corporation) and the shareholders of Hann.
The Disclosure Annexes to this agreement are omitted. Pursuant
to paragraph (2) of Item 601(b) of Regulation S-K, Susquehanna
agrees to furnish a copy of such schedules to the Commission
upon request.
(ii) Stock Purchase Agreement dated as of December 23, 1999 by and
among Susquehanna, Susquehanna Bancshares Central, Inc.,
Valley Forge Asset Management Corp. and certain of the
shareholders of VFAM. The Disclosure Annexes to this agreement
are omitted. Pursuant to paragraph (2) of Item 601(b) of
Regulation S-K, Susquehanna agrees to furnish a copy of such
schedules to the Commission upon request.
(iii) Agreement and Plan of Reorganization dated as of December 23,
1999 by and among Susquehanna, Susquehanna Bancshares Central,
Inc. and Valley Forge Investment Company, Inc. The Disclosure
Annexes to this agreement are omitted. Pursuant to paragraph
(2) of Item 601(b) of Regulation S-K, Susquehanna agrees to
furnish a copy of such schedules to the Commission upon
request.
(3) (i) Articles of Incorporation. Incorporated by reference to
Attachment E to Susquehanna's Joint Proxy Statement/Prospectus
on Susquehanna's Registration Statement on Form S-4,
Registration No. 33-13276 and to Exhibit 3.3 of Susquehanna's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998.
(ii) By-laws. Incorporated by reference to Exhibit (3)(b) of
Susquehanna's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
(4) Instruments defining the rights of security holders including
indentures. The rights of the holders of Susquehanna's Common Stock
and the rights of Susquehanna's note holders are contained in the
following documents or instruments, which are incorporated herein by
reference.
(i) Articles of Incorporation. Incorporated by reference to
Attachment E to Susquehanna's Joint Proxy Statement/Prospectus
on Susquehanna's Registration Statement on Form S-4,
Registration No. 33-76319 and to Exhibit 3.3 of Susquehanna's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998.
(ii) By-laws. Incorporated by reference to Exhibit (3)(b) of
Susquehanna's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
(iii) Form of Subordinated Note/Indenture incorporated by reference
to Exhibit 4.1 to Susquehanna's Registration Statement on Form
S-3, Registration No. 33-87624.
(9) Voting trust agreement. Not Applicable
(10) Material Contracts.
63
<PAGE>
(i) Susquehanna's Key Employee Severance Pay Plan, adopted in
1999, is filed herewith as Exhibit 10.
(ii) Susquehanna's Executive Deferred Income Plan, effective
January 1, 1999, is incorporated by reference to Exhibit 10(a)
of Susquehanna's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
(iii) Susquehanna's Performance Award Plan as amended in 1995, is
incorporated by reference to Exhibit (a)(10) of Susquehanna's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
(iv) Susquehanna's Equity Compensation Plan, as adopted in 1996, is
incorporated by reference to Exhibit (a)(10) of Susquehanna's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
(11) Statement re: computation of per share earnings. Not Applicable.
(12) Statements re: computation of ratios. Not applicable.
(13) Annual report to security holders, Form 10-Q or quarterly report to
security holders. Not applicable.
(16) Letter re: change in certified accountant. Not applicable.
(18) Letter re: change in accounting principles. Not Applicable.
(19) Report furnished to security holders. Not Applicable.
(21) Subsidiaries of the registrant. Filed herewith.
(22) Published report regarding matters submitted to vote of security
holders. Not Applicable.
(23) Consents of experts and counsel. Filed herewith.
(24) Power of Attorney. Not Applicable.
(27) Financial Data Schedule. Filed herewith.
(99) Additional Exhibits. Not Applicable.
64
<PAGE>
Exhibit 2(i)
------------
Share Exchange Agreement dated as of November 17, 1999
by among Susquehanna, Boston Service Company, Inc.
(t/a Hann Financial Service Corporation) and the shareholders of Hann.
<PAGE>
SHARE EXCHANGE AGREEMENT
DATED AS OF THE 17TH DAY OF NOVEMBER, 1999
BY AND AMONG
SUSQUEHANNA BANCSHARES, INC.,
BOSTON SERVICE COMPANY, INC.
(t/a HANN FINANCIAL SERVICE CORPORATION)
AND
THE SHAREHOLDERS LISTED ON THE SIGNATURE PAGES HERETO
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
ARTICLE I
THE SHARE EXCHANGE 2
SECTION 1.1 The Share Exchange; Closing 2
SECTION 1.2 Effect on Outstanding Shares 3
SECTION 1.3 Surrender and Exchange of BSC Certificates 3
ARTICLE II
CONDUCT PENDING THE SHARE EXCHANGE 3
SECTION 2.1 Conduct of BSC Businesses 3
SECTION 2.2 Forbearance by BSC 3
SECTION 2.3 Cooperation 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES 5
SECTION 3.1 Representations and Warranties of BSC Shareholders and BSC 5
SECTION 3.2 Representations, Warranties and Covenants of the
BSC Shareholders 20
SECTION 3.3 Representations and Warranties of SBI 23
ARTICLE IV
COVENANTS 26
SECTION 4.1 Acquisition Proposals 26
SECTION 4.2 Securities Registration and Disclosure 26
SECTION 4.3 Employees 27
SECTION 4.4 Access and Information 27
SECTION 4.5 Certain Filings, Consents and Arrangements 28
SECTION 4.6 Additional Agreements 29
SECTION 4.7 Publicity 29
SECTION 4.8 Listing Application 29
SECTION 4.9 Notification of Certain Matters 29
SECTION 4.10 Insurance 29
SECTION 4.11 Board Seat 30
SECTION 4.12 Pooling; Reorganization 30
SECTION 4.13 General Release 30
SECTION 4.14 Employment Agreement 30
SECTION 4.15 Real Property Leases 30
SECTION 4.16 Consents 30
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 4.17 BSC Shares 30
SECTION 4.18 Non-Competition 31
ARTICLE V
CONDITIONS TO CONSUMMATION OF THE SHARE EXCHANGE 31
SECTION 5.1 Conditions to Closing 31
SECTION 5.2 Conditions to Obligations of SBI 32
SECTION 5.3 Conditions to the Obligations of BSC and the BSC
Shareholders 33
ARTICLE VI
NATURE AND SURVIVAL OF REPRESENTATIONS
AND WARRANTIES; INDEMNIFICATION, ETC. 34
SECTION 6.1 Survival of Representations and Warranties, Indemnities 34
ARTICLE VII
TERMINATION 37
SECTION 7.1 Termination 37
SECTION 7.2 Effect of Termination 38
SECTION 7.3 Expenses 38
SECTION 7.4 Extension, Waiver 38
SECTION 7.5 Approval of Federal Reserve Board 38
ARTICLE VIII
OTHER MATTERS 38
SECTION 8.1 Certain Defined Terms 38
SECTION 8.2 Parties in Interest 42
SECTION 8.3 Waiver and Amendment 42
SECTION 8.4 Counterparts 42
SECTION 8.5 Governing Law 42
SECTION 8.6 Expenses 42
SECTION 8.7 Notices 43
SECTION 8.8 Entire Agreement; Etc 43
SECTION 8.9 Severability 44
SECTION 8.10 Interpretation 44
SECTION 8.11 Waivers 44
SECTION 8.12 Incorporation of Schedules and Exhibits 44
SECTION 8.13 Enforcement of Agreement 44
SECTION 8.14 Knowledge 44
SECTION 8.15 Representative 45
</TABLE>
iii
<PAGE>
Schedules
Schedule 1.1 - Exchange Ratio
Schedule 3.1(a) - Foreign Qualifications
Schedule 3.1(b) - Outstanding Rights with Respect to Capital Stock
Schedule 3.1(c) - Ownership of Capital Stock or Equity Securities
Schedule 3.1(e) - No Violation
Schedule 3.1(h) - Taxes and Tax Returns
Schedule 3.1(i) - Litigation and Liabilities
Schedule 3.1(j) - Contracts
Schedule 3.1(k) - Employee Relations
Schedule 3.1(l) - Employee Benefit Plans
Schedule 3.1(m) - Title to Assets
Schedule 3.1(n) - Authorizations
Schedule 3.1(o) - Brokers & Finders
Schedule 3.1(p) - Environmental Matters
Schedule 3.1(q) - Interests of Certain Persons
Schedule 3.1(r) - Insurance
Schedule 3.1(s) - Dividends
Schedule 3.1(t) - Books and Records
Schedule 3.1(v) - Intellectual Property
Schedule 3.1(w) - Absence of Undisclosed Liabilities
Schedule 3.1(x) - Condition of Tangible Assets
Schedule 3.1(y) - Year 2000 Compliance
Schedule 3.2(a) - Ownership of BSC Shareholders
Schedule 3.3(g) - Absence of Undisclosed Liabilities of SBI
Schedule 4.3(b) - Employee Plans
Exhibits
Exhibit A - Registration Rights Agreement
Exhibit B - General Release
Exhibit C - Employment Agreement
Exhibit D - Real Property Leases
Exhibit E - Opinion of Counsel to BSC
Exhibit F - Servicing Agreement
Exhibit G - Opinion of Counsel to SBI
iv
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This SHARE EXCHANGE AGREEMENT dated as of the 17th day of November, 1999
(this "Agreement"), is entered into by and among Susquehanna Bancshares, Inc., a
---------
Pennsylvania corporation ("SBI"), Boston Service Company, Inc., t/a Hann
---
Financial Service Corporation, a New Jersey corporation ("BSC"), and Michael J.
---
Wimmer, Terry Wimmer, Sydell Lourie and Michael J. Wimmer, Custodian for the
benefit of Brad Wimmer under the Uniform Gift to Minors Act (the "Custodial
---------
Shareholder") (each a "BSC Shareholder" and collectively, the "BSC
- ----------- --------------- ---
Shareholders").
- ------------
RECITALS:
WHEREAS, SBI is a multi-state, multi-institution bank holding company;
WHEREAS, BSC is a corporation engaged in automobile financing
arrangements with a strong record of performance;
WHEREAS , SBI wishes to acquire from the BSC Shareholders, on the terms
and conditions set forth in this Agreement, all of the issued and outstanding
shares of the capital stock of BSC through a share exchange (the "Share
-----
Exchange");
- --------
WHEREAS, the BSC Shareholders are the owners of 200 shares of common
stock, no par value per share of BSC (the "BSC Shares");
----------
WHEREAS, the BSC Shares represent all of the issued and outstanding
capital stock of BSC, and the BSC Shareholders desire to exchange the BSC Shares
for shares of the common stock, par value $2.00 per share, of SBI (the "SBI
---
Shares");
- ------
WHEREAS, the parties desire to make certain representations, warranties,
covenants and agreements in connection with this Agreement and to set forth the
conditions to the Share Exchange; and
WHEREAS, for federal income tax purposes, it is intended that the Share
Exchange shall qualify as a reorganization within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"), and for financial
----
accounting purposes shall be accounted for as a pooling of interests.
NOW, THEREFORE, in consideration of their mutual promises and obligations
hereunder, the parties hereto adopt and make this Agreement and prescribe the
terms and conditions hereof and the manner and basis of carrying it into effect,
which shall be as follows:
1
<PAGE>
ARTICLE I
THE SHARE EXCHANGE
SECTION 1.1 The Share Exchange; Closing
---------------------------
(a) Subject to the terms and conditions of this Agreement, on the Closing
Date (as defined below), subject to the provisions of Section 1.3 hereof with
respect to the payment of fractional shares in cash, each BSC Share shall be
exchanged for the number of SBI Shares determined in conformity with the
Exchange Ratio set forth at Schedule 1.1 hereof (such SBI Shares, determined on
the basis of the Exchange Ratio, as to each BSC Shareholder and, collectively to
all BSC Shareholders, is the "Share Exchange Consideration"). On the Closing
----------------------------
Date, SBI shall become the holder of record and beneficial owner of all the
issued and outstanding BSC Shares. Moreover, on the Closing Date, (i) SBI
shall direct that its transfer agent issue a certificate to each BSC Shareholder
for the required number of SBI Shares representing that BSC Shareholder's Share
Exchange Consideration with the restrictions set forth in this Agreement and
deliver the certificates by overnight courier to the BSC Shareholders and (ii)
the BSC Shareholders shall deliver to SBI certificates (each, a "BSC
---
Certificate" and collectively, the "BSC Certificates") representing all of the
- ----------- ----------------
outstanding BSC Shares registered in the name of such BSC Shareholder,
appropriately endorsed by such BSC Shareholder for transfer.
(b) The closing of the Share Exchange (the "Closing") shall take place at
-------
such place and time and on such date as shall be agreed upon by all parties,
which date shall not be later than the 10th business day after the day on which
the last to be fulfilled or waived of the conditions set forth in Article V
shall be fulfilled or waived in accordance herewith. Notwithstanding the
foregoing, in no event shall the Closing take place prior to January 1, 2000.
The date on which the Closing occurs is hereinafter referred to as the "Closing
-------
Date."
- ----
(c) Notwithstanding any of the provisions of this Article I, if any of
the BSC Shareholders shall fail or refuse to deliver any of the BSC Certificates
representing BSC Shares, or if any of the BSC Shareholders shall fail or refuse
to consummate the transactions described in this Agreement, such failure or
refusal shall not relieve the other BSC Shareholders of any of their obligations
under this Agreement, and SBI, at its option and without prejudice to its rights
against any defaulting BSC Shareholder, may either (i) acquire the remaining BSC
Shares which it is entitled to acquire hereunder, or (ii) refuse to acquire the
remaining BSC Shares and thereby terminate all of its obligations hereunder.
The BSC Shareholders acknowledge that the BSC Shares are unique and otherwise
not available and agree that in addition to any other remedies, SBI may invoke
any equitable remedies to enforce delivery of the BSC Shares hereunder,
including, without limitation, an action or suit for specific performance.
2
<PAGE>
SECTION 1.2 Effect on Outstanding Shares. If prior to the Closing
----------------------------
Date, the number of outstanding SBI Shares shall have been increased or
decreased through a reclassification, stock dividend, stock split or reverse
stock split, or other similar change, appropriate adjustment shall be made to
the Exchange Ratio.
SECTION 1.3 Surrender and Exchange of BSC Certificates.
------------------------------------------
(a) No certificates for fractional SBI Shares shall be issued in
connection with the Share Exchange. In lieu thereof, SBI shall issue to a BSC
Shareholder otherwise entitled to a fractional share, upon surrender of such
certificates, a check for an amount of cash equal to the fraction of an SBI
Share represented by the certificates so surrendered multiplied by the Average
Closing Price per SBI Share as determined in conformity with Schedule 1.1 and as
defined therein. No interest will be paid or accrued on the cash in lieu of
fractional shares, if any, payable to holders of BSC Shares.
(b) In the event any BSC Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the BSC Shareholder
claiming such BSC Certificate to be lost, stolen or destroyed and agreeing to
indemnify SBI against any claim that may be made against it with respect to such
Certificate, SBI will issue in exchange for such lost, stolen or destroyed BSC
Certificate, the SBI Shares into which such BSC Certificates has been converted
pursuant to this Agreement and cash in lieu of fractional shares.
ARTICLE II
CONDUCT PENDING THE SHARE EXCHANGE
SECTION 2.1 Conduct of BSC Businesses. Except as expressly provided in
-------------------------
this Agreement, during the period from the date of this Agreement to the
Closing, BSC shall (i) conduct its business in the usual, regular and ordinary
course consistent with past practice, (ii) maintain and preserve intact its
business organization, assets, leases, properties, employees and advantageous
business relationships and retain the services of its officers and key
employees, (iii) not take any action which would affect or delay its ability to
obtain any necessary approvals, consents or waivers of any governmental
authority required for the transactions contemplated hereby or to perform its
covenants and agreements on a timely basis under this Agreement and (iv) not
take any action that would have an adverse effect on the business, operations or
prospects of BSC.
SECTION 2.2 Forbearance by BSC. During the period from the date of this
------------------
Agreement to the Closing, BSC shall not, without the prior written consent of
SBI:
(a) other than in the ordinary course of business consistent with past
practice: (i) make any advance or loan; (ii) incur any indebtedness for borrowed
money, under existing credit lines or otherwise; or (iii) assume, guarantee,
endorse or otherwise as an accommodation become responsible for, the obligations
of any other individual, corporation or other person;
3
<PAGE>
(b) issue any equity securities or options, warrants, rights or
convertible securities; adjust, split, combine or reclassify any capital stock;
make, declare or pay any dividend or make any distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for any
shares of its capital stock; cause its assets to be distributed to any of its
shareholders, except in the form of compensation to employees who are
shareholders consistent with subsection (d) of this Section 2.2; or grant any
stock appreciation rights or grant, sell or issue to any individual, corporation
or other person any shares of its capital stock or any right to acquire, or any
securities evidencing a right to convert into or acquire, any shares of its
capital stock;
(c) other than in the ordinary course of business, consistent with past
practice and pursuant to policies, if any, currently in effect: (i) sell,
transfer, mortgage, encumber or otherwise dispose of any of its properties,
leasehold interests or assets; (ii) cancel, release or assign any indebtedness
of any such person; or (iii) assign any contracts or agreements as in force at
the date of this Agreement;
(d) increase in any manner the annual compensation or fringe benefits of
any of its employees, other than the payment of bonuses in the ordinary course
of business consistent with past practice and not in excess of 10% of each such
employee's annual base compensation or annual salary increases not in excess of
5%, or pay any pension or retirement allowance not required by law or by any
existing plan or agreement to any such employees, or become a party to, amend,
increase, terminate, otherwise modify or commit itself to any pension,
retirement, profit-sharing or welfare benefit plan or agreement or employment
agreement with or for the benefit of any employee, or grant any unusual or
extraordinary bonuses, benefits or other forms of direct or indirect
compensation to any employee, officer, director, or consultant, or voluntarily
accelerate the vesting of any stock options or other compensation or benefit;
(e) amend its articles of incorporation, or its bylaws, except as
expressly contemplated by this Agreement or required by law or regulation, in
each case as concurred in by its counsel;
(f) change its accounting principles or maintain its books in a manner
inconsistent with past practices or fail to promptly advise SBI in writing of
any material change in its business, earnings, assets, liabilities, financial or
other condition or results of operations;
(g) take any action that would prevent BSC from consummating the
transactions contemplated by this Agreement;
(h) take or agree to take any action that would prevent the Share
Exchange from constituting a reorganization qualifying under the provisions of
Section 368(a) of the Code, or
4
<PAGE>
prevent the Share Exchange from being treated as a pooling of interests for
financial accounting purposes;
(i) transfer any interest in the BSC Shares owned by them, or pledge or
otherwise encumber the BSC Shares owned by them; or
(j) fail to take any action that would be necessary to cause BSC to
perform its obligations under this Agreement.
SECTION 2.3 Cooperation. BSC and each BSC Shareholder shall cooperate
-----------
with SBI, and SBI shall cooperate with BSC, in completing the transactions
contemplated hereby and each shall not knowingly take, or cause to be taken, or
knowingly agree or make any commitment to take, any action (i) that would cause
any of the representations or warranties of it that are set forth in Article III
hereof not to be true and correct in all material respects, (ii) that would
cause it to fail to comply with the covenants set forth in Article IV or (iii)
in the case of BSC, that is inconsistent with or prohibited by Section 2.1 or
Section 2.2.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of BSC Shareholders and BSC.
----------------------------------------------------------
BSC, and each BSC Shareholder jointly and severally, represents and warrants to
SBI that, except as specifically disclosed by BSC to SBI in writing in the
disclosure schedules being delivered to SBI (the "BSC Schedules") which shall
-------------
identify the specific sections or subsections in the Agreement to which each
such disclosure relates:
(a) Corporate Organization and Qualification. BSC is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of New Jersey and is in good standing as a foreign corporation in each
jurisdiction where the properties owned, leased or operated, or the business
conducted, by BSC requires such qualification, except for such failure to
qualify or be in such good standing which, when taken together with all other
such failures, would not have a material adverse effect on BSC. Each such
jurisdiction is listed on Schedule 3.1(a). BSC has the requisite corporate and
other power and authority (including all federal, state, local and foreign
governmental authorizations) to carry on its businesses as now being conducted
and to own its properties and assets. BSC has made available to SBI a complete
and correct copy of the articles of incorporation and bylaws of BSC and such
articles and bylaws are in full force and effect as of the date hereof.
(b) Authorized Capital. The authorized capital stock of BSC consists of
3,000 shares of common stock, no par value per share, of which only the 200 BSC
Shares were issued and outstanding as of the date of this Agreement. No other
equity securities are authorized for issuance by BSC. All of the BSC Shares
have been duly authorized and are validly issued, fully
5
<PAGE>
paid and nonassessable, and are held of record and beneficially owned by the BSC
Shareholders. BSC does not have any shares of capital stock reserved for
issuance. BSC does not have any outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote (or which are
convertible into or exercisable for securities having the right to vote) with
shareholders on any matter. The BSC Shares have not been issued in violation of
any preemptive rights. Except as set forth in Schedule 3.1(b), there are no
outstanding subscriptions, options, warrants, rights, convertible securities or
other agreements or commitments of any character relating to the issued or
unissued capital stock or other securities of BSC. After the Closing, SBI will
not have any obligation to issue, transfer or sell any shares of capital stock
pursuant to any Employee Plan (as defined in Section 3.1(l)).
(c) Subsidiaries. BSC does not have any Subsidiaries. Except as set
forth in Schedule 3.1(c), BSC does not own any capital stock or other equity
securities of any corporation, has no direct or indirect equity or ownership
interest in, by way of stock ownership or otherwise, any corporation,
partnership, joint venture, association or business enterprise and is not
contemplating acquiring any such interest. BSC owns beneficially and of record
all shares of capital stock or other interests of any entity which shall be set
forth as owned by it in Schedule 3.1(c), free and clear of any mortgage, claim,
lien, pledge, option, security interest or other similar interest, encumbrance,
easement, judgment or imperfection of title of any nature whatsoever (each an
"Encumbrance"), and, except as set forth on Schedule 3.1(c), none of such shares
-----------
or interests is subject to any covenant or other contractual restriction
preventing or limiting the right to transfer such shares.
(d) Corporate Authority. Subject to the regulatory approvals specified
in Section 5.1(b) hereof, BSC has the requisite corporate power and authority,
and legal right, and has taken all corporate action necessary in order to
execute and deliver this Agreement and to consummate the transactions applicable
to BSC contemplated hereby. This Agreement has been duly and validly executed
and delivered by BSC and constitutes the valid and binding obligations of BSC,
enforceable against BSC in accordance with its terms, except to the extent
enforcement is limited by bankruptcy, insolvency and other similar laws
affecting creditors' rights or the application by a court of equitable
principles.
(e) No Violations. The execution, delivery and performance of this
Agreement by it does not, and the consummation of the transactions contemplated
hereby by it will not, constitute (i) subject to receipt of the required
regulatory approvals specified in Section 5.1(b), a breach or violation of, or a
default under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, to which it (or any of its respective
properties) is subject, (ii) a breach or violation of, or a default under BSC's
articles of incorporation or bylaws, (iii) a breach of any duty owed by BSC to
any person holding an interest in BSC, or (iv) except as disclosed in Schedule
3.1(e), a breach or violation of, or a default under (or an event which with due
notice or lapse of time or both would constitute a default under), or result in
the termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other encumbrance
upon any of the properties or assets of it under any of the
6
<PAGE>
terms, conditions or provisions of any note, bond, indenture, deed of trust,
loan agreement or other agreement, instrument or obligation to which it is a
party, or to which any of their respective properties or assets may be bound or
affected; and the consummation of the transactions contemplated hereby will not
require any approval, consent or waiver under any such law, rule, regulation,
judgment, decree, order, governmental permit or license or the approval, consent
or waiver of any other party to any such agreement, indenture or instrument,
other than the required approvals, consents and waivers of governmental
authorities referred to in Section 5.1(b).
(f) Financial Reports. BSC's audited statements of financial condition
as of and for the years ended December 31, 1996, 1997 and 1998, previously
provided to SBI (including in each case any related notes and schedules) fairly
presents or will fairly present the financial position of BSC as of its date and
each of the statements of income and stockholders' equity and of cash flows
provided therewith (including in each case any related notes and schedules),
fairly presents the results of operations, stockholders' equity and cash flows,
as the case may be, of BSC for the periods set forth therein, in each case in
accordance with generally accepted accounting principles consistently applied
("GAAP") during the periods involved, except as may be noted therein, and except
----
as qualified as indicated in the audited statements of financial condition for
the years ended December 31, 1996 and 1997.
(g) Absence of Certain Changes or Events. Since December 31, 1998, to
the date hereof, it has not incurred any material liability, except in the
ordinary course of its business consistent with past practice. Additionally,
since December 31, 1998, there has been no material adverse change in the
financial condition, properties, assets, business, results of operations or
prospects of it, nor has it taken any of the actions set forth in Section 2.2 of
this Agreement.
(h) Taxes.
i. For purposes of this Agreement, the term "Taxes" shall mean all
-----
taxes, charges, fees, levies or other assessments, including, without
limitation, income, gross receipts, employment excise, withholding, property,
sales, use, transfer, license, payroll and franchise taxes, together with any
interest and any penalties, additions to tax or additional amounts with respect
thereto, imposed by the United States, or any state, local or foreign government
or subdivision or agency thereof. For purposes of this Agreement, the term "Tax
---
Return" shall mean any report, return or other information required to be
- ------
supplied to a taxing authority in connection with Taxes. All citations to
provisions of the Code, or to the Treasury Regulations promulgated thereunder,
shall include any amendments thereto and any substitute or successor provisions
thereto.
ii. BSC has duly filed all Tax Returns required to be filed as of
the date hereof (and will file all Tax Returns required to be filed on or before
the Closing Date). All such Tax Returns are (and, as to Tax Returns not filed
as of the date hereof but filed on or before the Closing Date, will be) true,
correct and complete in all material respects and were (and, as to
7
<PAGE>
Tax Returns not filed as of the date hereof but filed on or before the Closing
Date, will be) filed on a timely basis. Except as disclosed in Schedule 3.1(h),
BSC has not requested any extension of time within which to file any Tax Return,
which Tax Return has not since been filed. True and complete copies of the
federal, state and local income Tax Returns of BSC for the last three years have
been provided to SBI prior to the date hereof. The reserves for Taxes reflected
in the financial statements of BSC are sufficient for the payment of all unpaid
Taxes (whether or not currently disputed) which are incurred or may be incurred
with respect to the period (or portion thereof) ended on the date of such
financial statements and for all years and periods ended prior thereto, and the
reserve for Taxes reflected in the balance sheet is sufficient for the payment
of all unpaid Taxes (whether or not currently disputed) which are incurred or
may be incurred with respect to the period (or portion thereof) ended on the
Closing Date and for all years and periods ended prior thereto. Since December
31, 1998, BSC has not incurred any liability for Taxes other than in the
ordinary course of business, which Taxes would result in a material decrease in
the net worth of BSC. There are no liens for taxes upon the assets of BSC or
for any liability, whenever assessed, arising pursuant to U.S. Treasury
Regulation Section 1.1502-6 or any comparable provision of state or local law.
No waiver or extension of any statute of limitations relating to Taxes has been
given to, or requested by, the Internal Revenue Service (the "IRS"), or any
---
state or local taxing authority. No claim is currently being made by any
authority in a jurisdiction where BSC does not file Tax Returns that they are or
may be subject to Taxes in that jurisdiction.
iii. Except as set forth on Schedule 3.1(h), BSC has compiled (and
until the Closing Date will comply) in all material respects with the provisions
of the Code relating to the withholding and payment of Taxes, including, without
limitation, the withholding and reporting requirements under Code sections 1441
through 1464, 3401 through 3406, and 6041 through 6049, as well as similar
provisions under any other laws, and have, within the time and in the manner
prescribed by law, withheld from employee wages and paid over to the proper
governmental authorities all amounts required. BSC has undertaken in good faith
to appropriately classify all service providers as either employees or
independent contractors for all Tax purposes.
iv. Neither the consolidated federal income Tax Returns nor the
state or local income Tax Returns of BSC have been examined by the IRS or
relevant state taxing authorities, except as set forth on Schedule 3.1(h). All
deficiencies asserted as a result of the examinations referred to on Schedule
3.1(h) have been paid, and no issue has been raised by any federal, state, local
or foreign income tax authority in any such examination which, by application of
the same or similar principles to similar transactions, could reasonably be
expected to result in a proposed deficiency for any subsequent period. Further,
to the best of BSC's knowledge, no state of facts exists or has existed which
would constitute grounds for the assessment of any material liability for Taxes
with respect to the periods which have not been audited by the IRS or other
taxing authority. Except as described on Schedule 3.1(h), there are no
examinations or other administrative or court proceedings relating to Taxes in
progress or pending nor has BSC received a revenue agents report asserting a tax
deficiency. To the best of
8
<PAGE>
BSC's knowledge, there are no threatened actions, suits, proceedings,
investigations or claims relating to or asserted for Taxes of BSC and there is
no basis for any such claim.
v. Since 1993, BSC has not been a member of any affiliated group of
corporations that filed a consolidated income tax return.
vi. Since the date of its incorporation, BSC has not (A) filed any
consent or agreement under Section 341(f) of the Code, (B) applied for any tax
ruling, (C) entered into a closing agreement with any taxing authority, (D)
filed an election under Section 338(g) or Section 338(h)(10) of the Code (nor
has a deemed election under Section 338(e) of the Code occurred), (E) made any
payments, or been a party to an agreement (including this Agreement) that under
any circumstances could obligate it to make payments that will not be deductible
because of Section 280G of the Code, or (F) been a party to any tax allocation
or tax sharing agreement.
(i) Litigation and Liabilities. Except as set forth in Schedule 3.1(i),
there are no (i) civil, criminal or administrative actions, suits, claims,
hearings, investigations or proceedings before any court, governmental agency or
otherwise pending or, to the best of BSC's Knowledge, threatened against it or
(ii) obligations or liabilities, whether or not accrued, contingent or
otherwise, including, without limitation, those relating to environmental and
occupational safety and health matters, or any other facts or circumstances of
which its management is aware that could reasonably be expected to result in any
claims against or obligations or liabilities of it, or to hinder or delay the
consummation of the transactions contemplated by this Agreement. There are no
judgements, decrees, injunctions, rules or orders of any court or governmental
department or agency outstanding against BSC.
(j) Agreements.
i. Schedule 3.1(j) contains an accurate list of all commitments,
contracts, leases (other than automobile leases entered into in the ordinary
course of business) and agreements to which BSC is a party or by which BSC is
bound which involves a commitment or obligation in excess of $50,000 in the
aggregate for each such commitment contract, lease or agreement or is otherwise
material to the business of BSC (including, without limitation, joint venture or
partnership agreements, employment agreements, contracts, tenant leases,
equipment leases, equipment maintenance agreements, agreements with
municipalities and labor organizations, loan agreements, bonds, mortgages, liens
or other security agreements) (the "Contracts"). BSC has delivered true,
---------
correct and complete copies of such Contracts to SBI. Except as set forth in
Schedule 3.1(j) attached hereto, as of the date of this Agreement it is not a
party to, or bound by, any oral or written:
(A) "material contract" as such term is defined in Item
601(b)(10) of Regulation S-K promulgated by the Securities and Exchange
Commission (the "SEC");
---
9
<PAGE>
(B) consulting agreement not terminable on thirty (30) days' or
less notice involving the payment of more than $10,000 per annum, in the case of
any such agreement;
(C) agreement with any officer or other key employee the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction of the nature contemplated by this
Agreement;
(D) agreement with respect to any officer providing any term of
employment or compensation guarantee extending for a period longer than one year
or for a payment in excess of $50,000;
(E) agreement or plan, including any stock option plan, stock
appreciation rights plan, employee stock ownership plan, restricted stock plan
or stock purchase plan, any of the benefits of which will be increased, or the
vesting of the benefits of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement;
(F) agreement containing covenants that limit its ability to
compete in any line of business or with any person, or that involve any
restriction on the geographic area in which, or method by which, it may carry on
its business (other than as may be required by law or any regulatory agency);
(G) agreement, contract or understanding, other than this
Agreement, regarding the capital stock of BSC or committing to dispose of
substantially all of the assets of BSC;
(H) collective bargaining agreement, contract, or other
agreement or understanding with a labor union or labor organization;
(I) any employment contracts or any other contracts, agreements
or commitments to or with individual employees or agents of BSC which involves a
commitment or obligation in excess of $50,000 in the aggregate for each such
contract, agreement or commitment and any contracts, agreements or commitments
with consultants or other independent contractors;
(J) any power of attorney given by BSC;
(K) any contracts or commitments providing for payments based in
any manner on the revenues or profits of BSC;
10
<PAGE>
(L) any contract under which BSC has agreed (i) to maintain the
confidentiality of third party information, (ii) not to compete or solicit for
hire employees of a third party or (iii) to otherwise limit or restrict its
operations;
(M) any instruments relating to indebtedness for borrowed money,
including any note, bond, deed of trust mortgage, indenture or agreement to
borrow money or any agreement of guarantee or indemnification, whether written
or oral, in favor of any person or entity; or
(N) any other contract or commitment, whether in the ordinary
course of business or not, which involves future payments, performance of
services or delivery of goods or materials, to or by BSC of any amount or value
in excess of $50,000 in the aggregate for each such contract or commitment.
ii. The Contracts constitute valid and legally binding obligations
of the parties thereto and are enforceable in accordance with their terms,
assuming due authorization, execution and delivery by parties other than BSC and
except (i) as may be affected by bankruptcy, insolvency, reorganization,
moratorium or similar laws or by equitable principles relating to or limiting
creditors rights generally and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief is subject to the discretion of
the court before which any proceeding therefor may be brought.
iii. Each Contract constitutes the entire agreement by and between
the respective parties thereto with respect to the subject matter thereof.
iv. All obligations required to be performed under the terms of the
Contracts have been performed, no act or omission has occurred or failed to
occur which, with the giving of notice, the lapse of time or both would
constitute a default by BSC under the Contracts.
v. Except as expressly set forth on Schedule 3.1(j), none of the
Contracts requires the consent of the other parties thereto in order for it to
be in full force and effect with respect to BSC as controlled by SBI after the
Closing or would give rise to the other party's right to terminate any Contract;
and BSC will use its best efforts to obtain any required consents prior to the
Closing. Except as expressly set forth on Schedule 3.1(j), BSC has no plans,
programs, commitments or arrangements to which they are parties, or to which
they are subject, pursuant to which payments may be required or acceleration of
benefits may be required upon change of control of BSC.
(k) Employee Relations. Except as set forth on Schedule 3.1(k) there are
no pending claims by any current or former personnel of BSC against BSC other
than for compensation and benefits due in the course of employment; (ii) there
are no pending claims against BSC arising out of any statute, ordinance or
regulation relating to employment practices
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or occupational or safety and health standards; (iii) there are no pending or,
to the best knowledge of BSC threatened labor disputes, strikes or work
stoppages against BSC; and (iv) to the best knowledge of BSC, there are no union
organizing activities in process or contemplated with respect to the BSC. No
collective bargaining units have been certified or recognized by BSC. Schedule
3.1(k) also identifies all employees on leave of absence and all current or
former employees and their dependents receiving health benefits, or eligible to
receive health benefits, as required by the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA"). Notice of the availability of COBRA
-----
coverage has been provided to all persons entitled thereto since June 30, 1996,
and all persons electing such coverage are being (or have been, if applicable)
provided such coverage.
(l) Employee Benefit Plans. Schedule 3.1(l) contains a complete list of
all pension, retirement, stock option, stock purchase, stock ownership, savings,
stock appreciation right, profit sharing, deferred compensation, consulting,
bonus, group insurance, severance and other employee incentive and welfare
contracts and plans, and all trust agreements related thereto, that it maintains
or to which it contributes for any of its present or former directors, officers,
or other employees (hereinafter referred to collectively as the "Employee
--------
Plans").
- -----
i. All of the Employee Plans comply in all material respects with
all applicable requirements of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), the Code and other applicable laws; it has not
-----
engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or
Section 4975 of the Code) with respect to any Employee Plan which is likely to
result in any penalties, taxes or other events under Section 502(i) of ERISA or
Section 4975 of the Code.
ii. No liability to the Pension Benefit Guaranty Corporation has been
or is expected by it to be incurred with respect to any Employee Plan which is
subject to Title IV of ERISA ("Pension Plan"), or with respect to any
------------
"single-employer plan" (as defined in Section 4001(a)(15) of ERISA) currently or
formerly maintained by it or any entity which is considered one employer with
BSC under Section 4001 of ERISA or Section 414 of the Code (an "ERISA
-----
Affiliate").
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iii. No Pension Plan or single-employer plan of an ERISA Affiliate
had an "accumulated funding deficiency" (as defined in Section 302 of ERISA
(whether or not waived)) as of the last date of the end of the most recent plan
year ending prior to the date hereof; all contributions to any Pension Plan or
single-employer plan of an ERISA Affiliate that were required by Section 302 of
ERISA and were due prior to the date hereof have been made on or before the
respective dates on which such contributions were due; the fair market value of
the assets of each Pension Plan or single-employer plan of an ERISA Affiliate
exceeds the present value of the "benefit liabilities" (as defined in Section
4001(a)(6) of ERISA) under such Pension Plan or single-employer plan of an ERISA
Affiliate as of the end of the most recent plan year with respect to the
respective Pension Plan or single-employer plan of an ERISA Affiliate ending
prior to the date hereof, calculated on the basis of the actuarial assumptions
used in the
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most recent actuarial valuation for such Pension Plan or single-employer plan of
an ERISA Affiliate as of the date hereof, and no notice of a "reportable event"
(as defined in Section 4043 of ERISA) for which the reporting requirement has
not been waived has been required to be filed for any Pension Plan or single-
employer plan of an ERISA Affiliate within the 12-month period ending on the
date hereof.
iv. Neither has it provided, nor is it required to provide,
security to any Pension Plan or to any single-employer plan of an ERISA
Affiliate pursuant to Section 401 (a)(29) of the Code.
v. Neither it nor any ERISA Affiliate has contributed to any
"multi-employer plan," as defined in Section 3(37) of ERISA, on or after
September 26, 1980.
vi. Each Employee Plan of it which is an "employee pension benefit
plan" (as defined in Section 3(2) of ERISA) and which is intended to be
qualified under Section 401 (a) of the Code (a "Qualified Plan") has received a
--------------
favorable determination letter from the IRS covering the requirements of the Tax
Equity and Fiscal Responsibility Act of 1982, the Retirement Equity Act of 1984
and the Deficit Reduction Act of 1984 and the Tax Reform Act of 1986; it is not
aware of any circumstances likely to result in revocation of any such favorable
determination letter; each such Employee Plan has been amended to reflect the
requirements of subsequent legislation applicable to such plans; and each
Qualified Plan has complied at all relevant times in all material respects with
all applicable requirements of Section 401 (a) of the Code.
vii. Each Qualified Plan which is an "employee stock ownership plan"
(as defined in Section 4975(e)(7) of the Code) has at all relevant times
satisfied all of the applicable requirements of Sections 409 and 4975(e)(7) of
the Code and the regulations thereunder.
viii. Neither it nor any ERISA Affiliate has committed any act or
omission or engaged in any transaction that has caused it to incur, or created a
material risk that it may incur, liability for any excise tax under Sections
4971 through 4980B, 4980D or 4980E of the Code, other than excise taxes which
heretofore have been paid and fully reflected in its financial statements.
ix. There is no pending or threatened litigation, administrative
action or proceeding relating to any Employee Plan other than routine claims for
benefits.
x. Except as disclosed in Schedule 3.1(l), there has been no
announcement or legally binding commitment by it to create an additional
Employee Plan, or to amend an Employee Plan except for amendments required by
applicable law which do not materially increase the cost of such Employee Plan,
and it does not have any obligations for retiree health and life benefits under
any Employee Plan that cannot be terminated without incurring any liability
thereunder except as required to be maintained by COBRA.
