Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------
VERMONT FINANCIAL SERVICES CORP.
(Exact name of registrant as specified in its charter)
-----------------------------
DELAWARE 6021 03-0284445
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification No.)
organization) Classification Code)
100 Main Street, Brattleboro, Vermont 05301
(802) 257-7151
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
-----------------------------
JOHN D. HASHAGEN, JR.
VERMONT FINANCIAL SERVICES CORP.
100 Main Street
Brattleboro, Vermont 05301
(802) 257-7151
Telecopy: (802) 258-4097
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------------------
Copies to:
STEPHEN J. COUKOS, ESQ. EDWARD YOUNG, ESQ.
SULLIVAN & WORCESTER LLP HALE AND DORR LLP
One Post Office Square 60 State Street
Boston, Massachusetts 02109 Boston, Massachusetts 02109
(617) 338-2800 (617) 526-6000
Telecopy: (617) 338-2880 Telecopy: (617) 526-5000
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective and all
other conditions to the merger of Eastern Bancorp, Inc. with and into Vermont
Financial Services Corp. pursuant to the Agreement and Plan of Reorganization
described in the accompanying Joint Proxy Statement-Prospectus have been
satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price Per Share Aggregate Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock, (1) (1) $69,649,356 (2) $24,017 (2)
Par Value $1.00 per share
<FN>
(1) The Securities to be offered hereby will be offered on the basis of a maximum aggregate offering price. Accordingly,
pursuant to Rule 457(a), the number of shares offered and, as a consequence, the maximum offering price per share are
omitted from this table.
(2) Pursuant to Rule 457(f), the maximum aggregate offering price has been determined as the value of the shares of
Eastern Bancorp, Inc. to be acquired by Vermont Financial Services Corp. in the merger, less the minimum portion of the
purchase price to be paid in cash.
</FN>
</TABLE>
--------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant will file a
further amendment which specifically states that this Registration Statement
will thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until this Registration Statement will become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
<PAGE>
VERMONT FINANCIAL SERVICES CORP.
100 Main Street
Brattleboro, Vermont 05301
_________, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
(the "Special Meeting") of Vermont Financial Services Corp. ("VFSC") to be held
on ______, 1997 at ____ a.m., local time, at ________________________________.
At the Special Meeting, stockholders will be asked to approve and adopt
an Agreement and Plan of Reorganization (the "Merger Agreement") entered into on
November 13, 1996 providing for the merger of Eastern Bancorp, Inc. with and
into VFSC (the "Merger").
Your Board of Directors has carefully evaluated the proposed Merger and
believes that the Merger is advisable and in the best interests of VFSC and its
stockholders. The Board has unanimously approved the Merger and the related
transactions and recommends that stockholders vote FOR that proposal.
The enclosed Joint Proxy Statement-Prospectus contains a description of
the Merger as well as the background of the proposed transaction and the
businesses of the two merging companies and their subsidiaries. I encourage you
to read this document closely. Should you have any questions concerning the
Special Meeting, you may call us at (802) 257-7151.
Accompanying this letter are a Notice of the Special Meeting, a Proxy
and the Joint Proxy Statement-Prospectus. To assure that your shares are
properly represented at the Special Meeting, please sign, date and return your
Proxy as soon as possible in the envelope provided. If you attend the Special
Meeting in person, you may vote your shares even if you have previously returned
a Proxy.
YOUR VOTE IS IMPORTANT. We urge you to vote FOR the proposed Merger.
Sincerely,
JOHN D. HASHAGEN, JR.
President and Chief Executive Officer
<PAGE>
VERMONT FINANCIAL SERVICES CORP.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On _________, 1997
TO THE STOCKHOLDERS OF VERMONT FINANCIAL SERVICES CORP.
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"VFSC Meeting") of VERMONT FINANCIAL SERVICES CORP. ("VFSC") will be held on
__________ at ______ a.m., local time, at ______________________________, for
the purpose of considering and voting upon the following matter:
o To approve and adopt the Agreement and Plan of Reorganization dated as
of November 13, 1996 (the "Merger Agreement"), by and among VFSC,
Eastern Bancorp, Inc. ("Eastern") and Eastern's wholly owned
subsidiary, Vermont Federal Bank, FSB, and each of the transactions
contemplated thereby, including the merger (the "Merger") of Eastern
with and into VFSC upon the terms and subject to the conditions set
forth in the Merger Agreement, as more fully described in the
accompanying Joint Proxy Statement-Prospectus. A copy of the Merger
Agreement is attached as Appendix A to the accompanying Joint Proxy
Statement-Prospectus, and certain related documents are attached as
exhibits thereto.
The VFSC Board of Directors has fixed the close of business on
________, 1997 as the record date for the determination of stockholders entitled
to notice of and to vote at the VFSC Meeting and any adjournments or
postponements thereof. Only stockholders of record at the close of business on
such date are entitled to notice of and to vote at the VFSC Meeting. A list of
VFSC stockholders entitled to vote at the VFSC Meeting or any adjournments or
postponements thereof will be available for examination for any purpose germane
to the VFSC Meeting, for 10 days prior to the VFSC Meeting during ordinary
business hours, at the principal executive offices of VFSC located at 100 Main
Street, Brattleboro, Vermont.
Shares of VFSC Common Stock are the only securities of VFSC the holders
of which are entitled to vote upon the matters to be presented at the VFSC
Meeting.
Your vote is important regardless of the number of shares you own.
Approval of the Merger requires the affirmative vote of the holders of not less
than two-thirds of the issued and outstanding shares of VFSC Common Stock. Each
stockholder, even though he or she now plans to attend the VFSC Meeting, is
requested to sign, date and return the enclosed Proxy without delay in the
enclosed postage-paid return envelope. You may revoke your Proxy at any time
prior to its exercise. Any stockholder present at the VFSC Meeting or at any
adjournments or postponements thereof may revoke his or her Proxy and vote
personally on each matter brought before the VFSC Meeting.
By Order of the Board of Directors,
RICHARD O. MADDEN
Secretary
___________, 1997
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO
APPROVE AND ADOPT THE MERGER AGREEMENT AND EACH OF THE TRANSACTIONS CONTEMPLATED
THEREBY.
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
ENCLOSED POSTAGE-PAID RETURN ENVELOPE.
<PAGE>
EASTERN BANCORP, INC.
537 CENTRAL AVENUE
DOVER, NEW HAMPSHIRE 03820
(603) 749-2150
_________ __, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
of Eastern Bancorp, Inc. ("Eastern") to be held on ________________ __, 1997 at
__:__ a.m., at ___________________ ( the "Special Meeting").
At the Special Meeting, stockholders will be asked to approve the
Agreement and Plan of Reorganization (the "Merger Agreement"), dated as of
November 13, 1996, by and among Eastern, its wholly owned subsidiary Vermont
Federal Bank, FSB, and Vermont Financial Services Corp. ("VFSC"). VFSC, a
Delaware corporation, is a registered bank holding company with its principal
place of business in Brattleboro, Vermont.