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xi. Except as disclosed in Schedule 3.1(l), the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby will not result in any payment or series of payments by BSC to any person
which is an "excess parachute payment" (as defined in Section 28OG of the Code)
under any Employee Plan, increase any benefits payable under any Employee Plan,
or accelerate the time of payment or vesting of any such benefit.
xii. Except as disclosed in Schedule 3.1(l), all required annual
reports have been filed timely with respect to each Employee Plan, and it has
made available to SBI a true and correct copy of (A) reports on the applicable
form of the Form 5500 series filed with the IRS for plan years beginning after
1987, (B) such Employee Plan, including amendments thereto, (C) each trust
agreement and insurance contract relating to such Employee Plan, including
amendments thereto, (D) the most recent summary plan description for such
Employee Plan, including amendments thereto, if the Employee Plan is subject to
Title I of ERISA, and (E) the most recent actuarial report or valuation if such
Employee Plan is a Pension Plan and (F) the most recent determination letter
issued by the IRS if such Employee Plan is a Qualified Plan.
(m) Title to Assets. Except as disclosed on Schedule 3.1(m), it has good
and marketable title to its properties and assets (other than property as to
which it is lessee), free and clear of all Encumbrances, except for (i) such
items shown in the BSC consolidated financial statements or notes thereto; (ii)
liens on real property for current real estate taxes not yet delinquent or (iii)
such minor defects in title which would not, individually or in the aggregate,
adversely effect the intended use of the property. BSC does not own any real
property. With respect to any property leased by it which is set forth on
Schedule 3.1(m), there are no defaults by it, or any of the other parties
thereto, or any events which, with the giving of notice or lapse of time or
both, would become defaults by it or any of the other parties thereto, under any
of such leases; and all such leases are in full force and effect and are
enforceable against it, as the case may be, and there is no circumstance
existing as of the date of this Agreement which causes or would cause such
leases to be unenforceable against any of the other parties thereto except as
the same may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the rights of creditors generally as well as principles
of equity to the extent enforcement by a court of equity is required.
(n) Compliance with Laws.
i. BSC holds all licenses, franchises, certificates, consents,
permits, approvals, certificates of public convenience and necessity,
concessions, rights and authorizations ("Authorizations") from all federal,
--------------
state, local and foreign governmental entities and other persons or entities
which are necessary for the lawful conduct of its business and its use and
occupancy of its assets and properties in the manner heretofore conducted, used
and occupied. A complete and correct list of the Authorizations held by BSC is
14
<PAGE>
set forth in Schedule 3.1(n). All of such Authorizations are valid, in good
standing and in full force and effect, not subject to any default and no
suspension or cancellation of any of which is threatened, and BSC has duly
performed in all material respects all of their respective obligations under
such Authorizations. No event has occurred with respect to the material
Authorizations which permits, or after notice or lapse of time or both would
permit, revocation or termination thereof or would result in any other material
impairment of the rights of the holder of any of the Authorizations, and no
terminations thereof have been, to the knowledge of BSC, threatened. Except as
disclosed in Schedule 3.1(n), all such Authorizations are renewable by their
terms or in the ordinary course of business and will not be adversely affected
by the transactions contemplated by this Agreement.
ii. BSC is in compliance with all applicable laws, statutes,
ordinances, codes, rules and regulations of any governmental entities, and BSC
has not received any notice from a governmental entity within five years of the
date hereof of any such violation.
iii. Except as expressly set forth on Schedule 3.1(n), none of
the Authorizations requires the consent of any governmental entity or any other
party in order for it to be in full force and effect with respect to BSC as
controlled by SBI after the Closing or would give rise to a governmental
entity's or any other party's right to terminate any Authorization as a result
of the Share Exchange; and BSC will use its best efforts to obtain any required
consents prior to the Closing.
(o) Brokers and Finders. Except as set forth in Schedule 3.1(o)
attached hereto, BSC and its officers, directors, employees or agents, and the
BSC Shareholders have not employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions, finders'
fees or similar fees or expenses and no broker or finder has acted directly or
indirectly for BSC or any BSC Shareholder in connection with this Agreement or
the transactions contemplated hereby and no investment banking, financial
advisory or similar fees have been incurred or are or will be payable by BSC or
any BSC Shareholder in connection with this Agreement or the transactions
contemplated hereby.
(p) Environmental Matters.
i. Except as disclosed in Schedule 3.1(p):
(A) BSC has been and is in full compliance with all
Environmental Laws (as defined below) applicable to the operations of, and the
property owned, operated, occupied or otherwise used by, BSC. To the best
knowledge of BSC, there are no circumstances that may prevent or interfere with
such full compliance in the future.
(B) BSC has obtained all Permits (as defined below)
necessary for the operation of their businesses and the ownership, operation,
occupation or other use of their properties, all such Permits are in good
standing and BSC is in compliance with all terms
15
<PAGE>
and conditions of such Permits. There has been no material change in the facts
or circumstances reported or assumed in the applications for or the granting of
such Permits.
(C) There is no lawsuit, claim, action, cause of action,
judicial or administrative proceeding, investigation, summons, or written notice
by any person pending, or to BSC's knowledge, threatened, against BSC alleging
potential liability (including, without limitation, potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resource damages, property damages, personal injuries or penalties) arising out
of or resulting from (i) the violation of any Environmental Law or (ii) the
presence or Release of any Hazardous Substance (as defined below) at any
location, whether or not owned, operated, occupied or otherwise used by BSC.
(D) BSC is not subject to any writ, injunction, order,
decree or settlement addressing (i) any alleged violation of any Environmental
Law or (ii) the alleged presence, or Release into the environment of any
Hazardous Substance at any location, whether or not owned, operated, occupied or
otherwise used by BSC.
(E) No Environmental Lien (as defined below) has attached
to any of the property owned, operated, occupied or otherwise used by BSC.
(F) There has been no Release of any Hazardous Substance
at, to or from any of the properties owned, operated, occupied or otherwise used
by BSC.
(G) BSC has not transported or arranged for the transport
of any Hazardous Substance to any facility or site for the purpose of treatment,
storage, disposal or recycling which (i) is included on the National Priorities
List or the Comprehensive Environmental Response, Compensation and Liability
Information System under the Comprehensive Environmental Response, Compensation
and Liability Act, 42 U.S.C. (S)(S) 9601 et. seq. ("CERCLA"), or any similar
------
state list which is required by any state Environmental Law to be kept, or (ii)
is presently subject to a governmental enforcement action under CERCLA or the
Solid Waste Disposal Act, 42 U.S.C. (S)(S) 6901 et. seq., or any similar state
Environmental Law.
(H) All of the third parties with which BSC presently has
arrangements, engagements or contracts to accept, treat, transport, store,
dispose, remove or recycle any Hazardous Substances generated or present at any
of the properties owned, operated, occupied or otherwise used by BSC is properly
permitted under Environmental Laws to perform the foregoing activities or
conduct.
(I) BSC has no liability for the violation of any
Environmental Law or the Release of any Hazardous Substance in connection with
any business or property previously owned, operated, occupied or otherwise used
by BSC or any of the predecessors of BSC.
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(J) There are no past or present actions, activities,
circumstances, conditions, event or incidents, including, without limitation,
the generation, handling, transportation, treatment, storage, Release, presence,
disposal or arranging for disposal of any Hazardous Substance, that could form
the basis of any claim against BSC under any Environmental Law.
(K) Without in any way limiting the generality of the
foregoing, (i) all underground storage tanks, and the capacity and contents of
such tanks, located on the real property owned or operated by BSC are identified
in Schedule 3.1(p), (ii) except as identified in Schedule 3.1(p), there is no
asbestos contained in or forming part of any building, building component,
structure or office space owned or operated by BSC, and (iii) no polychlorinated
biphenyls (PCBS) are used or stored at any part of the property owned or
operated by BSC.
(L) The following terms shall have the following meanings:
1. "Environmental Laws" means all federal, state,
local and foreign laws, statutes, codes, ordinances, rules, regulations, orders,
directives, binding policies, common law, or Permits as amended and in effect on
the date hereof and on the Closing Date relating to or addressing the
environment, health or safety, including, but not limited to, any law, statute,
code, ordinance, rule, regulation, order, directive, binding policy, common law
or Permit relating to the generation, use, handling, treatment removal, storage,
production, manufacture, transportation, remediation, disposal, arranging for
disposal, or Release of Hazardous Substances.
2. "Environmental Lien" means a lien in favor of any
conventional authority for any (a) liability under any Environmental Law or (b)
damages arising from, or costs incurred by, such governmental authority in
response to a release or threatened release of a Hazardous Substance into the
environment.
3. "Hazardous Substances" means any toxic or
hazardous substances (including, without limitation, wastes), pollutants,
explosives, radioactive materials or substances (including, without limitation,
wastes), including, without limitation, asbestos, PCBs, petroleum products and
byproducts, and substances (including, without limitation, wastes) defined in or
regulated under Environmental Law.
4. "Permit" means any permit, license, consent or
other approval or authorization required under any Environmental Law.
5. "Release" means the release, spill, emission,
leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching
or migrating of any Hazardous Substance through or in the air, soil, surface
water, or groundwater.
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(q) Interests of Certain Persons. Except as noted in Schedule 3.1(q),
none of its respective officers or directors, or any BSC Shareholder, or any
"associate" (as such term is defined in Rule 12b-2 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) of any such officer or director or
------------
any BSC Shareholder, has any interest in (i) any contract or property (real or
personal), tangible or intangible, used in or pertaining to its business, except
in connection with his or her service as an employee in the ordinary course of
business or (ii) any business that furnished goods or services to BSC since July
1, 1996, except for an interest of less than 5% of the stock of a company whose
securities are traded on a national securities exchange.
(r) Insurance. Set forth in Schedule 3.1(r) is a complete and
accurate list and description of all policies of fire, liability, product
liability, workers compensation, health and other forms of insurance presently
in effect with respect to the business and properties of BSC, true and correct
copies of which have been furnished to SBI. Schedule 3.1(r) includes, without
limitation, the carrier, a summary description of coverage, the limits of
coverage, retention or deductible amounts, amount of annual premiums, date of
expiration with respect to each such policy, and any pending claims in excess of
$5,000. No such policy (nor any previous policy) is subject to any currently
enforceable retroactive rate or premium adjustment, loss sharing arrangement or
other actual or contingent liability arising wholly or partially out of events
arising prior to the date hereof. Schedule 3.1(r) indicates each policy as to
which (a) the coverage limit has been reached or (b) the total incurred losses
to date equal 75% or more of the coverage limit. No notice of cancellation or
termination has been received with respect to any such policy, and no act or
omission of BSC could result in cancellation of any such policy prior to its
scheduled expiration date. BSC has not been refused any insurance with respect
to any aspect of the operations of the business nor has its coverage been
limited by any insurance carrier to which it has applied for insurance or with
which it has carried insurance during the last five (5) years. BSC has duly and
timely made all claims it has been entitled to make under each policy of
insurance. BSC has not received notice from any insurer or agent of such insurer
that substantial capital improvements or other expenditures will have to be made
in order to continue such insurance and, to the best knowledge of BSC, no such
improvements or expenditures are required.
(s) Dividends. The only dividends or other distributions which it has
made on its capital stock since January 1, 1999 are set forth in Schedule
3.1(s).
(t) Books and Records. Except as set forth on Schedule 3.1(t), its
books and records have been, and are being, maintained in accordance with
applicable legal and accounting requirements and reflect in all material
respects the substance of events and transactions that should be included
therein.
(u) Board Action. Its board of directors (at a meeting duly called
and held) has been duly convened and by the requisite vote of all directors (a)
determined that the Share
18
<PAGE>
Exchange is advisable and in the best interests of it and its shareholders and
(b) approved this Agreement and the transactions contemplated hereby and
thereby.
(v) Intellectual Property. BSC, directly or indirectly, possesses or
has adequate rights to all licenses, permits and all other franchises,
trademarks, trade names, service marks, inventions, patents, copyrights, and any
applications therefor, trade secrets, research and development, know-how,
technical data, computer software programs or applications and technology
systems necessary to operate its business and required by applicable law (the
"Intellectual Property"). Except as set forth on Schedule 3.1(v), all right,
- ----------------------
title and interest in and to each item of Intellectual Property is owned by BSC,
is not subject to any license, royalty arrangement or pending or threatened
claim or dispute and is valid and in full force and effect. None of the
Intellectual Property owned or used by BSC, infringes any Intellectual Property
right of any other entity and no Intellectual Property owned by BSC is infringed
upon by any other entity.
(w) Absence of Undisclosed Liabilities. Except (i) as and to the
extent specifically reserved against in BSC's audited balance sheet as of
December 31, 1998, and in the notes to such balance sheet for the period then
ended, (ii) liabilities which have been incurred since December 31, 1998 in the
ordinary course of business consistent with past practice as a result of arm's
length negotiations and (iii) liabilities and obligations specifically disclosed
on Schedule 3.1(w), BSC has no material liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise and whether due or to become
due). BSC and the BSC Shareholders have no reason to believe that any reserves
for liabilities are inadequate. Except as and to the extent described in BSC's
audited balance sheet as of December 31, 1998 or in Schedule 3.1(w), neither BSC
nor any BSC Shareholder has knowledge of any basis for the assertion against BSC
of any liability and there are no circumstances, conditions, happenings, events
or arrangements, contractual or otherwise which may give rise to liabilities,
except commercial liabilities and obligations incurred in the ordinary course of
BSC's business and consistent in amount and nature with past practice. Except as
set forth on Schedule 3.1(w), BSC's audited balance sheet as of December 31,
1998 reflects a reasonable residual value for the total portfolio of the leases
pursuant to which BSC acts as lender, lessor or sublessor, finances, leases or
subleases automobiles.
(x) Condition of Tangible Assets. Except as set forth in Schedule
3.1(x), in all material respects all the real property leased by it is free from
structural defects, and to the best knowledge of BSC the operation and use of
the real property conform in all material respects to all applicable laws,
ordinances, regulations, permits, licenses and certificates.
(y) Year 2000 Compliance. Except as provided in Schedule 3.1(y)
hereof, BSC has undertaken an assessment of its software and hardware in order
to reveal those portions thereof which will require modification or replacement
to utilize properly dates beyond December 31, 1999, and has contracted with
appropriate third parties to modify or replace such existing software and
hardware so that such software and hardware will not be affected by the
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change in the Year 2000. BSC has contacted its vendors and borrowers in order to
assess their efforts to mitigate any adverse effects to their computer programs
and systems beyond December 31, 1999.
(z) SBI Stock Ownership. BSC does not own any SBI Shares or other
securities convertible into SBI Shares.
(aa) Pooling of Interests. Neither BSC nor any BSC Shareholder has
taken or failed to take any action or has knowledge of any fact or circumstance
that would, or would be reasonably likely to, prevent the accounting for the
Share Exchange as a pooling of interests in accordance with GAAP and the
published pronouncements of the SEC.
(bb) Tax Reorganization. Neither BSC nor any BSC Shareholder has taken
or failed to take any action, or has knowledge of any fact or circumstance, that
would, or would be reasonably likely to, adversely affect the status of the
Share Exchange as a reorganization under Section 368(a) of the Code.
(cc) Disclosure. No representation or warranty by BSC and/or any BSC
Shareholder contained in this Agreement, nor any statement, certificate,
schedule, document or exhibit hereto furnished or to be furnished by or on
behalf of BSC or the BSC Shareholders pursuant to this Agreement or in any
documents delivered by BSC or the BSC Shareholders to SBI in connection with the
transactions contemplated by this Agreement, contains or shall contain any
untrue statement of material fact or omits or shall omit a material fact
necessary to make the statements contained therein not misleading. All
statements and information contained in any such certificate, instrument,
schedule or document delivered by or on behalf of BSC and/or any BSC Shareholder
shall be deemed representations and warranties by BSC and the BSC Shareholders.
SECTION 3.2 Representations, Warranties and Covenants of the BSC
----------------------------------------------------
Shareholders. The BSC Shareholders severally and not jointly represent, warrant
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and covenant to SBI that, except as specifically disclosed by the BSC
Shareholders to SBI in writing in the disclosure schedules being delivered to
SBI (the "BSC Shareholder Schedules") and which BSC Shareholder Schedules shall
-------------------------
identify the specific sections or subsections in the Agreement to which each
such disclosure relates:
(a) Ownership; Authority.
i. Such BSC Shareholder owns beneficially and of record the
number of shares set forth opposite his or her name on Schedule 3.2(a) free and
clear of all Encumbrances and such BSC Shareholder has the authority to execute
and deliver this Agreement, and no other acts or other proceedings on the part
of the BSC Shareholders are necessary to authorize this Agreement or the
transactions contemplated hereby or thereby. This Agreement has been duly and
validly executed and delivered by such BSC Shareholder and constitutes the
legal, valid and
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binding obligation of such BSC Shareholder, enforceable against each BSC
Shareholder in accordance with its terms, except as enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights in general, or by general
principles of equity.
ii. Neither the execution and delivery by such BSC Shareholder
of this Agreement nor the consummation of the transactions contemplated hereby
or thereby nor compliance by such BSC Shareholder with any of the provisions
hereof or thereof will (i) violate or conflict with, or result in a breach of
any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in the
creation of any Encumbrance upon any of the BSC Shares owned by such BSC
Shareholder under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease, sublease, option agreement
or other instrument or obligation to which such BSC Shareholder is a party, or
by which he or she or the BSC Shares owned by such BSC Shareholder may be bound
or affected, (ii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to such BSC Shareholder or the BSC Shares owned by such
BSC Shareholder or (iii) require any consent, approval or authorization of, or
notice to, or declaration, filing or registration with, any person or entity
applicable to such BSC Shareholder.
(b) Brokers or Finders. Such BSC Shareholder has not entered into and
will not enter into any agreement, arrangement or understanding with any broker,
finder or investment banker pertaining to the Share Exchange.
(c) No Other Agreements to Sell Shares. Other than pursuant to this
Agreement, no BSC Shareholder has any legal obligation, absolute or contingent,
to any other person or firm to sell any of the BSC Shares or to enter into any
agreement with respect thereto.
(d) Economic Risk; Sophistication. Each BSC Shareholder represents
and warrants that such BSC Shareholder has not relied on any purchaser
representative, or on BSC or any other BSC Shareholder, in connection with the
acquisition of shares of SBI Shares hereunder. Such BSC Shareholders is an
"accredited investor" within the meaning of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act"); and (a) has such
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knowledge, sophistication and experience in business and financial matters that
such BSC Shareholder is capable of evaluating the merits and risks of an
investment in the SBI Shares, (b) fully understands the nature, scope and
duration of the limitations on transfer contained in this Agreement and (c) can
bear the economic risk of an investment in the SBI Shares and can afford a
complete loss of such investment. Such BSC Shareholder has had an adequate
opportunity to ask questions and receive answers from the officers of SBI
concerning any and all matters relating to the transactions described herein
including without limitation the background and experience of the officers and
directors of SBI, the plans for the operations of the business of SBI, the
business, operations and financial condition of SBI, and any plans for
additional acquisitions and the like. Such BSC Shareholder has asked any and all
questions of the nature
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described in the preceding sentence and all questions have been answered to his
or her satisfaction. Additionally, such BSC Shareholder has received from SBI
copies of (i) SBI's Annual Report on Form 10-K for the year ended December 31,
1998, (ii) SBI's Quarterly Report on Form 10-Q for the period ended March 31,
1999 and (iii) the Proxy Statement for SBI's 1999 annual shareholder meeting,
and have also obtained such other information as such BSC Shareholder requires
in order to evaluate an investment in the Shares.
(e) Private Placement; Resale Restrictions.
i. By execution and delivery of this Agreement, each BSC
Shareholder represents and warrants to SBI that the representing BSC Shareholder
does not have any contract, undertaking, agreement or arrangement, written or
oral, with any other person to sell, transfer or grant participations in any SBI
Shares to be acquired by such BSC Shareholder. Additionally, each BSC
Shareholder represents and warrants that the SBI Shares are being acquired by
each of the BSC Shareholders for his or her own account, and not with a view to
the sale or distribution of any part thereof, except pursuant to a registration
statement filed pursuant to the Securities Act or an exemption from registration
thereunder.
ii. Each BSC Shareholder understands that the Shares have not
been registered under the Securities Act on the basis that the sale to the BSC
Shareholders in connection with the Share Exchange is exempt from registration
under the Securities Act pursuant to Section 4(2) thereof, and the SBI's
reliance on such exemption is predicated on the BSC Shareholder's
representations set forth herein.
iii. Each BSC Shareholder will not directly or indirectly,
offer, sell, contract to sell, pledge or otherwise dispose of (or solicit any
offers to buy, purchase or otherwise acquire or take a pledge of) any SBI Shares
unless (i) registered under the Securities Act, (ii) pursuant to an exemption
from registration under the Securities Act, (iii) in a transaction not requiring
registration under the Securities Act or (iv) accompanied by an opinion of
counsel satisfactory to SBI that registration is not required.
iv. The certificate or certificates evidencing the SBI Shares
to be delivered to the BSC Shareholders pursuant to the Share Exchange will bear
a legend substantially in the form set forth below and containing such other
information as SBI may deem necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. THE
SHARES HAVE BEEN ACQUIRED FOR INVESTMENT ONLY AND MAY NOT
BE SOLD, TRANSFERRED, OR ASSIGNED IN THE ABSENCE OF
REGISTRATION OF THE RESALE THEREOF UNDER THE SECURITIES
ACT OR AN
22
<PAGE>
OPINION OF COUNSEL REASONABLY SATISFACTORY IN FORM, SCOPE
AND SUBSTANCE TO SUSQUEHANNA BANCSHARES, INC.
("SUSQUEHANNA") THAT SUCH REGISTRATION IS NOT REQUIRED. IN
ADDITION, THE TRANSFER OF THESE SHARES IS RESTRICTED UNTIL
SUSQUEHANNA HAS PUBLICLY RELEASED ITS FIRST REPORT
INCLUDING THE COMBINED FINANCIAL RESULTS OF SUSQUEHANNA
AND BOSTON SERVICE COMPANY, INC. FOR A PERIOD OF AT LEAST
30 DAYS OF COMBINED OPERATIONS.
v. Notwithstanding anything herein contained to the contrary,
each BSC Shareholder will not sell, transfer or otherwise dispose of any of the
SBI Shares, or any option, right or other interest with respect to the SBI
Shares that such BSC Shareholder will acquire pursuant to this Agreement, or any
securities that may be paid as a dividend thereon or with respect thereto or
issued or delivered in exchange or substitution therefor, or offer or agree to
sell, transfer or otherwise dispose of, or in any other way reduce such BSC
Shareholder's risk of ownership or investment in the SBI Shares until SBI has
publicly released its first report including the combined financial results of
SBI and BSC for a period of at least thirty (30) days of combined operations.
After the release of the report described in the immediately preceding sentence,
certificates evidencing the SBI Shares delivered at or after the Closing Date,
may at the BSC Shareholder's election, be surrendered for cancellation and
reissuance with a legend relating only to the restriction on the transfer of the
SBI Shares pursuant to the Securities Act.
vi. Each BSC Shareholder acknowledges that SBI may place stop
transfer instructions with the transfer agent with respect to the SBI Shares.
SECTION 3.3 Representations and Warranties of SBI. SBI represents and
--------------------------------------
warrants to the BSC Shareholders (and the word "it" in this Article III refers
to SBI and each of its Subsidiaries), that, except as specifically disclosed by
SBI to the BSC Shareholders in writing in the disclosure schedules being
delivered to the BSC Shareholders (the "SBI Schedules") and which SBI Schedules
-------------
shall identify the specific sections or subsections in the Agreement to which
each such disclosures relates, to the best of its knowledge:
(a) Corporate Organization and Qualification. SBI is a corporation
duly incorporated, validly existing and duly subsisting under the laws of the
Commonwealth of Pennsylvania and is in good standing as a foreign corporation in
each jurisdiction where the properties owned, leased or operated, or the
business conducted, by SBI requires such qualification, except for such failure
to qualify or be in such good standing which, when taken together with all other
such failures, would not have a material adverse effect on SBI. It has the
requisite corporate and other power and authority (including all federal, state,
local and foreign governmental authorizations) to carry on its business as now
conducted and to own its properties and assets.
23
<PAGE>
(b) Corporate Authority. Subject only to the regulatory approvals
specified in Section 5.1(a) hereof, SBI has the requisite corporate power and
authority, and legal right, and has taken all corporate action necessary in
order to execute and deliver this Agreement and to consummate the transactions
applicable to SBI contemplated hereby. This Agreement has been duly and validly
executed and delivered by SBI and constitutes the valid and binding obligations
of SBI enforceable against SBI, in accordance with its terms, except to the
extent enforcement is limited by bankruptcy, insolvency and other similar laws
affecting creditors' rights or the application by a court of equitable
principles.
(c) Capitalization. As of June 30, 1999, SBI common stock was held of
record by more than 6,700 shareholders and the authorized capital stock of SBI
consisted of 100,000,000 shares of SBI common stock, of which approximately
36,977,488 shares are issued and outstanding (an additional 12,612 shares are
held as treasury stock) and 5,000,000 shares of Preferred Stock, no par value
per share, of which none are outstanding. Sufficient shares of authorized, but
unissued, SBI common stock to effect the transactions herein contemplated will
be reserved by SBI for such purpose.
(d) No Violations. The execution, delivery and performance of this
Agreement by SBI does not, and the consummation of the transactions contemplated
hereby by SBI will not, constitute (i) a breach or violation of, or a default
under, any law, rule or regulation or any judgment, decree, order, governmental
permit or license, or agreement, indenture or instrument to which SBI (or any of
SBI's respective properties or assets) is subject, (ii) a breach or violation
of, or a default under, SBI's articles of incorporation or bylaws or (iii) a
breach or violation of, or a default under (or an event which with due notice or
lapse of time or both would constitute a default under), or result in the
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other encumbrance
upon any of SBI's properties or assets under, any of the terms, conditions or
provisions of any note, bond, indenture, deed of trust, loan agreement or other
agreement, instrument or obligation to which it is a party, or to which any of
SBI's properties or assets may be bound or affected; and the consummation of the
transactions contemplated hereby will not require any approval, consent or
waiver under any such law, rule, regulation, judgment, decree, order,
governmental permit or license or the approval, consent or waiver of any other
party to any such agreement, indenture or instrument, other than (i) the
required approvals, consents and waivers of governmental authorities referred to
in Section 5.1(b) and (ii) any such approval, consent or waiver that already has
been obtained.
(e) Board Action. SBI's board of directors (at a meeting duly called
and held) has been duly convened and by the requisite vote of all directors (a)
determined that the Share Exchange is advisable and in the best interests of it
and its shareholders, and (b) approved this Agreement and the transactions
contemplated hereby, subject to the receipt of the opinion of SBI's financial
advisor to the effect that the Exchange Ratio and the Share Exchange
Consideration are fair from a financial point of view to the holders of SBI
Shares, as set forth in Section 5.2(f).
24
<PAGE>
(f) SBI SEC Reports and Financial Statements. SBI has furnished to
the BSC Shareholders copies of the Annual Report of SBI on Form 10-K for the
fiscal year ended December 31, 1998, any proxy statements and other reports
(including Quarterly Reports on Form 10-Q) under the Exchange Act, filed by SBI
after such date (collectively, the "SEC Reports"), each as filed with the SEC,
-----------
and SBI's 1998 Annual Report to Shareholders (the "1998 Annual Report"). As of
------------------
their respective dates, each SEC Report and any proxy statements and other
reports filed by SBI with the SEC after the date of this Agreement (i) compiled,
or will comply with on the date of such filing, as to form in all material
respects with the applicable requirements of the Securities Act and the Exchange
Act and (ii) did not, or will not, on the date of filing or the date as of which
information is set forth therein, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. The representation in clause (ii) of the
immediately preceding sentence shall not apply to any misstatement or omission
in any SEC Report filed prior to the date hereof which was superseded by a
subsequent SEC Report filed prior to the date hereof. The financial statements
(including any related schedules and/or notes) included in the SEC Reports and
the 1998 Annual Report have been prepared in accordance with GAAP consistently
applied (except as may be indicated in the notes thereto) throughout the periods
involved and fairly present the financial position, results of operations and
cash flows as of the dates and for the periods indicated therein.
(g) Absence of Undisclosed Liabilities. Except (i) as disclosed in,
or reflected in the financial statements included in, the SEC Reports, (ii)
liabilities which have been incurred since March 31, 1999 in the ordinary course
of business consistent with past practice as a result of arm's length
negotiations, which liabilities would not be reasonably likely to have a
material adverse effect on the business, earnings, assets, liabilities,
financial or other condition or results of operations of SBI and its
Subsidiaries taken as a whole and (iii) liabilities and obligations specifically
disclosed on Schedule 3.3(g), neither SBI nor any of its Subsidiaries has any
material liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise and whether due or to become due).
(h) SBI Shares. The issuance and delivery by SBI of the SBI Shares in
connection with the Share Exchange and this Agreement have been duly and validly
authorized by all necessary corporate action on the part of SBI. The SBI Shares
to be issued in connection with the Share Exchange and this Agreement, when
issued in accordance with the terms of this Agreement, will be validly issued,
fully paid and nonassessable.
(i) Pooling of Interests. Neither SBI nor any of its Subsidiaries has
taken or failed to take any action or has knowledge of any fact or circumstance
that would, or would be reasonably likely to, prevent the accounting for the
Share Exchange as a pooling of interests in accordance with GAAP and the
pronouncements of the SEC.
25
<PAGE>
(j) Tax Reorganization. SBI understands that this transaction is
intended by the BSC Shareholders to qualify as a tax-free reorganization under
Section 368(a) of the Code. Neither SBI nor any of its Subsidiaries has taken,
failed to take or will take any action, or has knowledge of any fact or
circumstances that would, or would be reasonably likely to, adversely affect the
status of the Share Exchange as a tax-free reorganization under Section 368(a)
of the Code.
ARTICLE IV
COVENANTS
SECTION 4.1 Acquisition Proposals. BSC and the BSC Shareholders agree
---------------------
that they shall not, and that they shall direct and use their best efforts to
cause the BSC employees, agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by them) not
to, initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to their shareholders) with respect to a
merger, acquisition, consolidation, reorganization, share exchange, tender
offer, exchange offer or similar transaction involving, or any purchase, sale or
other disposition of all or any significant portion of the assets or any equity
securities of, BSC (any such proposal or offer being hereinafter referred to as
an "Acquisition Proposal") or, engage in any negotiations concerning, or provide
--------------------
any confidential information or data to, or have any discussions with, any
person relating to an Acquisition Proposal, or otherwise facilitate any effort
or attempt to make or implement an Acquisition Proposal. BSC and the BSC
Shareholders agree that they will take the necessary steps to inform the
appropriate individuals or entities referred to in the first sentence hereof of
the obligations undertaken by each of them in this Section 4.1. BSC and the BSC
Shareholders agree that they will notify SBI immediately if any such inquiries
or proposals are received by, any such information is requested from, or any
such negotiations, or discussions are sought to be initiated or continued with,
them.
SECTION 4.2 Securities Registration and Disclosure. Following the
--------------------------------------
publication of financial results covering at least thirty (30) days of combined
operations of SBI and BSC have been published within the meaning of Section
201.01 of the SEC's Codification of Financial Reporting Policies, SBI will
promptly prepare and file with the SEC under the Securities Act a registration
statement for the registration of the resale of the SBI Shares to be issued
pursuant hereto (the "Registration Statement"), as provided in the Registration
----------------------
Rights Agreement between the BSC Shareholders and SBI set forth in Exhibit A
attached hereto. SBI shall take any action required to be taken under any
applicable state securities or "blue sky" laws in connection with the issuance
of SBI Shares pursuant to this Agreement and the BSC Shareholders shall furnish
SBI all information concerning them as SBI may reasonably request in connection
with any such action.
SBI shall use reasonable efforts to provide a copy of the Registration
Statement to the BSC Shareholders for their review ten (10) business days prior
to its filing with the SEC. Each
26
<PAGE>
party will promptly provide the other with copies of all correspondence, comment
letters, notices or other communications to or from the SEC or the Board
relating to the Registration Statement, or any amendment or supplement thereto,
and SBI will advise the BSC Shareholders promptly after it receives notice
thereof, of the effectiveness of the Registration Statement, of the issuance of
any stop order with respect to the effectiveness thereof, of the suspension of
the qualification of the SBI Shares issuable in connection herewith for offering
or sale in any jurisdiction, or the initiation or threat of any proceeding for
any such purpose.
SECTION 4.3 Employees.
---------
(a) Each person employed by BSC prior to the Closing who remains an
employee of BSC following the Closing (each a "Continued Employee") shall be
------------------
entitled to participate in whatever employee benefit plans, as defined in
Section 3(3) of ERISA, or whatever stock option, bonus or incentive plans or
other fringe benefit programs that may be in effect generally for employees of
SBI or SBI's Subsidiaries from time to time ("SBI's Plans"), if such Continued
-----------
Employee shall be eligible or selected for participation therein and otherwise
shall not be participating in a similar plan which continues to be maintained by
the BSC for such employee. All such participation shall be subject to such terms
of such plans as may be in effect from time to time provided, further that
Continued Employees will be eligible to participate in SBI's plans on the same
basis as similarly situated employees of SBI or SBI's Subsidiaries. Such
Continued Employees will receive credit for past service with BSC for purposes
of eligibility and vesting, but not benefit accrual, under SBI's Plans.
(b) BSC shall take all timely and necessary action to cease
participation or accrual of benefits, effective as of the Closing, by each
person employed by BSC prior to the Closing in each Employee Plan (as defined in
Section 3.1(l), including timely notice to all participants under Section 204(h)
of ERISA, if applicable, and to terminate each Employee Plan, other than an
Employee Plan containing a cash or deferred arrangement qualified under Section
401(k) of the Code ("Employee 401(k) Plan") and other than those specified in
--------------------
Schedule 4.3(b), effective as of the Closing; provided that SBI may, in its sole
discretion, give notice to BSC not less than twenty (20) days prior to the
Closing, that any Employee Plan shall not be terminated and/or participation or
accrual of benefits thereunder shall not cease pursuant to this Section 4.3(b).
At the sole discretion of SBI, any Employee 401(k) Plan shall be merged with any
similar such plan maintained and designated by SBI, effective at or after the
Closing, as elected by SBI, and BSC shall take any and all timely and necessary
action to effect such merger.
SECTION 4.4 Access and Information. Upon reasonable notice, and
----------------------
subject to applicable laws relating to the exchange of information, each party
to this Agreement shall provide the other party and its representatives
(including, without limitation, directors, officers and employees of the party
and its affiliates, and counsel, accountants and other professionals retained)
such access during normal business hours throughout the period prior to the
Closing to the facilities, books, records (including, without limitation, tax
returns and work papers of independent auditors), properties, personnel and such
other information as the requesting party
27
<PAGE>
may reasonably request (other than reports or documentation which are not
permitted to be disclosed under applicable law); provided, however, that no
investigation pursuant to this Section 4.4 shall affect or be deemed to modify
any representation or warranty made herein. Each of the parties will not, and
will cause their respective representatives not to, use any information obtained
pursuant to this Section 4.4 or Section 3.1 for any purpose unrelated to the
consummation of the transactions contemplated by this Agreement and in no event
will any party directly or indirectly use such information for any competitive
or commercial purpose. Subject to the requirements of law, each party to this
Agreement will keep confidential, and will cause its representatives to keep
confidential, all information and documents obtained pursuant to this Section
4.4 and Section 3.1 unless such information (i) is generally available to or
known by the public other than as a result of improper disclosure by the
receiving party or (ii) is obtained by a receiving party from a source other
than another party to this Agreement, provided that such source was not bound by
a duty of confidentiality with respect to such information. Without in any way
limiting the foregoing, BSC shall provide to SBI within forty-five (45) days of
the end of each calendar quarter financial statements (including a balance sheet
and income statement) (except for the calendar quarter financial statements for
the calendar quarter ended December 31, 1999, which shall be provided to SBI
within thirty (30) days) as of the end of, and for, such period prepared in each
case on a basis consistent with past practice for the quarters ended March 31,
1999, June 30, 1999 (each as restated to conform with GAAP) and September 30,
1999 and December 31, 1999, if applicable, as prepared in conformance with GAAP
and the representations set forth in Section 3.1(f) for the quarters ended
September 30, 1999 and December 31, 1999, if applicable. In the event that this
Agreement is terminated or the transactions contemplated by this Agreement shall
otherwise not be consummated, each party shall, if so requested, promptly cause
all copies of documents or extracts thereof containing information and data as
to another party hereto (or an affiliate of any party hereto) to be returned to
the party which furnished the same.
SECTION 4.5 Certain Filings, Consents and Arrangements. SBI shall use
------------------------------------------
all reasonable efforts to obtain all necessary approvals required to be obtained
by SBI to carry out the transactions contemplated by this Agreement and to
consummate the Share Exchange. BSC shall cooperate with SBI in connection
therewith, including without limitation furnishing all information concerning
BSC as may be reasonably requested by SBI in connection with any such action.
BSC shall use all reasonable efforts to obtain all necessary approvals required
to be obtained by BSC to carry out the transactions contemplated by this
Agreement and to consummate the Share Exchange. SBI shall cooperate with BSC in
connection therewith, including without limitation furnishing all information
concerning SBI as may be reasonably requested by BSC in connection with any such
action. Each party will consult with the other party with respect to the
obtaining of all permits, consents, approvals and authorizations of all third
parties and governmental authorities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
party apprised of the status of matters relating to completion of the
transactions contemplated hereby. Each party shall promptly furnish the other
party with copies of applications to any governmental authority in respect of
the transactions contemplated hereby.
28
<PAGE>
SECTION 4.6 Additional Agreements. Subject to the terms and
---------------------
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly, or cause to be done promptly, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as promptly as
practicable, including using efforts to obtain all necessary actions or non-
actions, extensions, waivers, consents and approvals from all applicable
governmental authorities, or other entities, effecting all necessary
registrations, applications and filings and obtaining any required contractual
consents and regulatory approvals.
SECTION 4.7 Publicity. Except and to the extent required by law,
---------
without the prior written consent of the other parties, none of the parties to
this Agreement shall, and each shall direct its representatives not to, directly
or indirectly, make any public comment, statement or communication with respect
to, or otherwise disclose or permit the disclosure of any information regarding
this Agreement or the transactions described herein. Prior to issuing any press
release or making any public filings under securities laws which makes any
reference to BSC, SBI shall provide a copy to BSC for comment and in all such
instances the parties shall cooperate.
SECTION 4.8 Listing Application. Following the disclosure of
-------------------
financial results covering at least thirty (30) days of combined operations of
SBI and BSC, SBI shall promptly prepare and submit to the Nasdaq National Market
a listing application covering the SBI Shares issuable in the Share Exchange,
and shall use its best efforts to obtain, prior to the effectiveness of the
Registration Statement, approval for the listing of such SBI Shares, subject to
official notice of issuance.
SECTION 4.9 Notification of Certain Matters. Each party shall give
-------------------------------
prompt notice to the others of (a) any notice of, or other communication
relating to, a default or event that, with notice or lapse of time or both,
would become a default, received by it or any of its subsidiaries subsequent to
the date of this Agreement and prior to the Closing, under any contract material
to the financial condition, properties, businesses, results of operations or
prospects of it to which it is a party or is subject; and (b) any material
adverse change in its financial condition, properties, business, or results of
operations taken as a whole or the occurrence of any event which, so far as
reasonably can be foreseen at the time of its occurrence, is reasonably likely
to result in any such change. Each party shall give prompt notice to the other
parties of any notice or other communication from any third party alleging that
the consent of such third party is or may be required in connection with the
transactions contemplated by this Agreement.
SECTION 4.10 Insurance. BSC shall use its best efforts to retain no
---------
less than the level of insurance coverage presently held by it as of the date
hereof.