If the Merger Agreement is approved and the merger between VFSC and
Eastern (the "Merger") is consummated, each outstanding share of Eastern Common
Stock, other than shares as to which dissenters' rights have been perfected and
shares held by Eastern as treasury stock, will be converted into the right to
receive (in cash and/or shares of VFSC Common Stock, as described below) the sum
of (i) $7.25 plus (ii) the product of 0.49 times the average closing bid price
per share of VFSC Common Stock on the Nasdaq National Market during the
20-trading- day period ending on the fifth business day prior to the effective
date of the Merger (the "Average Closing Price"). Eastern's stockholders may
elect to receive cash, VFSC Common Stock or a combination of cash and VFSC
Common Stock, subject to pro rata adjustment as provided in the Merger Agreement
to ensure that the total cash consideration to be paid and the total number of
shares of VFSC Common Stock to be issued will equal the aggregate cash amount
and share number referred to below.
The price per share will be subject to maximum and minimum collars as
follows: if the Average Closing Price is equal to or greater than $39.96, the
acquisition price per share of Eastern Common Stock will be fixed at $26.83 and
if the Average Closing Price is equal to or less than $29.54 but not less than
$26.06, the acquisition price per share of Eastern Common Stock will be fixed at
$21.72. The total consideration to be paid in connection with the Merger will
consist of approximately $26.65 million in cash and approximately 1.8 million
shares of VFSC Common Stock; the number of shares of VFSC Common Stock will be
decreased if the Average Closing Price equals or exceeds the $39.96 maximum and
increased if the Average Closing Price equals or falls below the $29.54 minimum.
If the Average Closing Price is less than $26.06, Eastern may terminate the
Merger unless VFSC agrees to issue additional shares of VFSC Common Stock such
that the adjusted acquisition price per share of Eastern Common Stock is equal
to $21.72.
<PAGE>
Eastern stock certificates should not be returned with the proxy and
should not be forwarded until you receive a letter of transmittal that will be
provided approximately ___ weeks before the Merger is consummated.
VFSC's banking subsidiaries have a total of 38 offices, located
primarily in central and southern Vermont and the contiguous market of
Greenfield, Massachusetts, with total deposits of approximately $1.1 billion and
total assets of approximately $1.3 billion at September 30, 1996. Vermont
Federal Bank conducts business through a network of 25 offices located primarily
in northern Vermont and southeastern New Hampshire, with total deposits of
approximately $641.3 million and total assets of approximately $868.7 million at
September 30, 1996.
The Merger and the Merger Agreement are described in the accompanying
Joint Proxy Statement-Prospectus, the forepart of which includes a summary of
the terms of the Merger and certain other information relating to the proposed
transaction. Consummation of the Merger is subject to certain conditions,
including the approval of the Merger Agreement by the holders of two-thirds of
Eastern's outstanding Common Stock and two-thirds of VFSC's outstanding Common
Stock, as well as regulatory approvals. We urge you to read the Joint Proxy
Statement-Prospectus carefully.
Eastern's Board of Directors (the "Eastern Board") has received the
opinion of its financial advisor, McConnell, Budd & Downes, Inc. ("MB&D"), that
the Merger Consideration (as defined in the Joint Proxy Statement-Prospectus) is
fair to the stockholders of Eastern from a financial point of view, and has
determined that the Merger Agreement is in the best interest of Eastern
stockholders.
ACCORDINGLY, THE EASTERN BOARD HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT, THE MERGER AND RELATED TRANSACTIONS, AND RECOMMENDS THAT YOU VOTE IN
FAVOR OF THE MERGER AGREEMENT AT THE SPECIAL MEETING.
MB&D's opinion is summarized in the Joint Proxy Statement-Prospectus,
and the complete opinion is included as Appendix B to the Joint Proxy
Statement-Prospectus. We urge you to read these items carefully.
YOUR VOTE IS IMPORTANT. FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A
VOTE AGAINST THE MERGER AGREEMENT. You are urged to sign, date and mail the
enclosed proxy card promptly in the postage-prepaid envelope provided, whether
or not you plan to attend the Special Meeting. If you attend the Special
Meeting, you may vote in person even if you have already mailed your proxy card.
On behalf of the Eastern Board, I thank you for your continued support.
We appreciate your interest in Eastern.
Sincerely yours,
W. STEVENS SHEPPARD
Chairman of the Board
<PAGE>
EASTERN BANCORP, INC.
537 Central Avenue
Dover, New Hampshire 03820
(603) 749-2150
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________, 1997
To the Stockholders of Eastern Bancorp, Inc.
Notice is hereby given that a Special Meeting of the Stockholders of
Eastern Bancorp, Inc. ("Eastern") will be held on __________ at ______ a.m.,
local time, at ______________________________, for the purpose of considering
and voting upon the following matters:
1. A proposal to approve and adopt the Agreement and Plan of Reorganization,
dated as of November 13, 1996 (the "Merger Agreement"), by and among
Eastern, Eastern's wholly owned subsidiary, Vermont Federal Bank, FSB, and
Vermont Financial Services Corp. ("VFSC") and each of the transactions
contemplated thereby, pursuant to which Merger Agreement Eastern would be
merged with and into VFSC, and shareholders of Eastern would receive cash
and/or shares of Common Stock of VFSC, all as more fully described in the
attached Joint Proxy Statement-Prospectus. A copy of the Merger Agreement
is attached as Appendix A to the accompanying Joint Proxy
Statement-Prospectus and certain related documents are attached as exhibits
thereto.
2. Such other matter or matters which may properly come before the meeting or
any adjournment or adjournments thereof.
Only stockholders of record at the close of business on __________, 1997
(the "Record Date") are entitled to notice of and to vote at the Special
Meeting. The affirmative vote of the holders of two-thirds of the shares of
Common Stock of Eastern outstanding on the Record Date is required for approval
of the Merger Agreement.
The persons named as proxies may propose and vote for one or more
adjournments or postponements of the Special Meeting to permit further
solicitation of proxies in favor of the foregoing proposal.
If the proposal described in Item 1 above is approved by the stockholders
at the Special Meeting and effected by Eastern, stockholders of Eastern who
follow the procedures set forth in Section 262 of the Delaware General
Corporation Law will have dissenters' rights of appraisal as therein provided.
A JOINT PROXY STATEMENT-PROSPECTUS IS SET FORTH ON THE FOLLOWING PAGES
AND A PROXY CARD IS ENCLOSED HEREWITH. TO ENSURE THAT YOUR VOTE IS COUNTED,
PLEASE COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD IN THE ENCLOSED,
<PAGE>
POSTAGE-PAID RETURN ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY REVOKE YOUR PROXY
AND VOTE YOUR SHARES IN PERSON. HOWEVER, ATTENDANCE AT THE MEETING WILL NOT OF
ITSELF CONSTITUTE REVOCATION OF A PROXY. IF YOUR SHARES ARE NOT REGISTERED IN
YOUR OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM THE HOLDER OF RECORD
OF SUCH SHARES IN ORDER TO VOTE PERSONALLY AT THE SPECIAL MEETING.
By Order of the Board of Directors,
W. STEVENS SHEPPARD
Chairman of the Board
Dover, New Hampshire
_______________, 1997
<PAGE>
JOINT PROXY STATEMENT
VERMONT FINANCIAL SERVICES CORP. EASTERN BANCORP, INC.
SPECIAL MEETING OF STOCKHOLDERS SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________, 1997 TO BE HELD ON __________, 1997
VERMONT FINANCIAL SERVICES CORP.
PROSPECTUS
1,994,484 Shares of Common Stock, Par Value $1.00 Per Share
(subject to adjustment as described below)
This Joint Proxy Statement-Prospectus is furnished in connection with
the solicitation of proxies from the holders of the common stock of Eastern
Bancorp, Inc. ("Eastern"), par value $0.01 per share ("Eastern Common Stock"),
for use at the Special Meeting of Stockholders of Eastern to be held on
__________, 1997 and any adjournments or postponements thereof (the "Eastern
Meeting") and from the holders of the common stock of Vermont Financial Services
Corp. ("VFSC"), $1.00 par value per share ("VFSC Common Stock"), for use at the
Special Meeting of stockholders of VFSC, to be held on __________, 1997 and any
adjournments or postponements thereof (the "VFSC Meeting" and, together with the
Eastern Meeting, the "Special Meetings"). The solicitation of proxies from VFSC
stockholders is made by VFSC's Board of Directors (the "VFSC Board"), and the
solicitation of proxies from Eastern's stockholders is made by Eastern's Board
of Directors (the "Eastern Board").
At the Special Meetings, the Eastern and VFSC stockholders will be
asked to consider and act upon a proposal to approve and adopt the Agreement and
Plan of Reorganization by and among VFSC, Eastern and Vermont Federal Bank, FSB,
dated as of November 13, 1996 (the "Merger Agreement"), pursuant to which
Eastern will be merged with and into VFSC, with VFSC being the surviving
corporation (the "Merger"). A copy of the Merger Agreement is attached hereto as
Appendix A and is incorporated herein by reference.
The terms of the Merger Agreement provide that upon the satisfaction or
waiver of the conditions to closing set forth therein, Eastern will be merged
with and into VFSC and each then outstanding share of Eastern Common Stock will
be converted into the right to receive consideration payable in cash, VFSC
Common Stock or a combination of cash and VFSC Common Stock, subject to certain
adjustments, as is more fully described in this Joint Proxy
Statement-Prospectus. Persons wishing to inquire about the acquisition price for
shares of Eastern Common Stock and the exchange ratio at which shares of VFSC
Common Stock will be issued for shares of Eastern Common Stock in the Merger may
telephone VFSC toll-free between 9:00 a.m. and 5:00 p.m., Eastern standard time,
at (800) 482-6245, ext. 4003.
Consummation of the Merger is conditioned upon, among other things,
receipt of all required stockholder and regulatory approvals. If there are not
<PAGE>
sufficient votes at the time of their respective Special Meetings to approve and
adopt the Merger Agreement, the stockholders of Eastern and/or VFSC may be asked
to approve adjournment of the Special Meeting to permit further solicitation of
proxies.
This Joint Proxy Statement-Prospectus also constitutes a prospectus of
VFSC in respect of up to 1,994,484 shares of VFSC Common Stock to be issued to
Eastern stockholders in connection with the Merger (subject to increase to an
amount which cannot currently be determined if the Average Closing Price of VFSC
Common Stock at the Effective Time (as those terms are hereinafter defined) is
less than $26.06 per share). Such shares of VFSC Common Stock are to be issued
on the conversion of the outstanding shares of Eastern Common Stock, as
described in this Joint Proxy Statement-Prospectus. See "THE MERGER--Terms of
the Merger."
All information contained in this Joint Proxy Statement-Prospectus
relating to VFSC and its subsidiaries has been supplied by VFSC, and all
information contained in this Joint Proxy Statement-Prospectus relating to
Eastern and its subsidiaries has been supplied by Eastern. The pro forma
financial information contained herein relating to VFSC has been prepared by
VFSC and includes historical financial information regarding Eastern that was
supplied to VFSC by Eastern.
The Joint Proxy Statement-Prospectus and the respective proxy forms for
the Special Meetings are first being mailed to stockholders of Eastern and VFSC
on or about __________, 1997.
---------------------------
THE SHARES OF VFSC COMMON STOCK OFFERED HEREBY HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
---------------------------
The date of this Joint Proxy Statement-Prospectus is ________, 1997.
No person is authorized to give any information or to make any representation
with respect to the matters described in this Joint Proxy Statement-Prospectus
other than those contained herein in connection with the solicitation of proxies
<PAGE>
or the offering of securities made hereby and, if given or made, such
information or representations must not be relied upon as having been authorized
by VFSC or Eastern. This Joint Proxy Statement-Prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, any securities, or the
solicitation of a proxy, in any jurisdiction to or from any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Joint Proxy Statement-Prospectus nor any distribution of
securities made hereunder will, under any circumstances, create any implication
that there has been no change in the affairs of VFSC or Eastern since the date
of this Joint Proxy Statement-Prospectus or that information herein is correct
as of any time subsequent to its date.