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SECTION 4.11 Board Seat. At the meeting of the SBI Board of
----------
Directors next following the Closing Date, Michael J. Wimmer shall be appointed
as a director of SBI in the class of directors whose term expires upon the
election of the successors to that class at the annual meeting of SBI
shareholders in or around May of 2000. So long as Michael J. Wimmer remains
employed under the Employment Agreement between Michael J. Wimmer and BSC, the
SBI Board of Directors shall recommend him for reelection as a director of SBI
in the class of directors whose term expires upon the election of the successors
to that class at the annual meeting of SBI shareholders in or around May of
2003.
SECTION 4.12 Pooling; Reorganization. From and after the date
-----------------------
hereof and until the Closing, neither SBI nor BSC nor any of their respective
subsidiaries or other affiliates nor any BSC Shareholder shall (i) take any
action, or fail to take any action, that could jeopardize the qualification of
the Share Exchange as a "pooling of interests" for accounting purposes; (ii)
take any action, or fail to take any action, that could jeopardize qualification
of the Share Exchange as a reorganization under Section 368(a) of the Code; or
(iii) enter into any contract, agreement, commitment or arrangement with respect
to either of the foregoing. At the Closing, the auditors of BSC will deliver a
letter to PricewaterhouseCoopers, as accountants for SBI, to the effect that BSC
has complied with all pooling requirements applicable to BSC in form and
substance satisfactory to PricewaterhouseCoopers.
SECTION 4.13 General Release. At the Closing, each BSC Shareholder
---------------
shall deliver a general release to SBI, in the form attached hereto as
Exhibit B, releasing SBI and the directors, officers, agents and employees of
SBI from all liabilities to the Closing Date.
SECTION 4.14 Employment Agreement. At the Closing, BSC and
-----------------
Michael J. Wimmer will enter into an Employment Agreement, substantially in the
form attached hereto as Exhibit C.
SECTION 4.15 Real Property Leases. At the Closing, real property
--------------------
leases substantially in the form of Exhibit D hereto will be entered into by BSC
and MTW Realty, L.L.C.
SECTION 4.16 Consents. BSC and the BSC Shareholders will use their
--------
best efforts prior to Closing to obtain all consents necessary for the
consummation of the transactions contemplated by this Agreement.
SECTION 4.17 BSC Shares. Between the date of this Agreement and the
----------
Closing Date, the BSC Shareholders will not transfer any of the BSC Shares or
convey any interest in the BSC Shares, nor will the BSC Shareholders vote the
BSC Shares in any way to cause a breach of this Agreement.
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<PAGE>
SECTION 4.18 Non-Competition. (a) Subject to the Closing, and as
---------------
an inducement to SBI to execute this Agreement and complete the transactions
contemplated hereby, and in order to preserve the goodwill associated with the
business of BSC being acquired pursuant to this Agreement, BSC and the BSC
Shareholders hereby covenant and agree that for a period of five (5) years from
the Closing Date, they will not, directly for themselves or any third party,
become engaged in any business or activity which is directly in competition with
any services or financial products sold by, or any business or activity engaged
in by, BSC, SBI or any of their affiliates including, without limitation, any
business or activity engaged in by any leasing company or any federally or state
chartered bank, savings bank, savings and loan association, trust company and/or
credit union, and/or any services or financial products sold by such entities,
including, without limitation, the taking and accepting of deposits, the
provision of trust services, the making of loans and/or the extension of credit,
brokering loans and/or leases and the provision of insurance and investment
services, within the states of New Jersey, New York, Pennsylvania, Delaware,
Maryland and Virginia; provided, however that Michael J. Wimmer may continue,
consistent with past practice, to engage in business activities with Auto
Lenders Liquidation Center, Inc. This provision shall not restrict BSC or the
BSC Shareholders from owing or investing in publicly traded securities of
financial institutions, so long as their respective aggregate holdings in any
financial institution do not exceed ten percent (10%) of the outstanding capital
stock of such institution.
In the event that a court of competent jurisdiction determines that
the provisions of this covenant not to compete are excessively broad as to
duration, geographical scope or activity, it is expressly agreed that this
covenant not to compete shall be construed so that the remaining provisions
shall not be affected, but shall remain in full force and effect, and any such
over broad provisions shall be deemed, without further action on the part of any
person, to be modified, amended and/or limited, but only to the extent necessary
to render the same valid and enforceable in such jurisdiction.
ARTICLE V
CONDITIONS TO CONSUMMATION OF THE SHARE EXCHANGE
SECTION 5.1 Conditions to Closing. The respective obligations of
---------------------
the parties to effect the Share Exchange shall be subject to the satisfaction or
waiver prior to the Closing of the following conditions:
(a) All of the required approvals, consents or waivers of
governmental authorities with respect to this Agreement and the transactions
contemplated hereby including, without limitation, the approvals, notices to,
consents or waivers of (i) the Board of Governors of the Federal Reserve and
(ii) jurisdictions with respect to "blue sky" obligations; and the parties shall
have procured all other regulatory approvals, consents or waivers of
governmental authorities that are necessary or appropriate to the consummation
of the transactions contemplated by this Agreement.
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(b) No party hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Share Exchange, or any other transaction
contemplated by this Agreement, and no litigation or proceeding shall be pending
against any of the parties herein or any of their subsidiaries brought by any
governmental agency seeking to prevent consummation of the transactions
contemplated hereby. In the event any order or injunction shall have been
issued, each party to this Agreement agrees to use its reasonable efforts to
have any such injunction lifted.
(c) No statute, rule, regulation, order, injunction or decree shall
have been enacted, entered, promulgated or enforced by any governmental
authority which prohibits, restricts or makes illegal consummation of the Share
Exchange, or any other transaction contemplated by this Agreement.
SECTION 5.2 Conditions to Obligations of SBI. The obligations of
--------------------------------
SBI to effect the Share Exchange shall be subject to the satisfaction or waiver
prior to the Closing of the following additional conditions:
(a) Each of the representations and warranties of BSC and the BSC
Shareholders contained in this Agreement and in any document delivered in
connection herewith shall be true and correct in all material respects as of the
Closing Date as if made on such date (or on the date when made in the case of
any representation or warranty which specifically relates to an earlier date);
BSC shall have performed each of its covenants and agreements, contained in this
Agreement; and SBI shall have received a certificate signed by the Chief
Executive Officer and the Controller of the BSC, dated the Closing Date, to the
foregoing effect.
(b) SBI shall have received an opinion or opinions dated as of the
Closing Date, from Capehart & Scatchard, P.A., counsel to BSC, substantially in
the form attached hereto as Exhibit E.
(c) There shall not have occurred any material adverse change in the
financial condition, prospects, properties, assets, liabilities (including
contingent liabilities), business or results of operation of BSC.
(d) The Share Exchange shall as of the date of the Closing meet the
requirements for pooling-of-interests accounting treatment under GAAP and under
the published accounting rules of the SEC, and SBI shall have received a letter
from PricewaterhouseCoopers LLP in form and substance reasonably satisfactory to
SBI as to the matters specified in this Section 5.2(d).
(e) Michael J. Wimmer shall have entered into an Employment Agreement
with BSC, substantially in the form of Exhibit C hereto.
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(f) SBI shall have received the opinion from its financial advisor to
the effect that the Exchange Ratio and the Share Exchange Consideration are fair
from a financial point of view to the holders of SBI Shares.
(g) BSC shall have entered into an agreement with Auto Lenders
Liquidation Center with respect to the provision of services, substantially in
the form attached hereto as Exhibit F.
(h) M.R. Weiser & Co., LLP, or such other accounting firm as is
acceptable to the parties, shall have furnished to SBI an "agreed upon
procedures" letter, dated the Closing Date, in form and substance satisfactory
to SBI to the effect that, based upon procedures performed with respect to the
financial condition of BSC for the period from December 31, 1998 to a specified
date not more than five (5) business days prior to the date of such letter,
including but not limited to (i) their inspection of the minute books of BSC,
(ii) inquiries made by them of officers and other employees of BSC and
affiliates responsible for financial and accounting matters as to transactions
and events during the period, as to consistency of GAAP with prior periods and
as to the existence and disclosure of any material contingent liabilities, and
(iii) other specified procedures and inquiries performed by them, noting in the
letter based only upon the procedures noted above, (A) during the period from
December 31, 1998 to a specified date not more than five (5) business days prior
to the date of such letter, any change in the capitalization of BSC on a
consolidated basis, (B) any material adjustments that would be required to the
audited financial statements for the period ended December 31, 1998 in order for
them to be in conformity with GAAP applied on a consistent basis with prior
periods or (C) any material adjustments which would be required to the unaudited
financial statements for the most recent quarter end period prior to the Closing
in order for them to be in conformity with GAAP applied on a consistent basis
with prior periods.
SECTION 5.3 Conditions to the Obligations of BSC and the BSC
------------------------------------------------
Shareholders. The obligations of BSC and the BSC Shareholders to effect the
- ------------
Share Exchange shall be subject to the satisfaction or waiver prior to the
Closing of the following additional conditions:
(a) Each of the representations, warranties and covenants of SBI
contained in this Agreement and in any document delivered in connection herewith
shall be true and correct in all material respects on the Closing Date as if
made on such date (or on the date when made in the case of any representation or
warranty which specifically relates to an earlier date); SBI shall have
performed each of its covenants and agreements, which are material to its
operations and prospects, contained in this Agreement; and BSC shall have
received certificates signed by the President or Vice President and Secretary or
Assistant Secretary of SBI, dated the Closing Date, to the foregoing effect.
(b) BSC shall have received an opinion dated as of the Closing Date,
from Counsel of SBI, substantially in the form attached hereto as Exhibit G.
33
<PAGE>
ARTICLE VI
NATURE AND SURVIVAL OF REPRESENTATIONS
AND WARRANTIES; INDEMNIFICATION, ETC.
SECTION 6.1 Survival of Representations and Warranties, Indemnities.
-------------------------------------------------------
(a) All covenants and agreements of the parties made in this Agreement or
provided herein shall survive the Closing Date to the extent expressly provided
herein. All representations and warranties of the parties made in this
Agreement or as provided herein shall be made as of the date hereof and shall
survive the Closing for a period of two years (the "Survival Period"), except
---------------
that (a) any intentional or knowing misrepresentation shall survive the Closing
indefinitely, and (b) Sections 3.1(a), (b), (d), (h), (n) and (p) and Section
3.2(a) shall survive the expiration of the fifteen (15) day period commencing on
the expiration date of the relevant statute of limitations period (including any
applicable extensions thereof), if longer than the two-year period previously
specified (provided that if there is no relevant statute of limitations,
survival shall be indefinite), unless survival is governed by the preceding
clause (a).
(b) The BSC Shareholders (other than the Custodial Shareholder),
jointly and severally, hereby agree to defend, indemnify and hold SBI and its
Subsidiaries and their officers, directors and employees (collectively, the "SBI
---
Indemnitees") harmless from and against any and all claims, liabilities, losses,
- -----------
damages, deficiencies, penalties, fines, costs or expenses (including, without
limitation, the fees and expenses of investigation and counsel) (collectively,
"Losses"), arising out of or resulting from (i) any breach of the
------
representations and warranties contained in Section 3.1; (ii) any breach in any
material respect by the BSC Shareholder or BSC of any covenant or agreement of
the BSC Shareholder or BSC contained in or arising out of this Agreement or
(iii) any and all actions, suits, proceedings, claims, demands, assessments and
judgments incidental to the foregoing to the enforcement of such
indemnification. Each BSC Shareholder, jointly and severally, hereby agrees to
defend, indemnify and hold the SBI Indemnitees harmless from and against any and
all Losses arising out of or resulting from any breach of any representation or
warranty by such BSC Shareholder contained in Section 3.2.
(c) Notwithstanding anything to the contrary in this Agreement, the
BSC Shareholders shall not be liable to the SBI Indemnitees for any Losses until
the Losses incurred by the SBI Indemnitees exceed Five Hundred Thousand Dollars
($500,000) (the "Threshold Amount"), and then the BSC Shareholders shall be
----------------
liable to indemnify and hold the SBI Indemnitees harmless hereunder only to the
extent such Losses exceed the Threshold Amount; provided that this Section
6.1(c) shall not apply to any intentional or knowing misrepresentations or
breaches of covenants or agreements by BSC or the BSC Shareholders.
(d) Notwithstanding anything to the contrary in this Agreement, the
BSC Shareholders shall not have any liability under this Article VI to the
extent that any such liability exceeds Three Million Dollars ($3,000,000).
34
<PAGE>
(e) SBI hereby agrees to defend, indemnify and hold the BSC
Shareholders (collectively, the "BSC Shareholder Indemnitees") harmless from and
---------------------------
against any and all Losses, arising out of or resulting from (i) any breach of
the representations and warranties contained in Section 3.3; (ii) any breach in
any material respect by SBI of any covenant or agreement of SBI contained in or
arising out of this Agreement or (iii) any and all actions, suits, proceedings,
claims, demands, assessments and judgments incidental to the foregoing to the
enforcement of such indemnification.
(f) Notwithstanding anything to the contrary in this Agreement, SBI
shall not have any liability under this Article VI to the extent that any such
liability exceeds Three Million Dollars ($3,000,000), except that nothing
contained in this subparagraph shall limit SBI's obligation to provide validly
issued SBI Shares to the BSC Shareholders in the amount provided for in this
Agreement.
(g) Promptly after the receipt by the SBI Indemnitees of a notice
of any claim, action, suit or proceeding of any third party which is subject to
indemnification hereunder, such party or parties (the "Indemnified Buyer Party")
-----------------------
shall give written notice of such claim (a "Notice of Claim") to the party or
---------------
parties obligated to provide indemnification hereunder (collectively, the
"Indemnifying Shareholder Party"), stating the nature and basis of such claim
------------------------------
and the amount thereof, to the extent known. The failure of the Indemnified
Buyer Party to so notify the Indemnifying Shareholder Party shall not impair the
Indemnified Buyer Party's ability to seek indemnification from the Indemnifying
Shareholder Party, except to the extent that the Indemnifying Shareholder Party
is materially prejudiced. The Indemnifying Shareholder Party shall be entitled
to participate in the defense or settlement of such matter and the parties agree
to cooperate in any such defense or settlement and to give each other full
access to all information relevant thereto. The Indemnifying Shareholder Party
shall not be obligated to indemnify an Indemnified Buyer Party hereunder for any
settlement entered into without the Indemnifying Shareholder Party's prior
written consent, which consent shall not be unreasonably withheld, conditioned
or delayed. If any Notice of Claim relates to a claim by a person or persons
other than any federal state, local or foreign tax authority; and the amount of
such claim is acknowledged by the Indemnifying Shareholder Party to be fully
covered by the foregoing indemnity, as limited herein, the Indemnifying
Shareholder Party may elect to defend against such claim at its own expense, in
lieu of the Indemnified Buyer Party assuming such defense; provided, that the
--------
Indemnified Buyer Party shall be entitled to participate in or monitor such
defense at its own expense and the Indemnifying Shareholder Party will fully
cooperate with the Indemnified Buyer Party and its counsel with respect thereto.
If the Indemnifying Shareholder Party elects to assume such defense, the
Indemnifying Shareholder Party shall retain counsel reasonably satisfactory to
the Indemnified Buyer Party. No compromise or settlement of such claim may be
effected by the Indemnifying Shareholder Party without the consent of the
Indemnified Buyer Party (which shall not be unreasonably withheld, conditioned
or delayed) unless (i) there is no finding or admission of any violation of law
and no effect on any other claims that may be made against such Indemnified
Buyer Party and (ii) the sole relief provided is monetary damages that are paid
---
in full by the Indemnifying Shareholder Party. If a Notice of
35
<PAGE>
Claim relates to a claim by a federal, state, local or foreign Tax authority and
the Indemnifying Shareholder Party requests that the Indemnified Buyer Party
accept a settlement offer (other than an offer conditioned upon the Indemnified
Buyer Party's agreement with respect to any other issue not deemed a Loss
hereunder) and agrees to pay the indemnity with respect thereto, then the
Indemnified Buyer Party shall either (i) accept such settlement offer or (ii)
not accept such settlement offer, in which case the Indemnifying Shareholder
Party shall only be liable to the Indemnified Buyer Party for the amount the
Indemnifying Shareholder Party would have been required to pay the Indemnified
Buyer Party had the Indemnified Buyer Party accepted the settlement offer.
(h) All claims for indemnification by a BSC Shareholder Indemnitee
under this Article VI shall be asserted and resolved under the procedures set
forth above substituting in the appropriate place "Indemnified Shareholder
Party" for "Indemnified Buyer Party" and variations thereof and "SBI" for
"Indemnifying Shareholder Party."
(i) Notwithstanding any provision in this Article VI to the contrary,
any claim for indemnification in respect of which notice is given in accordance
with the provisions of Section 6.1(a) hereof prior to the expiration of the
Survival Period shall survive with respect to such claim until final resolution
thereof.
(j) Notwithstanding any provision in this Article VI to the contrary,
no party shall be able to avoid the limitations of this Article by electing to
pursue some other remedy, except with respect to remedies relating to fraud or
intentional or knowing misrepresentation.
36
<PAGE>
ARTICLE VII
TERMINATION
SECTION 7.1 Termination. This Agreement may be terminated, and the
-----------
Share Exchange abandoned, prior to the Closing:
(a) by the mutual, written consent of BSC and SBI;
(b) by BSC if (i) there has been a material breach by SBI of any
representation, warranty, covenant or agreement contained herein and such breach
is not cured or not curable within ten (10) days after written notice of such
breach is given to SBI by BSC; or (ii) any condition precedent to BSC's
obligations as set forth in Article V of this Agreement has not been met or
waived by BSC at such time as such condition can no longer be satisfied.
(c) by SBI by written notice to BSC and the BSC Shareholders, in the
event (1) of a material breach by BSC or any BSC Shareholder of any
representation, warranty, covenant or agreement contained herein and such breach
is not cured or not curable within ten (10) days after written notice of such
breach is given to BSC and the BSC Shareholders by SBI; or (ii) any condition
precedent to SBI's obligations as set forth in Article V of this Agreement has
not been met or waived by SBI at such time as such condition can no longer be
satisfied.
(d) by SBI or BSC by written notice to the other, in the event that
the Share Exchange is not consummated by February 28, 2000, unless the failure
to so consummate by such time is due to the breach of any representation,
warranty or covenant contained in this Agreement by the party seeking to
terminate; provided, however, that such date may be extended by the written
agreement of SBI and BSC, and such date will be automatically extended until
May 31, 2000 if the approval set forth in Section 7.5 of this Agreement has not
been received by such date.
(e) by BSC, by giving written notice of such election to SBI within
one (1) business day following determination of the Average Closing Price per
SBI Share in connection with Closing if such Average Closing Price is greater
than $25.00 per share (subject to adjustment in accordance with Section 1.1
herein) at the time such calculation is required to be made pursuant to
Schedule 1.1 hereof
(f) by SBI, by giving written notice of such election to BSC within
one (1) business day following determination of the Average Closing Price per
SBI Share in connection with Closing if such Average Closing Price is less than
$15.00 per share (subject to adjustment in accordance with Section 1.1 herein)
at the time such calculation is required to be made pursuant to Schedule 1.1
hereof.
37
<PAGE>
SECTION 7.2 Effect of Termination. In the event of the termination
---------------------
of this Agreement, as provided above, this Agreement shall thereafter become
void and have no effect, except that the provisions of Sections 3.1(o) (fees),
4.4 (as applicable to confidentiality and return of documents), 4.7 (publicity)
and 7.3 (expenses) of this Agreement shall survive any such termination and
abandonment.
SECTION 7.3 Expenses. Any termination of this Agreement pursuant to
--------
Sections 7.1(a), 7.1(d), 7.1(e) or 7.1(f) hereof shall be without cost, expense
or liability on the part of any party to the others. Any termination of this
Agreement pursuant to Section 7.1(b) or 7.1(c) hereof shall also be without
cost, liability or expense on the part of any party to the others, unless the
breach of a representation or warranty or covenant is caused by the willful
conduct or gross negligence of a party, in which event said party shall be
liable to the other parties for all out-of-pocket costs and expenses, including
without limitation, reasonable legal and accounting, incurred by such other
party in connection with their entering into this Agreement and their carrying
out of any and all acts contemplated hereunder ("Expenses").
--------
SECTION 7.4 Extension, Waiver. At any time prior to the Closing, any
-----------------
party hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 7.5 Approval of Federal Reserve Board. Notwithstanding the
---------------------------------
foregoing or any other provision of this Agreement to the contrary, in the event
that SBI is required to file with the Federal Reserve Bank an approval request,
with respect to the transactions contemplated by this Agreement, BSC and the BSC
Shareholders hereby agree to extend the date of this Agreement until such
approval is granted, or May 31, 2000, whichever is earlier, and BSC and the BSC
Shareholders hereby agree that the time period required for the filing of such
an approval request and the receipt of approval from the Federal Reserve Bank
shall not give rise to a right to terminate this Agreement under Section 7.1(d).
ARTICLE VII
OTHER MATTERS
SECTION 8.1 Certain Defined Terms. As used in the Agreement, the
---------------------
following terms shall have the meanings indicated:
"1998 Annual Report" shall be defined as at Section 3.3(f).
"Acquisition Proposal" shall be defined as at Section 4.1.
38
<PAGE>
"Agreement" shall be this Share Agreement dated as of the 17th day of
November, 1999 by and among Susquehanna Bancshares, Inc., Boston Service
Company, Inc., t/a Hann Financial Services Corporation and Michael Wimmer, Terry
Wimmer and Sydell Lourie.
"Authorizations" shall be defined as at Section 3.1(n).
"Average Closing Price" means the average closing price per share of
SBI common stock as determined in conformity with Schedule 1.1 and as defined
therein.
"BSC" shall mean Boston Service Company, Inc. (t/a Hann Financial
Service Corporation).
"BSC Certificate" shall be defined as at Section 1.1(a).
"BSC Schedules" shall be defined as at Section 3.1.
"BSC Shareholder Indemnitees" shall be defined as at Section 6.1(e).
"BSC Shareholder Schedules" shall be defined as at Section 3.2.
"BSC Shareholders" shall mean Michael J. Wimmer, Terry Wimmer and
Sydell Lourie.
"BSC Shares" shall be defined in the recitals to this Agreement.
"CERCLA" shall be defined as at Section 3.1(p)(i)(G).
"COBRA" is the Consolidated Omnibus Budget Reconciliation Act of 1985
and shall be defined as at Section 3.1(k).
"Closing" shall be defined as at Section 1.1(b).
"Closing Date" shall be defined as at Section 1.1(b).
"Code" is the Internal Revenue Code of 1986, as amended and shall be
defined in the recitals to this Agreement.
"Continued Employee" shall be defined as at Section 4.3(a).
"Contracts" shall be defined as at Section 3.1(j)(i).
"corporate affiliate" shall mean, with respect to a person, any other
corporation controlling, controlled by, or under common control with, such
person.
39
<PAGE>
"Custodial Shareholder" shall mean Terry Wimmer, custodian for the
benefit of Brad Wimmer under the Uniform Gift to Minors Act.
"ERISA" is the Employee Retirement Income Security Act and defined as
at Section 3.1(l)(i).
"ERISA Affiliate" shall be defined as at Section 3.1(l)(ii).
"Employee 401(k) Plan" shall be defined as at Section 4.3(b).
"Employee Plans" shall be defined as at Section 3.1(l).
"Encumbrance" shall be defined as at Section 3.1(c).
"Environmental Laws" shall be defined as at Section 3.1(p)(i)(L)(1).
"Environmental Lien" shall be defined as at Section 3.1(p)(i)(L)(2).
"Exchange Act" is the Securities Exchange Act of 1934, as amended, and
defined as at Section 3.1(q).
"Exchange Ratio" shall be described on Schedule 1.1 hereof
"Expenses" shall be described as at Section 7.3.
"GAAP" shall be described as at Section 3.1(f).
"Hazardous Substances" shall be described as at Section
3.1(p)(i)(L)(3).
"Indemnified Buyer Party" shall be defined as at Section 6.1(g).
"Indemnified Shareholder Party" shall be defined as at Section 6.1(h).
"Indemnifying Shareholder Party" shall be defined as at
Section 6.1(g).
"IRS" is the Internal Revenue Service and shall be defined as at
Section 3.1(h)(ii).
"Losses" shall be defined as at Section 6.1(b).
"material" means material to the party in question (as the case may
be) and its respective subsidiaries, taken as a whole.
"Notice of Claim" shall be defined as at Section 6.1(g).
40
<PAGE>
"Pension Plan" is an employee benefit plan subject to Title IV of
ERISA and shall be defined as at Section 3.1(l)(ii).
"Permit" shall be defined as at Section 3.1(p)(i)(L)(4).
"person" includes an individual, corporation, partnership,
association, trust or unincorporated organization.
"Qualified Plan" shall be defined as at Section 3.1(l)(vi).
"Registration Statement" shall be defined as at Section 4.2.
"Release" shall be defined as at Section 3.1(p)(i)(L)(5).
"Representative" shall be defined as at Section 8.15.
"SBI" shall be Susquehanna Bancshares, Inc., a Pennsylvania
corporation and a multi-state, multi-institutional bank holding company.
"SBI Indemnitees" shall be defined as at Section 6.1(b).
"SBI Schedules" shall be defined as at Section 3.3.
"SBI Shares" shall be defined in the recitals to this Agreement.
"SBI's Plans" shall be defined as at Section 4.3.
"SEC" is the Securities and Exchange Commission and shall be defined
as at Section 3.1(j)(i)(A).
"SEC Reports" shall be defined as at Section 3.3(f).
"Securities Act" is the Securities Act of 1933, as amended, and shall
be defined as at Section 3.2(d).
"Share Exchange" shall be defined in the recitals to this Agreement.
"Share Exchange Consideration" shall be determined on the basis of the
Exchange Ratio set forth at Schedule 1.1 hereof, and shall be defined as at
Section 1.1(a).
"Subsidiary" means, with respect to any party, any corporation,
limited liability company, partnership, joint venture, or other business
association or entity, at least a majority of
41
<PAGE>
the voting securities or economic interests of which is directly or indirectly
owned or controlled by such party or by any one or more of its Subsidiaries.
"Survival Period" shall be defined as at Section 6.1(a).
"Tax Return" shall be defined as at Section 3.1(h)(i).
"Threshold Amount" shall be defined as at Section 6.1(c).
When a reference is made in this Agreement to Exhibits, Sections, or Schedules,
such reference shall be to a Section of, or Exhibit, or Schedule to, this
Agreement unless otherwise indicated. The table of contents, tie sheet and
headings contained in this Agreement are for ease of reference only and shall
not affect the meaning or interpretation of this Agreement. Whenever the words
"include," "includes," or "including" are used in this Agreement, they shall be
deemed followed by the words "without limitation." Any singular term in this
Agreement shall be deemed to include the plural and any plural term the
singular.
SECTION 8.2 Parties in Interest. This Agreement shall be binding
-------------------
upon and inure solely to the benefit of each party hereto and their respective
successors and assigns, and, other than the right to receive the consideration
payable in the Share Exchange pursuant to Article I hereof, is not intended to
and shall not confer upon any other person any rights, benefits or remedies of
any nature whatsoever under or by reason of this Agreement.
SECTION 8.3 Waiver and Amendment. Prior to the Closing, any
--------------------
provision of this Agreement may be: (i) waived by the party benefited by the
provision; or (ii) amended or modified at any time (including the structure of
the transaction) by an agreement in writing between the parties hereto approved
by their respective boards of directors, except that no amendment or waiver may
be made that would change the form or the amount of the Share Exchange
Consideration or otherwise have the effect of prejudicing the BSC shareholders'
interest in the Share Exchange Consideration.
SECTION 8.4 Counterparts. This Agreement may be executed in
------------
counterparts each of which shall be deemed to constitute an original, but all of
which together shall constitute one and the same instrument.
SECTION 8.5 Governing Law. This Agreement shall be governed by, and
-------------
interpreted in accordance with, the laws of the Commonwealth of Pennsylvania,
or, to the extent it may control, federal law, without reference to the choice
of law principles thereof.
SECTION 8.6 Expenses. Subject to the provisions of Section 7.3
--------
hereof, SBI will bear all expenses incurred by it in connection with this
Agreement and the transactions contemplated hereby and, at the election of the
BSC Shareholders, BSC will pay up to One Hundred Thousand Dollars ($100,000) of
the expenses incurred by them in connection with this
42
<PAGE>
Agreement; provided, however, that all filing and other fees (other than federal
and state income taxes) required to be paid to any governmental agency or
authority in connection with the consummation of the transactions contemplated
hereby shall be borne by SBI.
SECTION 8.7 Notices. All notices, requests, acknowledgments and
-------
other communications hereunder to a party shall be in writing and shall be
deemed to have been duly given when delivered by hand, telecopy, telegram or
telex (confirmed in writing) to such party at its address set forth below or
such other address as such party may specify by notice to the other party
hereto.
If to BSC, to:
Boston Service Company, Inc.
(t/a Hann Financial Service Corporation)
One Centre Drive
Jamesburg, NJ 08831
Attention: Michael J. Wimmer
President and Chief Executive Officer
With copies to:
Capehart & Scatchard, P.A.
8000 Midlantic Drive, Suite 300
Mt. Laurel, NJ 08054
Attention: Charles A. Rizzi, Jr., Esquire
If to SBI, to:
Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, PA 17543
Attention: Robert S. Bolinger
President and Chief Executive Officer
With copies to:
Morgan, Lewis & Bockius llp
1701 Market Street
Philadelphia, PA 19103-2921
Attention: John F. Bales, III, Esquire
SECTION 8.8 Entire Agreement; Etc. This Agreement, together with
---------------------
other agreements as are executed by the parties in connection herewith, on the
such Date hereof, represent
43
<PAGE>
the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and thereby and supersede any and all other
oral or written agreements heretofore made. All terms and provisions of this
Agreement, together with such other agreements as are executed by the parties in
connection herewith, on the date hereof, and thereof, shall be binding upon and
shall inure to the benefit of the parties hereto and thereto and their
respective successors and assigns. Nothing in this Agreement is intended to
confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Agreement except as expressly provided.
SECTION 8.9 Severability. If any provision of this Agreement or the
------------
application thereof to any person or circumstances is held invalid or
unenforceable in any jurisdiction, the remainder of this Agreement, and the
application of such provision to such person or circumstances in any other
jurisdiction or to the other person or circumstances in any jurisdiction shall
not be affected thereby, and to this end the provisions of this Agreement shall
be severable.
SECTION 8.10 Interpretation. In this Agreement, unless the context
--------------
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.
SECTION 8.11 Waivers. Except as provided in this Agreement, no
-------
action taken pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
SECTION 8.12 Incorporation of Schedules and Exhibits. All
---------------------------------------
Schedules and Exhibits attached hereto and referred to herein are hereby
incorporated herein and made a part hereof for all purposes as if fully set
forth herein.
SECTION 8.13 Enforcement of Agreement. The parties hereto agree that
------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Delaware Court, this
being in addition to any other remedy to which they are entitled at law or in
equity.
SECTION 8.14 Knowledge. As used in this Agreement, the words
---------
"knowledge of BSC" or "best of BSC's knowledge" or "known to BSC" or similar
phrases shall mean the actual knowledge of the BSC Shareholders and the
executive officers of BSC and the knowledge
44
<PAGE>
reasonably imputed to such persons assuming prudent performance of their
respective duties as officers and directors of the BSC.
SECTION 8.15 Representative. Each of the BSC Shareholders hereby
--------------
appoints Michael J. Wimmer as his exclusive agent and attorney-in-fact to act on
his behalf with respect to any and all matters, claims, controversies, or
disputes arising out of the terms of this Agreement (the "Representative"). SBI
--------------
shall have the right to rely on any actions taken or omitted to be taken by the
Representative as being the act or omission of the BSC Shareholders, without the
need for any inquiry, and any such actions or omissions shall be binding upon
the BSC Shareholders. The BSC Shareholders shall have the right to change the
identity of the Representative and shall deliver to SBI prompt written notice of
any such change of identity, which upon receipt by SBI will effect said change.
The BSC Shareholders agree to hold the Representative free and harmless from and
indemnify the Representative against any and all loss, damage or liability which
he may sustain as a result of any action taken in good faith hereunder,
including, without limitation, any legal fees and expenses.
45
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers as of the day and year first above
written.
SUSQUEHANNA BANCSHARES, INC.
By: /s/ Robert S. Bolinger
--------------------------------------------
Name: Robert S. Bolinger
Title: President and CEO
BOSTON SERVICE COMPANY, INC. (t/a HANN FINANCIAL
SERVICE CORPORATION)
By: /s/ Michael J. Wimmer
--------------------------------------------
Name: Michael J. Wimmer
Title: President and CEO
MICHAEL J. WIMMER
By: /s/ Michael J. Wimmer
--------------------------------------------
TERRY WIMMER
By: /s/ Terry L. Wimmer, by Michael J.
--------------------------------------------
Wimmer, Attorney-In-Fact
------------------------
SYDELL LOURIE
By: /s/ Sydell Lourie, by Michael J. Wimmer,
--------------------------------------------
Attorney-In-Fact
----------------
MICHAEL J. WIMMER, Custodian f/b/o BRAD WIMMER
under the UNIFORM GIFT TO MINORS ACT
By: /s/ Michael J. Wimmer
--------------------------------------------
46
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Exhibit 2(ii)
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Stock Purchase Agreement dated as of December 23, 1999
by and among Susquehanna, Susquehanna Bancshares Central, Inc.,
Valley Forge Asset Management Corp. and certain of the shareholders of VFAM.
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EXHIBIT 2(ii)
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of December 23, 1999, by and among
SUSQUEHANNA BANCSHARES, INC., a Pennsylvania business corporation registered as
a bank holding company under the Bank Holding Company Act of 1956, as amended
("SBI"), SUSQUEHANNA BANCSHARES CENTRAL, INC., a Pennsylvania corporation
("Buyer"), VALLEY FORGE ASSET MANAGEMENT CORPORATION, a Pennsylvania corporation
("VFAM") and the undersigned holders of common stock of VFAM (such individuals
are hereinafter referred to individually as "Shareholder" and collectively as
"Shareholders").
WHEREAS, Shareholders own the issued and outstanding shares of Voting and
Non-Voting Common Stock, no par value, of VFAM (the "Common Stock"), set forth
opposite his/her name on Annex I to this Agreement;
WHEREAS, the Shareholders, together with Valley Forge Investment Company,
Inc., a Pennsylvania business corporation ("VFICO"), own all of the issued and
outstanding shares of capital stock of VFAM and all options or other rights to
purchase shares of capital stock of VFAM;
WHEREAS, Buyer is a wholly-owned subsidiary of SBI;
WHEREAS, on this date, SBI, Buyer and VFICO entered into an Agreement and
Plan of Reorganization (the "VFICO Agreement") pursuant to which Buyer,
simultaneously with the closing under this Agreement, will merge with and into
VFICO (Buyer is defined in this Agreement to include VFICO after consummation of
such merger);
WHEREAS, Shareholders desire to sell to Buyer, and Buyer desires to
purchase from Shareholders, the shares of Common Stock set forth opposite
his/her name on Annex I to this Agreement (the "Shares");
WHEREAS, upon the completion of the transactions contemplated by this
Agreement and the VFICO Agreement, VFICO will become a wholly-owned subsidiary
of SBI, and VFICO will hold all of the issued and outstanding shares of capital
stock of VFAM;
NOW, THEREFORE, to consummate the purchase of the Shares, and in
consideration of the foregoing and the respective representations, warranties,
covenants and agreements set forth herein, the parties hereto, intending to be
legally bound hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
SECTION 1.01 Purchase and Sale of Stock. Upon the terms and conditions
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of this Agreement, at Closing, as defined in Section 1.04 hereof, Buyer agrees
to purchase from the Shareholders, and the Shareholders agree to sell to Buyer,
the Shares. In consideration therefore, Buyer agrees to pay at Closing an
aggregate amount of $4,200,000 for the Shares. Of the total amount paid at
Closing,
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$200,000 ("Escrow Funds") shall be paid to a bank escrow agent (the "Escrow
Agent") in accordance with the escrow agreement attached hereto as Exhibit 1.02
(the "Escrow Agreement"), if any shareholder of VFICO shall have provided notice
on or before Closing of intention to dissent (in respect of the merger
contemplated by the VFICO Agreement) in accordance with Section 1574 of the
Pennsylvania Business Corporation Law. The Escrow Agent shall be selected prior
to the Closing Date by SBI and the Shareholder Representative appointed pursuant
to Section 1.02. In exchange for their Shares, each Shareholder shall be
entitled to receive the amount set forth on Annex I hereto (the "Share
Consideration").
SECTION 1.02 Shareholder Representative. Simultaneously with the
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execution of this Agreement, Shareholders appoint David S. Foulke (the
"Shareholder Representative") as his or her agent and as his or her true and
lawful attorney in fact, for such Shareholder and in such Shareholder's name (i)
to hold his or her Shares and deliver the same to Buyer at Closing, (ii) to
receive his or her check for his or her respective share of the Share
Consideration at Closing and to have such Shareholder Representative deliver
such check to him or her, and (iii) to act on behalf of such Shareholder at
Closing in connection with any and all issues that may arise at Closing in
connection with the transactions contemplated by this Agreement and to execute
and deliver all instruments and documents or every kind incident thereto. This
power of attorney is a power of coupled with an interest as provided by
applicable law and shall survive, bankruptcy or mental incapacity of each
Shareholder to the extent that such Shareholder may legally contract for such
survival. All parties to this Agreement and any person to whom any of the
agreements, undertakings, consents and other documents referred to in this
Agreement relate may conclusively presume and rely upon this power of attorney
without further inquiry. This appointment of the Shareholder Representative may
only be revoked in a writing which shall name a successor who agrees to be bound
by the terms of this Agreement and shall be signed by a majority of the
Shareholders. The Shareholder Representative shall at all times be the same
person who serves as the Associates' Representative, as that term is used and
defined in the Contingent Earnings Agreement set forth as Exhibit 9.02(i)
hereto.
SECTION 1.03 Deliveries.
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(a) At Closing, (i) the Shareholders, through the Shareholder
Representative, shall deliver to Buyer stock certificates for all of the Shares,
free and clear of all liens, claims, charges, restrictions, equities, or
encumbrances, duly endorsed in blank, or with separate notarized stock transfer
powers attached thereto and signed in blank, together with evidence of the
appointment of the Shareholder Representative as required by Section 1.02 above,
and (ii) VFAM shall deliver to Buyer, as applicable, all of the documents,
instruments, certificates, etc. required by Section 10.01 hereof.
(b) At Closing, (i) upon receipt of the stock certificates as
required by Section 1.03(a) hereof, Buyer shall deliver to the Shareholder
Representative, checks for each of the Shareholders in the amount of their
respective shares of the Share Consideration less their respective share of the
Escrow Funds, and (ii) Buyer shall deliver to the Shareholder Representative,
for the benefit of the Shareholders, all of the documents, instruments,
certificates, etc. required by Section 10.02 hereof.
SECTION 1.04 Closing. The closing of the transactions contemplated
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herein (the "Closing") will take place at such place and time and on such date
as shall be agreed upon by VFAM and Buyer, which date shall not be later than
thirty business days after the day on which the last to be fulfilled or
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waived of the conditions set forth in Article IX shall be fulfilled or waived in
accordance herewith. The date on which the closing occurs is hereinafter
referred to as the "Closing Date."
SECTION 1.05 Post-Closing Adjustment.