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION.......................................................1
INFORMATION INCORPORATED BY REFERENCE.......................................2
SUMMARY ...................................................................4
The Companies.............................................................4
The Merger................................................................6
The Special Meetings......................................................9
Record Date and Vote Required.............................................9
Management and Operations after the Merger...............................10
Recommendation of the Boards of Directors and Reasons for the Merger.....10
Opinions of Financial Advisors...........................................11
No Solicitation..........................................................11
Interests of Certain Persons in the Merger...............................12
Conditions to Consummation of the Merger; Termination....................13
Amendment and Waiver of the Merger Agreement; Extensions.................14
Regulatory Approvals.....................................................14
Certain Federal Income Tax and Accounting Consequences...................14
Stock Option Agreement...................................................15
Appraisal Rights and Dissenting Eastern Stockholders.....................15
Certain Differences in the Rights of Stockholders........................15
Market Prices and Dividend Data..........................................16
SELECTED FINANCIAL DATA....................................................18
COMPARATIVE UNAUDITED PER SHARE FINANCIAL DATA.............................23
RECENT DEVELOPMENTS........................................................25
THE SPECIAL MEETINGS.......................................................27
Record Date, Quorum and Voting for Eastern Meeting.......................27
Required Vote at Eastern Meeting ........................................28
Record Date, Quorum and Voting for VFSC Meeting..........................29
Required Vote at VFSC Meeting............................................29
Solicitation Expenses....................................................30
Appraisal Rights and Dissenting Eastern Stockholders.....................31
THE MERGER.................................................................35
General ................................................................35
Background of the Merger.................................................35
Recommendation of the Eastern Board and Reasons for the Merger...........38
Recommendation of the VFSC Board and Reasons for the Merger..............40
Opinion of Financial Advisors............................................41
(i)
<PAGE>
Effective Time of the Merger; Closing Date...............................54
Conversion of Shares of Eastern Common Stock Pursuant to the Merger......54
Election Procedures......................................................57
Certificate Exchange Procedures..........................................59
Treatment of Eastern Stock Options.......................................60
Conduct of Business Pending the Merger...................................61
Conditions to Consummation of the Merger.................................64
Termination..............................................................66
Amendment, Extension and Waiver..........................................67
Requisite Regulatory Approvals...........................................68
Expenses ................................................................68
Stock Option Agreement...................................................68
Stockholders Agreement...................................................70
No Solicitation..........................................................71
Interests of Certain Persons in the Merger...............................71
Employment Obligations...................................................72
Resale of VFSC Common Stock..............................................73
Certain Federal Income Tax Consequences..................................74
PRO FORMA COMBINED FINANCIAL DATA..........................................79
INFORMATION REGARDING VFSC.................................................85
DESCRIPTION OF VFSC CAPITAL STOCK..........................................85
Common Stock......................................................85
Preferred Stock...................................................86
MARKET FOR VFSC COMMON STOCK...............................................87
COMPARISON OF RIGHTS OF HOLDERS OF
EASTERN COMMON STOCK AND VFSC COMMON STOCK...............................89
Special Meetings of Stockholders.........................................89
Inspection Rights........................................................89
Action by Consent of Stockholders........................................89
Cumulative Voting........................................................89
Preemptive Rights........................................................90
Classification of the Board of Directors.................................90
Removal of Directors.....................................................90
Additional Directorships and Vacancies on the Board of Directors.........90
Exculpation of Directors and Officers....................................90
Indemnification of Directors, Officers and Others........................90
Restrictions upon Certain Business Combinations..........................91
Mergers, Share Exchanges or Asset Sales..................................92
Certain Issuances of Stock...............................................92
Amendments to By-laws....................................................93
Appraisal Rights.........................................................93
(ii)
<PAGE>
LEGAL MATTERS..............................................................93
EXPERTS ..................................................................94
APPENDICES
Appendix A -- Agreement and Plan of Reorganization dated as of November 13, 1996
Appendix B -- Form of Opinion of McConnell, Budd & Downes, Inc.
Appendix C -- Form of Opinion of Tucker Anthony Incorporated
Appendix D -- Text of Section 262 of Delaware General Corporation Law
(Appraisal Rights)
(iii)
<PAGE>
AVAILABLE INFORMATION
VFSC has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") on Form
S-4 under the Securities Act of 1933, as amended (the "Securities Act"),
relating to the securities to be issued in connection with the Merger. For
further information pertaining to the securities of VFSC to which this Joint
Proxy Statement-Prospectus relates, reference is made to the Registration
Statement, including the exhibits and schedules filed as a part thereof. In
addition, VFSC and Eastern are each subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information with
the Commission. Proxy statements, reports and other information concerning VFSC
and Eastern can be inspected and copied at the Commission's office at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the
Commission's Regional Offices in New York (7 World Trade Center, Suite 1300, New
York, New York 10048) and Chicago (CitiCorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661), and copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a World Wide Web site (located at http://www.sec.gov) which contains
reports, proxy and information statements and other information regarding VFSC
and Eastern. VFSC Common Stock and Eastern Common Stock are listed on the Nasdaq
National Market (the "Nasdaq NM"). Consequently, reports, proxy statements and
other information concerning VFSC and Eastern may also be inspected at the
offices of the NASD, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. This
Joint Proxy Statement-Prospectus does not contain all the information set forth
in the Registration Statement and exhibits thereto which VFSC has filed with the
Commission under the Securities Act, which Registration Statement and exhibits
thereto may be obtained from the Public Reference Section of the Commission at
its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 upon
payment of the prescribed fees, and to which reference is hereby made.
THIS JOINT PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
RELATING TO VFSC AND EASTERN THAT ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER THAN EXHIBITS THERETO, ARE
AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF VFSC
COMMON STOCK OR EASTERN COMMON STOCK, TO WHOM THIS JOINT PROXY
STATEMENT-PROSPECTUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO, IN THE CASE
OF VFSC, VERMONT FINANCIAL SERVICES CORP., 100 MAIN STREET, BRATTLEBORO, VERMONT
05301, ATTENTION: RICHARD O. MADDEN, SECRETARY (TELEPHONE: 802-257-7151), OR IN
THE CASE OF EASTERN, EASTERN BANCORP, INC., 537 CENTRAL AVENUE, DOVER, NEW
HAMPSHIRE 03820, ATTENTION: PRESIDENT (TELEPHONE: 603-749-2150). IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
_____________, 1997.
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
The following documents previously filed by VFSC with the Commission
are incorporated by reference herein:
(1) VFSC's Annual Report on Form 10-K for the year ended December 31, 1995;
(2) VFSC's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1996 as amended on Form 10-Q/A, June 30, 1996 and September 30, 1996;
and
(3) VFSC's Current Reports on Form 8-K, dated March 18, 1996 and November
21, 1996.
The following documents previously filed by Eastern with the Commission
are incorporated by reference herein:
(1) Eastern's Annual Report on Form 10-K for the year ended September 30,
1996; and
(2) Eastern's Current Report on Form 8-K, dated November 21, 1996.
Also incorporated herein by reference are the following portions of
Eastern's Annual Report to Stockholders for the fiscal year ended September 30,
1996, which accompanies this Joint Proxy Statement-Prospectus: (i) Business
(pages to ); (ii) Market for Registrant's Common Stock and Related Stockholder
Matters; (iii) Selected Financial Data (pages to ); (iv) Management's Discussion
and Analysis of Financial Condition and Results of Operations (pages to ); and
(v) Consolidated Financial Statements and Notes thereto (pages to ).
In addition, all documents subsequently filed by VFSC with the
Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
prior to the date of the Special Meetings shall be deemed to be incorporated by
reference into this Joint Proxy Statement-Prospectus and to be a part hereof
from the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Joint Proxy Statement-Prospectus
to the extent that a statement contained herein, or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Joint Proxy Statement-Prospectus.
THIS JOINT PROXY STATEMENT-PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
BUSINESS OF VFSC FOLLOWING THE CONSUMMATION OF THE MERGER, INCLUDING STATEMENTS
RELATING TO THE COST SAVINGS, REVENUE ENHANCEMENTS AND FUNDING ADVANTAGES THAT
ARE EXPECTED TO BE REALIZED FROM THE MERGER AND THE EXPECTED IMPACT OF THE
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MERGER ON VFSC'S FINANCIAL PERFORMANCE (SEE "THE MERGER--REASONS OF VFSC FOR THE
MERGER," "--REASONS OF EASTERN FOR THE MERGER" AND "--MANAGEMENT AND OPERATIONS
AFTER THE MERGER"). THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT
STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.
WITHOUT LIMITING THE FOREGOING, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (1) INABILITY FULLY TO REALIZE EXPECTED COST SAVINGS
FROM THE MERGER ; (2) GREATER THAN EXPECTED DEPOSIT ATTRITION, CUSTOMER LOSS OR
REVENUE LOSS FOLLOWING THE MERGER; (3) SIGNIFICANT INCREASES IN COMPETITIVE
PRESSURE IN THE BANKING INDUSTRY; (4) GREATER THAN ANTICIPATED COSTS OR
DIFFICULTIES RELATED TO THE INTEGRATION OF THE BUSINESSES OF VFSC AND EASTERN;
(5) REDUCTIONS IN MARGINS BECAUSE OF CHANGES IN THE INTEREST RATE ENVIRONMENT;
(6) LESS FAVORABLE GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY,
THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS, A DETERIORATION IN CREDIT
QUALITY, (7) CHANGES IN THE REGULATORY ENVIRONMENT, (8) CHANGES IN BUSINESS
CONDITIONS AND INFLATION, AND (9) CHANGES IN THE SECURITIES MARKETS.
3
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere in
this Joint Proxy Statement-Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained herein,
the appendices hereto and the documents incorporated by reference herein.
Stockholders of VFSC and Eastern are urged to read this Joint Proxy
Statement-Prospectus with care in its entirety.
The Companies
VFSC. VFSC, a Delaware corporation, is a registered bank holding
company under the Bank Holding Company Act of 1956, as amended (the "BHC Act").
VFSC has two wholly owned subsidiaries, Vermont National Bank, a national
banking association ("VNB"), and United Bank, a Massachusetts chartered stock
savings bank ("UB" and, together with VNB, the "Banks"). At September 30, 1996,
VFSC had total consolidated assets of approximately $1.3 billion and total
consolidated stockholders' equity of approximately $115.5 million.
VNB, which operates 31 branches throughout the State of Vermont, and
UB, which operates seven branches in western Massachusetts, are engaged in
commercial and retail banking and in the trust business, including the taking of
deposits, the making of secured and unsecured loans, the financing of commercial
transactions, and the performance of corporate, pension and personal trust
services.
The principal offices of VFSC and VNB are located at 100 Main Street,
Brattleboro, Vermont 05301. VFSC's telephone number is (802) 257-7151. The
principal offices of UB are located at 45 Federal Street, Greenfield,
Massachusetts 01301.
VFSC and the Banks are subject to federal, state and local laws
applicable to state savings banks, national banks and bank holding companies and
to the regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), the Comptroller of the Currency (the "OCC"), the
Federal Deposit Insurance Corporation (the "FDIC") and the Massachusetts
Division of Banks.
For further information concerning VFSC, see "INFORMATION REGARDING
VFSC" and the VFSC documents incorporated by reference herein as described under
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
Eastern. Eastern, a Delaware corporation, is a nondiversified savings
and loan holding company. It owns 100% of the stock of Vermont Federal Bank, FSB
("Vermont Federal"), a federally chartered stock savings bank. Eastern also owns
Vermont Service Corporation ("VSC"), a real estate development company which it
purchased from Vermont Federal in 1991. VSC and its subsidiary company, Vermont
East Coast Company ("VECC"), are joint venture partners in the ownership of
development rights in a mobile home association known as "Williston Woods." At
present, Eastern is not significantly engaged in operating business activities
4
<PAGE>
other than management of its investments and operations through Vermont Federal,
VSC, and VECC. At September 30, 1996, Eastern had total consolidated assets of
approximately $868.7 million and total consolidated stockholders' equity of
approximately $63.6 million.
The principal offices of Eastern are located at 537 Central Avenue,
Dover, New Hampshire 03820. Eastern's telephone number is (603) 749-2150. The
principal offices of Vermont Federal are located at 282 Williston Road,
Williston, Vermont 05495. Vermont Federal's telephone number is (802) 879-9000.
Eastern and Vermont Federal are subject to federal, state and local
laws applicable to savings and loan holding companies and federal savings banks
and to the regulations, principally, of the Office of Thrift Supervision (the
"OTS").
For further information concerning Eastern, see "INFORMATION
INCORPORATED BY REFERENCE," "SELECTED HISTORICAL FINANCIAL DATA OF EASTERN" and
the information contained in the form of Annual Report to Stockholders for the
fiscal year ended September 30, 1996 accompanying this Joint Proxy
Statement-Prospectus.
Comparison of Loan Portfolios. Through its subsidiary Banks, VFSC makes
commercial loans to small and medium-sized businesses in Vermont and
Massachusetts. VNB is the leading commercial lender in the State of Vermont. At
September 30, 1996, approximately 19.4% of VFSC's outstanding loans consisted of
commercial real estate loans, 20.1% consisted of commercial loans and 2.6%
consisted of construction loans. These percentages are somewhat higher than for
Eastern in the case of commercial real estate and construction loans, which
accounted for 16.8% and 2%, respectively, of Eastern's loan portfolio at
September 30, 1996, and significantly higher in the case of commercial loans,
which accounted for 1.5% of Eastern's portfolio. After the Merger is
consummated, the proportion of the combined company's loan portfolio consisting
of such loans will be greater than is the case with Eastern's current loan
portfolio, and the proportion consisting of residential mortgage loans will be
less. Because commercial real estate and commercial lending generally involves
larger loan balances to single borrowers or groups of related borrowers, and
because repayment of the loan depends in part on the underlying business and
financial condition of the borrower and is more susceptible to adverse future
developments, such lending typically accounts for a disproportionate share of
delinquent loans and real estate owned through foreclosure when compared with
residential mortgage lending. In addition to such factors, construction loans
are, in general, subject to uncertainties inherent in estimating construction
costs, delays arising from labor problems, shortages of material, uncertain
marketability of a completed project and other unpredictable contingencies that
make it relatively difficult to determine accurately the total loan funds
required to complete a project or the value of the completed project. For
certain historical indicia of the performance of VFSC's loan portfolio, see the
information on Selected Financial Ratios in "SELECTED FINANCIAL DATA--Selected
Historical Financial Data of VFSC."