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(a) Post-Closing Audit. Within sixty (60) days following the
Closing Date, Buyer at Buyer's expense, shall cause PricewaterhouseCoopers
("Buyer's Accountant") to audit (the "Post-Closing Audit") the books of VFAM and
VFICO to determine the accuracy of the information set forth in the VFAM Closing
Financial Certificate (as defined in Section 9.02(k) herein) and the VFICO
Closing Financial Certificate (as defined in Section 6.02(j) of the VFICO
Agreement; and together with the VFAM Closing Financial Certificate the "Closing
Financial Certificates"). In the course of the Post-Closing Audit, Buyer's
Accountant shall apply generally accepted accounting principles ("GAAP"). The
Shareholders shall cooperate with Buyer and Buyer's Accountant in furnishing
information, documents, evidence and other assistance to Buyer's Accountant to
facilitate the completion of the Post-Closing Audit. In the event that Buyer's
accountant determines that (i) the actual tangible net worth of VFAM or VFICO on
the Closing Date is less than the Required Amount on the Closing Financial
Certificates, (ii) the available cash balance of VFAM or VFICO is less than the
Required Amount on the Closing Financial Certificates, (iii) VFAM or VFICO have
long term liabilities, (iv) in the case of VFAM, the Net Capital (as defined in
Section 9.02(k)) is less than the Required Amount on the VFAM Closing Financial
Certificate, (v) and/or in the case of VFAM its cash plus current receivables
minus current liabilities must be equal to or greater than $1,200,000, (each of
(i) - (v) a "Financial Requirement Deficiency" and together "Financial
Requirement Deficiencies"), then Buyer shall promptly deliver a written notice
to that effect with supporting documentation to the Shareholder Representative
setting forth such Financial Requirement Deficiency or Deficiencies of VFAM
and/or VFICO, as the case may be, on the Closing Date ("Adjustment Notice"). As
used in this agreement, "Required Amount" means the amounts required by Section
9.02(k) of this Agreement and Section 6.02(j) of the VFICO Agreement.
(b) Review by Shareholders' Accountant. As soon as practicable,
but in any event within 30 calendar days of receipt of the Adjustment Notice
from Buyer, the Shareholders may cause their accountant to provide to Buyer, a
report indicating their agreement or objections to the Adjustment Notice. Any
such objections shall be set forth in reasonable detail in a report (the
"Shareholders' Report") that shall indicate the grounds upon which the
Shareholders' accountant disputes the calculation of the Financial Requirement
Deficiencies in the Adjustment Notice.
(c) Agreement on Financial Information Adjustment.
(1) Within 15 calendar days of the receipt by the Buyer of
the Shareholders' Report, the Shareholder Representative and the Buyer shall
endeavor to agree on any matters in dispute.
(2) If the Buyer and the Shareholder Representative are
unable to agree on any matters in dispute within 15 calendar days after receipt
of the Shareholders' Report, the matters in dispute will be submitted for
resolution to the national office of Ernst & Young or such other independent
accounting firm of national reputation as may be mutually acceptable to the
Shareholder Representative and the Buyer (the "Independent Accounting Firm")
which shall within 30 calendar days of such submission determine and issue a
written report to the Shareholder Representative and the Buyer upon such
disputed items and such written decision shall be final and binding upon the
parties. The Shareholders and the Buyer agree to co-operate with each other and
each other's representatives to
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enable the Independent Accounting Firm to render a written decision as promptly
as possible. The fees and disbursements of the Independent Accounting Firm shall
be shared equally by the Shareholders and the Buyer.
(3) The Financial Requirement Deficiencies of VFAM and
VFICO, respectively, determined after resolution of matters in dispute (if any)
is referred to as the "Actual Financial Requirement Deficiencies". The Actual
Financial Requirement Deficiencies have the legal effect of an arbitral award
and shall be final, binding and conclusive on the parties hereto.
(4) In acting under this Agreement, the Shareholders'
accountants, the Buyer's Accountants and the Independent Accounting Firm shall
be entitled to the privileges and immunities of arbitrators.
(d) Post-Closing Adjustment. The purchase price paid pursuant to
Section 1.01 shall be reduced by an aggregate amount of deficiencies (the "Post-
Closing Adjustment") equal to the sum of (A) (B) (C) and (D), where (A) (B) (C)
and (D) shall be as follows:
(A) is the greater of (1) any shortfall between the actual VFICO net worth
and the Required Amount of net worth on the VFICO Closing Financial
Certificate or (2) any shortfall between the actual available cash balance
of VFICO and the Required Amount of available cash balance of VFICO on the
VFICO Closing Financial Certificate;
(B) is the greatest of (1) any shortfall between the actual Net Capital of
VFAM and the Required Amount of Net Capital on the VFAM Closing Financial
Certificate or (2) any shortfall between the actual available cash balance
of VFAM and the Required Amount of cash balance of VFAM on the VFAM Closing
Financial Certificate or (3) any shortfall between the actual VFAM cash
plus receivables minus current liabilities compared to the Required Amount
on the VFAM Closing Financial Certificate or (4) any shortfall between the
actual VFAM net worth and the Required Amount on the VFAM Closing Financial
Certificate;
(C) is any long term liabilities of VFICO; and
(D) is any long term liabilities of VFAM.
Within five (5) business days after notification of the amount of the Post-
Closing Adjustment, each Shareholder shall pay to Buyer his or her Proportionate
Share of the Post-Closing Adjustment. Such Proportionate Share shall equal the
fraction the numerator of which is the purchase price paid to such Shareholder
at Closing as set forth on Annex I and the denominator of which is the purchase
price paid to all Shareholders at Closing as set forth on Annex I. If any
Shareholder fails to promptly make such payment, Buyer shall have the right to
offset the amount of such payment by a claim against the amounts escrowed for
the benefit of such Shareholder under Sections 2.01 and 3.01 of this Agreement.
Upon demand by Buyer to the Escrow Agent (with notice to the Shareholder), the
Escrow Agent shall pay such Proportionate Share of the Post-Closing Adjustment
to Buyer, or the Buyer may deduct any such deficiencies from any payments to
which such Shareholder may become entitled under his or her Contingent Earnings
Agreement as defined in Section 9.02(i) hereto or Additional Stock Payments as
defined in Section 1.07 hereto (or which have been deposited into escrow for the
benefit of such shareholder, by demand to the Escrow Agent as provided above).
Any amount still not collected from
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such Shareholder shall remain the personal obligation of that Shareholder. If
such Shareholder would not have been entitled to receive funds in escrow which
have been paid to Buyer pursuant to this Section 1.05(d) (the "Disqualified
Amount") because the conditions to distribution of such funds would not have
been satisfied by the continued employment by such Shareholder with VFAM, then
the liability of such Shareholder to Buyer shall be increased by the
Disqualified Amount. Any amounts not paid by any Shareholder when due shall bear
interest from the Closing Date until the date of payment of a rate equal to the
prime rate, as reported from time to time in The Wall Street Journal, eastern
edition.
(e) If a determination is made that the holders of Dissenting
Shares (as defined in Section 2.03 of the VFICO Agreement) are entitled to
receive an amount which exceeds the per share value of the Cash Consideration (
as defined in the VFICO Agreement), then the Escrow Agent shall pay to SBI the
portion of the Escrow Funds (up to the $200,000 deposited at Closing) that is
equal to such excess plus costs including reasonable attorney's fees related to
the determination.
SECTION 1.06 Payment to SBI. Immediately following the Closing, VFAM
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shall pay to SBI an amount equal to $1,200,000.
SECTION 1.07 Additional Stock Payment. In exchange for the Shares set
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forth on Annex I, the Shareholders shall be entitled to receive an additional
(payment allocated in accordance with Annex I) for the Shares, up to a maximum
of $1,500,000 (the "Additional Stock Payment"). SBI shall cause VFAM to pay to
Shareholders an Additional Stock Payment in accordance with the terms of this
Agreement. Such Additional Stock Payment shall be calculated and paid when and
if earned each Fiscal Year until the maximum amount of the Additional Stock
Payment has been paid to the Escrow Agent pursuant to this Agreement. For the
purposes of this Agreement, the term "Fiscal Year" shall mean a twelve month
period ending on December 31; provided, however, that the first Fiscal Year
under this Agreement shall commence on the later of January 1, 2000 or the
Closing Date and shall end on December 31, 2000.
SECTION 1.08 Calculation of Additional Stock Payment. (a) As of the
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end of each Fiscal Year, VFAM shall determine whether an Additional Stock
Payment is due with respect to such Fiscal Year. The Additional Stock Payment
for a Fiscal Year shall be determined by taking VFAM's Adjusted Pre-tax Profit
(hereinafter defined) in excess of $2,000,000 ("Excess Earnings") and
multiplying such Excess Earnings by 5, then deducting from that result any
amounts paid as an Additional Stock Payment payments for prior Fiscal Years.
(b) "Pre-tax Profit" means for a Fiscal Year, VFAM's Income Before
Provision for Income Taxes, determined in accordance with Generally Accepted
Accounting Principles, and "Adjusted Pre-tax Profit" means for any Fiscal Year
the figure obtained after making additions and adjustments to Pre-tax Profit for
any applicable items set forth in subsections (c), (d) and (e).
(c) In calculating Adjusted Pre-tax Profit, the following items shall
be eliminated and not taken as expenses in this calculation: (i) management fees
or similar charges or expenses by SBI; provided, however, that charges by SBI
for reasonable and necessary business products or services of the type
customarily purchased by VFAM which can be provided to VFAM by SBI (for example,
insurance or auditing) may be allowed as expenses for up to the amount paid by
VFAM for such products or services in the past, plus moderate vendor induced
increases, with only the excess being eliminated; (ii) allocation of any
overhead by SBI or affiliates thereof; (iii) inter-company interest expense
except
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interest at a reasonable rate on up to $100,000 of debt or equity provided by
SBI to VFAM for VFAM to comply with NASD net capital requirements, or inter-
company interest expense on any VFAM borrowings or capital infusions approved by
Joseph J. Miller, Jr. or the Shareholder Representative; (iv) amortization of
good will or other intangible assets; and (v) income taxes.
(d) Unless approved by VFAM's Board of Directors and except as
otherwise provided in paragraph (e) of this Section 1.08, the following items
shall likewise be eliminated and not taken as expenses in this calculation: (i)
any category of expense (net of related revenue) not included among the
Operating Expenses listed on Schedule 1.08(d) (ii) any expense (net of related
revenue) not incurred by VFAM in its normal operations based on its business
plan as amended from time to time and (iii) any expense (net of related revenue)
resulting from a material change in the way VFAM conducts its business. It is
the intention of this paragraph that VFAM shall be operated in such a way as to
maximize the realization of the Additional Stock Payment as rapidly as possible
without sacrificing altogether opportunities for long term growth or prudent
management.
(e) Pre-tax Profit shall be adjusted for the net amount of all non-
recurring items (including but not limited to items set forth below) as follows:
(i) if the net amount of such items plus carryovers from prior Fiscal Years
resulting from the application of this subsection is less than $300,000 (whether
revenue or expense) in any Fiscal Year, then the full amount thereof shall be
included in the determination of Pre-tax Profit for the Fiscal Year; or (ii) if
the net amount of such items plus carryovers from prior Fiscal Years is greater
than $300,000 (whether revenue or expense), then the amount above $300,000
(whether revenue or expense) shall be eliminated from the calculation of Pre-tax
Profit for the current Fiscal Year and carried over into the next Fiscal Year.
Non-recurring items subject to this subparagraph (e) shall include but not be
limited to (i) commissions on the private placement of securities, net of
commissions paid to client representatives; and (ii) "bonuses" owed client
representatives pursuant to their contracts if such bonuses are more than 5%
above budget for all such representatives in the aggregate, and only the excess
above 5% over the budget shall be treated as a non-recurring item. The budget
for bonuses in this category shall be reasonable in relation to prior
performance and realistic expectations for the future.
SECTION 1.09 Payment Date. Upon the earlier of (i) the completion of
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the Fiscal Year end audit of the books and records of VFAM; or (ii) sixty days
following the Fiscal Year end (the "Calculation Date"), VFAM shall notify SBI
and the Shareholder Representative in accordance with Section 1.11 hereof, of
the aggregate amount of Additional Stock Payment earned, if any.
SECTION 1.10 Acceleration of Payments. All potential Additional
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Stock Payments up to $1,500,000 not previously paid, less amounts properly
retained by SBI to satisfy any Post-Closing Adjustment, or Deficiency as defined
in Section 8.02 hereto, shall become due and immediately payable by VFAM, or if
VFAM does not or cannot pay, then by SBI, upon the happening of any of the
following events: (a) VFAM fails to make an Additional Stock Payment when due
(after dispute resolution where applicable), provided SBI and VFAM are given
thirty (30) days' notice within which to make the past due payment; (b) VFAM
discharges any of Bernard A. Francis, Jr., Frank Corace or James Gibson for any
reason other than "cause" (as defined and provided for in such employee's
employment agreement), unless such discharge is approved by the vote of two-
thirds (2/3) or more of VFAM's Board of Directors; (c) SBI commits a material
breach of Sections 3.01 or 3.02 of the Contingent Earnings Agreement as defined
in Section 9.02(i) and such breach is not cured within thirty (30) days after
notice thereof.
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Section 1.11 Notice of Additional Stock Payment. Each year on the
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Calculation Date, VFAM shall provide the Shareholder Representative, notice of
its calculation, with supporting financial statements and appropriate
explanations when reasonably requested, of the Additional Stock Payment for
fiscal year ("Calculation Notice");
(a) No Objection. If the Shareholder Representative has not given
VFAM written notice of an objection to the Additional Stock Payment calculation
within thirty (30) days following his or her receipt of the Calculation Notice,
then the amount set forth in the Calculation Notice will be deemed the
Additional Stock Payment for such fiscal year and SBI shall pay such amounts to
the Shareholders (at their addresses provided in Section 13.03) within 45 days.
(b) Objection. If the Shareholder Representative has any
objections to the Calculation Notice, then he or she must provide VFAM with
written notice of the objections within thirty (30) days following his or her
receipt of the Calculation Notice. The written notice must describe in
reasonable detail the manner in which VFAM allegedly failed to account for or
calculate the Additional Stock Payment in accordance with this Agreement. Except
with respect to fraud, bad faith or willful misconduct by VFAM, the Shareholder
Representative and the Shareholders will be precluded from later raising any
objection to the Additional Stock Payment which is not raised in the notice.
VFAM and Shareholder Representative will use reasonable efforts to
resolve any objections to the Additional Stock Payment calculation. If VFAM and
Shareholder Representative do not resolve the objections within thirty (30) days
after VFAM's receipt of Shareholder Representative's written notice of
objections, then VFAM and Shareholder Representative will select a nationally-
recognized accounting firm (excluding their respective regular outside
accounting firms) by lot. Any accounting firm agreed to or chosen in this way is
hereinafter referred to as the "Accountants". The Shareholder Representative
shall be under no obligation to initiate a determination by the Accountants
unless and until some or all of the Shareholders agree in writing to pay any
fees and expenses incurred in accordance with Section 1.11(c) hereof, and
deposit with the Shareholder Representative such amount of money as he or she
shall consider sufficient in his or her reasonable judgment to cover the
estimated amount of such fees and expenses. If a dispute is submitted to the
Accountants for resolution, VFAM and Shareholder Representative: (i) will
exchange and furnish or make available to the Accountants at reasonable times
and upon reasonable notice, the Additional Stock Payment calculations, and such
financial statements, work papers and other documents and information relating
to the disputed issues as the Accountants may request and are available to that
party (or its independent public accountants), including supporting schedules,
work papers and back up materials used in preparing the Additional Stock Payment
calculation, the books, records, and financial staff of VFAM, the parties'
accountants, and summaries by VFAM and the Shareholder Representative of their
resolution of any objections thereto; and (ii) will be afforded the opportunity
to present to the Accountants any material relating to the Accountants'
determination, and to discuss with the Accountants in a hearing with all parties
present, the Accountants' determination. The role of the Accountants will be to
determine whether VFAM properly accounted for and calculated the Additional
Stock Payment in accordance with this Agreement. If the Accountants determine
that any disputed items resulted in an incorrect determination of the Additional
Stock Payment, then the Accountants will recalculate the Additional Stock
Payment for the applicable Fiscal Year and so notify VFAM and Shareholder
Representative. Such amount will be deemed the Additional Stock Payment. The
Accountants, determination of the Additional Stock Payment for the Fiscal Year
in question, as set forth in a notice delivered to both parties by the
Accountants, will be binding and conclusive on the parties.
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(c) Expenses. If the Shareholder Representative in good faith
submits any dispute to the Accountants for resolution as provided in this
Section 1.11 and the Accountants determine that VFAM's calculation of Additional
Stock Payment was understated by $1,000 or more, then the fees and expenses of
the Accountants, VFAM and the Shareholder Representative shall be paid by SBI;
otherwise, all such fees and expenses shall be paid by the Shareholder
Representative from the deposit provided for above and, if the deposit is
insufficient, the excess shall be paid by those Shareholders who agreed to pay
such fees and expenses.
ARTICLE II
OPTION BUY OUT
SECTION 2.01 Options Buy Out
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(a) Closing Date Payments. Immediately prior to the Closing, VFAM
shall pay to each holder of outstanding options to purchase VFAM common stock
("Options") identified on Annex II hereto (each an "Option Holder") the amount
set forth in Column I on Annex II, less the amount required to be withheld by
applicable federal and state income tax withholding laws and less any amounts
due in respect of social security or other statutory deductions. In exchange for
such payment at Closing, all of the Options shall be canceled.
(b) First Anniversary Option Payments. On the first anniversary
of the Closing Date, or the first business day thereafter, VFAM shall cause to
be paid out of escrow to each Option Holder who remains an employee of VFAM on
such date, the amount set forth in Column II of Annex II (the "First Anniversary
Option Payments"), less amounts required to be withheld by applicable federal
and state income tax withholding laws and less any amounts due in respect of
social security or other statutory deductions.
(c) Second Anniversary Option Payments. On the second anniversary
of the Closing Date, or the first business day thereafter, VFAM shall cause to
be paid out of escrow to each Option Holder who remains an employee of VFAM on
such date, the amount set forth in Column III of Annex II (the "Second
Anniversary Option Payments"), less amounts required to be withheld by
applicable federal and state income tax withholding laws and less any amounts
due in respect of social security or other statutory deductions.
(d) Option Payment Escrow. At the Closing, VFAM shall pay to the
Escrow Agent an amount equal to the sum of the First Anniversary Option Payments
and the Second Anniversary Option Payments to be held for disbursement by the
Escrow Agent in accordance with the terms of the Escrow Agreement. After payment
of the Second Anniversary Option Payments in accordance with clause (c) above,
any amounts related to the option buy-out remaining in escrow shall be paid to
VFAM.
(e) Termination of Employment. Notwithstanding the foregoing, if
the employment with VFAM of any Option Holder is terminated by VFAM without
cause as defined in the form of employment agreements (as defined in Section
9.02(h)) prior to the second anniversary of the Closing Date, then VFAM shall
immediately pay any remaining amounts due to such Option Holder. If the
employment with VFAM of an Option Holder is terminated because of the death or
permanent
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disability, as defined in the Employment Agreements, of such Option Holder, any
amounts due to the Option Holder shall immediately be paid to such Option Holder
or, in the case of death, to his or her heirs or estate.
ARTICLE III
PAYMENTS TO KEY EMPLOYEES
SECTION 3.01 Bonus Payments to Key Employees.
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(a) Closing Date Payments. On the Closing Date, VFAM shall pay to
each employee set forth on Annex III hereto (each a "Key Employee"), the amount
set forth next to their name in Column I on Annex III, less the amount required
to be withheld by applicable federal and state income tax withholding laws and
less any amounts due in respect of social security or other statutory
deductions.
(b) First Anniversary Bonus Payments. On the first anniversary of
the Closing Date, or the first business day thereafter, VFAM shall cause to be
paid out of escrow to each Key Employee who remains an employee of VFAM on such
date, the amount set forth in Column II of Annex III (the "First Anniversary
Bonus Payments"), less amounts required to be withheld by applicable federal and
state income tax withholding laws and less any amounts due in respect of social
security or other statutory deductions.
(c) Second Anniversary Bonus Payments. On the second anniversary
of the Closing Date, or the first business day thereafter, VFAM shall cause to
be paid out of escrow to each Key Employee who remains an employee of VFAM on
such date, the amount set forth in Column III of Annex III (the "Second
Anniversary Bonus Payments"), less amounts required to be withheld by applicable
federal and state income tax withholding laws and less any amounts due in
respect of social security or other statutory deductions.
(d) Bonus Payment Escrow. At the Closing, VFAM shall pay to the
Escrow Agent an amount equal to the sum of the First Anniversary Bonus Payments
and the Second Anniversary Bonus Payments to be held for disbursement by the
Escrow Agent in accordance with the terms of the Escrow Agreement. After payment
of the Second Anniversary Bonus Payment in accordance with clause (c) above, any
amounts related to the bonus payments remaining in escrow shall be paid to VFAM.
(e) Termination of Employment. Notwithstanding the foregoing, if
the employment with VFAM of any Key Employee is terminated by VFAM without cause
as defined in the form of Employment Agreement (described in Section 9.02(h))
prior to the second anniversary of the Closing Date, then VFAM shall cause the
Escrow Agent to immediately pay any remaining amounts of the First Anniversary
Bonus Payments and the Second Anniversary Bonus Payments due to such Key
Employee. If the employment with VFAM of a Key Employee is terminated because of
the death or permanent disability, as defined in the form of Employment
Agreements, of such Key Employee, any amounts of the First Anniversary Bonus
Payments and the Second Anniversary Bonus Payments due to the Key Employee shall
immediately be paid to such Key Employee or, in the case of death, to his or her
heirs or estate.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
VFAM AND THE SHAREHOLDERS
As a material inducement to SBI and Buyer to enter into this Agreement and
consummate the transactions contemplated herein, the Shareholders and, if the
transaction is not consummated, the Shareholders and VFAM make the following
representations and warranties to Buyer and SBI.
SECTION 4.01 Organization, Registration.
--------------------------
(a) VFAM is a corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Pennsylvania and has all
requisite corporate power and corporate authority and all necessary governmental
approvals to own, lease and operate its properties, and to carry on its
business, to enter into this Agreement and the other documents and instruments
to be executed and delivered by VFAM and to carry out the transactions
contemplated hereby and thereby. Except as set forth on Schedule 4.01, VFAM is
duly licensed or qualified to do business as a foreign corporation and is in
good standing in all jurisdictions wherein the character of the properties owned
or leased or the nature of its business, make such qualification to do business
necessary except for those jurisdictions where the failure to be so qualified
would not have a material adverse effect. Schedule 4.01 lists all of the
jurisdictions in which VFAM is qualified to do business. VFAM has delivered to
Buyer true and correct copies of its Articles of Incorporation and Bylaws, each
as in effect on the date hereof.
(b) VFAM has all federal, state, local and foreign governmental
licenses, permits, or registrations required for its business as currently
conducted. Schedule 4.01 lists all of such licenses, permits or registrations
currently in effect, the applicable jurisdictions, and the date of expiration,
if any. All of such Licenses, permits or registrations are in full force and
effect, no violations have occurred or been asserted with respect thereto other
than as set forth on NASD and SEC Reports of examination, copies of which have
been delivered to Buyer, and no material change in the facts or circumstances
reported in any documents submitted by VFAM in connection with any such license,
permit or registration has occurred which would require an amendment of such
document, license, permit or registration.
(c) The officers and directors of VFAM are set forth on Schedule
4.01.
(d) VFAM has no subsidiaries.
(e) There is no pending or, to the knowledge of VFAM or the
Shareholders, any threatened claim or litigation against VFAM (nor to the
knowledge of VFAM or the Shareholders does there exist any basis therefor)
contesting the validity of or right to use the "Valley Forget Asset Management
Corporation" name as currently used by VFAM as its corporate name in connection
with its business activities, nor has VFAM received any notice that its use of
the "Valley Forge Asset Management Corporation" name conflicts with the asserted
rights of others.
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SECTION 4.02 Investment Advisor/Broker-Dealer Matters.
----------------------------------------
(a) VFAM is and has been since October 10, 1973 duly registered
as an investment adviser under the Investment Advisers Act of 1940, as amended
(the "Advisers Act"), and is and has been since October 10, 1973 duly registered
as a broker/dealer under the Securities Exchange Act of 1934, as amended (the
"1934 Act"). VFAM is registered as an investment advisor and as a broker/dealer
in the states listed on Schedule 4.02 and is in compliance in all material
respects with all laws of such states requiring registration, licensing or
qualification as an investment advisor or a broker/dealer. Each such federal and
state registration is in full force and effect. VFAM has delivered or made
available to Seller a true and complete copy of its Form ADV and Form BD, in
each case as amended to date, filed by VFAM with the SEC, copies of all such
state registration forms, likewise as amended to date, and copies of all current
reports filed by VFAM pursuant to the Advisers Act and rules promulgated
thereunder, and pursuant to state statutes applicable to such registrations. The
information contained in such forms and reports was true and complete in all
material respects at the time of filing. VFAM has filed all amendments required
to be filed to its Form ADV and Form BD and such state registration forms under
federal and state law. VFAM has filed all reports required to be filed under the
1934 Act and rules promulgated thereunder. As of the Closing Date, VFAM will be
registered as an investment advisor and as a broker/dealer in each state where
such registration is required. VFAM is not required to disclose any information
to clients under SEC Rule 206(4)-4 promulgated under the Advisers Act.
(b) VFAM is not an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act"), which is required
to be registered under the 1940 Act in order to engage in the transactions
described in Section 7 of the 1940 Act. VFAM does not act as an investment
advisor or subadvisor to any "investment company," as defined in the 1940 Act,
which is registered under the 1940 Act.
(c) VFAM has adopted a formal code of ethics, a true, complete
and accurate copy of which has been provided to Buyer. VFAM's policies with
respect to avoiding conflicts of interest are as set forth in its Form ADV, as
amended. There have been no violations or allegations of violations of such code
or policies.
SECTION 4.03 Capitalization. The authorized capital stock of VFAM
--------------
consists of 3,000,000 shares of voting common stock, no par value and 12,000,000
shares of non-voting stock, no par value. There are 2,664,928 shares of voting
common stock outstanding and 10,659,712 shares of non-voting common stock shares
outstanding. All outstanding shares of VFAM Common Stock are validly issued,
fully paid and nonassessable and not subject to any preemptive rights. Except as
set forth on Schedule 4.03 hereto there are no existing options, warrants,
calls, subscriptions or other rights or other agreements or commitments of any
character relating to the issued or unissued capital stock of VFAM, and, as of
the date hereof, there are no outstanding contractual obligations of VFAM to
repurchase, redeem or otherwise acquire any shares of its capital stock.
SECTION 4.04 Authority. The execution, delivery and performance of this
---------
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of VFAM and no
other corporate proceedings on the part of VFAM are necessary to authorize this
Agreement or to consummate the transactions so contemplated.
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SECTION 4.05 Consents and Approvals; No Violations. This Agreement, the
-------------------------------------
Contingent Earnings Agreement, the Employment Agreements (as defined in Section
9.02(h)) and the Lease (as defined in Section 9.02(o)), constitute or when
executed and delivered will constitute, valid and binding agreements of VFAM,
enforceable in accordance with their respective terms, and, except as such
enforceability may be limited by bankruptcy or other similar laws affecting
creditors' rights and remedies generally, and except as set forth on Schedule
4.05, the execution and delivery of this Agreement, the Contingent Earnings
Agreement, the Lease and/or the Employment Agreements, and the consummation of
the transactions contemplated hereby do not or will not (i) conflict or result
in a breach of any provision of the Articles of Incorporation or Bylaws of VFAM,
(ii) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, amendment, cancellation or acceleration) under, any of the terms,
conditions or provisions of any of the Corporation Agreements (as defined in
Section 4.11), note, bond, mortgage, indenture, lease or license to which VFAM
is a party or by which any of its or their properties or assets may be bound or
(iii) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to VFAM or any of its properties or assets. Except as set forth in
Schedule 4.05, no permit, authorization, consent or approval of, any court or
other adjudicatory body, administrative agency or commission or other
governmental or regulatory authority or agency is required in connection with
the execution, delivery or performance by VFAM of this Agreement or the
consummation of the transactions contemplated hereby.
SECTION 4.06 Financial Statements and Internal Control Structure.
---------------------------------------------------
(a) VFAM has delivered to Buyer the audited financial statements
of VFAM for the years ended September 30, 1999, 1998 and 1997 (collectively, the
"Financial Statements") and except as set forth on Schedule 4.06(a), to the
knowledge of VFAM, the Financial Statements have been prepared in accordance
with GAAP. The audited balance sheet of VFAM at September 30, 1999, is referred
to herein as the "Balance Sheet" and the dates of such Balance Sheet is referred
to herein as the "Balance Sheet Date"). The Financial Statements and the notes
thereto, if any, were prepared in accordance with the books and records of VFAM
and fairly present the assets, liabilities and financial condition of VFAM as at
the respective dates thereof, and the corresponding results of operations,
retained earnings and cash flows for the periods therein referred to and except
as set forth on Schedule 4.06(a), to the knowledge of VFAM, the Financial
Statements have been prepared in accordance with GAAP consistently applied
throughout the periods involved.
(b) VFAM has not received any management letters from its outside
auditors.
SECTION 4.07 Title to Assets, Properties, Interests in Properties, Rights
------------------------------------------------------------
and Related Matters.
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(a) VFAM has good title to all of the properties, interest in
properties, and assets, real, personal or mixed, reflected on the Balance Sheet
and to all property and assets acquired after the Balance Sheet Date, free and
clear of any mortgages, pledges, liens, security interests, conditional and
installment sale agreements, right of first refusal or similar claims with
respect to VFAM, or encumbrances or charges of any kind other than (i) any such
claim or encumbrance disclosed in the notes to the Balance Sheet, (ii) the lien
of current taxes not yet due and payable; (iii) properties, interests and assets
that are leased or have been disposed of by VFAM since the Balance Sheet Date in
the ordinary course of business consistent with past practice; and (iv) such
imperfections of title, easements and encumbrances, if any, as are not
substantial in character, amount or extent and do not materially detract from
the value, or interfere with the present or proposed use, of the properties
subject thereto.
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(b) The assets and properties of VFAM on its Balance Sheet
constitute the rights, properties and assets (tangible or intangible) necessary
for the conduct of VFAM's business as currently conducted.
(c) Except as set forth on Schedule 4.07, VFAM has no interest in
any real property.
SECTION 4.08 Absence of Certain Changes. Since September 30, 1999, VFAM
--------------------------
has not experienced, nor to the knowledge of VFAM or the Shareholders has there
been threatened, any material adverse change in the condition (financial or
otherwise), assets, liabilities (absolute, accrued, contingent or otherwise),
business, or operations of VFAM (except as may have been caused by general stock
market conditions) nor has any client of VFAM with respect to any of the
Investment Accounts (as defined in Section 4.11) terminated or to the knowledge
of VFAM or the Shareholders threatened to terminate its relationship with VFAM
except as set forth on Schedule 4.08.
SECTION 4.09 Absence of Undisclosed Liabilities. Except to the extent
----------------------------------
set forth in the Balance Sheet, VFAM has no liabilities or obligations of any
nature, whether or not accrued, contingent or otherwise, that would be required
by GAAP to be reflected on a balance sheet of VFAM, as the case may be
(including the notes thereto), and have no claims, debts, liabilities or
obligations or any alleged claims, debts, liabilities or obligations of VFAM to
any party, including but not limited to claims made by governmental authorities
for taxes or otherwise, except for (x) liabilities expressly disclosed in this
Agreement and in the Exhibits or Schedules and (y) liabilities incurred between
the date of this Agreement and the Closing Date, the occurrence of which is not
in violation of the provisions of this Agreement.
SECTION 4.10 Litigation. Except as set forth in Schedule 4.10, there
----------
are no claims, actions, suits, orders, proceedings or investigations pending or
to the knowledge of VFAM or the Shareholders threatened by or against VFAM, at
law or in equity or before or by any federal, state or municipal or other
governmental department, commission, board, agency, instrumentality or
authority. There is no basis known to VFAM or to the Shareholders for any such
claims, actions, suits, orders, proceedings or investigations, which if
adversely determined would have a material adverse affect on VFAM.
SECTION 4.11 Contracts, Leases, Agreements and Other Commitments.
---------------------------------------------------
(a) Schedule 4.11(a) lists the accounts with which VFAM has
assets under management (the "Investment Accounts") and Schedule 4.11(a) lists
all the Investment Accounts that are party to an agreement with VFAM (each a
"Investment Advisory Agreement"). Schedule 4.11(a) lists the Investment Accounts
with assets under management valued in excess of $1,000,000 as of September 30,
1999. VFAM and each client with an Investment Account are parties to an
Investment Advisory Agreement ("Investment Advisory Agreement"). VFAM has
delivered to Buyer copies of all Investment Advisory Agreements between VFAM and
Investment Accounts with assets under management in excess of $3,000,000.
(b) Schedule 4.11(b) sets forth each written or oral contract,
agreement, lease, power of attorney, guaranty, surety agreement or other
commitment, including any amendment to any of the foregoing, to which VFAM is a
party or by which it is bound other than:
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(1) Investment Advisory Agreements as described in Section
4.11(a);
(2) agreements involving a maximum liability or obligation
on the part of VFAM of less than $10,000 each.
(c) True, correct and complete copies of all of the items set
forth on Schedule 4.11(a) and Schedule 4.11(b) (such items are collectively the
"Corporation Agreements") (including all amendments thereto) have been delivered
to Buyer (except for Investment Advisory Agreements between VFAM and Investment
Accounts with assets under management less than $3,000,000). All of the
Corporation Agreements are valid, binding and enforceable in accordance with
their terms. Except as shown on Schedules 4.11 (a) and (b), VFAM and, to the
best knowledge of the Shareholders, all of the parties to the Corporation
Agreements have performed all material obligations required to be performed to
date under such Corporation Agreements and VFAM is not and, to the best
knowledge of the Shareholders, any such other party is not in default or in
arrears under the terms thereof, and, to the best knowledge of the Shareholders,
no condition exists or event has occurred which, with the giving of notice of
lapse of time or both, would constitute a default thereunder. The Corporation
Agreements are in full force and effect in accordance with their terms and are
free and clear of any liabilities, claims, liens or encumbrances, of any kind,
and, except as set forth on Schedule 4.05, Section 7.03 or otherwise in this
Agreement, the consummation of this Agreement and the transactions contemplated
hereby will not result in an impairment or termination of any of VFAM's rights
under any of the Corporation Agreements and does not require any consents of the
parties thereto.
SECTION 4.12 Insurance. Schedule 4.12 is a summary of all insurance
---------
policies maintained by VFAM (specifying, among other things, the insurer, type
of insurance, amount of coverage and policy number). Such policies are in full
force and effect and all premiums with respect to such policies are currently
paid. VFAM has not been denied or had revoked or rescinded any policy of
insurance or received any notice of intent to cancel or not renew during the
past three years.
SECTION 4.13 Benefit Plans. Schedule 4.13 contains a complete list of
-------------
all pension, retirement, stock option, stock purchase, savings, stock
appreciation right, profit sharing, deferred compensation, consulting, bonus
group insurance, severance and other employee incentive and welfare contracts
and plans, and all trust agreements related thereto, that VFAM maintains or to
which it contributes for any of its present of former directors, officers, or
other employees (collectively the "Employee Plans").
(a) To the knowledge of the Shareholders, all of the Employee
Plans comply in all material respects with all applicable requirements of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code
(as defined in Section 4.18) and other applicable laws; VFAM has not engaged in
a "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975
of the Code) with respect to any Employee Plan which is likely to result in any
penalties, taxes or other events under Section 502(i) of ERISA or Section 4975
of the Code.
(b) No liability to the Pension Guaranty Corporation has been or
is expected by VFAM to be incurred with respect to any Employee Plan which is
subject to Title IV of ERISA ("Pension Plan") or with respect to any "single-
employer plan" (as defined in Section 4001(a)(15) of ERISA) currently or
formerly maintained by it or any entity which is considered on employer with
VFAM under Section 4001 of ERISA or Section 414 of the Code (an "ERISA
Affiliate").
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(c) No Pension Plan or single-employer plan of an ERISA Affiliate
had an "accumulated funding deficiency" (as defined in Section 302 of ERISA
(whether or not waived)) as of the last date of the end of the most recent plan
year ending prior to the date hereof; all contributions to any Pension Plan or
single-employer plan of an ERISA Affiliate that were required by Section 302 of
ERISA and were due prior to the date hereof have been made on or before the
respective dates on which such contributions were due; the fair market value of
the assets of each Pension Plan or single-employer plan of an ERISA Affiliate
exceeds the present value of the "benefit liabilities" (as defined in Section
4001(a)(6) of ERISA) under such Pension Plan or single-employer plan of an ERISA
Affiliate as of the end of the most recent plan year with respect to the
respective Pension Plan or single-employer plan of an ERISA Affiliate ending
prior to the date hereof, calculated on the basis of actuarial assumption used
in the most recent actuarial valuation of such Pension Plan or single-employer
plan of an ERISA Affiliate as of the date hereof, and no notice of a "reportable
event" (as defined in Section 4043 of ERISA) for which the reporting requirement
has not been waived has been required to be filed for any Pension Plan or
single-employer plan of an ERISA Affiliate within the 12-month period ending on
the date hereof.
(d) VFAM is not required to provide, security to any Pension Plan
or to any single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Code.
(e) Neither VFAM nor any ERISA Affiliate has contributed to any
"multi-employer plan," as defined in Section 3(37) of ERISA, on or after
September 26, 1980.
(f) Each Employee Benefit Plan which is an "employee pension
benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be
qualified under Section 401(a) of the Code (a "Qualified Plan) has received a
favorable determination letter for the IRS covering the requirements of the Tax
Equity and Fiscal Responsibility Act of 1982, the Retirement Equity Act of 1984
and the Deficit Reduction Act of 1984 and the Tax Reform Act of 1986; VFAM and
the Shareholders are not aware of any circumstances likely to result in
revocation of any such favorable determination letter; each Employee Plan has
been amended to reflect the requirements of subsequent legislation applicable to
such plans; and each Qualified Plan has complied at all relevant times in all
material respects with all applicable requirements of Section 401(a) of the
Code.
(g) Each Qualified Plan which is an "employee stock ownership
plan" (as defined in Section 4975(e)(7) of the Code) has at all relevant times
satisfied all of the applicable requirements of Sections 409 and 4975(e)(7) of
the Code and the regulations thereunder.
(h) Neither VFAM, nor any ERISA Affiliate has committed any act
or omission or engaged in any transaction that has caused it to incur, or
created a material risk that it may incur, liability for any excise tax under
Sections 4971 through 4980B, 4980D or 4980E of the Code, other than excise taxes
which heretofore have been paid and fully reflected in its financial statements.
(i) There is not pending or threatened litigation, administrative
action or proceeding relating to any Employee Plan other than routing claims for
benefits.
(j) Except as disclosed on Schedule 4.13(j), there has been no
announcement or legally binding commitment by VFAM to create an additional
Employee Plan, or to amend an Employee Plan except for amendments required by
applicable law which do not materially increase the cost of such
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Employee Plan, and VFAM does not have any obligations for retiree health and
life benefits under and Employee Plan that cannot be terminated without
incurring any liability thereunder except as required to be maintained by COBRA.
(k) Except as disclosed on Schedule 4.13(k), the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby will not result in any payment or series of payments by VFAM to any
person which is an "excess parachute payment" (as defined in Section 280G of the
Code) under an Employee Plan or under any agreement executed in connection with
this Agreement, increase any benefits payable under any Employee Plan, or
accelerate the time of payment or vesting of any such benefit.
(l) Except as disclosed on Schedule 4.13(l), all required annual
reports have been filed timely with respect to each Employee Plan, and VFAM has
made available to SBI and Buyer a true and complete copy of (A) reports on the
applicable form of the Form 5500 series filed with the IRS for plan years
beginning after 1987, (B) Employee Plan, including amendment thereto, (C) each
trust agreement and insurance contract relating to such Employee Plan, including
amendments thereto, (D) the most recent summary plan description for such
Employee Plan, including amendments thereto, if the Employee Plan is subject to
Title I of ERISA, and (E) the most recent actuarial report or valuation if such
Employee Plan is a Pension Plan and (F) the most recent determination letter
issued by the IRS if such Employee Plan is a Qualified Plan.
SECTION 4.14 Collective Bargaining Agreements and Employment Agreements.