5
<PAGE>
VFSC and Eastern both realize income principally from the differential
between the interest earned on loans, investments and other interest-earning
assets, and the interest paid on deposits, borrowings and other interest-bearing
liabilities. However, residential mortgage loans, which generally have a longer
maturity than commercial and commercial real estate loans, tend to respond
differently to increases in interest rates. Because the proportion of
residential mortgage loans to commercial and commercial real estate loans in the
combined company will be different from that in Eastern's current portfolio,
unanticipated changes in interest rates could have a different, and possibly
adverse, effect on the combined company's actual interest rate spread and net
income.
For further information concerning the portfolios and interest rate
experience of VFSC and Eastern, see "INFORMATION INCORPORATED BY REFERENCE,"
"SELECTED HISTORICAL FINANCIAL DATA OF EASTERN" and the information contained in
the form of Annual Report to Stockholders for the fiscal year ended September
30, 1996 accompanying this Joint Proxy Statement-Prospectus.
The Merger
General. Pursuant to the terms of the Merger Agreement, Eastern is to
be merged with and into VFSC, with VFSC being the surviving entity. It is
anticipated that the Merger will close in the second quarter of 1997, although
there can be no assurance in this regard. See "--Conditions to Consummation of
the Merger; Termination."
Merger Consideration. The Merger Agreement provides that, on the
closing date (the "Closing Date") and at the effective time of the Merger (the
"Effective Time") and subject to the election and allocation procedures provided
for therein, each share of Eastern Common Stock outstanding at the Effective
Time (other than shares with respect to which appraisal rights are perfected)
shall be converted into either (i) an amount in cash equal to the sum of (x)
$7.25 plus (y) the product of 0.49 times the average closing bid price per share
of VFSC Common Stock on the Nasdaq NM during the 20-trading-day period ending on
the fifth business day prior to the Effective Time (the "Average Closing Price")
(such total per share purchase price being referred to herein as the
"Acquisition Price" and such total per share cash amount being referred to
herein as the "Cash Distribution"), or (ii) the number of whole and fractional
shares of VFSC Common Stock, rounded to the nearest ten-thousandth of a share,
equal to the number obtained by dividing the Acquisition Price by the Average
Closing Price (such number being referred to herein as the "Exchange Ratio" or
the "Stock Distribution" and, together with the Cash Distribution, as the
"Merger Consideration"). However, if the Average Closing Price is greater than
or equal to $39.96 per share, the Acquisition Price shall equal $26.83, and if
the Average Closing Price is less than or equal to $29.54 per share but greater
than or equal to $26.06 per share, the Acquisition Price shall equal $21.72. If
the Average Closing Price is less than $26.06, the Acquisition Price shall equal
the sum of (x) $7.25 and (y) the product of 0.5553 times the Average Closing
Price.
6
<PAGE>
If the Average Closing Price is less than $26.06 per share, then
Eastern shall have the right to terminate the Merger Agreement, unless VFSC
elects, in its sole discretion, to adopt $21.72 as the Acquisition Price (the
"Adjusted Acquisition Price").
The total amount of the Cash Distribution to be made to all holders of
shares of Eastern Common Stock will equal the product of $7.25 times the number
of shares of Eastern Common Stock outstanding at the Effective Time (which
product is currently estimated at $26.6 million); the balance of the Merger
Consideration will consist of shares of VFSC Common Stock. Subject to the
allocation procedures provided for in the Merger Agreement, each holder of
shares of Eastern Common Stock may, by means of an election form that will be
mailed following the Special Meetings, elect to receive, with respect to some or
all of such holder's shares of Eastern Common Stock, shares of VFSC Common Stock
or cash, or may make no election. Any election may be revoked or changed by the
person submitting such form, provided such notice is timely received. See "THE
MERGER--Election Procedures."
Because the aggregate number of shares of VFSC Common Stock to be
issued in the Merger is fixed under the Merger Agreement, the extent to which
elections to receive cash or VFSC Common Stock can be accommodated will depend
upon the number of Eastern stockholders who elect to receive cash or VFSC Common
Stock or who make no election. No prediction can be made as to the election that
any Eastern stockholder may make and, consequently, no assurance can be given
that an election by any given holder of Eastern Common Stock will be honored
with respect to any or all shares of Eastern Common Stock held by such holder,
and holders may not receive their requested form or mix of consideration.
For example, a holder of Eastern Common Stock who elects to receive
cash may instead receive shares of VFSC Common Stock (plus cash in lieu of any
fractional share) for some or all of such holder's shares of Eastern Common
Stock. Conversely, a holder who elects to receive shares of VFSC Common Stock
could receive cash for some or all of the shares of Eastern Common Stock subject
to such election. Holders of Eastern Common Stock who do not submit properly
completed election forms by 5:00 p.m., Eastern standard time, on the 15th
calendar day following, but not including, the mailing date of the election
forms will be deemed to have made no election as to whether they receive VFSC
Common Stock or cash in the Merger. Such persons will be allocated cash or
shares of VFSC Common Stock based on the effect of valid elections on the amount
of cash and number of shares of VFSC Common Stock available under the allocation
formula. Because the deadline for return of the election forms will occur prior
to the end of the valuation period, the Average Closing Price will not be
determined by the time holders of Eastern Common Stock will be required to
submit their election forms. See "THE MERGER--Election Procedures." In the event
a holder of Eastern Common Stock receives both VFSC Common Stock and cash (other
than cash for fractional shares), the receipt of such cash could be subject to
tax as a dividend. See "THE MERGER--Certain Federal Income Tax Consequences."
7
<PAGE>
TABULAR AND GRAPHIC ILLUSTRATION OF THE MERGER CONSIDERATION
AT VARIOUS AVERAGE CLOSING PRICES
The table below shows the Merger Consideration corresponding to various
possible values of the Acquisition Price and Adjusted Acquisition Price,
respectively. If the Average Closing Price is less than $26.06 and VFSC in its
sole discretion so elects, the Merger Consideration will be based on the
Adjusted Acquisition Price of $21.72. The Merger Consideration will be in the
form of the Cash Distribution per share of Eastern Common Stock or the Stock
Distribution of the number of shares of VFSC Common Stock to be exchanged for
each share of Eastern Common Stock.
There can be no assurance as to what the Average Closing Price will be
or what the value of the Merger Consideration will be at or following the
Effective Time. The table and graph below are intended as illustrative examples
only. This illustration is qualified in its entirety by reference to the Merger
Agreement. The highest and lowest Average Closing Prices depicted in the
illustration are not intended to suggest that the Average Closing Price, when
computed, will not be higher or lower than these respective values.
As shown below, if the Average Closing Price were to be $36.25, the
closing price of VFSC Common Stock on November 11, 1996, the Acquisition Price
would be $25.0125; an Eastern Stockholder receiving all cash would receive
$25.0125 per share of Eastern Common Stock, and an Eastern Stockholder receiving
all stock would receive 0.69 shares of VFSC Common Stock per share of Eastern
Common Stock.
<TABLE>
<CAPTION>
Merger Consideration
--------------------------
Average Acquisition Stock
Closing Price Price Distribution
(of VFSC (per Eastern Cash (VFSC
shares) Share) Distribution shares)
- -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
$44.000 $26.8300 $26.8300 0.6098
42.000 26.8300 26.8300 0.6388
40.000 26.8300 26.8300 0.6708
39.960 26.8300 26.8300 0.6714
38.000 25.8700 25.8700 0.6808
36.000 24.8900 24.8900 0.6914
35.500 24.6450 24.6450 0.6942
34.000 23.9100 23.9100 0.7032 If Eastern elects to terminate the Merger
32.000 22.9300 22.9300 0.7166 but VFSC elects to keep the Merger Agreement in effect:
30.000 21.9500 21.9500 0.7317 Merger Consideration
---------------------
29.540 21.7200 21.7200 0.7353 Adjusted
28.000 21.7200 21.7200 0.7757 Acquisition Price (per Cash Stock Distribution
26.060 21.7200 21.7200 0.8335 Eastern share) Distribution (VFSC shares)
---------------------- ------------ ------------------
26.000 21.6878 21.6878 0.8341 $21.7200 $21.7200 0.8354
24.000 20.5772 20.5772 0.8574 21.7200 21.7200 0.9050
22.000 19.4666 19.4666 0.8848 21.7200 21.7200 0.9873
</TABLE>
[GRAPHIC OMITTED]
Graph showing value of merger consideration plotted against Average Closing
Prices between $20.00 and $45.00 of VFSC stock to be issued, with specific
example at VFSC stock price of $36.25.
8
<PAGE>
Because the tax consequences of receiving cash or VFSC Common Stock
will differ, holders of Eastern Common Stock are urged to read carefully the
information set forth under the caption "THE MERGER--Certain Federal Income Tax
Consequences."
The Special Meetings
At the Special Meetings, the stockholders of Eastern and VFSC will
consider and vote upon a proposal to approve and adopt the Merger Agreement and
the transactions contemplated thereby.
The VFSC Meeting will be held on __________, 1997 at _____ a.m. at
______________________.
The Eastern Meeting will be held on __________, 1997 at _____ a.m. at
______________________.
Record Date and Vote Required
VFSC. The VFSC Board has fixed the close of business on __________,
1997 as the record date (the "VFSC Record Date") for determination of
stockholders entitled to notice of and to vote at the VFSC Meeting and any
adjournments or postponements thereof. The Merger Agreement and the transactions
contemplated thereby must be approved by the affirmative vote of the holders of
at least two-thirds of the issued and outstanding shares of VFSC Common Stock.
Stockholders of VFSC are entitled to one vote at the VFSC Meeting for each share
of VFSC Common Stock held of record at the close of business on the VFSC Record
Date. At the close of business on the VFSC Record Date, __________ shares of
VFSC Common Stock were outstanding and entitled to vote, of which approximately
__________ shares, or _____%, were held by directors and executive officers of
VFSC and their respective affiliates. See "THE SPECIAL MEETINGS--Record Date,
Quorum and Voting for VFSC Meeting."
Eastern. The Eastern Board has fixed the close of business on
__________, 1997 as the record date (the "Eastern Record Date") for
determination of stockholders entitled to notice of and to vote at the Eastern
Meeting and any adjournments or postponements thereof. The affirmative vote of
the holders of at least two-thirds of the outstanding shares of Eastern Common
Stock entitled to vote is required to approve and adopt the Merger Agreement and
the transactions contemplated thereby. Stockholders of Eastern are entitled to
one vote at the Eastern Meeting for each share of Eastern Common Stock held of
record at the close of business on the Eastern Record Date. At the close of
business on the Eastern Record Date, __________ shares of Eastern Common Stock
were outstanding and entitled to vote, of which approximately _________ shares,
or approximately _____%, were beneficially owned by directors and executive
officers of Eastern and their respective affiliates. See "THE SPECIAL
MEETINGS--Record Date, Quorum and Voting for Eastern Meeting" and "--BeneficiaL
Ownership of Eastern Common Stock."
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<PAGE>
Certain Eastern directors, who beneficially own in the aggregate
____________ shares on the Eastern Record Date, representing approximately
_______ of the shares of Eastern Common Stock issued and outstanding on the
Eastern Record Date, have entered into a letter agreement with VFSC dated as of
November 13, 1996 (the "Stockholders Agreement") to vote their shares of Eastern
Common Stock in favor of the Merger Agreement. See "THE SPECIAL
MEETINGS--Beneficial Ownership of Eastern Common Stock" and "THE
MERGER--StockholderS Agreement."
Management and Operations after the Merger
The Merger will become effective on the Closing Date and at the
Effective Time as set forth in a Certificate of Merger to be filed with the
Secretary of State of the State of Delaware. The directors and officers of VFSC
will continue to serve in such offices after the Effective Time. However, the
size of the VFSC Board will be increased, and a minimum of three and a maximum
of four individuals who are members of the Eastern Board will be designated by
VFSC to serve as members of the VFSC Board.
Recommendation of the Boards of Directors and Reasons for the Merger
THE BOARDS OF DIRECTORS OF VFSC AND EASTERN EACH UNANIMOUSLY APPROVED
THE MERGER AGREEMENT AND EACH UNANIMOUSLY RECOMMENDS APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
THEREBY.
Eastern. The Eastern Board has determined the Merger to be fair to and
in the best interests of Eastern and its stockholders and has unanimously
approved the Merger Agreement and the transactions contemplated thereby,
including the Merger. Accordingly, the Board unanimously recommends that
stockholders vote "for" approval of the Merger Agreement.
In the course of reaching its decision to enter into the Merger
Agreement with VFSC, the Eastern Board consulted with its advisors and
considered a number of factors, including without limitation, the following: (i)
its belief that the Merger represents an attractive strategic alternative to
Eastern for enhancing stockholder value; (ii) the presentation and opinion of
its financial advisor, McConnell, Budd & Downes, Inc. ("MB&D"), as to the
fairness from a financial point of view of the Merger Consideration to Eastern
and its stockholders; and (iii) a number of factors relating to Eastern, VFSC
and Eastern's stockholders. See "THE MERGER--Background of the Merger," and
"--Recommendation of the Eastern Board anD Reasons for the Merger" for a
discussion of the reasons for the Eastern Board's recommendation to approve the
Merger Agreement and the transactions contemplated thereby.
VFSC. The VFSC Board believes that the terms of the Merger Agreement
and the transactions contemplated thereby are in the best interests of its
stockholders and recommends
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<PAGE>
that its stockholders vote FOR the approval and adoption of the Merger Agreement
and the transactions contemplated thereby.