----------------------------------------------------------
(a) (i) VFAM has not entered into any collective bargaining
agreements; (ii) there is no labor strike, slowdown or work stoppage or lockout
actually pending or to the knowledge of VFAM or the Shareholders threatened
against or affecting VFAM, and during the past four years there has not been any
such action; (iii) no union organizational campaign is in progress with respect
to the employees of VFAM; (iv) there is no unfair labor practice charge or
complaint pending or to the knowledge of VFAM or the Shareholders threatened
before the National Labor Relations Board; and (v) no charges with respect to or
relating to VFAM is pending before the Equal Employment Opportunity Commission.
(b) Schedule 4.14 lists:
(1) any employment agreement VFAM has with any of its
employees; and
(2) any consulting, retainer or service agreement or
arrangement VFAM has with any individual or entity.
SECTION 4.15 Compliance with Applicable Law. VFAM has in the past
------------------------------
complied and is presently complying, in respect of the assets and operation of
its business in all material respects, with the rules of the National
Association of Securities Dealers, Inc. ("NASD") and all applicable laws
(whether statutory or otherwise), rules, regulations, orders, ordinances,
judgments or decrees of all governmental authority (federal, state, local or
otherwise), including but not limited to the Advisers Act, the 1940 Act, 1934
Act, the Securities Act of 1933, as amended and, in each case, the rules
promulgated thereunder, and except as set forth on Schedule 4.15, VFAM has not
received notification of any asserted present or past failure to so comply. VFAM
has delivered to Buyer all inspection reports or
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similar documents received during the past three years from the SEC, state
regulatory authorities, or the NASD and VFAM's responses thereto.
SECTION 4.16 Actions Since the Balance Sheet Date. Except as set forth on
------------------------------------
Schedule 4.16, since September 30, 1999 and to the date hereof, VFAM:
(a) has not taken any action outside of the ordinary course of
business;
(b) has not borrowed any money or become contingently liable for any
obligation or liability of others outside of the ordinary course of business;
(c) paid all of its debts and obligations as they became due or
otherwise in the ordinary course of business;
(d) has not incurred any material debt, liability or obligation of
any nature to any party except for obligations arising from the purchase of
goods or the rendition of services in the ordinary course of business;
(e) has not knowingly waived any right of substantial value;
(f) has used its reasonable best efforts to preserve its business
organization intact, to keep available the services of its employees, and to
preserve its relationships with its customers, suppliers and others with whom it
deals; and
(g) has not purchased or redeemed any shares of capital stock of
VFAM, or transferred, distributed or paid, directly or indirectly any money or
other property or assets to the Shareholders;
(h) made a change in the number of shares of capital stock of VFAM
issued and outstanding;
(i) declared, set aside, paid or distributed any dividend or other
distribution with respect to its capital stock, or with respect to any split,
combination or reclassification of its capital stock;
(j) increased the compensation or severance pay payable or to become
payable by VFAM to any employee or with respect to any employee welfare,
pension, retirement, profit-sharing or similar payment plan or arrangement
applicable to any present or former employee;
(k) incurred any capital expenditure or authorization for a capital
expenditure, acquisition of assets or execution of any lease, or incurred
liability therefor, requiring any payment or payments in excess of $10,000 in
the aggregate with respect to each individual transaction;
(l) borrowed or lent money, issued debt securities or pledged a
credit of VFAM or guaranteed any indebtedness of others by VFAM;
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(m) lost the services of any employee that is, either individually or
in the aggregate, material to the conduct of the business of VFAM; incurred the
loss or termination of relationship with any supplier, client or customer; or
(n) entered into any agreement, arrangement or understanding to do
any of the foregoing.
SECTION 4.17 Tax Matters.
-----------
(a) For purposes of this Agreement, the term "Taxes" shall mean all
taxes, charges, fees, levies or other assessments, including, without
limitation, income, gross receipts, employment excise, withholding, property,
sales, use, transfer, license, payroll and franchise taxes, together with any
interest and any penalties, additions to tax or additional amounts with respect
thereto, imposed by the United States, or any state, local or foreign government
or subdivision or agency thereof. For purposes of this Agreement, the term "Tax
Return" shall mean any report, return or other information required to be
supplied to a taxing authority in connection with Taxes. All citations to
provisions of the Code, or to the Treasury Regulations promulgated thereunder,
shall include any amendments thereto and any substitute or successor provisions
thereto.
(b) VFAM has duly filed all Tax Returns required to be filed as of
the date hereof (and will file all Tax Returns required to be filed on or before
the Closing Date). All such Tax Returns are (and, as to Tax Returns not filed as
of the date hereof but filed on or before the Closing Date, will be) true,
correct and complete in all material respects and were (and, as to Tax Returns
not filed as of the date hereof but filed on or before the Closing Date, will
be) filed on a timely basis. All taxes shown on such Tax Returns or otherwise
due or payable with respect to the income of VFAM (whether or not shown on any
Tax Return) have been timely paid except as expressly reserved on the Balance
Sheet. Except as disclosed in Schedule 4.17(b), VFAM has not requested any
extension of time within which to file any Tax Return, which Tax Return has not
since been filed. True and complete copies of the federal state and local income
Tax Returns of VFAM for the last three years have been provided to SBI prior to
the date hereof. The reserves for Taxes reflected in the financial statements of
VFAM are sufficient for the payment of all unpaid taxes (whether or not
currently disputed) which are incurred or may be incurred with respect to the
period (or portion thereof) ended on the date of such financial statements and
for all years and periods ended prior thereto, and the reserve for Taxes
reflected in the balance sheet is sufficient for the payment of all unpaid Taxes
(whether or not currently disputed) which are incurred or may be incurred with
respect to the period (or portion thereof) ended on the Closing Date and for all
years and periods ended prior thereto. Since December 31, 1998, VFAM has not
incurred any liability for Taxes other than in the ordinary course of business,
which Taxes would result in a material decrease in the net worth of VFAM, except
any such liability for taxes incurred as a result of the disposition on or
before the Closing Date of those private placement assets which appear on the
Balance Sheet. No waiver or extension of any statute of limitations relating to
Taxes has been given to, or requested by, the Internal Revenue Service (the
"IRS"), or any state or local taxing authority. No claim is currently being made
by any authority in a jurisdiction where VFAM files Tax Returns that they are or
may be subject to Taxes in that jurisdiction.
(c) Except as set forth on Schedule 4.17(c), VFAM has complied (and
until the Closing Date will comply) in all material respects with the provisions
of the Code relating to the withholding and payment of Taxes, including, without
limitation, the withholding and reporting
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requirements under Code sections 1441 through 1464, 3401 through 3406, and 6041
through 6049, as well as similar provisions under any other laws, and have,
within the time and in the manner prescribed by law, withheld from employee
wages and paid over to the proper governmental authorities all amounts required.
VFAM has under taken in good faith to appropriately classify all service
providers as either employees or independent contractors for all Tax purposes.
(d) Neither the federal income Tax Returns nor the state or local
income Tax Returns of VFAM have been examined by the IRS or relevant state
taxing authorities, except as set forth on Schedule 4.17(d). All deficiencies
asserted as a result of the examinations referred to on Schedule 4.17(d) have
been paid, and no issue has been raised by any federal, state, local or foreign
income tax authority in any such examination which, by application of the same
or similar principles to similar transactions, could reasonably be expected to
result in a proposed deficiency for any subsequent period. Further, to the best
of VFAM's knowledge, no state of facts exists or has existed which would
constitute grounds for the assessment of any material liability for Taxes with
respect to the periods which have not been audited by the IRS or other taxing
authority. There are no examinations or other administrative or court
proceedings relating to Taxes in progress or pending nor has VFAM received a
revenue agent's report asserting a tax deficiency. To the best of VFAM's
knowledge, there are no threatened actions, suits, proceedings, investigations
or claims relating to or asserted for Taxes of VFAM and there is no basis for
any such claim.
(e) Since 1993, VFAM has not been a member of any affiliated group of
corporations that filed a consolidated income tax return.
(f) Since its date of incorporation, VFAM has not (A) filed any
consent or agreement under Section 341(f) of the Code, (B) applied for any tax
ruling, (C) entered into a closing agreement with any taxing authority, (D)
filed an election under Section 338(g) or Section 338(h)(10) of the Code (nor
has a deemed election under Section 338(e) of the Code occurred), (E) made any
payments, or been a party to an agreement (including this Agreement) or any
transactions related hereto that under any circumstances could obligate it to
make payments that will not be deductible because of Section 280G of the Code,
or (F) been a party to any tax allocation or tax sharing agreement.
SECTION 4.18 Environmental Matters.
---------------------
(a) Except as disclosed in Schedule 4.18(a):
(i) VFAM has been and is in full compliance with all
Environmental Laws (as defined below) applicable to the operations of, and the
property owned, operated, occupied or otherwise used by, VFAM. To the best
knowledge of VFAM, there are no circumstances that may prevent or interfere with
such full compliance in the future.
(ii) VFAM has obtained all Permits (as defined below) necessary
for the operation of their businesses and the ownership, operation, occupation
or other use of their properties, all such Permits are in good standing and VFAM
is in compliance with all terms and conditions of such Permits. There has been
no material change in the facts or circumstances reported or assumed in the
applications for or the granting of such Permits.
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(iii) There is no lawsuit, claim, action, cause of action, judicial
or administrative proceeding, investigation, summons, or written notice by any
person pending, or to VFAM's knowledge, threatened, against VFAM alleging
potential liability (including, without limitation, potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resource damages, property damages, personal injuries or penalties) arising out
of or resulting from (i) the violation of any Environmental Law or (ii) the
presence or Release of any Hazardous Substance (as defined below) at any
location, whether or not owned, operated, occupied or otherwise used by VFAM.
(iv) VFAM is not subject to any writ, injunction, order, decree or
settlement addressing (i) any alleged violation of any Environmental Law or (ii)
the alleged presence, or Release into the environment of any Hazardous Substance
at any location, whether or not owned, operated, occupied or otherwise used by
VFAM.
(v) No Environmental Lien (as defined below) has attached to any of
the property owned, operated, occupied or otherwise used by VFAM.
(vi) There has been no Release of any Hazardous Substance at, to or
from any of the properties owned, operated, occupied or otherwise used by VFAM.
(vii) VFAM has not transported or arranged for the transport of any
Hazardous Substance to any facility or site for the purpose of treatment,
storage, disposal or recycling which (i) is included on the National Priorities
List or the Comprehensive Environmental Response, Compensation and Liability
Information System under the Comprehensive Environmental Response, Compensation
and Liability Act, 42 U.S.C. (S)(S) 9601 et. seq. ("CERCLA"), or any similar
------
state list which is required by any state Environmental Law to be kept, or (ii)
is presently subject to a governmental enforcement action under CERCLA or the
Solid Waste Disposal Act, 42 U.S.C. (S)(S) 6901 et. seq., or any similar state
Environmental Law.
(viii) All of the third parties with which VFAM presently have
arrangements, engagements or contracts to accept, treat, transport, store,
dispose, remove or recycle any Hazardous Substances generated or present at any
of the properties owned, operated, occupied or otherwise used by VFAM are
properly permitted under Environmental Laws to perform the foregoing activities
or conduct.
(ix) VFAM has no violation of any Environmental Law or the Release
of any Hazardous Substance in connection with any business or property
previously owned, operated, occupied or otherwise used by VFAM or any of the
predecessors of VFAM.
(x) There are no past or present actions, activities,
circumstances, conditions, event or incidents, including, without limitations,
the generation, handling, transportation, treatment, storage, Release, presence,
disposal or arranging for disposal of any Hazardous Substance, that could form
the basis of any claim against VFAM under any Environmental Law.
(xi) Without any way limiting the generality of the foregoing, (i)
all underground storage tanks, and the capacity and contents of such tanks,
located on the real property owned or operated by VFAM are identified in
Schedule 4.18(a), (ii) except as identified in Schedule 4.18(a), there is no
asbestos contained in or forming part of any building, building component,
structure
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or office space owned or operated by VFAM, and (iii) no polychlorinated
biphenyls (PCBS) are used or stored at any part of the property owned or
operated by VFAM.
(xii) The following terms shall have the following meanings:
A. "Environmental Laws" means all federal, state,
local and foreign laws, statues, codes, ordinances, rules, regulations, orders,
directives, binding policies, common law, or Permits as amended and in effect on
the date hereof and on the Closing Date relating to or addressing the
environment, health or safety, including, but not limited to, any law, statute,
code, ordinance, rule, regulation, order, directive, binding policy, common law
or Permit relating to the generation, use, handling, treatment removal, storage,
production, manufacture, transportation, remediation, disposal, arranging for
disposal, or Release of Hazardous Substances.
B. "Environmental Lien" means a lien in favor of any
conventional authority for any (a) liability under any Environmental Law or (b)
damages arising from, or costs incurred by, such governmental authority in
response to a release or threatened release of a Hazardous Substance into the
environment.
C. "Hazardous Substances" means any toxic or
hazardous substances (including, without limitation, wastes), pollutants,
explosives, radioactive materials or substances (including, without limitation,
wastes), including, without limitation, asbestos, PCBs, petroleum products and
byproducts, and substances (including, without limitation, wastes) defined in or
regulated under Environmental Law.
D. "Permit" means any permit, license, consent or
other approval or authorization required under any Environmental Law.
E. "Release" means the release, spill, emission,
leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching
or migrating of any Hazardous Substance through or in the air, soil, surface
water, or groundwater.
SECTION 4.19 Books and Records. The books and records of VFAM have been,
-----------------
and are being, maintained in accordance with applicable legal and accounting
requirements and reflect in all material respects the substance of events and
transactions that should be included therein.
SECTION 4.20 Intellectual Property. VFAM, directly or indirectly,
---------------------
possesses or has adequate rights to all licenses, permits and all other
franchises, trademarks, trade names, service marks, inventions, patents,
copyrights, and any applications therefor, trade secrets, research and
development, know-how, technical data, computer software programs or
applications and technology systems necessary to operate their respective
businesses and required by applicable law (the "Intellectual Property"). Except
as set forth on Schedule 4.20, all right, title and interest in and to each item
of Intellectual Property is owned by VFAM, is not subject to any license,
royalty arrangement or pending or threatened claim or dispute and is valid and
in full force and effect. To VFAM's knowledge, none of the Intellectual
Property owned or used by VFAM, infringes any Intellectual Property right of any
other entity and no Intellectual Property owned by VFAM is infringed upon by any
other entity.
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SECTION 4.21 Condition of Tangible Assets. To VFAM's knowledge, the
----------------------------
operation and use of the property in the business conform in all material
respects to all applicable laws, ordinances, regulations, permits, licenses and
certificates.
SECTION 4.22 Year 2000 Compliance. Except as provided in Schedule 4.22
--------------------
hereof, VFAM has undertaken an assessment of its software and hardware in order
to reveal those portions thereof which will require modification or replacement
to utilize properly dates beyond December 31, 1999, and have contracted with
appropriate third parties to modify or replace such existing software and
hardware so that such software and hardware will not be affected by the change
in the Year 2000. VFAM and has contacted those vendors and borrowers who are
critical to its business operations in order to assess their efforts to mitigate
any adverse effects to their computer programs and systems beyond December 31,
1999.
SECTION 4.23 Conflicts of Interest. Except as set forth on Schedule 4.23,
---------------------
no present or former officer or director, or managerial employee, of VFAM and no
Shareholder has (i) any interests in the property, tangible or intangible,
including without limitation, licenses, inventions, processes, know how or
formula of a proprietary nature used in or pertaining to the business of VFAM,
or (ii) any contract, commitment, claim, arrangement or understanding,
including, without limitation loan arrangement, with VFAM. To the best knowledge
of VFAM, no present officer, director, or managerial employee of VFAM and no
Shareholder has any ownership or stock interest in any other enterprise, firm,
corporation, trust or any other entity which is engaged in any contractual
arrangement or understanding with VFAM or is engaged in any line or lines of
business which are the same as, or similar to, or competitive with, the line or
lines of business of VFAM. For the purpose of this representations, ownership of
not more than 3% of the voting stock of any publicly-held company whose stock is
listed on a recognized securities exchange or traded over-the-counter shall be
disregarded.
SECTION 4.24 VFICO Agreement Representations. The representations and
-------------------------------
warranties of VFICO made pursuant to Article III of the VFICO Agreement are true
and correct.
SECTION 4.25 Disclosure. No representation or warranty by VFAM or the
----------
Shareholders contained in this Agreement, and no statement contained in any
Exhibit or Schedule hereto or any lists, certificate or writing delivered in
connection herewith or pursuant hereto, contains any untrue statement of a
material fact, or omits to state a material fact necessary in order to make the
statements contained herein or therein not misleading or necessary in order to
fully and fairly provide the information required to be provided in any such
document.
ARTICLE V
FURTHER REPRESENTATIONS AND WARRANTIES OF THE
SHAREHOLDERS
As a material inducement to SBI and Buyer to enter into this Agreement and
to consummate the transactions contemplated herein, each of the Shareholders
makes the following representations and warranties to SBI, Buyer and VFAM:
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SECTION 5.01 Ownership of Capital Stock of VFAM. Such Shareholder resides
----------------------------------
at the address indicated on Annex I and owns the number of Shares set forth
opposite his or her name on Annex I hereto. Such Shareholders has good,
marketable and unencumbered title to such Shares, free and clear of all liens,
security interests, pledges, claims, options and rights of others.
SECTION 5.02 Valid and Binding Agreement. This Agreement constitutes and
---------------------------
will constitute the valid and binding obligation of such Shareholder.
SECTION 5.03 Marital Status. Such Shareholder has not commenced an action
--------------
for divorce or annulment of his or her current marriage in any court. Such
Shareholder's Shares are not subject to any lien as security for the payment of
alimony, child support or other award granted in any prior divorce or annulment
proceeding.
SECTION 5.04 Shareholder Agreements. Except the Buy-Sell Agreements among
----------------------
VFAM and the Shareholders which will terminate at Closing, there are no
agreements among or between VFAM and such Shareholder and no agreements between
such Shareholder and any other Shareholder pertaining to VFAM or the VFAM Common
Stock. Except the Buy-Sell Agreements among VFAM and the Shareholders which will
terminate at Closing, such Shareholder does not have (i) any interests in the
property, tangible or intangible, including without limitation, licenses,
inventions, processes, know how or formula of a proprietary nature used in or
pertaining to the business of VFAM, or (ii) any contract, commitment, claim,
arrangement or understanding, including, without limitation loan arrangement,
with VFAM. Such Shareholder does not have any ownership or stock interest in any
other enterprise, firm, corporation, trust or any other entity which is engaged
in any contractual arrangement or understanding with VFAM or is engaged in any
line or lines of business which are the same as, or similar to, or competitive
with, the line or lines of business of VFAM. For the purpose of this
representations, ownership of not more than 3% of the voting stock of any
publicly-held company whose stock is listed on a recognized securities exchange
or traded over-the-counter shall be disregarded.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF SBI AND BUYER
As a material inducement to VFAM and the Shareholders to enter into this
Agreement, SBI and Buyer makes the following representations and warranties to
VFAM and the Shareholders:
SECTION 6.01 Organization. Each of SBI and Buyer is a corporation duly
------------
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and has the corporate power and authority to
carry on its business as presently conducted, to enter into this Agreement, and
the other documents and instruments to be executed and delivered by SBI and
Buyer pursuant hereto and to carry out the transactions contemplated hereby and
thereby.
SECTION 6.02 Authority. The execution and delivery of this Agreement and
---------
the other documents and instruments to be executed and delivered by SBI and
Buyer pursuant hereto and the consummation by SBI and Buyer of the transactions
contemplated hereby have been duly authorized by their respective Board of
Directors. No other corporate act or proceeding on the part of SBI or Buyer is
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necessary to authorize this Agreement, or the other documents and instruments to
be executed and delivered by SBI or Buyer.
SECTION 6.03 Consents and Approvals; No Violation. This Agreement
------------------------------------
constitutes or will constitute valid and binding agreements of SBI and Buyer,
enforceable in accordance with its terms, and except as such enforceability may
be limited by bankruptcy or other similar laws affecting creditors' rights and
remedies generally, neither the execution and delivery of this Agreement, nor
the consummation of the transactions contemplated hereby (i) conflict or result
in a breach of any provision of the Articles of Incorporation or Bylaws of SBI
or Buyer, (ii) result in a violation or breach of, or constitute with or without
due notice or lapse of time or both) a default (or give rise to any right of
termination, amendment, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease, license,
contract, agreement or other instrument or obligation to which Buyer is a party
or by which any of its properties or assets may be bound or (iii) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to SBI
or Buyer or any of its properties or assets. Except as set forth on Schedule
6.03, no permit, authorization, consent or approval of, any court or other
adjudicatory body, administrative agency or commission or other governmental or
regulatory authority or agency is required in connection with the execution,
delivery or performance by SBI or Buyer of this Agreement or the consummation of
the transactions contemplated hereby.
SECTION 6.04 Disclosure. No representation or warranty by SBI or Buyer
----------
contained in this Agreement, and no statement contained in any Exhibit or
Schedule hereto or any lists, certificate or writing delivered in connection
herewith or pursuant hereto contains any untrue statement of a material fact, or
omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading or necessary in order to fully and
fairly provide the information required to be provided in any such document.
SECTION 6.05 SEC Reports and Financial Statements. SBI has delivered to
------------------------------------
VFAM complete (except in certain cases for listed exhibits which are available
upon request) and correct copies of SBI's (a) Proxy Statement and Annual Report
on Form 10-K for the fiscal year ended December 31, 1998; (b) Quarterly Reports
on Form 10-Q for the fiscal quarters ended March 31, June 30 and September 30,
1999, in each case as filed by SBI with the SEC pursuant to the 1934 Act (such
reports and other filings collectively referred to herein as the "1934 Act
Filings"). As of their respective dates, the 1934 Act Filings did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading and, since
the date of the last 1934 Act Filing, SBI has not experienced nor to the
knowledge of SBI has there been threatened or anticipated any material adverse
change in the condition (financial or otherwise), assets, liabilities (absolute,
accrued, contingent or otherwise), business, or operations of SBI taken as a
whole.
SECTION 6.06 Disciplinary History. Except as set forth on Schedule 6.06,
--------------------
there is no information concerning SBI or Buyer, or any person or entity that,
upon the consummation of the transactions contemplated by this Agreement and the
VFICO Agreement, will be a control affiliate (as such term is defined in
Instruction 4(3) to Form BD, Uniform Application for Broker-Dealer Registration
("Form BD") or an advisory affiliate (as such term is defined in Item 11 of Form
ADV, Uniform Application for Investment Adviser Registration (Form ADV")) of
VFAM (other than persons and entities that are presently control affiliates or
advisory affiliates of VFAM), that will be required to be
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disclosed in response to Item 11 or Schedule DRP of VFAM's Form BD or in
response to Item 11 or Schedule E of VFAM's Form ADV.
ARTICLE VII
CERTAIN COVENANTS PENDING THE CLOSING
SECTION 7.01 Access and Information. Between the date hereof and the
----------------------
Closing Date, VFAM will give Buyer and its authorized representatives full and
free access during normal business hours, in such manner as not to unduly
disrupt normal business activities, to any and all premises, properties,
contracts, commitments, books and records, and VFAM will cause its officers to
furnish any and all financial, technical and operating data and other
information as Buyer and its authorized representatives from time to time
reasonably may request.
SECTION 7.02 Conduct of the Business of VFAM Pending the Closing Date.
--------------------------------------------------------
Except as set forth on Schedule 7.02, between the date hereof and the Closing
Date, unless Buyer otherwise consents in writing, VFAM and the Shareholders
shall:
(a) Not take any action which would render untrue any of the
representations or Warranties of VFAM or the Shareholders herein contained; not
omit to take any action, the omission of which would render untrue any such
representation or warranty; provided, however, VFAM and the Shareholders shall
not be obligated to take any action not in the ordinary course of business that
would result in the expenditure of funds by VFAM exceeding $5,000 in the
aggregate; and not take any action or commit any omission that would have as a
result any of the conditions set forth in Article IX not being satisfied.
(b) Conduct VFAM's business in a good and diligent manner in the
ordinary and usual course.
(c) Use their respective best efforts to preserve VFAM's business
organization intact, to keep available the services of its employees, and to
preserve its relationships with customers, vendors, suppliers and others with
whom it deals.
(d) Not reveal, orally or in writing, to any party, other than
consultants and vendors of services with a need to know and other than Buyer and
its authorized agents, any of the confidential business procedures and practices
followed by VFAM in the conduct of its business.
(e) Not enter into any contract, agreement, commitment or arrangement
with any party, other than contracts in the ordinary and usual course of
business, and not amend, modify or terminate any of the Corporation Agreements
except modifications or amendments to such Corporation Agreements which either
are not materially adverse to VFAM or are necessary or desirable to meet the
competitive conditions in the industry.
(f) Except as contemplated by this Agreement, not redeem or otherwise
acquire any shares of its capital stock or issue any capital stock or any stock
or any stock option, warrant, preference, call or right relating thereto.
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(g) Use their best efforts to ensure that at Closing, the financial
requirements to which VFAM and VFICO will certify on the Closing Financial
Certificates have been met.
(h) Use their best efforts to maintain in full force and effect all
of the insurance policies presently maintained by VFAM, make no change in any
insurance coverage and notify Buyer at least ten days prior to any pending
cancellation or lapse of any insurance policy.
(i) Keep the premises occupied and owned or leased by VFAM and all of
its equipment and other tangible personal property in good order and repair and
perform all necessary repairs and maintenance.
(j) Continue to maintain all of VFAM's usual business books and
records in accordance with its past practices.
(k) Not amend or propose to amend VFAM's Articles of Incorporation or
Bylaws.
(l) Not waive any material right or cancel any material claim without
the receipt of adequate consideration.
(m) Maintain VFAM's corporate existence and not merge or consolidate
it with any other entity.
(n) Comply with all material provisions of any of the Corporation
Agreements and all applicable laws, rules and regulations.
(o) Not make any capital expenditure other than in the ordinary
course of business and an amount not exceeding $10,000 in the aggregate.
(p) Not place any additional encumbrances on any of the inventory or
assets of VFAM not in the ordinary course of business, except that existing
encumbrances may attach to inventory or assets of VFAM acquired after the date
hereof.
(q) Not pay any severance, deferred compensation or other payments to
any Shareholder, whether or not accrued except as otherwise expressly provided
by this Agreement.
(r) Not declare or make any dividend or other payment on or with
respect to VFAM's capital stock, and not declare or pay any bonuses or non-
periodic compensation to either of the Shareholders.
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SECTION 7.03 Client Notification.
-------------------
(a) As promptly as possible following the date of this Agreement (but
in no event later than the fifth business day after the date hereof), VFAM shall
provide each client who has an Investment Account written notice of the
transactions contemplated hereby (the "Notice Letter"). Buyer and its counsel
shall have the opportunity to review the form of the Notice Letter prior to
delivery to the Investment Accounts, and the Notice Letter shall be in form and
substance reasonably satisfactory to Buyer and its counsel.
(b) Prior to the Closing, VFAM shall contact clients as selected by
VFAM, but including clients with assets under management valued in excess of
$1,000,000 as of September 30, 1999, to discuss by telephone the proposed
transaction contemplated by this Agreement.
(c) VFAM shall give prompt notice to Buyer of any indications
(written or oral) from any client maintaining an Investment Account that such
client will not consent to the transactions contemplated by this Agreement.
SECTION 7.04 Notices. VFAM shall give prompt notice to Buyer of (i) any
-------
notice of, or other communication relating to, a default which would have a
material adverse effect on VFAM or event which, with notice or lapse of time or
breach of a covenant or other provision or both, would become a default or
breach which would have a material adverse effect on VFAM, received by it
subsequent to the date of this Agreement and prior to the Closing, under its
Articles of Incorporation or Bylaws or any of the Corporation Agreements or
pursuant to its investment advisor registrations and (x) by which it is bound or
(y) to which it is subject, (ii) any claim, action, suit, proceeding or
investigation by any governmental department, taxing authority commission,
board, agency, instrumentality or authority involving or relating to its assets,
properties or business or the Corporation Agreements (or any communication
indicating that the same may he contemplated), (iii) any notice or other
communication from any third party (other than Clients) alleging that the
consent of such third party is or may be required in connection with the
transactions contemplated hereby and (iv) any matter which would cause any
material change with respect to any representations made hereunder.
SECTION 7.05 Advice of Changes. Each of Buyer and VFAM shall confer on a
-----------------
regular and frequent basis with the other, report on operational matters and
promptly advise the other orally and in writing of any change or event having,
or which, insofar as can reasonably be foreseen, could have, a material adverse
effect on such party.
SECTION 7.06 No Shopping. The Shareholders and VFAM agree that none of
-----------
them shall solicit, enter into or continue any discussions, negotiations or
contracts (including any disclosure of business information concerning VFAM)
with any person or entity other than Buyer concerning the disposition of VFAM's
capital stock or of its assets and business operations, whether by sale, merger
or other transaction.
SECTION 7.07 Best Efforts.
------------
Subject to the terms and conditions of this Agreement, each of the parties
hereto agrees to use best efforts to take, or cause to be taken, all action and
to do, or cause to be done, all things necessary,
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<PAGE>
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement.
SECTION 7.08 December 31, 1999 Financial Statements. If the Closing has
--------------------------------------
not occurred by January 15, 2000, then VFAM shall deliver to Buyer on or before
that date the unaudited financial statements of VFAM for the quarter ended
December 31, 1999, prepared in accordance with GAAP (the "December 31, 1999
Financials").
ARTICLE VIII
INDEMNIFICATION
SECTION 8.01 Basic Provision. The Shareholders severally and not jointly
---------------
and (only if the Closing does not occur) VFAM, jointly and severally with the
Shareholders, hereby indemnify and agree to hold harmless SBI, Buyer and their
Affiliates (as defined herein), successors and assigns, and SBI and Buyer hereby
indemnify and agree to hold harmless the Shareholders and VFAM and their
respective Affiliates, successors and assigns, from, against and in respect of
the amount of any and all Deficiencies (as hereinafter defined); provided,
however, that no Shareholder shall be liable for breaches or misrepresentations
by the other Shareholders of their representations or warranties contained in
Article V of this Agreement.
SECTION 8.02 Definitions. As used in this Article VIII, the following
-----------
terms have the meanings:
(a) "Affiliate" as to any person or entity, means any other person
---------
that directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with such person or entity.
(b) "Deficiency" means any and all loss or damage, resulting from (i)
----------
any breach of warranty, or any non-fulfillment of any warranty, representation,
covenant or agreement by an Indemnitor contained herein; (ii) any
misrepresentation contained in any statement, report, certificate or other
document or instrument delivered by an Indemnitor pursuant to this Agreement or
contained in any Exhibit or Schedule; (iii) efforts by holders of Dissenting
Shares (as defined in Section 7.03 of the VFICO Agreement) to seek dissenters'
rights Pennsylvania law, including any payments that exceed the per share value
of the Cash Consideration; (iv) claims by any VFAM shareholder or VFICO
shareholder that the materials delivered to such shareholder in connection with
obtaining approval of the transactions contemplated by this Agreement or the
VFICO Agreement contain any untrue statement of material fact or omit to state a
material fact or are otherwise defective (a "Shareholder Disclosure
Deficiency"); and (v) any and all acts, suits, proceedings, demands,
assessments, judgments, reasonable attorneys' fees, costs and expenses incident
to any of the foregoing.
(c) "Indemnified Party" means the individuals or entities entitled to
-----------------
indemnification under this Article VIII consisting of (i) SBI and Buyer, their
respective Affiliates, successors and assigns and their respective officers and
directors or (ii) VFAM (only if the Closing does not occur), the Shareholders,
their respective Affiliates, successors and assigns and their respective
officers and directors, as the case may be.
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(d) "Indemnitor" means the individuals or entities obligated to
----------
provide indemnification under this Article VIII consisting of SBI and Buyer, or
VFAM (only if the Closing does not occur) and the Shareholders, as the case may
be.
SECTION 8.03 Procedures for Establishment of Deficiencies.
--------------------------------------------
(a) In the event that any claim shall be asserted by any third party
against an Indemnified Party which, if sustained, would result in a Deficiency,
such Indemnified Party, within a reasonable time after learning of such claim,
shall notify Indemnitor of such claim, and shall extend to Indemnitor a
reasonable opportunity to defend against such claim at Indemnitor's sole expense
and through legal counsel acceptable to the Indemnified Party, provided that
Indemnitor proceed in good faith, expeditiously and diligently. No determination
shall be made pursuant to subparagraph (b) below while such defense is still
being made until the earlier of (i) the resolution of said claim by Indemnitor
with the claimant, or (ii) the termination of the defense by Indemnitor against
such claim or the failure of indemnitor to prosecute such defense in good faith
in an expeditious and diligent manner. The Indemnified Party shall be entitled
to rely upon the opinion of its counsel as to the occurrence of either of said
events. The Indemnified Party shall, at its option, have the right to
participate in any defense undertaken by Indemnitor with legal counsel of its
own selection, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Party unless (I) the employment of such counsel shall have
been authorized in writing by Indemnitor in connection with the defense of such
action, suit, or proceeding, or (II) Indemnitor shall fail actively and
diligently to defend such claim, in either of which events the defense of such
claim on behalf of the Indemnified Party shall be controlled by the Indemnified
Party and that portion of any fees and expenses of counsel related to matters
covered by the indemnity agreement contained in Section 8.01 shall be borne by
Indemnitor. The Indemnified Party shall be kept fully informed of such claim at
all stages thereof whether or not they are so represented. Each party shall make
reasonably available to the other party and its attorneys and accountants all
books and records of such party relating to such claim and the parties hereto
shall render to each other such assistance as they may reasonably require of
each other in order to ensure a proper and adequate defense. No settlement or
compromise of any claim which may result in a Deficiency may be made by
Indemnitor without the prior written consent of the Indemnified party unless (i)
prior to such settlement or compromise Indemnitor acknowledges in writing its
obligation to pay in full the amount of the settlement or compromise and all
associated expenses and (ii) the Indemnified Party is furnished with security
reasonably satisfactory to the Indemnified Party that Indemnitor will in fact
pay such amount and expenses.
(b) In the event that the Indemnified Party asserts the existence of
any Deficiency, the Indemnified Party shall give written notice to Indemnitor of
the nature and amount of the Deficiency asserted. If Indemnitor, within a period
of twenty (20) business days after the giving of the Indemnified Party's notice,
shall not give written notice to the Indemnified Party announcing its intent to
contest such assertion of the Indemnified Party (such notice by Indemnitor being
hereinafter called the "contest notice"), such assertion of the Indemnified
Party shall be deemed accepted and the amount of the Deficiency shall be deemed
established. In the event, however, that a contest notice is given to the
Indemnified Party within said twenty-day period, then the contested assertion of
a Deficiency shall be settled by arbitration to be held in Philadelphia,
Pennsylvania in accordance with the rules of the American Arbitration
Association then obtaining. The arbitrator shall be a firm or person with
experience pertaining to registered investment advisors mutually selected by the
Shareholders and Buyer (or by the rules of the American Arbitration Association
absent such agreement within ten (10) business
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days after a request for such selection by the Indemnified Party or Indemnitor)
which has not been engaged by VFAM, the Shareholders or Buyer or their
respective subsidiaries or affiliates during the prior five years. The
determination of the arbitrator(s) and the reasons therefor shall be delivered
in writing to Indemnitor and the Indemnified Party and shall be final, binding
and conclusive upon all of the parties hereto, and the amount of the Deficiency,
if any, determined to exist, shall be deemed established.
(c) Indemnitor and the Indemnifying Party may agree in writing, at
any time, as to the existence and amount of a Deficiency, and, upon the
execution of such agreement such Deficiency shall be deemed established.
SECTION 8.04 Payment of Deficiencies.
-----------------------
VFAM (only if the Closing does not occur) and the Shareholders,
severally and not jointly hereby agree to pay the amount of established
Deficiencies to SBI and Buyer within twenty (20) days after the establishment
thereof in cash. Any amounts not paid by VFAM and the Shareholders when due
under this subparagraph shall bear interest from the due date thereof until the
date paid at a rate equal to the prime rate, as reported from time to time in
The Wall Street Journal, eastern edition. Within five (5) business days after
notification of the amount of the Deficiencies, each Shareholder shall pay to
Buyer his or her Proportionate Share of the Deficiencies. Such Proportionate
Share shall equal the fraction the numerator of which is the purchase price paid
to such Shareholder at Closing as set forth on Annex I and the denominator of
which is the purchase price paid to all Shareholders at Closing as set forth on
Annex I. If any Shareholder fails to promptly make such payment, Buyer shall
have the right to offset the amount of such payment by a claim against the
amounts escrowed for the benefit of such Shareholder under Sections 2.01 and
3.01 of this Agreement. Upon demand by Buyer to the Escrow Agent (with notice to
the Shareholder), the Escrow Agent shall pay such Proportionate Share of the
Deficiencies to Buyer. The Buyer may also deduct any such deficiencies not so
paid from any payments to which such Shareholder may become entitled under his
or her Contingent Earnings Agreement (or which have been or would have been
deposited into escrow for the benefit of such shareholder, by demand to the
Escrow Agent as provided above) and from and Additional Stock Payments which may
become due under this Agreement. Any amount still not collected from such
Shareholder shall remain the personal obligation of that Shareholder. If such
Shareholder would not have been entitled to receive funds in escrow which have
been paid to Buyer pursuant to this Section 8.04 (the "Deficiency Disqualified
Amount") because the conditions to distribution of such funds would not have
been satisfied by the continued employment by such Shareholder with VFAM, then
the liability of such Shareholder to Buyer shall be increased by the Deficiency
Disqualified Amount.
SECTION 8.05 Survival of Representations, Warranties and Agreements.
------------------------------------------------------
(a) All representations and warranties contained in Articles IV, V
and VI of this Agreement and any certificates pertaining thereto to be delivered
at the Closing and the rights of the parties to seek indemnification under this
Article VIII with respect to such representations and warranties and Closing
certificates pertaining thereto, shall survive the Closing Date but, except as
set forth below in respect of any claims as to which notice shall have been duly
given prior to the relevant expiration date set forth below, shall expire on the
second anniversary of the Closing Date provided, however that;
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(b) All agreements and covenants contained in this Agreement and
the rights of the parties to seek indemnification under this Article VIII with
respect to such agreements and covenants shall survive Closing.
(c) Nothing contained herein shall limit or restrict the
Shareholders continuing liability for any breach of representations and
warranties contained in Sections 4.01(a), 4.03, 4.04, 4.17, 4.18, 5.01 and 5.02,
which in each case shall continue until the expiration of the applicable statute
of limitations.
(d) Nothing contained in this Section 8.05 shall limit or
restrict the Shareholders continuing liability for Deficiencies relating to
Section 1.05.
(e) Except for claims involving fraud and the provisions of
Section 1.05, the indemnification provided in this Article VIII shall be the
exclusive remedies the parties have under the terms of this Agreement with
respect to Deficiencies.
SECTION 8.06 Limitations on Indemnification.
------------------------------
The indemnification provided for in Article VIII shall be subject to the
following limitations:
(a) Except for a Shareholder Disclosure Deficiency or Deficiency
relating to Section 1.05, no Indemnified Party shall make any claim against an
Indemnitor for indemnification under this Article VII unless the aggregate
amount of the Deficiency pertaining to all such claims exceeds $250,000 (the
"Threshold Amount") in which case all Deficiencies incurred shall be subject to
indemnification hereunder; provided, however that although Deficiencies under
$2,500 ("Indemnification Minimum") shall be counted towards the Threshold
Amount, Deficiencies under $2,500 shall not be subject to indemnification
hereunder, except for such Deficiencies which arise under related or common
facts or circumstances and when aggregated exceed the Indemnification Minimum.
(b) The Shareholders' total liability for indemnity to an
Indemnified Party in respect of all claims for indemnification under this
Article VIII shall not exceed the aggregate Share Consideration received by all
Shareholders.
ARTICLE IX
CONDITIONS TO CLOSING
SECTION 9.01 Conditions to Each Party's Obligation To Effect the
---------------------------------------------------
Transaction. The respective obligation of each party to effect the transactions
- -----------
contemplated hereby shall be subject to the satisfaction prior to the Closing
Date of the following conditions:
(a) No Injunctions or Restraints. No temporary restraining
----------------------------
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect.
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(b) Consummation of Closing Under VFICO Agreement. The
----------------------------------------------
transactions contemplated by the VFICO Agreement shall have been closed
simultaneously with, Closing under this Agreement.
SECTION 9.02 Conditions of Obligations of Buyer and SBI. The obligations
------------------------------------------
of Buyer and SBI to effect the transactions contemplated hereby are subject to
the satisfaction of the following conditions unless waived by Buyer:
(a) Representations and Warranties. The representations and
------------------------------
warranties of VFAM and the Shareholders set forth in this Agreement shall be
true and correct in all material respects as of the date of this Agreement and
as of the Closing Date.
(b) Performance of Obligations of VFAM and the Shareholders.
-------------------------------------------------------
VFAM and the Shareholders shall have performed in all material respects all of
their respective obligations required to be performed by them under this
Agreement at or prior to the Closing Date.
(c) Consents, Approvals, etc. Any and all material consents,
------------------------
waivers, permits and approvals from any third party or any governmental or
regulatory body required by VFAM in connection with the execution, delivery and
performance of this Agreement, the Contingent Earnings Agreement, the Lease and
the Employment Agreements shall have been duly obtained and shall be in full
force and effect on the Closing Date. Pursuant to the notice procedures set
forth in Section 7.03, VFAM shall have not received negative responses from
clients with Investment Accounts under management representing 10% or more of
assets under management at September 30, 1999.
(d) Notification. No litigation, governmental action or other
------------
proceedings involving or potentially involving a liability, obligation or loss
on the part of VFAM, or which by reason of the nature of the relief sought might
have a materially adverse effect on VFAM's business shall be threatened or
commenced against VFAM with respect to any matter and no litigation,
governmental action or other proceedings shall be threatened or commenced
against any person with respect to the consummation of the transactions provided
for herein.
(e) Other Approvals. All authorizations, consents, orders or
---------------
approvals, including, without limitation, all licenses or assignments of
licenses, of, or declarations or filings with any governmental entity the
failure to obtain which would have a material adverse effect on Buyer, shall
have been filed, occurred or been obtained.
(f) Closing Documents. All documents required to be delivered
-----------------
by the Shareholders and VFAM at or prior to the Closing Date shall have been
delivered.
(g) Share Transfer Restrictions. Any and all share transfer
---------------------------
restrictions on the VFAM common stock, including, without limitation, any
restrictions imposed in VFAM's Articles of Incorporation, bylaws or any
shareholder agreements, shall be terminated or waived.
(h) Employment Agreements. The Key Employees shall have
---------------------
terminated any existing employment agreements with VFAM and entered into
employment agreements with VFAM in the forms attached hereto as Exhibit 9.02(h)
(the "Employment Agreements").
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(i) Contingent Earnings Agreement. All parties thereto shall
-----------------------------
have executed and delivered a contingent earnings agreement in the form attached
hereto as Exhibit 9.02(i) (the "Contingent Earnings Agreement"), as compensation
to the "Associates" as defined therein as an incentive to continue to provide
services to VFAM. SBI shall have received assurance that Messrs. Francis,
Corace, Gibson and Born have each become a party to a Contingent Earnings
Agreement.
(j) Payment of VFAM's Expenses. Prior to the Closing, VFAM and
--------------------------
the Shareholders shall have paid all fees and expenses of VFAM's accountants and
counsel whether incident to the negotiations, preparation, execution, delivery
and performance of this Agreement or otherwise for the period through the
Closing Date, such that no liability or obligation with respect to such fees and
expenses shall be included on VFAM's closing balance sheet. VFAM's accountants
and counsel shall have executed and delivered to VFAM and Buyer a release
agreement in a form satisfactory to Buyer reflecting that as of the Closing Date
they have no right to any further payment from VFAM and SBI and Buyer, for any
fees or expenses.
(k) Tangible Net Worth. SBI and Buyer shall have received a
------------------
certificate (the "VFAM Closing Financial Certificate") dated as of the Closing
Date, signed on behalf of VFAM certifying that, after making all payments
required or permitted to be made by VFAM under this Agreement except the payment
to SBI contemplated in Section 1.06, immediately after the Closing:
(i) the tangible net worth of VFAM as of such date is at
least $1,450,000;
(ii) VFAM has available a cash balance of at least
$1,200,000;
(iii) VFAM has cash and receivables less current liabilities
of at least $1,200,000;
(iv) the net capital as defined in Rule 15c 3-1 promulgated
under the Securities Exchange Act of 1934 ("Net Capital"), shall not be less
than $1,450,000 minus the product obtained by multiplying receivables by 0.415;
and
(v) VFAM has no long term liabilities.
An example of the calculation of such certificate is set forth on Schedule
9.02(k).
(l) Tender of Shares. The Shareholders shall have tendered all
-----------------
of the Shares as contemplated by Section 1.01 hereof.
(m) Cash-Out of Options. The Option Holders shall have
--------------------
surrendered and released the Options, as contemplated by Section 2.01 hereof.
(n) Lease. VFAM shall have entered into a new lease, or
------
amended its current lease, with Warner Road Associates, in form and substance
acceptable to SBI (the "Lease").
(o) Pro Forma Balance Sheet and Income Statements. In addition
----------------------------------------------
to the December 31, 1999 Financials, at least ten days prior to the Closing
Date, VFAM shall deliver to SBI, a pro forma balance sheet and income statement
and supporting documents for the period from the most recent
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audited financial statements through the Closing Date which shall confirm the
accuracy of the VFAM Closing Financial Certificate.
SECTION 9.03 Conditions of Obligations of VFAM and the Shareholders. The
------------------------------------------------------
obligation of VFAM to effect the transactions contemplated herein is subject to
the satisfaction of the following conditions unless waived by VFAM and the
Shareholders (through the Shareholder Representative):
(a) Representations and Warranties. The representations and
------------------------------
warranties of SBI and Buyer set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and as of the
Closing Date.
(b) Performance of Obligations of Buyer. SBI and Buyer shall
-----------------------------------
have performed in all material respects all of its obligations required to be
performed under this Agreement at or prior to the Closing Date.
(c) Consents, Approvals, etc. Any and all material consents,
------------------------
waivers, permits and approvals from any governmental or regulatory body required
by SBI and Buyer in connection with the execution, delivery and performance of
this Agreement shall have been duly obtained and shall be in full force and
effect on the Closing Date except for such items which may lawfully be obtained
after the Closing Date without a material adverse effect on VFAM or the
Shareholders.
(d) No Litigation. No litigation, governmental action or other
-------------
proceeding shall be threatened or commenced against any person with respect to
the consummation of the transaction provided for herein.
(e) Closing Documents. All documents required to be delivered
-----------------
by SBI and Buyer at or prior to the Closing Date shall have been delivered.
ARTICLE X
DELIVERIES
SECTION 10.1 VFAM's and the Shareholders' Deliveries. At the Closing, the
---------------------------------------
Shareholder Representative shall deliver or cause to be delivered to SBI and
Buyer, the following:
(a) Certificates for all of the Shares outstanding on the Closing
Date, duly endorsed by the respective Shareholders in blank, or with stock
transfer powers duly executed by the respective Shareholders in blank attached,
and with all required transfer tax stamps, if any, affixed.
(b) Executed Escrow Agreement.
(c) Evidence of the surrender of the Options to VFAM.
(d) The legal opinion of David S. Foulke, Esq. in form reasonably
acceptable to SBI and Buyer and its counsel;
(e) The Closing Financial Certificate described in Section
9.02(k);
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<PAGE>
(f) A "Good Standing Certificate" and/or a certificate of valid
registration of VFAM issued by the Secretary of State of each State in which it
does business or is registered as an investment advisor or broker/dealer, dated
as of recent date;
(g) A certified copy of the Articles of Incorporation and all
amendments thereto of VFAM issued by the Secretary of State of the Commonwealth
of Pennsylvania, dated as of a recent date;
(h) Officer's Certificate of VFAM certifying that, as of the
Closing Date, (i) each of the representations and warranties of VFAM under this
Agreement is true and correct in all material respects, (ii) VFAM has performed
all of its obligations under this Agreement, and (iii) each of VFAM's
registrations as an investment advisor and broker/dealer is still in effect;
(i) Secretary's Certificate certifying and setting forth (i) the
names of the directors and officers of VFAM; (ii) a true and complete copy of
the Articles of Incorporation and the Bylaws of VFAM, in each case as in effect
on the date thereof, and (iii) a true and complete copy of all resolutions
adopted by the Board of Directors of VFAM relating to the transactions
contemplated by this Agreement.
(j) A Certificate of the Shareholder Representative, certifying
that as of the Closing Date, no Shareholder has revoked their appointment of
such person as their agent and attorney in fact in connection with the
transactions contemplated by this Agreement.
(k) Releases executed by VFAM's accountants and counsel as
provided in Section 9.02(j) that as of the Closing Date they have no right to
any further payment from VFAM or Buyer for any fees or expenses relating to work
performed on or prior to the Closing Date.
(l) The stock books and records, corporate minute books
(containing, to the best knowledge of the Shareholders, the originals of all
minutes and resolutions ever adopted or consented to or agreed by the
shareholders, directors or any committee of directors of VFAM) and corporate
seal of VFAM.
(m) Copies of all consents or assignments from governmental
agencies or third parties necessary for the consummation of the transactions
contemplated by this Agreement.
SECTION 10.02 SBI and Buyer Deliveries. At the Closing, SBI and Buyer
------------------------
shall deliver or cause to be delivered to the Shareholder Representative, the
following:
(a) The Shareholder Consideration;
(b) Executed Escrow Agreement;
(c) The legal opinion of Lisa M. Cavage, Esq., Assistant
Secretary and Counsel of SBI, in form reasonably acceptable to VFAM and its
counsel;
(e) A "Good Standing Certificate" of SBI and a certified copy of
the Articles of Incorporation and all amendments thereto issued by the Secretary
of State of the Commonwealth of Pennsylvania dated as of a recent date;
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<PAGE>
(f) A "Good Standing Certificate" of Buyer and a certified copy
of the Articles of Incorporation and all amendments thereto issued by the
Secretary of State of the Commonwealth of Pennsylvania dated as of a recent
date;
(g) Officer's Certificate of SBI certifying that, as of the
Closing Date, (i) each of the representations and warranties of SBI is true and
correct in all material respects, and (ii) SBI has performed all of its
obligations under this Agreement;
(h) Officer's Certificate of Buyer certifying that, as of the
Closing Date, (i) each of the representations and warranties of Buyer is true
and correct in all material respects, and (ii) Buyer has performed all of its
obligations under this Agreement;
(i) Secretary's Certificate of SBI certifying that (i) attached
thereto is a true and complete copy of the Articles of Incorporation and the
Bylaws of SBI, in each case as in effect on the date thereof, and (ii) that
attached thereto is a true and complete copy of all resolutions adopted by the
Board of Directors of SBI relating to the transactions contemplated by this
Agreement.
(j) Secretary's Certificate of Buyer certifying that (i) attached
thereto is a true and complete copy of the Articles of Incorporation and the
Bylaws of Buyer, in each case as in effect on the date thereof, and (ii) that
attached thereto is a true and complete copy of all resolutions adopted by the
Board of Directors of Buyer relating to the transactions contemplated by this
Agreement.
SECTION 10.03 Net Capital Delivery. At and after the Closing,
--------------------
notwithstanding the provisions of Section 1.06, SBI shall leave sufficient funds
in VFAM's cash account from the $1,200,000 referred to in Section 1.06 so that
VFAM will retain at all times Net Capital of at least $350,000. Such amount
shall be in the form of an equity investment. However, the capital contributed
by SBI to cover the goodwill created by this transaction may be in the form of
either equity or subordinated debt. If subordinated debt is selected by SBI, it
will not appear on VFAM's books until after the Closing Date. Each of the
parties hereto agrees to use its best efforts to obtain appropriate regulatory
approval that subordinated debt of VFAM provided by SBI or its affiliates may be
included as capital in the calculation of Net Capital.
ARTICLE XI
TERMINATION AND AMENDMENT
SECTION 11.01 Termination. This Agreement may be terminated at any time
-----------
prior to the Closing Date:
(a) by mutual consent of SBI, Buyer, Shareholders (through the
Shareholder Representative) and VFAM;
(b) (i) by SBI and Buyer on the one hand or by VFAM or the
Shareholders on the other hand, respectively, if there shall have been a
material breach of any representation, warranty, covenant or agreement on the
part of the other set forth in this Agreement which breach shall not have been
cured, in the case of a representation or warranty, within five business days
following notice of such breach given to the breaching party by the other party
or, in the case of a covenant or agreement, within
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<PAGE>
five (5) business days following receipt by the breaching party of notice of
such breach, or (ii) by either SBI and Buyer, together, or VFAM if any permanent
injunction or other order of a court or other competent authority preventing the
consummation of the transactions contemplated hereby shall have become final and
non-appealable;
(c) by either SBI and Buyer, together, or VFAM if the Closing
shall not have occurred before March 31, 2000.
SECTION 11.02 Effect of Termination. In the event of a termination of this
---------------------
Agreement by either VFAM or SBI and Buyer as provided in Section 10.01, this
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of SBI and Buyer, or VFAM or their respective officers or
directors, except (y) with respect to the second and third sentences of Section
7.01, and Sections 13.01 and 13.02 and (z) to the extent that such termination
results from the willful breach by a party hereto of any of its representations,
warranties, covenants or agreements set forth in this Agreement.
SECTION 11.03 Amendment. This Agreement may be amended by the parties
---------
hereto at any time; provided however, this Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.
SECTION 11.04 Extension; Waiver. At any time prior to the Closing Date,
-----------------
the parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
ARTICLE XII
POST-CLOSING COVENANTS
SECTION 12.01 Cooperation of Shareholders. The Shareholders shall
---------------------------
cooperate with Buyer and VFAM and do all things necessary proper or advisable to
ensure that the VFAM retains all necessary federal, state, local and governments
licenses, permits or registrations required for the conduct or its business,
including, without limitation, all broker/dealer and investment advisor
registrations required under federal and state law.
SECTION 12.02 Client Notification. As promptly as possible following the
-------------------
Closing, VFAM shall notify each client who has an Investment Account that the
transactions contemplated by this Agreement have been completed.
ARTICLE XIII
MISCELLANEOUS
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<PAGE>
SECTION 13.01 Costs and Expenses. All costs and expenses incurred in
------------------
connection with this Agreement and the transactions contemplated hereby shall be
paid by the Shareholders to the extent incurred by the Shareholders and/or VFAM
(including, without limitation, all expenses incurred in soliciting Client
Consents) and paid by SBI and Buyer to the extent incurred by either of them.
SECTION 13.02 Brokers or Finders. Except with respect to any amounts that
------------------
might be due under the Contingent Earnings Agreement, VFAM hereby represents and
warrants that there is no corporation, firm or person entitled to receive from
it or him (or, with respect to the Shareholders, from VFAM) any brokerage
commission or finder's fee in connection with this Agreement or the other
transactions and agreements provided for herein, and each hereby indemnifies and
agrees to save SBI and Buyer harmless from and against any claim for brokerage
commission or finder's fee based on any retention or alleged retention of a
broker or finder by it or him/her.
SECTION 13.03 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if SBI, to:
Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, Pa 17543
Attention: Robert S. Bolinger
President and Chief Executive Officer
Telecopy No.: 717.626.1874
with a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, Pa 19103
Attention: John F. Bales, III, Esq.
Telecopy No : 215.963.5299
(b) if Buyer, to:
SBI Acquisition Corporation
c/o Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, Pa 17543
Attention: Robert S. Bolinger
President and Chief Executive Officer
Telecopy No.: 717.626.1874
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<PAGE>
with a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, Pa 19103
Attention: John F. Bales, III, Esq.
Telecopy No : 215.963.5299
(c) if VFAM to:
Valley Forge Asset Management Corporation
P.O. Box 837
Valley Forge, Pa 19482
Attention: Joseph J. Miller
Telecopy No.: 610.687.1848
with a copy to:
Stradley Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pa 19103
Attention: Dean M. Schwartz, Esq.
Telecopy No.: 215.564.8120
(d) if a Shareholder, to the address of the Shareholder set forth on
Annex I hereto:
with a copy to:
Stradley Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pa 19103
Attention: Dean M. Schwartz, Esq.
Telecopy No.: 215.564.8120
SECTION 13.04 Publicity. Except as otherwise required by law or the
---------
rules of the NASD for so long as this Agreement is in effect, neither VFAM or
the Shareholders nor SBI or Buyer shall issue or cause the publication of any
press release or other public announcement with respect to the transactions
contemplated by this Agreement without the consent of the other party, which
consent shall not be unreasonably withheld.
SECTION 13.05 Binding Nature of Agreement; No Assignment. This Agreement
------------------------------------------
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns, except that
no party may assign or transfer its rights or obligations under this Agreement
(other than as provided herein) without the prior written consent of the other
parties hereto.
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<PAGE>
SECTION 13.06 Controlling Law. The Agreement and all questions relating
---------------
to its validity, interpretation, performance and enforcement (including without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the Commonwealth of Pennsylvania,
other than the choice of law provisions thereof, and without the aid of any
canon, custom, or rule of law requiring construction against the drafting party.
SECTION 13.07 Exhibits and Schedules. All Exhibits and Schedules attached
----------------------
hereto are hereby incorporated by reference into, and made a part of, this
Agreement.
SECTION 13.08 Execution in Counterparts. This Agreement may be executed
-------------------------
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signature of all of the parties reflected hereon as the
signatories.
SECTION 13.09 Provisions Separable. The provisions of this Agreement are
--------------------
independent of and separable from each other, and no provisions shall be
affected or rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be invalid or unenforceable in whole or
in part.
SECTION 13.10 Entire Agreement. This Agreement and the Confidentiality
----------------
Agreement dated April 16, 1999, contain the entire understanding among the
parties hereto and with respect to the subject matter hereof, and supersedes all
prior and contemporaneous agreements and understandings, inducements or
conditions, express or implied, oral or written, except as herein contained.
This Agreement may not be modified or amended other than by an agreement in
writing signed by the parties hereto.
SECTION 13.11 Paragraph Headings and Table of Contents. The headings and
----------------------------------------
the table of contents in this Agreement are for convenience only; they form no
part of this Agreement and shall not affect its interpretation.
SECTION 13.12 Gender, Etc. Words used herein, regardless of the number
-----------
and gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
SECTION 13.13 Knowledge of VFAM and the Shareholders. For purposes of this
--------------------------------------
Agreement, "knowledge of VFAM or the Shareholders" or similar words and phrases
shall be conclusively deemed to include: (i) actual knowledge of the
Shareholders or the officers and directors of VFAM and (ii) that knowledge which
any officer or director of VFAM should have obtained after exercising due
diligence which a prudent officer or director should have undertaken with
respect thereto. In connection therewith, the knowledge (both actual and
constructive) of the officers and directors of VFAM shall be imputed to be the
knowledge of the Shareholders and, except as to Article V the knowledge of one
Shareholder shall be imputed to the other Shareholder.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first written above.
VALLEY FORGE ASSET MANAGEMENT CORPORATION
By:/s/ Joseph J. Miller, Jr.
-----------------------------------------------
Name: Joseph J. Miller, Jr.
Title: Chairman
SUSQUEHANNA BANCSHARES, INC.
By:/s/ Robert S. Bolinger
-----------------------------------------------
Name: Robert S. Bolinger
Title: President
SUSQUEHANNA BANCSHARES CENTRAL, INC.
By:/s/ Robert S. Bolinger
-----------------------------------------------
Name: Robert S. Bolinger
Title: President
SHAREHOLDERS
/s/ Joseph J. Miller, Jr.
--------------------------------------------------
Joseph J. Miller, Jr.
/s/ Frank C. Corace by Bernard A. Francis, Jr. POA
--------------------------------------------------
Frank C. Corace
/s/ Donald Born by Bernard A. Francis, Jr. POA
--------------------------------------------------
Donald Born
<PAGE>
/s/ Bernard A. Francis, Jr.
--------------------------------------------------
Bernard A. Francis, Jr.
/s/ Kelly C. Malloy
--------------------------------------------------
Kelly C. Malloy
<PAGE>
Exhibit 2(iii)
--------------
Agreement and Plan of Reorganization dated as of December 23, 1999
by and among Susquehanna, Susquehanna Bancshares Central, Inc.
and Valley Forge Investment Company, Inc.
<PAGE>
EXHIBIT 2(iii)
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") dated as of December 23,
1999, by and among SUSQUEHANNA BANCSHARES, INC., a Pennsylvania business
corporation registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended ("SBI"), SUSQUEHANNA BANCSHARES CENTRAL, INC., a
Pennsylvania business corporation and a wholly-owned subsidiary of SBI
("Acquisition Corporation") and VALLEY FORGE INVESTMENT COMPANY, INC., a
Pennsylvania business corporation ("VFICO").
RECITALS:
WHEREAS, SBI is a multi-state, multi-institution bank holding company;
WHEREAS, SBI owns all of the issued and outstanding shares of capital stock
of Acquisition Corporation;
WHEREAS, VFICO is a Pennsylvania corporation;
WHEREAS, the Boards of Directors of SBI, Acquisition Corporation and VFICO
deem it advisable and in the best interests of the respective corporations and
their shareholders to consummate, and have approved, the business combination
transaction provided for herein in which Acquisition Corporation would merge
with and into VFICO (the "Merger");
WHEREAS, between VFICO and Acquisition Corporation, this Agreement shall
constitute a Plan of Merger pursuant to Section 1922 of the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL");
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01 Effective Time of the Merger. Subject to the provisions of
----------------------------
this Agreement, articles of merger in the form of Exhibit A (the "Articles of
Merger") shall be duly prepared and executed by VFICO and Acquisition
Corporation and thereafter delivered to the Department of State of the
Commonwealth of Pennsylvania for filing, as provided in the BCL, on the Closing
Date (as defined in Section 1.02). The Merger shall become effective upon
filing of the Articles of Merger with the Secretary of State of the Commonwealth
of Pennsylvania (the "Effective Time").
SECTION 1.02 Closing. The closing of the Merger (the "Closing") will take
-------
place at such place and at such time and on such date as shall be agreed upon by
the parties, which date shall not be later than thirty business days after the
day on which the last to be fulfilled or waived
1
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of the conditions set forth in Article VI shall be fulfilled or waived in
accordance herewith. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
SECTION 1.03 Effects of the Merger.
---------------------
(a) At the Effective Time, (i) the separate corporate existence
of Acquisition Corporation shall cease and Acquisition Corporation shall be
merged with and into VFICO (Acquisition Corporation and VFICO are sometimes
referred to herein as the "Constituent Corporations" and VFICO is sometimes
referred to herein as the "Surviving Corporation"), (ii) the Articles of
Incorporation of Acquisition Corporation as in effect immediately prior to the
Effective Time shall be the Articles of Incorporation of the Surviving
Corporation, (iii) the Bylaws of Acquisition Corporation as in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation, (iv) the individuals listed on Exhibit B shall become the directors
of the Surviving Corporation, (v) the individuals serving as officers of VFICO
immediately prior to the Effective Time shall become the officers of the
Surviving Corporation, (vi) the name of the Surviving Corporation shall be
"Valley Forge Investment Company, Inc.", and (vii) the registered office of the
Surviving Corporation shall be 26 North Cedar Street, Lititz, Pennsylvania
17543.
(b) At and after the Effective Time, the Surviving Corporation
shall possess all the rights, privileges, powers and franchises and be subject
to all the restrictions, disabilities and duties of each of the Constituent
Corporations; and all rights, privileges, powers and franchises of each of the
Constituent Corporations, and all property, real, personal and mixed, and all
debts due to either of the Constituent Corporations on whatever account, as well
as for stock subscription and all other things belonging to each of the
Constituent Corporations, shall be deemed to be transferred to and vested in the
Surviving Corporation without further action, and all property, rights,
privileges, powers and franchises, and all and every other interest shall be
thereafter the property of the Surviving Corporation as they were of the
Constituent Corporations, and the title to any real estate or any interest
herein vested by deed or otherwise in either of the Constituent Corporations,
shall not revert or be in any way impaired by reason of the Merger, but all
rights of creditors and all liens upon any property of either of the Constituent
Corporations shall be preserved unimpaired, and all debts, liabilities and
duties of the Constituent Corporations shall thenceforth attach to the Surviving
Corporation, and may be enforced against it to the same extent as if said debts
and liabilities had been incurred by it.
(c) If at any time after the Closing Date, the Surviving
Corporation shall determine or be advised that any deeds, bills of sale,
assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of Acquisition Corporation acquired or to be acquired by
the Surviving Corporation as a result of, or in connection with, the Merger or
otherwise to carry out this Agreement, the officers and directors of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of either Acquisition Corporation or VFICO, all deeds, bills of
sale, assignments or assurances and to take and do, in the name and on behalf of
each of such corporations or otherwise, all such other actions and things as may
be necessary or desirable to vest, perfect or confirm any and all right, title
and interest in, to and under such rights, properties or assets in the Surviving
Corporation and otherwise to carry out this Agreement.
2
<PAGE>
SECTION 1.04 Other Matters.
-------------
(a) Notwithstanding any term of this Agreement to the contrary,
SBI may, in its discretion at any time prior to the Closing, designate a direct
or an indirect wholly-owned subsidiary to substitute for Acquisition Corporation
hereunder by written notice to VFICO so long as the exercise of this right does
not materially adversely affect the interests of the shareholders of VFICO in a
manner that has not been disclosed to them or cause a material delay in the
consummation of the transactions contemplated herein; if such right is
exercised, this Agreement shall be deemed to be modified to accord such change.
(b) Notwithstanding any term of this Agreement to the contrary,
after the Closing, SBI may, in its sole discretion, merge or consolidate the
Surviving Corporation into, Valley Forge Asset Management Corporation ("VFAM"),
or alternatively, merge or consolidate VFAM, into the Surviving Corporation.
(c) Nothing in this Agreement shall be deemed to restrict the
ability of SBI or any of its subsidiaries to merge with or into another entity
so long as no such other transaction shall materially, adversely affect the
parties' ability to consummate the transactions contemplated herein or cause a
material delay in, or otherwise adversely affect, consummation of the
transactions contemplated herein.
SECTION 1.05 Dissenters' Rights. In accordance with the provisions of
------------------
Subchapter D of Chapter 15 of the BCL commencing at Section 1571, the
shareholders of VFICO shall be entitled to exercise dissenters' rights.
SECTION 1.06 Payment to SBI. Immediately following the Closing, VFICO
--------------
shall pay to SBI an amount equal to $1,500,000.
ARTICLE II
CONVERSION; CASH CONSIDERATION FOR SECURITIES
SECTION 2.01 Conversion of Capital Stock. As of the Effective Time, by
---------------------------
virtue of the Merger and without any action on the part of the holders of any
common stock, par value $.01 per share, of VFICO (the "VFCIO Common Stock") or
capital stock of Acquisition Corporation:
(a) Capital Stock of Acquisition Corporation. Each outstanding
----------------------------------------
share of capital stock of Acquisition Corporation shall be converted into and
become one fully paid and nonassessable share of common stock, par value $0.01
per share, of the Surviving Corporation.
(b) Cash Consideration for VFICO Common Stock. Each outstanding
-----------------------------------------
share of VFICO Common Stock (other than shares to be cancelled in accordance
with Section 2.01(c) below, and shares the holders of which are exercising
appraisal rights pursuant to the BCL) shall be converted into the right to
receive cash from Acquisition Corporation in the amount of $8.5 million divided
by the number of issued and outstanding shares of VFICO Common Stock immediately
prior to Closing (the "Cash Consideration"). All such shares of VFICO Common
Stock, when so converted, shall no longer be outstanding and shall automatically
be cancelled and retired, and each holder of a certificate representing any such
shares shall cease to have any rights with respect thereto, except the right to
receive the Cash Consideration, without interest, in
3
<PAGE>
consideration therefor upon the surrender of such certificate in accordance with
Section 2.02 hereof.
(c) Cancellation of VFICO Common Stock. Each share of VFICO
----------------------------------
Common Stock held in treasury at the Effective Time shall be cancelled and
no Cash Consideration or other consideration shall be delivered in exchange
therefor.
SECTION 2.02 Surrender and Exchange of VFICO Common Stock.
--------------------------------------------
(a) At the Effective Time, VFICO shall deliver to SBI the
certificates representing all of the shares of VFICO Common Stock, accompanied
by blank stock powers duly executed with all necessary transfer tax and other
revenue stamps affixed and canceled, in exchange for the Cash Consideration, to
which each holder is entitled under Section 2.01 hereof.
(b) After the Effective Time, there shall be no transfer on the
stock transfer books of VFICO or the Surviving Corporation of VFICO Common
Stock. VFICO Certificates presented for transfer after the Effective Time, shall
be cancelled and Cash Consideration shall be issued in exchange therefor as
provided herein.
(c) If outstanding certificates for shares of VFICO Common Stock
are not surrendered prior to the date on which such certificates would otherwise
escheat to or become the property of any governmental unit or agency, the
unclaimed items shall, to the extent permitted by abandoned property and other
applicable law, become the property of the Surviving Corporation (and to the
extent not in its possession shall be paid over to it), free and clear of claims
or interest of any person previously entitled to such claims. Notwithstanding
the foregoing, neither the Surviving Corporation nor its agents nor any other
person shall be liable to any former holder of VFICO Common Stock for any
property delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(d) In the event any certificates for shares of VFICO Common
Stock shall have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming such VFICO Certificate to be lost, stolen or
destroyed and, if requested by SBI, the posting by such person of a bond in such
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such certificate, the Surviving
Corporation will issue the Cash Consideration in exchange for such lost, stolen
or destroyed certificate into which such certificate has been converted pursuant
to this Agreement.
SECTION 2.03 Dissenting Shares. Notwithstanding anything in this
-----------------
Agreement to the contrary, shares of VFICO Common Stock that are outstanding
immediately prior to the Effective Time and which are held by shareholders who
have perfected dissenters' rights in accordance with Subchapter D of Chapter 15
of the BCL (the "Dissenting Shares") shall not be converted into the Cash
Consideration, unless and until such holders shall have failed to perfect or
shall have effectively withdrawn or lost such holder's rights to an appraisal
under the BCL. Any payments to any holder who has exercised dissenters' rights
which exceed the per share value of the Cash Consideration, shall be paid out of
the Escrow Funds as defined in the Stock Purchase Agreement among SBI,
Acquisition Corporation, VFAM and certain Shareholders of VFAM (the "VFAM
Agreement"), or shall be paid as otherwise provided in the VFAM Agreement. If
any such holder shall have failed to perfect or shall have effectively withdrawn
or lost such holder's rights to appraisal of such shares of VFICO Common Stock
under the BCL, such holder's shares shall thereupon be deemed to have been
converted into and to have become
4
<PAGE>
exchangeable for, at the Effective Time, the right to receive, upon surrender as
provided above, the Cash Consideration, without interest, for the certificate or
certificates that formerly evidenced such shares of VFICO Common Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VFICO
As a material inducement to SBI and Acquisition Corporation to enter into
this Agreement and consummate the Merger and the other transactions contemplated
herein, VFICO represents and warrants to SBI and Acquisition Corporation that,
except as specifically disclosed to SBI and Acquisition Corporation in writing
in the disclosure schedules being delivered to SBI and Acquisition Corporation
(the "VFICO Schedules") which shall identify the specific sections or
subsections in this Agreement to which each such disclosure relates:
SECTION 3.01 Organization, Registration.
--------------------------
(a) VFICO is a corporation duly organized, validly existing and
in good standing under the laws of the Commonwealth of Pennsylvania and has all
requisite corporate power and corporate authority and all necessary governmental
approvals to own, lease and operate its properties, and to carry on its
business, to enter into this Agreement and the other documents and instruments
to be executed and delivered by it and to carry out the transactions
contemplated hereby and thereby. VFICO is duly licensed or qualified to do
business as a foreign corporation and is in good standing in all jurisdictions
wherein the character of the properties owned or leased or the nature of its
business make such qualification to do business necessary, except for those
jurisdictions where the failure to be so qualified would not have a material
adverse effect. Schedule 3.01(a) lists all of the jurisdictions in which VFICO
is qualified to do business. VFICO has delivered to SBI true and correct copies
of its Articles of Incorporation and Bylaws, each as in effect on the date
hereof.
(b) VFICO has all federal, state, local and foreign governmental
licenses, permits, or registrations required for its business as currently
conducted, except where the absence would not have a material adverse effect.
Schedule 3.01(b) lists all of such licenses, permits or registrations currently
in effect, the applicable jurisdictions, and the date of expiration, if any.
All of such licenses, permits or registrations are in full force and effect, no
violations have occurred or been asserted with respect thereto, and no material
change in the facts or circumstances reported or assumed in any documents
submitted by VFICO in connection with any such license, permit or registration
has occurred which would require an amendment of such document, license, permit
or registration.
(c) VFICO is not, and has never been, registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"), and is not, and has never been, registered as a broker/dealer under the
Securities Exchange Act of 1934, as amended (the "1934 Act").
(d) VFICO is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended (the "1940 Act"), which is
required to be registered under the 1940 Act in order to engage in the
transactions described in Section 7 of the 1940 Act. VFICO does not act as an
investment advisor or subadvisor to any "investment company," as defined in the
1940 Act, which is registered under the 1940 Act.
5
<PAGE>
(e) Schedule 3.01(e) contains a complete list of all of the
directors and officers of VFICO as of the date hereof.
(f) There is no pending or, to the knowledge of VFICO, any
threatened claim or litigation against VFICO (nor to the knowledge of VFICO does
there exist any basis therefor) contesting the validity of or right to use the
"Valley Forge Investment Company, Inc." name as currently used by VFICO as its
corporate name in connection with its business activities, nor has VFICO
received any notice that its use of its respective name conflicts, with the
asserted rights of others.
(g) VFAM is the only entity in which VFICO holds an equity
interest. Except for VFAM, VFICO does not own any capital stock or other equity
interest of any corporation, has no direct or indirect equity or ownership
interest in, by way of stock ownership or otherwise, any corporation,
partnership, joint venture, association or business enterprise and is not
contemplating acquiring any such interest. VFICO owns beneficially and of record
the shares of stock or other interests of VFAM as set forth on Schedule 3.01(g),
free and clear of any mortgage, claim, lien, pledge, option, security interest
or other similar interest, encumbrance, easement, judgment or imperfection of
title of any nature whatsoever (each an "Encumbrance"), and, except as set forth
in Schedule 3.01(g), none of the shares or interests is subject to any covenant
or other contractual restriction preventing or limiting the right to transfer
such shares. Except as set forth on Schedule 3.01(g), there are not any
agreements or understandings to which VFICO or VFAM is a party which respect to
the voting of shares of capital stock of VFAM; and VFAM has no outstanding
options, calls, rights of conversion or other commitments to purchase or sell
any authorized or issued shares of capital stock. There are no contracts,
commitments, agreements, understandings or restrictions that require VFICO to
sell or deliver any shares of the capital stock of VFAM.
SECTION 3.02 Capitalization. The VFICO Common Stock, which constitutes
--------------
all of the authorized capital stock of VFICO, consists of 500,000 shares of
common stock, $1.00 par value per share, of which 497,800 shares are issued and
outstanding and 2,200 shares are held in treasury. All outstanding shares of
VFICO Common Stock are validly issued, fully paid and nonassessable and not
subject to any preemptive rights. There are no existing options, warrants,
calls, subscriptions or other rights (including rights of conversion) or other
agreements or commitments of any character (including voting agreements)
relating to the issued or unissued capital stock of VFICO, and, as of the date
hereof, there are no outstanding contractual obligations of VFICO to repurchase,
redeem or otherwise acquire any shares of its capital stock. All securities
issued by VFICO, including all shares of VFICO Common Stock, have been issued in
compliance with all applicable federal and state securities laws, including
applicable provisions of the Securities Act of 1933 (the "1933 Act").
SECTION 3.03 Authority. The execution, delivery and performance of this
---------
Agreement and the consummation of the Merger and the other transactions
contemplated herein have been duly authorized by all necessary corporate action
on the part of VFICO and no other corporate proceedings on the part of VFICO
(other than the approval of the adoption of this Agreement and the Merger by the
affirmative vote of the holders of a majority of the outstanding shares of VFICO
Common Stock in accordance with the BCL) are necessary to authorize this
Agreement or to consummate the transactions so contemplated.
6
<PAGE>
SECTION 3.04 Consents and Approvals; No Violations. This Agreement
-------------------------------------
constitutes or when executed and delivered will constitute, a valid and binding
agreement of VFICO enforceable in accordance with its terms, and, except as such
enforceability may be limited by bankruptcy or other similar laws affecting
creditors' rights and remedies generally, and except as set forth on Schedule
3.04, neither the execution and delivery of this Agreement, nor the consummation
of the transactions contemplated hereby (i) conflict or result in a breach of
any provision of the Articles of Incorporation or Bylaws of VFICO, (ii) result
in a violation or breach of, or constitute (with or without due notice or lapse
of time or both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration) under, any of the terms, conditions or provisions
of any of the VFICO Agreements (as defined in Section 3.10(b)), note, bond,
mortgage, indenture, lease or license to which VFICO is a party or by which any
of its properties or assets may be bound or (iii) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to VFICO or any of
its properties or assets. No permit, authorization, consent or approval of, any
court or other adjudicatory body, administrative agency or commission or other
governmental or regulatory authority or agency is required in connection with
the execution, delivery or performance by VFICO of this Agreement or the
consummation of the transactions contemplated hereby.
SECTION 3.05 Financial Statements and Internal Control Structure.
---------------------------------------------------
(a) VFICO has delivered to SBI the audited financial statements,
including the notes thereto, of VFICO for the years ended December 31, 1998 and
1997 accompanied by the report of Maillie Falconiero & Company, LLP with respect
thereto (collectively, the "VFICO Financial Statements"), except as set forth on
Schedule 3.05(a), to the knowledge of VFICO, the VFICO Financial Statements were
prepared in accordance with generally accepted accounting principles ("GAAP").
The audited balance sheet of VFICO at December 31, 1998 is referred to herein as
the "VFICO Balance Sheet" and the date of such VFICO Balance Sheet is referred
to herein as the "VFICO Balance Sheet Date." The VFICO Financial Statements and
the notes thereto, if any, were prepared in accordance with the books and
records of VFICO and fairly present the assets, liabilities and financial
condition of VFICO as at the respective dates thereof, and the corresponding
results of operations, retained earnings and cash flows for the periods therein
referred to and except as set forth on Schedule 3.05(a), to the knowledge of
VFICO, were prepared in accordance with GAAP consistently applied throughout the
periods involved. In addition, VFICO has delivered unaudited financial
statements for the nine months ended September 30, 1999, which are contained in
the VFICO Financial Statements were prepared on a basis consistent with the
audited financial statements of VFICO contained in the VFICO Financial
Statements, subject to normal, recurring year-end adjustments.
(b) VFICO has not received any management letters from its
outside auditors relating to the VFICO Financial Statements.
SECTION 3.06 Title to Assets, Properties, Interests in Properties, Rights
------------------------------------------------------------
and Related Matters.
- -------------------
(a) VFICO has good title to all of its properties, interest in
properties, and assets, free and clear of any mortgages, pledges, liens,
security interests, conditional and installment sale agreements, right of first
refusal or similar claims or encumbrances or charges of any kind other than any
such claim or encumbrance as disclosed in the notes to the VFICO Balance Sheet
(i) the lien of current taxes not yet due and payable; (ii) properties,
interests and assets that are leased or have been disposed of by VFICO since the
VFICO Balance Sheet Date,
7
<PAGE>
in the ordinary course of business consistent with past practice; and (iii) such
imperfections of title, easements and encumbrances, if any, as are not
substantial in character, amount or extent and do not materially detract from
the value, or interfere with the present or proposed use, of the properties
subject thereto.
(b) The assets and properties of VFICO constitute the rights,
properties and assets (tangible or intangible) necessary for the conduct of its
respective business as currently conducted.
(c) VFICO owns no real property.
SECTION 3.07 Absence of Certain Changes. Since the VFICO Balance Sheet
--------------------------
Date VFICO has not experienced, nor to the knowledge of VFICO has there been
threatened, any material adverse change in its condition (financial or
otherwise), assets, liabilities (absolute, accrued, contingent or otherwise),
business, or operations.
SECTION 3.08 Absence of Undisclosed Liabilities. Except to the extent set
----------------------------------
forth in the VFICO Balance Sheet VFICO has no material liabilities or
obligations of any nature, whether or not accrued, contingent or otherwise, that
would be required by GAAP to be reflected on its respective balance sheet
(including the notes thereto), and it does not have any material claims, debts,
liabilities or obligations or any alleged material claims, debts, liabilities or
obligations to any party, including but not limited to claims made by
governmental authorities for taxes or otherwise, except for (x) liabilities
expressly disclosed in this Agreement and in the Exhibits or Schedules and (y)
liabilities incurred between the date of this Agreement and the Closing Date,
the occurrence of which is not in violation of the provisions of this Agreement.
SECTION 3.09 Legal Proceedings. There are no claims, actions, suits,
-----------------
orders, proceedings or investigations pending or to the knowledge of VFICO
threatened by or against VFICO, at law or in equity or before or by any federal,
state or municipal or other governmental department, commission, board, agency,
instrumentality or authority. There is no valid basis known to VFICO for any
such claims, actions, suits, orders, proceedings or investigations, which if
adversely determined could have a material adverse effect on VFICO or the
ability of VFICO to consummate the transactions contemplated hereby. There are
no judgments, decrees, injunctions or orders of any court or governmental
department or agency outstanding against VFICO.
SECTION 3.10 Contracts, Leases, Agreements and Other Commitments.
---------------------------------------------------
(a) VFICO is not a party to any written or oral investment
advisor, administrator, distributor, custodian or agency agreement, contract or
understanding or any other agreement, contract or understanding under which
VFICO is required to provide investment advice or services.
(b) Schedule 3.10(b) contains an accurate list of all
commitments, contracts, leases and agreements to which VFICO is a party or by
which it is bound which involves a commitment or obligation in excess of $10,000
in the aggregate for each such commitment contract, lease or agreement or is
otherwise material to the business of VFICO (including, without limitation,
joint venture or partnership agreements, employment agreements, contracts,
tenant leases, equipment leases, equipment maintenance agreements, agreements
with municipalities and labor organizations, loan agreements, bonds, mortgages,
liens or other
8
<PAGE>
security agreements) (the "VFICO Agreements"). VFICO has delivered true, correct
and complete copies of such agreements to SBI. Except as set forth in Schedule
3.10(b) attached hereto, as of the date of this Agreement, VFICO is not a party
to, or bound by, any oral or written:
(i) consulting agreement not terminable on thirty (30) days' or
less notice involving the payment of more than $10,000 per annum, in the case of
any such agreement;
(ii) agreement with any officer or other key employee the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction of the nature contemplated by this
Agreement;
(iii) agreement with respect to any officer providing any term of
employment or compensation guarantee extending for a period longer than one year
or for a payment in excess of $50,000;
(iv) agreement or plan, including any stock option plan, stock
appreciation rights plan, employee stock ownership plan, restricted stock plan
or stock purchase plan, any of the benefits of which will be increased, or the
vesting of the benefits of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement;
(v) agreement containing covenants that limit its ability to
compete in any line of business or with any person, or that involve any
restriction on the geographic area in which, or method by which, it may carry on
its business (other than as may be required by law or any regulatory agency);
(vi) its agreement, contract or understanding, other than this
Agreement, regarding the capital stock or committing to dispose of substantially
all of its assets;
(vii) collective bargaining agreement, contract, or other
agreement or understanding with a labor union or labor organization;
(viii) any employment contracts or any other contracts,
agreements or commitments to or with individual employees or agents of VFICO
which involves a commitment or obligation in excess of $50,000 in the aggregate
for each such contract, agreement or commitment and any contracts, agreements or
commitments with consultants or other independent contractors;
(ix) any power of attorney given by VFICO;
(x) any contracts or commitments providing for payments based
in any manner on the revenues or profits of VFICO;
(xi) any contract under which VFICO has agreed (i) to maintain
the confidentiality of third party information, (ii) not to compete or solicit
for hire employees of a third party or (iii) to otherwise limit or restrict its
operations;
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<PAGE>
(xii) any instruments relating to indebtedness for borrowed
money, including any note, bond, deed of trust, mortgage, indenture or agreement
to borrow money or any agreement of guarantee or indemnification, whether
written or oral, in favor of any person or entity; or
(xiii) any other contract or commitment, whether in the ordinary
course of business or not, which involves future payments, performance of
services or delivery of goods or materials, to or by VFICO of any amount or
value in excess of $50,000 in the aggregate for each such contract or
commitment.
(c) The VFICO Agreements constitute valid and legally binding
obligations of VFICO and are enforceable in accordance with their terms,
assuming due authorization, execution and delivery by parties other than VFICO
and except (i) as may be affected by bankruptcy, insolvency, reorganization,
moratorium or similar laws or by equitable principles relating to or limiting
creditors rights generally and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief is subject to the discretion of
the court before which any proceeding therefor may be brought.
(d) Each VFICO Agreement constitutes the entire agreement by and
between the respective parties thereto with respect to the subject matter
thereof.
(e) All obligations required to be performed under the terms of the
VFICO Agreements have been performed by VFICO, and to VFICO's knowledge by the
other parties thereto, no act or omission has occurred or failed to occur which,
with the giving of notice, the lapse of time or both would constitute a default
by VFICO under the VFICO Agreements.
(f) Except as expressly set forth on Schedule 3.10(f), none of the
VFICO Agreements requires the consent of the other parties thereto in order for
it to be in full force and effect with respect to the Surviving Corporation or
Acquisition Corporation after the Merger or would give rise to the other party's
right to terminate any VFICO Agreement; and VFICO will use its best efforts to
obtain any required consents prior to the Closing. Except as expressly set
forth on Schedule 3.10(f), VFICO has no plans, programs, commitments or
arrangements to which they are parties, or to which they are subject, pursuant
to which payments may be required or acceleration of benefits may be required
upon change of control of VFICO or the consummation of the Merger.
SECTION 3.11 Insurance. Schedule 3.11 is a summary of all insurance
---------
policies maintained by VFICO (specifying, among other things, the insurer, type
of insurance, amount of coverage and policy number). Such policies are in full
force and effect and all premiums with respect to such policies are currently
paid. VFICO has not been denied or had revoked or rescinded any policy of
insurance or received any notice of intent to cancel or not renew during the
past three years.
SECTION 3.12 Benefit Plans. Schedule 3.12 contains a complete list of all
-------------
pension, retirement, stock option, stock purchase, savings, stock appreciation
right, profit sharing, deferred compensation, consulting, bonus, group
insurance, severance and other employee incentive and welfare contracts and
plans, and all trust agreements related thereto, that VFICO maintains or to
which it contributes for any of its present or former directors, officers, or
other employees (hereinafter referred to collectively as the "Employee Plans").
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(a) To the knowledge of VFICO, all of the Employee Plans comply in
all material respects with all applicable requirements of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), the Code (as
defined in Section 3.16 hereto) and other applicable laws; VFICO has not engaged
in a "prohibited transaction" (as defined in Section 406 of ERISA or Section
4975 of the Code) with respect to any Employee Plan which is likely to result in
any penalties, taxes or other events under Section 502(i) of ERISA or Section
4975 of the Code.
(b) No liability to the Pension Benefit Guaranty Corporation has been
or is expected by VFICO to be incurred with respect to any Employee Plan which
is subject to Title IV of ERISA ("Pension Plan"), or with respect to any
"single-employer plan" (as defined in Section 4001(a)(15) of ERISA) currently or
formerly maintained by it or any entity which is considered one employer with
VFICO under Section 4001 of ERISA or Section 414 of the Code (an "ERISA
Affiliate").
(c) No Pension Plan or single-employer plan of an ERISA Affiliate had
an "accumulated funding deficiency" (as defined in Section 302 of ERISA (whether
or not waived)) as of the last date of the end of the most recent plan year
ending prior to the date hereof; all contributions to any Pension Plan or
single-employer plan of an ERISA Affiliate that were required by Section 302 of
ERISA and were due prior to the date hereof have been made on or before the
respective dates on which such contributions were due; the fair market value of
the assets of each Pension Plan or single-employer plan of an ERISA Affiliate
exceeds the present value of the "benefit liabilities" (as defined in Section
4001(a)(6) of ERISA) under such Pension Plan or single-employer plan of an ERISA
Affiliate as of the end of the most recent plan year with respect to the
respective Pension Plan or single-employer plan of an ERISA Affiliate ending
prior to the date hereof, calculated on the basis of the actuarial assumptions
used in the most recent actuarial valuation for such Pension Plan or single-
employer plan of an ERISA Affiliate as of the date hereof, and no notice of a
"reportable event" (as defined in Section 4043 of ERISA) for which the reporting
requirement has not been waived has been required to be filed for any Pension
Plan or single-employer plan of an ERISA Affiliate within the 12-month period
ending on the date hereof.
(d) VFICO has not provided, nor been required to provide, security to
any Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant
to Section 401 (a)(29) of the Code.
(e) Neither VFICO nor any ERISA Affiliate has contributed to any
"multi-employer plan," as defined in Section 3(37) of ERISA, on or after
September 26, 1980.
(f) Each Employee Plan of VFICO which is an "employee pension benefit
plan" (as defined in Section 3(2) of ERISA) and which is intended to be
qualified under Section 401(a) of the Code (a "Qualified Plan") has received a
favorable determination letter from the IRS covering the requirements of the Tax
Equity and Fiscal Responsibility Act of 1982, the Retirement Equity Act of 1984
and the Deficit Reduction Act of 1984 and the Tax Reform Act of 1986; VFICO is
not aware of any circumstances likely to result in revocation of any such
favorable determination letter; each such Employee Plan has been amended to
reflect the requirements of subsequent legislation applicable to such plans; and
each Qualified Plan has complied at all relevant times in all material respects
with all applicable requirements of Section 401 (a) of the Code.
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(g) Each Qualified Plan which is an "employee stock ownership plan"
(as defined in Section 4975(e)(7) of the Code) has at all relevant times
satisfied all of the applicable requirements of Sections 409 and 4975(e)(7) of
the Code and the regulations thereunder.
(h) Neither VFICO, nor any ERISA Affiliate has committed any act or
omission or engaged in any transaction that has caused it to incur, or created a
material risk that it may incur, liability for any excise tax under Sections
4971 through 4980B, 4980D or 4980E of the Code, other than excise taxes which
heretofore have been paid and fully reflected in its financial statements.
(i) There is no pending or threatened litigation, administrative
action or proceeding relating to any Employee Plan other than routine claims for
benefits.
(j) Except as disclosed in Schedule 3.12(j), there has been no
announcement or legally binding commitment by VFICO to create an additional
Employee Plan, or to amend an Employee Plan except for amendments required by
applicable law which do not materially increase the cost of such Employee Plan,
and VFICO does not have any obligations for retiree health and life benefits
under any Employee Plan that cannot be terminated without incurring any
liability thereunder except as required to be maintained by COBRA.
(k) Except as disclosed in Schedule 3.12(k), the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby will not result in any payment or series of payments by VFICO, to any
person which is an "excess parachute payment" (as defined in Section 28OG of the
Code) under any Employee Plan or under any agreement executed in connection with
this Agreement, increase any benefits payable under any Employee Plan, or
accelerate the time of payment or vesting of any such benefit.
(l) Except as disclosed in Schedule 3.12(l), all required annual
reports have been filed timely with respect to each Employee Plan, and VFICO has
made available to SBI a true and correct copy of (A) reports on the applicable
form of the Form 5500 series filed with the IRS for plan years beginning after
1987, (B) such Employee Plan, including amendments thereto, (C) each trust
agreement and insurance contract relating to such Employee Plan, including
amendments thereto, (D) the most recent summary plan description for such
Employee Plan, including amendments thereto, if the Employee Plan is subject to
Title I of ERISA, and (E) the most recent actuarial report or valuation if such
Employee Plan is a Pension Plan and (F) the most recent determination letter
issued by the IRS if such Employee Plan is a Qualified Plan.
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SECTION 3.13 Collective Bargaining Agreements and Employment Agreements.
----------------------------------------------------------
(a) VFICO has not entered into any collective bargaining
agreements; (ii) there is no labor strike, slowdown or work stoppage or lockout
actually pending or to the knowledge of VFICO threatened against or affecting
VFICO, and during the past five years there has not been any such action; (iii)
no union organizational campaign is in progress with respect to the employees of
VFICO; (iv) there is no unfair labor practice charge or complaint pending or to
the knowledge of VFICO threatened before the National Labor Relations Board; and
(v) no charges with respect to or relating to VFICO is pending before the Equal
Employment Opportunity Commission. VFICO does not have any plans, programs,
commitments or arrangements to which either such entity is a party, or to which
either such entity may be subject, pursuant to which payments may be required or
acceleration of benefits may be required upon change of control of VFICO.
(b) Set forth on Schedule 3.13 are:
i. any employment agreement VFICO has with any of its
employees; and
ii. any consulting, retainer or service agreement or
arrangement VFICO has with any individual or entity.
SECTION 3.14 Compliance with Applicable Law. VFICO has in the past
------------------------------
complied and is presently complying, in respect of the assets and operation of
its respective business in all material respects, with all applicable laws
(whether statutory or otherwise), rules, regulations, orders, ordinances,
judgments or decrees of all governmental authorities (federal, state, local or
otherwise), including but not limited to the 1934 Act, the 1933 Act, the
Advisers' Act and the 1940 Act and, in each case, the rules promulgated
thereunder, and VFICO has not received notification of any asserted present or
past failure to so comply. VFICO has delivered to SBI all inspection reports or
similar documents received during the past three years from the SEC or state
regulatory authorities, and their responses thereto.
SECTION 3.15 Actions since the Balance Sheet Date. Except as set forth on
------------------------------------
Schedule 3.15 VFICO has not, since the VFICO Balance Sheet Date and to date
hereof:
(a) taken any action outside of the ordinary course of business;
(b) borrowed any money or become contingently liable for any
obligation or liability of others outside of the ordinary course of business;
(c) not paid all of its debts and obligations as they became due
or otherwise in the ordinary course of business;
(d) incurred any material debt, liability or obligation of any
nature to any party except for obligations arising from the purchase of goods or
the rendition of services in the ordinary course of business;
(e) knowingly waived any right of substantial value;
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(f) failed to use its reasonable best efforts to preserve its
business organization intact, kept available the services of its employees, and
preserved relationships with customers, suppliers and others with whom it deals;
and
(g) purchased or redeemed any shares of its capital stock, or
transferred, distributed or paid, directly or indirectly, any money or other
property or assets to its shareholders;
(h) made a change in the number of shares of capital stock of
VFICO issued and outstanding;
(i) declared, set aside, paid or distributed any dividend or
other distribution with respect to its capital stock, or with respect to any
split, combination or reclassification of its capital stock;
(j) increased the compensation or severance pay payable or to
become payable by VFICO to any employee or with respect to any employee welfare,
pension, retirement, profit-sharing or similar payment plan or arrangement
applicable to any present or former employee;
(k) incurred any capital expenditure or authorization for a
capital expenditure, acquisition of assets or execution of any lease, or
incurred liability therefor, requiring any payment or payments in excess of
$10,000 in the aggregate with respect to each individual transaction;
(l) borrowed or lent money, issued debt securities or pledges a
credit of VFICO or guaranteed any indebtedness of others by VFICO;
(m) lost the services of any employee that is, either
individually or in the aggregate, material to the conduct of the business of
VFICO; incurred the loss or termination of relationship with any supplier,
client or customer; or
(n) entered into any agreement, arrangement or understanding to
do any of the foregoing.
SECTION 3.16 Tax Matters.
------------
(a) For purposes of this Agreement, the term "Taxes" shall mean
all taxes, charges, fees, levies or other assessments, including, without
limitation, income, gross receipts, employment excise, withholding, property,
sales, use, transfer, license, payroll and franchise taxes, together with any
interest and any penalties, additions to tax or additional amounts with respect
thereto, imposed by the United States, or any state, local or foreign government
or subdivision or agency thereof. For purposes of this Agreement, the term "Tax
Return" shall mean any report, return or other information required to be
supplied to a taxing authority in connection with Taxes. All citations to
provisions of the Code, or to the Treasury Regulations promulgated thereunder,
shall include any amendments thereto and any substitute or successor provisions
thereto.
(b) VFICO has duly filed all Tax Returns required to be filed as
of the date hereof (and will file all Tax Returns required to be filed on or
before the Closing Date). All such
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Tax Returns are (and, as to Tax Returns not filed as of the date hereof but
filed on or before the Closing Date, will be) true, correct and complete in all
material respects and were (and, as to Tax Returns not filed as of the date
hereof but filed on or before the Closing Date, will be) filed on a timely
basis. All taxes shown on such Tax Returns or otherwise due or payable with
respect to the income of VFICO (whether or not shown on any Tax Return) have
been timely paid except as expressly reserved on the VFICO Balance Sheet. Except
as disclosed in Schedule 3.16(b), VFICO has not requested any extension of time
within which to file any Tax Return, which Tax Return has not since been filed.
True and complete copies of the federal, state and local income Tax Returns of
VFICO for the last three years have been provided to SBI prior to the date
hereof. The reserves for Taxes reflected in the financial statements of VFICO
are sufficient for the payment of all unpaid Taxes (whether or not currently
disputed) which are incurred or may be incurred with respect to the period (or
portion thereof) ended on the date of such financial statements and for all
years and periods ended prior thereto, and the reserve for Taxes reflected in
the balance sheet is sufficient for the payment of all unpaid Taxes (whether or
not currently disputed) which are incurred or may be incurred with respect to
the period (or portion thereof) ended on the Closing Date and for all years and
periods ended prior thereto. Since December 31, 1998, VFICO has not incurred any
liability for Taxes other than in the ordinary course of business, which Taxes
would result in a material decrease in the net worth of VFICO. No waiver or
extension of any statute of limitations relating to Taxes has been given to, or
requested by, the Internal Revenue Service (the "IRS"), or any state or local
taxing authority. No claim is currently being made by any authority in a
jurisdiction where neither VFICO nor any Subsidiary files Tax Returns that they
are or may be subject to Taxes in that jurisdiction.
(c) Except as set forth on Schedule 3.16(c), VFICO has complied
(and until the Closing Date will comply) in all material respects with the
provisions of the Code relating to the withholding and payment of Taxes,
including, without limitation, the withholding and reporting requirements under
Code sections 1441 through 1464, 3401 through 3406, and 6041 through 6049, as
well as similar provisions under any other laws, and has, within the time and in
the manner prescribed by law, withheld from employee wages and paid over to the
proper governmental authorities all amounts required. VFICO has undertaken in
good faith to appropriately classify all service providers as either employees
or independent contractors for all Tax purposes.
(d) Neither the federal income Tax Returns nor the state or local
income Tax Returns of VFICO have been examined by the IRS or relevant state
taxing authorities, except as set forth on Schedule 3.16(d). All deficiencies
asserted as a result of the examinations referred to on Schedule 3.16(d) have
been paid, and no issue has been raised by any federal, state, local or foreign
income tax authority in any such examination which, by application of the same
or similar principles to similar transactions, could reasonably be expected to
result in a proposed deficiency for any subsequent period. Further, to the best
of VFICO's knowledge, no state of facts exists or has existed which would
constitute grounds for the assessment of any material liability for Taxes with
respect to the periods which have not been audited by the IRS or other taxing
authority. Except as described on Schedule 3.16(d), there are no examinations
or other administrative or court proceedings relating to Taxes in progress or
pending nor has VFICO received a revenue agent's report asserting a tax
deficiency. To the best of VFICO's knowledge, there are no threatened actions,
suits, proceedings, investigations or claims relating to or asserted for Taxes
of VFICO and there is no basis for any such claim.
(e) Since 1993, VFICO has not been a member of any affiliated
group of corporations that filed a consolidated income tax return.
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(f) Since its date of incorporation, VFICO has not (A) filed any
consent or agreement under Section 341(f) of the Code, (B) applied for any tax
ruling, (C) entered into a closing agreement with any taxing authority, (D)
filed an election under Section 338(g) or Section 338(h)(10) of the Code (nor
has a deemed election under Section 338(e) of the Code occurred), (E) made any
payments, or been a party to an agreement (including this Agreement), or any
transactions related thereto that under any circumstances could obligate it to
make payments that will not be deductible because of Section 280G of the Code,
or (F) been a party to any tax allocation or tax sharing agreement.
SECTION 3.17 Environmental Matters.
---------------------
(a) Except as disclosed in Schedule 3.17(a):
(i) VFICO has been and is in full compliance with all
Environmental Laws (as defined below) applicable to the operations of, and the
property owned, operated, occupied or otherwise used by, VFICO. To the best
knowledge of VFICO, there are no circumstances that may prevent or interfere
with such full compliance in the future.
(ii) VFICO has obtained all Permits (as defined below)
necessary for the operation of their businesses and the ownership, operation,
occupation or other use of their properties, all such Permits are in good
standing and VFICO are in compliance with all terms and conditions of such
Permits. There has been no material change in the facts or circumstances
reported or assumed in the applications for or the granting of such Permits.
(iii) There is no lawsuit, claim, action, cause of action,
judicial or administrative proceeding, investigation, summons, or written notice
by any person pending, or to VFICO's knowledge, threatened, against VFICO
alleging potential liability (including, without limitation, potential liability
for investigatory costs, cleanup costs, governmental response costs, natural
resource damages, property damages, personal injuries or penalties) arising out
of or resulting from (i) the violation of any Environmental Law or (ii) the
presence or Release of any Hazardous Substance (as defined below) at any
location, whether or not owned, operated, occupied or otherwise used by VFICO.
(iv) VFICO is not subject to any writ, injunction, order,
decree or settlement addressing (i) any alleged violation of any Environmental
Law or (ii) the alleged presence, or Release into the environment of any
Hazardous Substance at any location, whether or not owned, operated, occupied or
otherwise used by VFICO.
(v) No Environmental Lien (as defined below) has attached to
any of the property owned, operated, occupied or otherwise used by VFICO.
(vi) There has been no Release of any Hazardous Substance at,
to or from any of the properties owned, operated, occupied or otherwise used by
VFICO.
(vii) VFICO has not transported or arranged for the transport
of any Hazardous Substance to any facility or site for the purpose of treatment,
storage, disposal or recycling which (i) is included on the National Priorities
List or the Comprehensive Environmental Response, Compensation and Liability
Information System under the
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Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
(S)(S) 9601 et. seq. ("CERCLA"), or any similar state list which is required by
------
any state Environmental Law to be kept, or (ii) is presently subject to a
governmental enforcement action under CERCLA or the Solid Waste Disposal Act, 42
U.S.C. (S)(S) 6901 et. seq., or any similar state Environmental Law.
(viii) All of the third parties with which VFICO presently have
arrangements, engagements or contracts to accept, treat, transport, store,
dispose, remove or recycle any Hazardous Substances generated or present at any
of the properties owned, operated, occupied or otherwise used by VFICO are
properly permitted under Environmental Laws to perform the foregoing activities
or conduct.
(ix) VFICO does not have any liability for the violation of any
Environmental Law or the Release of any Hazardous Substance in connection with
any business or property previously owned, operated, occupied or otherwise used
by VFICO or any of the predecessors of VFICO.
(x) There are no past or present actions, activities,
circumstances, conditions, event or incidents, including, without limitation,
the generation, handling, transportation, treatment, storage, Release, presence,
disposal or arranging for disposal of any Hazardous Substance, that could form
the basis of any claim against VFICO under any Environmental Law.
(xi) Without in any way limiting the generality of the foregoing,
(i) all underground storage tanks, and the capacity and contents of such tanks,
located on the real property owned or operated by VFICO are identified in
Schedule 3.17(a), (ii) except as identified in Schedule 3.17(a), there is no
asbestos contained in or forming part of any building, building component,
structure or office space owned or operated by VFICO, and (iii) no
polychlorinated biphenyls (PCBS) are used or stored at any part of the property
owned or operated by VFICO.
(xii) The following terms shall have the following meanings:
A. "Environmental Laws" means all federal, state, local
and foreign laws, statutes, codes, ordinances, rules, regulations, orders,
directives, binding policies, common law, or Permits as amended and in effect on
the date hereof and on the Closing Date relating to or addressing the
environment, health or safety, including, but not limited to, any law, statute,
code, ordinance, rule, regulation, order, directive, binding policy, common law
or Permit relating to the generation, use, handling, treatment removal, storage,
production, manufacture, transportation, remediation, disposal, arranging for
disposal, or Release of Hazardous Substances.
B. "Environmental Lien" means a lien in favor of any
conventional authority for any (a) liability under any Environmental Law or (b)
damages arising from, or costs incurred by, such governmental authority in
response to a release or threatened release of a Hazardous Substance into the
environment.
C. "Hazardous Substances" means any toxic or hazardous
substances (including, without limitation, wastes), pollutants, explosives,
radioactive materials or substances (including, without limitation, wastes),
including, without limitation, asbestos, PCBs,
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petroleum products and byproducts, and substances (including, without
limitation, wastes) defined in or regulated under Environmental Law.
D. "Permit" means any permit, license, consent or other
approval or authorization required under any Environmental Law.
E. "Release" means the release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching or
migrating of any Hazardous Substance through or in the air, soil, surface water,
or groundwater.
SECTION 3.18 Books and Records. The books and records of VFICO have
-----------------
been, and are being, maintained in accordance with applicable legal and
accounting requirements and reflect in all material respects the substance of
events and transactions that should be included therein.
SECTION 3.19 Intellectual Property. VFICO, directly or indirectly,
---------------------
possess or has adequate rights to all licenses, permits and all other
franchises, trademarks, trade names, service marks, inventions, patents,
copyrights, and any applications therefor, trade secrets, research and
development, know-how, technical data, computer software programs or
applications and technology systems necessary to operate its business and
required by applicable law (the "Intellectual Property"). Except as set forth on
Schedule 3.19, all right, title and interest in and to each item of Intellectual
Property is owned by VFICO, is not subject to any license, royalty arrangement
or pending or threatened claim or dispute and is valid and in full force and
effect To VFICO's knowledge, none of the Intellectual Property owned or used by
VFICO, infringes any Intellectual Property right of any other entity and no
Intellectual Property owned by VFICO is infringed upon by any other entity.
SECTION 3.20 Condition of Tangible Assets. Except as set forth in
----------------------------
Schedule 3.20, in all material respects: (i) all buildings, structures and
improvements on the real property leased by VFICO are in good condition,
ordinary wear and tear excepted, and are free from structural defects, and (ii)
the equipment, including heating, air conditioning and ventilation equipment
owned by VFICO, is in good operating condition, ordinary wear and tear excepted.
The operation and use of the property in the business conform in all material
respects to all applicable laws, ordinances, regulations, permits, licenses and
certificates.
SECTION 3.21 Year 2000 Compliance. Except as provided in Schedule 3.21
--------------------
hereof, VFICO has undertaken an assessment of its software and hardware in order
to reveal those portions thereof which will require modification or replacement
to utilize properly dates beyond December 31, 1999, has contracted with
appropriate third parties to modify or replace such existing software and
hardware so that such software and hardware will not be affected by the change
in the Year 2000. VFICO has contacted its critical vendors and borrowers in
order to assess their efforts to mitigate any adverse effects to their computer
programs and systems beyond December 31, 1999.
SECTION 3.22 Conflict of Interest. No present or former officer or
--------------------
director managerial employee, of VFICO and no shareholder of VFICO has (i) any
interest in the property, tangible or intangible, including, without limitation,
licenses, inventions, processes, know how or formula of a proprietary nature
used in or pertaining to the business of VFICO, (ii) any contract, commitment,
claim, arrangement or understanding, including, without limitation, any loan
arrangement, with VFICO. Except as set forth on Schedule 3.22, to the knowledge
of
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VFICO, no present officer, director or managerial employee of VFICO and no
shareholder of VFICO, has any ownership or stock interest in any other
enterprise, firm, corporation, trust or any other entity which is engaged in any
contractual arrangement or understanding with VFICO or is engaged in any line or
lines of business which are the same as, or similar to, or competitive with, the
line or lines of business or VFICO. For the purpose of this representation,
ownership of not more than 3% of the voting stock of any publicly-held company
whose stock is listed on a recognized securities exchange or traded over-the-
counter shall be disregarded.
SECTION 3.23 Vote Required. The affirmative vote of the holders of a
-------------
majority of the outstanding shares of VFICO Common Stock is necessary in order
to approve this Agreement, the Merger and the other transactions contemplated
herein.
SECTION 3.24 Disclosure. No representation or warranty by VFICO
----------
contained in this Agreement, and no statement contained in any Exhibit or
Schedule hereto or any lists, certificates or writing delivered in connection
herewith or pursuant hereto to the knowledge of VFICO, contains any untrue
statement of a material fact, or omits to state a material fact necessary in
order to make the statements contained herein or therein not misleading or
necessary in order to fully and fairly provide the information required to be
provided in such document.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SBI
AND ACQUISITION CORPORATION
As a material inducement to VFICO to enter into this Agreement and
consummate the Merger and the other transactions contemplated herein, SBI and
Acquisition Corporation, jointly and severally, represent and warrant to VFICO
that, except as specifically disclosed to VFICO in writing in the disclosure
schedules being delivered to VFICO (the "SBI Schedules") which shall identify
the specific sections or subsections in this Agreement to which each such
disclosure relates:
SECTION 4.01 Organization. Each of SBI and Acquisition Corporation is a
------------
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, and has the corporate power and
authority to carry on its business as presently conducted, to enter into this
Agreement, and the other documents and instruments to be executed and delivered
by it pursuant hereto and to carry out the transactions contemplated hereby and
thereby.
SECTION 4.02 Authority. The execution and delivery of this Agreement and
---------
the other documents and instruments to be executed and delivered by SBI and
Acquisition Corporation pursuant hereto and the consummation by SBI and
Acquisition Corporation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of SBI and Acquisition Corporation,
respectively. No other corporate act or proceeding on the part of SBI or
Acquisition Corporation or their respective shareholders (other than the
approval of the merger by SBI as the sole shareholder of Acquisition
Corporation) is necessary to authorize this Agreement, the Merger or the other
documents and instruments to be executed and delivered by SBI or Acquisition
Corporation.
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SECTION 4.03 Consents and Approvals; No Violation. This Agreement
------------------------------------
constitutes a valid and binding agreements of each of SBI and Acquisition
Corporation, enforceable in accordance with its respective terms, and except as
such enforceability may be limited by bankruptcy or other similar laws affecting
creditors' rights and remedies generally, neither the execution and delivery of
this Agreement nor the consummation of the Merger or the other transactions
contemplated hereby (i) conflict or result in a breach of any provision of the
Articles of Incorporation or Bylaws of SBI or Acquisition Corporation, (ii)
result in a violation or breach of, or constitute with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
amendment, cancellation or acceleration) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, license, contract,
agreement or other instrument or obligation to which SBI or Acquisition
Corporation is a party or by which any of its properties or assets may be bound
or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to SBI or Acquisition Corporation or any of their
respective properties or assets. Except as set forth in Schedule 4.03, no
permit, authorization, consent or approval of, any court or other adjudicatory
body, administrative agency or commission or other governmental or regulatory
authority or agency is required in connection with the execution, delivery or
performance by SBI or Acquisition Corporation of this Agreement, the Merger or
the consummation of the transactions contemplated hereby.
SECTION 4.04 SEC Reports and Financial Statements. SBI has delivered to
------------------------------------
VFICO complete (except in certain cases for listed exhibits which are available
upon request) and correct copies of SBI's (a) Proxy Statement and Annual Report
on Form 10-K for the fiscal year ended December 31, 1998; (b) Quarterly Reports
on Form 10-Q for the fiscal quarters ended March 31, June and September 30,
1999, in each case as filed by SBI with the SEC pursuant to the 1934 Act (such
reports and other filings collectively referred to herein as the "1934 Act
Filings"). As of their respective dates, the 1934 Act Filings did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading and, since
the date of the last 1934 Act Filing, SBI has not experienced nor to the
knowledge of SBI has there been threatened or anticipated any material adverse
change in the condition (financial or otherwise), assets, liabilities (absolute,
accrued, contingent or otherwise), business, or operations of SBI taken as a
whole.
SECTION 4.05 Disclosure. No representation or warranty by SBI or
----------
Acquisition Corporation contained in this Agreement, and no statement contained
in any Exhibit or SBI Schedule hereto or any lists, certificate or writing
delivered in connection herewith or pursuant hereto, contains any untrue
statement of a material fact, or omits to state a material fact necessary in
order to make the statements contained herein or therein not misleading or
necessary in order to fully and fairly provide the information required to be
provided in any such document.
SECTION 4.06 Vote Required. SBI, as the sole shareholder of Acquisition
-------------
Corporation, has executed or will execute prior to the Closing Date, an Action
by Written Consent approving this Agreement, the Merger and the transactions
contemplated hereby and thereby.
SECTION 4.07 Disciplinary History. Except as set fort on Schedule 4.07,
--------------------
there is no information concerning SBI or Buyer, or any person or entity that,
upon the consummation of the transactions contemplated by this Agreement and the
VFAM Agreement, will be a control affiliate (as such term is defined in
Instruction 4(3) to Form BD, Uniform Application for Broker-Dealer Registration
("Form BD") or an advisory affiliate (as such term is defined in Item
20
<PAGE>
11 of Form ADV, Uniform Application for Investment Adviser Registration (Form
ADV")) of VFICO (other than persons and entities that are presently control
affiliates or advisory affiliates of VFAM), that will be required to be
disclosed in response to Item 11 or Schedule DRP of VFAM's Form BD or in
response to Item 11 or Schedule E of VFAM's Form ADV.
ARTICLE V
CERTAIN COVENANTS PENDING THE CLOSING
SECTION 5.01 Access and Information. Between the date hereof and the
----------------------
Closing Date, VFICO will give SBI and Acquisition Corporation and their
authorized representatives full and free access during normal business hours, in
such manner as not to unduly disrupt normal business activities, to any and all
premises, properties, contracts, commitments, books and records, and VFICO will
cause its officers to furnish any and all financial, technical and operating
data and other information as SBI and Acquisition Corporation and their
authorized representatives from time to time reasonably may request.
SECTION 5.02 Conduct of the Business of VFICO pending the Closing Date.
---------------------------------------------------------
Except as set forth on Schedule 5.02, between the date hereof and the Closing
Date, unless SBI otherwise consents in writing or unless otherwise required by
the VFAM Agreement (as defined in Section 6.01(b) hereof), VFICO shall:
(a) Not take any action which would render untrue any of the
representations or warranties of VFICO herein contained; not omit to take any
action, the omission of which would render untrue any such representation or
warranty; provided, however, it shall not be obligated to take any action not in
the ordinary course of business that would result in the expenditure of funds by
it exceeding $5,000 in the aggregate; and not take any action or commit any
omission that would have as a result any of the conditions set forth in Article
VI not being satisfied.
(b) Conduct its business in a good and diligent manner in the
ordinary and usual course.
(c) Use its best efforts to preserve its business organization
intact, to keep available the services of its employees, and to preserve its
relationships with customers, vendors, suppliers and others with whom it deals.
(d) Not reveal, orally or in writing, to any party, other than
consultants and vendors of services with a need to know and other than SBI and
Acquisition Corporation and their authorized agents, any of the confidential
business procedures and practices followed by it in the conduct of its business.
(e) Not enter into any contract, agreement, commitment or arrangement
with any party, other than contracts in the ordinary and usual course of
business.
(f) Not redeem or otherwise acquire any shares of its capital stock
or issue any capital stock or any stock or any stock option, warrant,
preference, call or right relating thereto.
21
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(g) Use its best efforts to maintain in full force and effect all of
the insurance policies presently maintained by it, make no change in any
insurance coverage and notify SBI at least ten days prior to any pending
cancellation or lapse of any insurance policy.
(h) Keep the premises occupied and owned or leased by it and all of
its equipment and other tangible personal property in good order and repair and
perform all necessary repairs and maintenance.
(i) Continue to maintain all of its usual business books and records
in accordance with its past practices.
(j) Not amend or propose to amend its Articles of Incorporation or
Bylaws.
(k) Not waive any material right or cancel any material claim without
the receipt of adequate consideration.
(l) Maintain its respective corporate existence and not merge or
consolidate it with any other entity.
(m) Comply with all material provisions of any of the VFICO
Agreements and all applicable laws, rules and regulations.
(n) Not make any capital expenditure other than in the ordinary
course of its business and in an amount not exceeding $10,000 in the aggregate.
(o) Not place any additional encumbrances on any of its inventory or
assets not in the ordinary course of business, except that existing encumbrances
may attach to its inventory or assets acquired after the date hereof.
(p) Not pay any severance, deferred compensation or other payments to
any shareholder, whether or not accrued.
(q) Not declare or make any dividend or other payment on or with
respect to its capital stock, and not declare or pay any bonuses or non-periodic
compensation to any of its shareholders or employees
(r) Not engage in any transaction of the type listed in Section 3.15.
SECTION 5.03 Notices. VFICO shall give prompt notice to SBI of (i) any
-------
notice of, or other communication relating to, a default which would have a
material adverse effect on VFICO or event which, with notice or lapse of time or
both, would become a default which would have a material adverse effect on
VFICO, received by it subsequent to the date of this Agreement and prior to the
Closing, under its Articles of Incorporation or Bylaws or any of the VFICO
Agreements and (x) by which it is bound or (y) to which it is subject, (ii) any
claim, action, suit, proceeding or investigation by any governmental department,
taxing authority commission, board, agency, instrumentality or authority
involving or relating to its assets, properties or business or the VFICO
Agreements (or any communication indicating that the same may he contemplated),
(iii) any notice or other communication from any third party alleging that the
consent of such third party is or may be required in connection with the
transactions
22
<PAGE>
contemplated hereby and (iv) any matter which would cause any material change
with respect to any representations made hereunder.
SECTION 5.04 Advice of Changes. Each of SBI, Acquisition Corporation and
-----------------
VFICO shall confer on a regular and frequent basis with the other, report on
operational matters and promptly advise the other orally and in writing of any
change or event having, or which, insofar as can reasonably be foreseen, could
have, a material adverse effect on such party.
SECTION 5.05 Legal Conditions to Stock Purchase. Each of SBI, Acquisition
----------------------------------
Corporation and VFICO will take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed on itself with respect
to the transactions contemplated hereby (which actions shall include, without
limitation, approvals or filings with any governmental entity) and will promptly
cooperate with and furnish information to each other with any such requirements
imposed upon any of them in connection with the same. Each of SBI, Acquisition
Corporation and VFICO will take all reasonable actions necessary to obtain (and
will cooperate with each other in obtaining) any consent, authorization, order
or approval of, or any exemption by, any governmental entity or other public or
private third party, required to be obtained by SBI, Acquisition Corporation or
VFICO in connection with the taking of any action contemplated by this
Agreement. Each of SBI, Acquisition Agreement and VFICO will use its best
efforts to effectuate the transactions and agreements contemplated by this
Agreement, and, in furtherance thereof, shall make and execute, under the
corporate seal of SBI, Acquisition Corporation or VFICO, if required, whatever
certificates and documents are required by the appropriate federal and state
regulatory authorities to effect the transactions contemplated hereby, and to
cause the same to be filed, in the manner provided by law, and to do all things
whatsoever, whether within or without the Commonwealth of Pennsylvania, which
would be necessary and proper to effect the transactions and agreements
contemplated herein.
SECTION 5.06 Best Efforts. Subject to the terms and conditions of this
------------
Agreement, each of the parties hereto agrees to use best efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
SECTION 5.07 VFICO Shareholder Approval. VFICO shall use its best efforts
--------------------------
to cause to be prepared, as promptly as possible following the date of this
Agreement, proxy materials for the Special Meeting of its shareholders, and to
use its best efforts to cause such proxy solicitation to be undertaken as soon
as practicable, in accordance with the BCL and VFICO's Articles of Incorporation
and Bylaws. VFICO shall bear the full cost of such solicitation, meeting and
approval. SBI and its counsel shall have the opportunity to review all Special
Meeting materials prior to their delivery to the VFICO shareholders, and all
such materials shall be in form and substance reasonably satisfactory to SBI and
its counsel. The Board of Directors of VFICO shall recommend to its shareholders
that they approve the Merger and the consummation of the transactions
contemplated by this Agreement.
SECTION 5.08 December 31, 1999 Financial Statements. If the Closing has
--------------------------------------
not occurred by January 15, 2000, then VFICO shall deliver to SBI the unaudited
financial statement of VFICO for the year ended December 31, 1999, prepared in
accordance with GAAP (the "December 31, 1999 Financials").
23
<PAGE>
ARTICLE VI
CONDITIONS TO CLOSING
SECTION 6.01 Conditions to Each Party's Obligation To Effect the
---------------------------------------------------
Transaction. The respective obligation of each party to effect the Merger shall
- -----------
be subject to the satisfaction prior to the Closing Date of the following
conditions:
(a) No Injunctions or Restraints. No temporary restraining order,
----------------------------
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect.
(b) Consummation of Closing under VFAM Agreement. The Closing
--------------------------------------------
contemplated in Section 1.04 of the VFAM Agreement shall have occurred prior to,
or shall occur simultaneously with, Closing under this Agreement.
(c) Shareholder Approval. This Agreement, the Merger and the
--------------------
transactions contemplated hereby shall have been approved in the manner required
by applicable law by the holders of the issued and outstanding shares of VFICO
Common Stock.
SECTION 6.02 Conditions of Obligations of SBI and Acquisition Corporation.
------------------------------------------------------------
The obligations of SBI and Acquisition Corporation to effect the Merger are
subject to the satisfaction of the following conditions unless waived by SBI and
Acquisition Corporation:
(a) Representations and Warranties. The representations and
------------------------------
warranties of VFICO set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing Date.
(b) Performance of Obligations of VFICO. VFICO shall have performed
-----------------------------------
in all material respects all of its obligations required to be performed by it
under this Agreement at or prior to the Closing Date.
(c) Consents, Approvals, etc. Any and all material consents, waivers,
------------------------
permits and approvals from any governmental or regulatory body required by VFICO
in connection with the execution, delivery and performance of this Agreement as
listed in Schedule 3.04 shall have been duly obtained and shall be in full force
and effect on the Closing Date. No litigation, governmental action or other
proceedings involving or potentially involving a liability, obligation or loss
on the part of VFICO, or which by reason of the nature of the relief sought
might have a materially adverse effect on VFICO's business, shall be threatened
or commenced against VFICO with respect to any matter and no litigation,
governmental action or other proceedings shall be threatened or commenced
against any person with respect to the consummation of the transactions provided
for herein.
(d) Other Approvals. Other than the filing provided for by Section
---------------
1.01, all authorizations, consents, orders or approvals, including, without
limitation, all licenses or assignments of licenses, of, or declarations or
filings with any governmental entity by VFICO the failure to obtain which would
have a material adverse effect on SBI shall have been filed, occurred or been
obtained.
24
<PAGE>
(e) Closing Documents. All documents required to be delivered by
-----------------
VFICO at or prior to the Closing Date shall have been delivered.
(f) Lease Termination. VFICO shall have terminated any written or
-----------------
verbal lease arrangement that it may have with Warner Road Associates.
(g) Share Transfer Restrictions. Any and all share transfer
---------------------------
restrictions on the VFICO Common Stock, including, without limitation, any
restrictions imposed in VFICO's articles of incorporation, bylaws or any
shareholder agreements, shall be terminated or waived.
(h) VFICO Dissenting Shareholders. Holders of less than 5 percent of
-----------------------------
the outstanding VFICO Common Stock shall have elected to exercise their
dissenters' rights.
(i) Payment of VFICO's Expenses. VFICO shall have paid all fees and
---------------------------
expenses of its advisors, accountants and counsel, whether incident to the
negotiations, preparation, execution, delivery and performance of this Agreement
or otherwise for the period through the Closing Date, such that no liability or
obligation with respect to such fees and expenses shall be included on VFICO's
closing balance sheet. VFICO's and VFICO's advisors and accountants shall have
executed and delivered to VFICO, and SBI a release agreement in a form
satisfactory to SBI reflecting that all such amounts have been paid and that as
of the Closing Date they have no right to any further payment from VFICO,
Acquisition Corporation or SBI for any fees or expenses.
(j) VFICO Closing Financial Certificate. SBI shall have received a
-----------------------------------
certificate, (the "VFICO Closing Financial Certificate") dated as of the Closing
Date, signed on behalf of VFICO, certifying that:
(i) the tangible net worth of VFICO as of the Closing Date is
at least $2,000,000;
(ii) VFICO has a cash balance of at least $1,500,000 plus
current liabilities; and
(iii) VFICO has no long term liabilities.
An example of the calculation of such certificate is set forth on Schedule
6.02(j).
(k) Pro Forma Balance Sheet and Income Statements. In addition to
---------------------------------------------
the December 31, 1999 Financials, at least ten days prior to the Closing Date,
VFICO shall deliver to SBI a pro forma balance sheet and income statement and
supporting documents for the period from the most recent audited financial
statements through the Closing Date, which shall confirm the accuracy of the
VFICO Closing Financial Certificate.
SECTION 6.03 Conditions of Obligations of VFICO. The obligation of VFICO
----------------------------------
to effect the transactions contemplated herein is subject to the satisfaction of
the following conditions unless waived by VFICO:
25
<PAGE>
(a) Representations and Warranties. The representations and
------------------------------
warranties of SBI and Acquisition Corporation set forth in this Agreement shall
be true and correct in all material respects as of the date of this Agreement
and as of the Closing Date.
(b) Performance of Obligations of SBI and Acquisition Corporation.
-------------------------------------------------------------
SBI and Acquisition Corporation shall have performed in all material respects
all of their respective obligations required to be performed by it under this
Agreement at or prior to the Closing Date.
(c) Consents, Approvals, etc. Any and all material consents,
------------------------
waivers, permits and approvals from any governmental or regulatory body required
by SBI or Acquisition Corporation in connection with the execution, delivery and
performance of this Agreement as listed in Schedule 4.03, including, without
limitation, the approval of the Board of Governors of the Federal Reserve
System, shall have been duly obtained and shall be in full force and effect on
the Closing Date except for such items which may lawfully be obtained after the
Closing Date without a material adverse effect on VFICO. No litigation,
governmental action or other proceedings involving a liability, obligation or
loss on the part of SBI or Acquisition Corporation, or which by reason of the
nature of the relief sought might have a materially adverse effect on SBI's
business, shall be threatened or commenced against SBI or Acquisition
Corporation with respect to any matter, and no litigation, governmental action
or other proceedings shall be threatened or commenced against any person with
respect to the consummation of the transactions provided for herein.
(d) Other Approvals. Other than the filing provided for by Section
---------------
1.01, all authorizations, consents, orders or approvals shall have been filed,
occurred or been obtained.
(e) Closing Documents. All documents required to be delivered by SBI
-----------------
or Acquisition Corporation at or prior to the Closing Date shall have been
delivered.
ARTICLE VII
DELIVERIES
SECTION 7.01 VFICO's Deliveries. At the Closing, VFICO shall deliver or
------------------
cause to be delivered to SBI, the following:
(a) The legal opinion of David S. Foulke, Esq. in form reasonably
acceptable to SBI and its counsel;
(b) The VFICO Closing Financial Certificate;
(c) A "Good Standing Certificate" and/or a certificate of valid
registration of VFICO issued by the Secretary of State of each State in which it
is qualified or registered to do business, dated as of recent date;
(d) A certified copy of the Articles of Incorporation and all
amendments thereto of VFICO issued by the Secretary of State of the Commonwealth
of Pennsylvania, dated as of a recent date;
(e) An Officer's Certificate of VFICO certifying that, as of the
Closing Date, (i) each of the representations and warranties of VFICO is true
and correct in all material
26
<PAGE>
respects, (ii) VFICO has performed all of its obligations under this Agreement,
and (iii) attached thereto is a true and correct copy of any and all approvals,
consents, etc. required to be obtained by VFICO pursuant to Section 3.04 hereof,
and that the same are in full force and effect on the Closing Date;
(f) A Secretary's Certificate certifying (i) that the persons
identified in such certificate are the officers of VFICO; (ii) that attached
thereto is a true and complete copy of the Articles of Incorporation and the
Bylaws of VFICO as in effect on the date thereof, (iii) that attached thereto is
a true and complete copy of all resolutions adopted by the Board of Directors of
VFICO relating to the transactions contemplated by this Agreement, and (iv) the
vote of the shareholders of VFICO at the Special Meeting (including, without
limitation, the existence of a quorum, the number of votes cast for or against
this Agreement, the Merger and the other transactions contemplated herein, and
the number of shares that abstained from voting);
(g) The stock books and records, corporate minute books (containing
the originals of all minutes and resolutions ever adopted or consented to or
agreed by the shareholders, directors or any committee of directors of VFICO and
corporate seal of VFICO);
(h) Releases executed by each of VFICO's advisors and accountants
reflecting that all fees and expenses as provided in Section 6.02(i) have been
paid and that as of the Closing Date they have no right to any further payment
from VFICO, Acquisition Corporation or SBI for any fees or expenses relating to
work performed on or prior to the Closing Date.
SECTION 7.02 SBI's and Acquisition Corporation's Deliveries. At the
----------------------------------------------
Closing, SBI and Acquisition Corporation shall deliver or cause to be delivered
to VFICO, the following:
(a) Proof that Acquisition Corporation has obtained the $8.5 million
necessary for the Cash Consideration;
(b) The legal opinion of SBI's and Acquisition Corporation's legal
counsel in form reasonably acceptable to VFICO and its counsel;
(c) A "Good Standing Certificate" of each of SBI and Acquisition
Corporation and a certified copy of the Articles of Incorporation and all
amendments thereto issued by the Secretary of State of the Commonwealth of
Pennsylvania, dated as of a recent date;
(d) An Officer's Certificate of each of SBI and Acquisition
Corporation certifying that, as of the Closing Date, (i) each of the
representations and warranties of SBI and Acquisition Corporation is true and
correct in all material respects, and (ii) each of SBI and Acquisition
Corporation has performed all of its obligations under this Agreement, and (iii)
attached thereto is a true and correct copy of any and all approvals, consents,
etc. required to be obtained by SBI or Acquisition Corporation pursuant to
Section 4.03 hereof, and that the same are in full force and effect on the
Closing Date; and;
(e) A Secretary's Certificate of each of SBI and Acquisition
Corporation, certifying that (i) attached thereto is a true and complete copy of
the Articles of Incorporation and the Bylaws of SBI and Acquisition Corporation,
as the case may be, in each case as in effect on the date thereof, and (ii) that
attached thereto is a true and complete copy of all resolutions
27
<PAGE>
adopted by the Board of Directors of SBI and Acquisition Corporation, as the
case may be, relating to the transactions contemplated by this Agreement.
ARTICLE VIII
TERMINATION AND AMENDMENT
SECTION 8.01 Termination. This Agreement may be terminated at any time
-----------
prior to the Effective Time, whether before or after approval of the matters
presented in connection with the transactions contemplated herein:
(a) by mutual consent of VFICO, SBI and Acquisition Corporation;
(b) (i) by SBI and Acquisition Corporation on the one hand or by
VFICO on the other hand, respectively, if there shall have been a material
breach of any representation, warranty, covenant or agreement on the part of the
other set forth in this Agreement which breach shall not have been cured, in the
case of a representation or warranty, within five business days following notice
of such breach given to the breaching party by the other party or, in the case
of a covenant or agreement, within five business days following receipt by the
breaching party of notice of such breach, or (ii) by either SBI and Acquisition
Corporation or VFICO if any permanent injunction or other order of a court or
other competent authority preventing the consummation of the Merger or the other
transactions contemplated hereunder shall have become final and non-appealable;
or
(c) by SBI and Acquisition Corporation or VFICO if the transactions
contemplated herein shall not have been consummated before March 31, 2000.
SECTION 8.02 Effect of Termination. In the event of a termination of this
---------------------
Agreement by either VFICO or SBI and Acquisition Corporation as provided in
Section 8.01, this Agreement shall forthwith become void and there shall be no
liability or obligation on the part of SBI, Acquisition Corporation or VFICO, or
their respective officers or directors, except (y) with respect to the second
and third sentences of Section 5.01, and Sections 9.01 and 9.02, and (z) to the
extent that such termination results from the willful breach by a party hereto
of any of its representations, warranties, covenants or agreements set forth in
this Agreement.
SECTION 8.03 Amendment. This Agreement may be amended by the parties
---------
hereto, by action taken or authorized by their respective Boards of Directors,
at any time before or after approval of the matters presented in connection with
the Merger by VFICO's shareholders. This Agreement may not be amended except by
an instrument in writing signed on behalf of each of the parties hereto.
SECTION 8.04 Extension; Waiver. At any time prior to the Effective Time,
-----------------
the parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
28
<PAGE>
ARTICLE IX
MISCELLANEOUS
SECTION 9.01 Costs and Expenses. All costs and expenses incurred in
------------------
connection with this Agreement and the transactions contemplated hereby shall be
paid by VFICO to the extent incurred by it and paid by SBI and Acquisition
Corporation to the extent incurred by them.
SECTION 9.02 Brokers or Finders. Except with respect to any amounts that
------------------
might be due to VFICO's advisors, including without limitation any amounts that
may be due to James E. Bickley (any of which amounts shall be paid by VFICO),
each of SBI, Acquisition Corporation and VFICO hereby represents and warrants
that there is no corporation, firm or person entitled to receive from it any
brokerage commission or finder's fee in connection with this Agreement or the
transactions and agreements provided for herein, and each hereby indemnifies and
agrees to save the other parties hereto harmless from and against any claim for
brokerage commission or finder's fee based on any retention or alleged retention
of a broker or finder by it.
SECTION 9.03 Statements as Representations. All statements contained
-----------------------------
herein or in any Schedule, Exhibit, certificate, list or other document
delivered pursuant hereto or in connection with the transactions contemplated
herein shall be deemed representations, warranties and covenants within the
meaning of Articles III, IV and V hereof.
SECTION 9.04 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if SBI or Acquisition Corporation, to:
Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, PA 17543
Attention: Robert S. Bolinger, President and
Chief Executive Officer
Telecopy No.: 717.626.1874
with a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-2921
Attention: John F. Bales, III, Esquire
Telecopy No : 215.963.5299
(b) if VFICO, to:
VFICO
P.O. Box 837
Valley Forge, PA 19482
29
<PAGE>
Attention: Joseph J. Miller
Telecopy No.: 610.687.1848
with a copy to:
Stradley Ronon, Stevens & Young LLP
2600 One Commerce Square
Philadelphia, PA 19103
Attention: Dean M. Schwartz, Esq.
Telecopy No.: 215.564.8120
SECTION 9.05 Publicity. Except as otherwise required by law or the rules
---------
of the NASD for so long as this Agreement is in effect, neither VFICO, SBI nor
Acquisition Corporation shall issue or cause the publication of any press
release or other public announcement with respect to the transactions
contemplated by this Agreement without the consent of the other party, which
consent shall not be unreasonably withheld. Until a press release of the
execution of this Agreement has been made in accordance with the rules of the
NASD, all of the parties hereto shall treat the Agreement and the terms thereof
in the strictest confidence.
SECTION 9.06 Binding Nature of Agreement; No Assignment. This Agreement
------------------------------------------
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns, except that
no party may assign or transfer its rights or obligations under this Agreement
(other than as provided herein) without the prior written consent of the other
parties hereto; provided, however, that any substitute corporation as provided
in Section 1.04 hereof shall be entitled to the same rights and privileges as
those of SBI and Acquisition Corporation pursuant to this Agreement.
SECTION 9.07 Controlling Law. The Agreement and all questions relating
---------------
to its validity, interpretation, performance and enforcement (including without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the Commonwealth of Pennsylvania,
other than the choice of law provisions thereof, and without the aid of any
canon, custom, or rule of law requiring construction against the drafting party.
SECTION 9.08 Exhibits and Schedules. All Exhibits and Schedules attached
----------------------
hereto are hereby incorporated by reference into, and made a part of, this
Agreement.
SECTION 9.09 Execution in Counterparts. This Agreement may be executed
-------------------------
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signature of all of the parties reflected hereon as the
signatories.
SECTION 9.10 Provisions Separable. The provisions of this Agreement are
--------------------
independent of and separable from each other, and no provisions shall be
affected or rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be invalid or unenforceable in whole or
in part.
30
<PAGE>
SECTION 9.11 Entire Agreement. This Agreement and the Confidentiality
----------------
Agreement dated April 16, 1999 contain the entire understanding among the
parties hereto and with respect to the subject matter hereof, and together
supersede all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. This Agreement may not be modified or amended other than by an
agreement in writing signed by the parties hereto.
SECTION 9.12 Paragraph Headings. The headings in this Agreement are for
------------------
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
SECTION 9.13 Gender, Etc. Words used herein, regardless of the number
-----------
and gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
SECTION 9.14 Knowledge of VFICO. For purposes of this Agreement,
------------------
"knowledge of VFICO" or similar words and phrases shall be conclusively deemed
to include: (i) actual knowledge of VFICO or the officers and directors of
VFICO, and (ii) that knowledge which any officer or director of VFICO should
have obtained after exercising due diligence which a prudent officer or director
should have undertaken with respect thereto.
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first written above.
SUSQUEHANNA BANCSHARES, INC.
By: /s/ Robert S. Bolinger
-------------------------------------
Name: Robert S. Bolinger
Title: President
SUSQUEHANNA BANCSHARES CENTRAL, INC.
By: /s/ Robert S. Bolinger
------------------------------------
Name: Robert S. Bolinger
Title: President
VALLEY FORGE INVESTMENT
COMPANY, INC.
By: /s/ Joseph J. Miller, Jr.
------------------------------------
Name: Joseph J. Miller, Jr.
Title: Chairman
32
<PAGE>
Exhibit 10
----------
Key Employee Severance Pay Plan
<PAGE>
SUSQUEHANNA BANCSHARES, INC.
KEY EMPLOYEE
SEVERANCE PAY PLAN
------------------
<PAGE>
ARTICLE I
PURPOSE OF PLAN
---------------
Section 1.01 Purpose of the Plan. The Susquehanna Bancshares, Inc.
-------------------
Key Employee Severance Pay Plan (the "Plan"), as set forth herein, is intended
to alleviate financial hardships which may be experienced by senior executives
and other key employees of Susquehanna Bancshares, Inc. (the "Company") whose
employment is terminated under specified circumstances within one (1) year
following a Change of Control of the Company, and to reinforce and encourage the
continued attention and dedication of those senior executives and other key
employees to their assigned duties without distraction from a potential Change
of Control of the Company. The Plan is not intended to be an "employee pension
benefit plan" or a "pension plan" as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Rather, this Plan
is intended to meet the criteria set forth in 29 C.F.R. (S) 2510.3-2(b) for a
"severance pay plan" that is an "employee welfare benefit plan" within the
meaning of Section 3(1) of ERISA. Accordingly, the benefits paid by the Plan are
not deferred compensation.
ARTICLE II
DEFINITIONS
-----------
Section 2.01 "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act.
Section 2.02 "Beneficial Owner" of any securities shall mean:
(i) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such right
is exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in writing) or upon the
exercise of conversion rights, exchange rights, rights, warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the "Beneficial
-------- -------
Owner" of securities tendered pursuant to a tender or exchange offer made by
such Person or any of such Person's Affiliates or Associates until such tendered
securities are accepted for payment, purchase or exchange;
(ii) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or has
"beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General
Rules and Regulations under the Exchange
<PAGE>
Act), including without limitation pursuant to any agreement, arrangement or
understanding, whether or not in writing; provided, however, that a Person shall
-------- -------
not be deemed the "Beneficial Owner" of any security under this subsection (ii)
as a result of an oral or written agreement, arrangement or understanding to
vote such security if such agreement, arrangement or understanding (A) arises
solely from a revocable proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, applicable provisions of
the General Rules and Regulations under the Exchange Act, and (B) is not then
reportable by such Person on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) where voting securities are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate thereof) with
which such Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (whether or not in writing) for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy as
described in the proviso to subsection (ii) above) or disposing of any voting
securities of the Company;
provided, however, that nothing in this Section 2.02 shall cause a Person
- -------- -------
engaged in business as an underwriter of securities to be the "Beneficial Owner"
of any securities acquired through such Person's participation in good faith in
a firm commitment underwriting until the expiration of forty (40) days after the
date of such acquisition.
Section 2.03 "Benefit" or "Benefits" shall mean any or all of the
benefits that a Participant is entitled to receive pursuant to Article IV of the
Plan.
Section 2.04 "Board of Directors" shall mean the Board of Directors of
the Company.
Section 2.05 "Change of Control" shall be deemed to have taken place
if (i) any Person (except the Company or any employee benefit plan of the
Company or of any Affiliate, any Person or entity organized, appointed or
established by the Company for or pursuant to the terms of any such employee
benefit plan), together with all Affiliates and Associates of such Person, shall
become the Beneficial Owner in the aggregate of thirty percent (30%) or more of
the equity of the Company then outstanding, (ii) any Person together with all
Affiliates and Associates of such Person purchases substantially all of the
assets of the Company, or (iii) during any twenty-four (24) month period,
individuals who at the beginning of such period constituted the Board cease for
any reason (other than death or compulsory retirement at the age of seventy-two
(72) years) to constitute a majority of the continuing directors thereof, unless
the election, or the nomination for election by the Company's shareholders, of
at least seventy-five percent (75%) of the directors who were not directors at
the beginning of such period was approved by a vote of at least seventy-five
percent (75%) of the directors in office at the time of such election or
nomination who were directors at the beginning of such period.
2
<PAGE>
Section 2.06 "Company" shall mean Susquehanna Bancshares, Inc., or any
successor thereto.
Section 2.07 "Compensation" shall mean one hundred ten percent (110%)
of the sum of the Participant's annual base salary, determined as the greater of
(a) the amount in effect on the first day of the calendar quarter immediately
preceding a Change of Control or (b) the amount in effect on the first day of
the calendar quarter immediately preceding his or her Termination following a
Change of Control.
Section 2.08 "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
Section 2.09 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
Section 2.10 "Participant" shall mean any senior executive or other
key employee of the Company who is designated by the Compensation Committee and
approved by the Board of Directors as eligible to participate in the Plan.
Section 2.11 "Person" shall mean any individual, firm, corporation,
partnership or other entity.
Section 2.12 "Plan" shall mean the Susquehanna Bancshares, Inc. Key
Employee Severance Pay Plan, as set forth herein, and as the same may from time
to time be amended.
Section 2.13 "Subsidiary" shall have the meaning ascribed to such term
in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
Section 2.14 "Termination Date" shall mean the date of receipt of the
Notice of Termination described in Article III hereof or any later date
specified therein, as the case may be.
Section 2.15 "Termination of Employment" shall mean the termination of
the Participant's actual employment relationship with the Company.
Section 2.16 "Termination following a Change of Control" shall mean a
Termination of Employment within one (1) year after a Change of Control either:
(i) initiated by the Company for any reason other than (a) the
Participant's continuous illness, injury or incapacity for a period of twelve
(12) consecutive months or (b)for "cause," which shall mean misappropriation of
funds, habitual insobriety, substance abuse, conviction of a crime involving
moral turpitude, or gross negligence in the performance of
3
<PAGE>
duties, which gross negligence has had a material adverse effect on the
business, operations, assets, properties or financial condition of the Company
and its Subsidiaries taken as a whole; or
(ii) initiated by the Participant upon one or more of the following
occurrences:
(A) any change resulting in a significant reduction by the Company of
the authority, duties or responsibilities of the Participant;
(B) any removal by the Company of the Participant from the employment
grade, compensation level or officer positions which the
Participant holds as of the Change of Control except in
connection with promotions to higher office;
(C) the requirement that the Participant undertake business travel
(or commuting in excess of fifty miles each way) to an extent
substantially greater than is reasonable and customary for the
position the Participant holds.
ARTICLE III
NOTICE OF TERMINATION
---------------------
Any Termination following a Change of Control shall be communicated by
a Notice of Termination to the other party given in accordance with Section 8.05
hereof. For purposes of this Plan, a "Notice of Termination" means a written
notice which (i) indicates the specific termination provision in this Plan
relied upon, (ii) briefly summarizes the facts and circumstances deemed to
provide a basis for termination of the Participant's employment under the
provision so indicated, and (iii) if the Termination Date is other than the date
of receipt of such notice, specifies the Termination Date (which date shall not
be more than fifteen (15) days after the giving of such notice).
ARTICLE IV
BENEFIT
-------
Section 4.01 Amount of Immediate Cash Benefit. Upon a Participant's
--------------------------------
Termination following a Change of Control, the Company shall pay the Participant
an amount
4
<PAGE>
equal to one and one-half times his Compensation in a lump sum within fifteen
(15) days after the Termination Date.
Section 4.02 Additional Benefits. For a period of one (1) year
-------------------
following the Participant's Termination Date, the Participant shall be entitled
to participate in all employee benefit plans or programs, and to receive all
benefits, perquisites and emoluments, for which any salaried employees of the
Company are eligible under any plan or program in effect on the Participant's
Termination Date and maintained by the Company for officers at a comparable
level (other than any severance or termination pay plan or program or bonus,
stock option or other long-term incentive plan or program), to the fullest
extent permissible under the general terms and provisions of such plan or
program and in accordance with the provisions thereof, including group
hospitalization, health, dental care, life or other insurance, tax-qualified
pension and savings plans, stock purchase plan, and disability insurance.
Notwithstanding the foregoing, if any such Benefits cannot lawfully be provided,
or the provision thereof would disqualify any plan for favorable tax treatment
under the Internal Revenue Code or result in adverse tax consequences to the
Participant, the Company shall pay to the Participant a lump sum amount equal on
an after-tax basis to the actuarial present value of such Benefits, as
determined by an actuary chosen by the Participant, within fifteen (15) days
after such determination by such actuary. Further notwithstanding the foregoing,
nothing in this Plan shall preclude the amendment or termination of any such
plan or program, provided that such amendment or termination is applicable
generally to the officers of the Company or any Subsidiary or affiliate.
Section 4.03. Other Payments. The Benefits due under this Article IV
--------------
shall be in addition to and not in lieu of any payments or benefits due to the
Participant under any other plan, policy or program of the Company, except that
no payments shall be due to the Participant under the Company's otherwise
applicable severance or termination pay plan for employees, if any.
ARTICLE V
ENFORCEMENT AND REMEDIES
------------------------
Section 5.01 Interest. In the event that the Company shall fail or
--------
refuse to make payment of any amounts or provide any other Benefits due the
Participant under Article IV hereof within the respective time periods provided
therein, the Company shall pay to the Participant, in addition to the payment of
any other sums provided in this Plan, interest, compounded daily, on any amount
remaining unpaid (including the amount of any other Benefit due but unpaid) from
the date payment is required under Article IV, as appropriate, until paid to the
Participant, at the rate from time to time announced by Chase Manhattan Company
as its "prime rate" plus two percent (2%), each change in such rate to take
effect on the effective date of the change in such prime rate.
5
<PAGE>
Section 5.02 Expenses. It is the intent of the Company that the
--------
Participant not be required to incur any expenses associated with the
enforcement of his rights under this Plan by arbitration, litigation or other
legal action because the cost and expense thereof would substantially detract
from the benefits intended to be extended to the Participant hereunder.
Accordingly, the Company shall pay the Participant on demand the amount
necessary to reimburse the Participant in full for all expenses (including
attorneys' fees and legal expenses) incurred by the Participant in enforcing any
of the obligations of the Company under this Plan.
Section 5.03 No Mitigation. The Participant shall not be required to
-------------
mitigate any Benefit provided for in this Plan by seeking other employment or
otherwise, nor shall any Benefit provided for herein be reduced by any
compensation earned or benefit received through other employment or otherwise.
Section 5.04 No Set-Off. The Company's obligation to make the
----------
payments provided for in this Plan and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Participant or others.
Section 5.05 Taxes. Any payment required under this Plan shall be
-----
subject to all requirements of the law with regard to the withholding of taxes,
filing, making of reports and the like, and the Company shall use its best
efforts to satisfy promptly all such requirements.
ARTICLE VI
AMENDMENT AND TERMINATION
-------------------------
Section 6.01 Amendment, Suspension and Termination. The Company,
-------------------------------------
acting through the Board of Directors, retains the right, at any time and from
time to time prior to a Change of Control, to amend, suspend or terminate the
Plan in whole or in part, for any reason, and without either the consent of or
the prior notification to any Participant. No such amendment, suspension or
termination shall be permitted upon or after a Change of Control. No such
amendment shall give the Company the right to recover any amount paid to a
Participant prior to the date of such amendment or to cause the cessation and
discontinuance of Benefits to any person or persons under the Plan already
receiving Benefits.
6
<PAGE>
ARTICLE VII
CLAIMS PROCEDURES
-----------------
Section 7.01 Application for Benefits. Each Participant believing
------------------------
himself/herself eligible for Benefits under this Plan may apply for such
Benefits by filing with the Board of Directors a written request for Benefits,
which request may comprise a Notice of Termination delivered by the Participant.
Section 7.02 Appeals of Denied Claims for Benefits. In the event
-------------------------------------
that any claim for Benefits is denied in whole or in part, the Participant (or
beneficiary, if applicable) whose claim has been so denied shall be notified of
such denial in writing by the Board of Directors. The notice advising of the
denial shall specify the reason or reasons for denial, make specific reference
to pertinent Plan provisions, describe any additional material or information
necessary for the claimant to perfect the claim (explaining why such material or
information is needed), and shall advise the Participant of the procedure for
the appeal of such denial. All appeals shall be made by the following procedure:
(a) The Participant whose claim has been denied shall file with the
Board of Directors a notice of desire to appeal the denial. Such
notice shall be filed within sixty (60) days of notification by
the Board of Directors of claim denial, shall be made in writing,
and shall set forth all of the facts upon which the appeal is
based.
(b) The Board of Directors shall, within thirty (30) days of receipt
of the Participant's notice of appeal, establish a hearing date
on which the Participant may make an oral presentation to the
Board of Directors in support of his/her appeal. The Participant
shall be given not less than ten (10) days notice of the date set
for the hearing.
(c) The Board of Directors shall consider the merits of the
claimant's written and oral presentations, the merits of any
facts or evidence in support of the denial of benefits, and such
other facts and circumstances as the Board of Directors shall
deem relevant. If the claimant elects not to make an oral
presentation, such election shall not be deemed adverse to
his/her interest, and the Board of Directors shall proceed as set
forth below as though an oral presentation of the contents of the
claimant's written presentation had been made.
7
<PAGE>
(d) The Board of Directors shall render a determination upon the
appealed claim, within sixty (60) days of the hearing date, which
determination shall be accompanied by a written statement as to
the reasons therefor.
ARTICLE VIII
MISCELLANEOUS
-------------
Section 8.01 Nonalienation of Benefits. None of the payments,
-------------------------
Benefits or rights of any Participant shall be subject to any claim of any
creditor, and, in particular, to the fullest extent permitted by law, all such
payments, Benefits and rights shall be free from attachment, garnishment,
trustee's process, or any other legal or equitable process available to any
creditor of such Participant. No Participant shall have the right to alienate,
anticipate, commute, pledge, encumber or assign any of the Benefits or payments
which he/she may expect to receive, contingently or otherwise, under this Plan.
Section 8.02 No Contract of Employment. Neither the establishment of
-------------------------
the Plan, nor any modification thereof, nor the payment of any Benefits shall be
construed as giving any Participant, or any person whosoever, the right to be
retained in the service of the Company, and all Participants shall remain
subject to discharge to the same extent as if the Plan had never been adopted.
Section 8.03 Severability of Provisions. If any provision of this
--------------------------
Plan shall be held invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provisions hereof, and this Plan shall be construed
and enforced as if such provisions had not been included.
Section 8.04 Successors, Heirs, Assigns, and Personal
----------------------------------------
Representatives. This Plan shall be binding upon the heirs, executors,
administrators, successors and assigns of the parties, including each
Participant, present and future. The Company shall require any successor or
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, or a division thereof, to acknowledge expressly that this Plan is
binding upon and enforceable against the Company in accordance with the terms
hereof, and to become jointly and severally obligated with the Company to
perform this Plan in the same manner and to the same extent that the Company
would be required to perform if no such succession or successions had taken
place.
Section 8.05 Notice. Any Notice of Termination delivered pursuant to
------
Article III shall be delivered, if by the Company, to the Participant at his or
her last known address, and if by the Participant, to the Corporate Secretary of
the Company at the Company's corporate
8
<PAGE>
headquarters, personally, by registered or certified mail, return receipt
requested, or by overnight express courier service. Any such notice shall be
deemed delivered and effective when received in the case of personal delivery,
five (5) days after deposit, postage prepaid, with the U.S. Postal Service in
the case of registered or certified mail, or on the next business day in the
case of overnight express courier service.
Section 8.06 Headings and Captions. The headings and captions herein
---------------------
are provided for reference and convenience only, shall not be considered part of
the Plan, and shall not be employed in the construction of the Plan.
Section 8.07 Gender and Number. Except where otherwise clearly
-----------------
indicated by context, the masculine and the neuter shall include the feminine
and the neuter, the singular shall include the plural, and vice-versa.
Section 8.08 Unfunded Plan. The Plan shall not be funded. The
-------------
Company may, but shall not be required to, set aside or earmark an amount
necessary to provide the Benefits specified herein (including the establishment
of trusts). In any event, no Participant shall have any right to, or interest
in, any assets of the Company which may be applied by the Company to the payment
of Benefits.
Section 8.09 Payments to Incompetent Persons, Etc. Any benefit
------------------------------------
payable to or for the benefit of a minor, an incompetent person or other person
incapable of receipting therefor shall be deemed paid when paid to such person's
guardian or to the party providing or reasonably appearing to provide for the
care of such person, and such payment shall fully discharge the Company, the
Board of Directors and all other parties with respect thereto.
Section 8.10 Lost Payees. A Benefit shall be deemed forfeited if the
-----------
Board of Directors is unable to locate a Participant to whom a Benefit is due.
Such Benefit shall be reinstated if application is made by the Participant for
the forfeited Benefit while this Plan is in operation.
Section 8.11 Controlling Law. This Plan shall be construed and
---------------
enforced according to the laws of the Commonwealth of Pennsylvania to the extent
not preempted by Federal law.
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused the Plan to be executed by
its duly authorized officers and its corporate seal to be affixed hereto as of
the 20th day of January, 1999.
SUSQUEHANNA BANCSHARES, INC.
Attest:
/s/ Lisa M. Cavage By: /s/ Robert S. Bolinger
- ------------------------------ --------------------------------
Assistant Secretary President
10
<PAGE>
Exhibit 21
----------
SUBSIDIARIES OF THE REGISTRANT
1. Farmers First Bank, 9 East Main Street, Lititz, Pennsylvania; a Bank and
Trust Company organized under the Pennsylvania Banking Code of 1965.
2. The Citizens National Bank of Southern Pennsylvania, 35 North Carlisle
Street, Greencastle, Pennsylvania; a National Bank organized under the
National Bank Act.
3. First National Trust Bank, 400 Market Street, Sunbury, Pennsylvania; a
National Bank organized under the National Bank Act.
4. Williamsport National Bank, 329 Pine Street, Williamsport, Pennsylvania; a
National Bank organized under the National Bank Act.
5. Farmers & Merchants Bank and Trust, 59 West Washington Street, Hagerstown,
Maryland; a Bank and Trust Company organized under the Maryland Banking
Code.
6. Susque-Bancshares Life Insurance Company, Phoenix, Arizona; an insurance
company organized under the laws of the State of Arizona.
7. Susque-Bancshares Leasing Company, Inc., 9 East Main Street, Lititz,
Pennsylvania; a company organized under the laws of the Commonwealth of
Pennsylvania.
8. Susquehanna Bancshares South, Inc., 100 West Road, Baltimore, Maryland; a
thrift holding company organized under the laws of the State of Delaware.
9. Susquehanna Bank, 100 West Road, Towson, Maryland; a wholly-owned
subsidiary of Susquehanna Bancshares South, Inc.
10. Susquehanna Bancshares East, Inc., 114 North Main Street, Mullica Hill,
New Jersey; a wholly-owned subsidiary of Susquehanna Bancshares, Inc.
11. Equity Bank, National Association, 8000 Sagemore Drive, Suite 8101,
Marlton, New Jersey; a wholly-owned subsidiary of Susquehanna Bancshares
East, Inc.
12. Founders' Bank, 101 Bryn Mawr Avenue, Bryn Mawr, Pennsylvania; a
wholly-owned subsidiary of Susquehanna Bancshares East, Inc.
13. First American National Bank of Pennsylvania, 140 East Main Street,
Everett, Pennsylvania, a National Bank organized under the National Bank
Act.
14. First Capitol Bank, 2951 Whiteford Road, York, Pennsylvania; a Bank
organized under the Pennsylvania Banking Code of 1965.
15. Boston Service Company, Inc. (t/a Hann Financial Service Corporation), One
Centre Drive, Jamesburg, New Jersey, a consumer automobile finance company
(acquired February 1, 2000).
16. Valley Forge Asset Management Corp., 120 South Warner Road, King of
Prussia, Pennsylvania, an asset management company (acquired March 3,
2000).
<PAGE>
Exhibit 23
----------
PriceWaterhouseCoopers LLP
One South Market Square
Harrisburg, PA 17101-9916
Telephone (717) 231-5900
Facsimile (717) 232-5672
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File No. 33-92512 and 333-385655) of Susquehanna
Bancshares, Inc. of our report dated January 24, 2000, except as to Note 18
which is as of March 3, 2000, relating to the financial statements, which
appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE SUSQUEHANNA
BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION AT
DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 144,548
<INT-BEARING-DEPOSITS> 4,817
<FED-FUNDS-SOLD> 12,872
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 878,958
<INVESTMENTS-CARRYING> 33,090
<INVESTMENTS-MARKET> 33,461
<LOANS> 2,995,152
<ALLOWANCE> 37,233
<TOTAL-ASSETS> 4,310,606
<DEPOSITS> 3,180,520
<SHORT-TERM> 207,507
<LIABILITIES-OTHER> 50,755
<LONG-TERM> 467,414
0
0
<COMMON> 74,068
<OTHER-SE> 330,322
<TOTAL-LIABILITIES-AND-EQUITY> 4,310,606
<INTEREST-LOAN> 241,633
<INTEREST-INVEST> 55,717
<INTEREST-OTHER> 2,420
<INTEREST-TOTAL> 299,770
<INTEREST-DEPOSIT> 106,013
<INTEREST-EXPENSE> 138,848
<INTEREST-INCOME-NET> 160,922
<LOAN-LOSSES> 7,200
<SECURITIES-GAINS> 978
<EXPENSE-OTHER> 131,882
<INCOME-PRETAX> 61,819
<INCOME-PRE-EXTRAORDINARY> 61,819
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,397
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 7.85
<LOANS-NON> 22,770
<LOANS-PAST> 10,160
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 32,500
<ALLOWANCE-OPEN> 36,158
<CHARGE-OFFS> 8,366
<RECOVERIES> 2,241
<ALLOWANCE-CLOSE> 37,233
<ALLOWANCE-DOMESTIC> 37,233
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