In reaching its determination, the VFSC Board considered the following
factors: (i) the opportunity for VFSC to expand and strengthen its existing
franchise in Vermont and to establish a presence in the attractive market of
southeastern New Hampshire; (ii) the opportunity for cost savings arising from
Eastern's existing presence in Vermont; (iii) cross-selling opportunities
provided by Eastern's customer base; and (iv) the opinion of its financial
advisor, Tucker Anthony Incorporated ("Tucker Anthony"), that, subject to
certain assumptions, the consideration to be paid by VFSC to Eastern's
stockholders was fair to the stockholders of VFSC, from a financial point of
view.
Opinions of Financial Advisors
Eastern. MB&D has delivered to the Eastern Board its written opinion
dated the date of this Joint Proxy Statement-Prospectus that, in its opinion,
the consideration to be received in the Merger is fair, from a financial point
of view, to the stockholders of Eastern. The full text of MB&D's opinion as of
the date of this Joint Proxy Statement-Prospectus, which describes the
procedures followed, assumptions made, limitations on the review undertaken and
other matters in connection with rendering such opinion, is set forth in
Appendix B attached hereto. Stockholders of Eastern are urged to read this
opinion in its entirety. MB&D's opinion is directed only to the consideration to
be received in the Merger and does not constitute a recommendation to Eastern
stockholders as to how they should vote at the Eastern Meeting.
VFSC. Tucker Anthony has delivered to the VFSC Board its written
opinions dated November 13, 1996 and the date of this Joint Proxy
Statement-Prospectus, that the consideration to be paid in the Merger is fair,
from a financial point of view, to the stockholders of VFSC. The full text of
Tucker Anthony's opinion as of the date of this Joint Proxy
Statement-Prospectus, which sets forth assumptions made, matters considered and
limits on the review undertaken by it, is attached hereto as Appendix C.
Stockholders of VFSC are urged to read this opinion in its entirety. Tucker
Anthony's opinions are directed only to the consideration to be paid in the
Merger and do not constitute a recommendation to VFSC stockholders as to how
they should vote at the VFSC Meeting.
See "THE MERGER--Background of the Merger," "--Opinions of Financial
Advisors" and Appendix B and Appendix C to this Joint Proxy
Statement-Prospectus.
No Solicitation
Eastern has also agreed that neither it nor Vermont Federal will
encourage, solicit, initiate or, subject to the fiduciary obligations of the
Eastern Board (as advised by outside counsel), participate in any discussions or
negotiations with, or provide information to, any other party concerning any
merger, tender offer, sale of substantial assets, sale of shares of capital
stock or debt securities or similar transaction involving Eastern or any of its
subsidiaries (any
11
<PAGE>
of the foregoing being referred to as an "Acquisition Transaction"), except that
Eastern may communicate or disclose certain information to its stockholders
pursuant to applicable securities or other law. Eastern has also agreed that it
will immediately communicate to VFSC the terms of any proposal, discussion,
negotiation or inquiry relating to an Acquisition Transaction and the identity
of the party making such proposal or inquiry which it may receive in respect of
any such transaction or its receipt of any request for information from any
governmental agency or authority with respect to a proposed Acquisition
Transaction. See "THE MERGER--No Solicitation."
Interests of Certain Persons in the Merger
Pursuant to the Merger Agreement, VFSC has, subject to certain
limitations, agreed to indemnify, defend and hold harmless each present and past
director, officer and employee of Eastern against certain claims and related
expenses and liabilities. VFSC has also agreed to maintain for six years the
directors' and officers' liability insurance maintained by Eastern prior to the
Effective Time (or provide an appropriate substitute therefor), but VFSC is not
required to expend more than $207,000 for such insurance coverage. VFSC is also
required to designate a minimum of three and a maximum of four members of the
Eastern Board to serve on the VFSC Board after the Merger is consummated. VFSC
has not yet designated the members of the Eastern Board who will serve on the
VFSC Board.
Certain members of Eastern's management and of the Eastern Board have
certain arrangements, including certain benefits under existing employment
agreements and severance and benefit plans, which are likely to be triggered in
connection with the Merger. In addition, at the Effective Time, certain options
granted to one executive officer of Eastern to purchase 1,200 shares of Eastern
Common Stock will become immediately exercisable in full pursuant to the
accelerated vesting provisions contained in the agreements under which such
options were granted. See "THE MERGER--Interests of Certain Persons in the
Merger."
Employment Matters
VFSC is not obligated to employ any person who is employed by Eastern
immediately prior to the Effective Time. Following the Effective Time, VFSC
will, or will cause its subsidiaries to, honor in accordance with their terms
all employment, severance and other compensation contracts between Eastern or
any subsidiary thereof and any director, officer or employee thereof, and all
provisions for benefits or other amounts earned or accrued through the Effective
Time under Eastern's pension or benefit plans. VFSC has agreed to provide to
those persons who are employees of Eastern or any subsidiary of Eastern at the
Effective Time and who are thereafter employed by VFSC or a subsidiary of VFSC
with the benefits maintained by VFSC and its affiliates from time to time for
the benefit of their employees similarly situated. VFSC will cause each plan,
program or arrangement included among the benefits of VFSC to be provided after
the Effective Time (other than VFSC's defined benefit pension plan) to treat the
prior service of each such employee with Eastern or its affiliates, to the
extent such prior service is recognized under the comparable plan, program or
arrangement of Eastern, as service
12
<PAGE>
rendered to VFSC or its affiliate, as the case may be, for purposes of
eligibility to participate, vesting, and eligibility for special benefits under
each such plan, program or arrangement of VFSC, but not in any case for benefit
accrual attributable to any period before the Effective Time. Any employee of
Eastern or any subsidiary of Eastern who becomes an employee of VFSC or any
subsidiary of VFSC immediately following the Effective Time who is not otherwise
covered by an employment, severance or other compensation agreement and who has
been identified by VFSC within the first six months from and after the Closing
Date as an employee whose employment is terminated as a result of VFSC's
consolidation and/or cost-saving efforts in connection with the Merger
following the Effective Time, will be entitled to receive from and after the
date of such employee's termination of employment certain salary continuation
payments based on the length of the employee's employment by Eastern. See "THE
MERGER--Employment Obligations."
Conditions to Consummation of the Merger; Termination
Conditions to the Merger. The obligations of VFSC and Eastern to
consummate the Merger are subject to various conditions, including, but not
limited to, obtaining requisite stockholder, regulatory and third-party
approvals, the absence of breaches of representations and warranties by the
other party, authorization for listing (subject to official notice of issuance)
on the Nasdaq NM of the additional shares of VFSC Common Stock to be issued in
connection with the Merger, and the receipt by each of VFSC and Eastern of an
opinion of counsel with respect to certain federal income tax consequences of
the Merger. In addition, it is a condition to the obligations of VFSC to
consummate the Merger that none of the requisite regulatory approvals pertaining
to the Merger impose any term, condition or restriction upon VFSC or its
subsidiaries after the Merger that, in VFSC's reasonable business judgment,
would be burdensome in the context of the transactions contemplated by the
Merger Agreement. It is also a condition to the obligations of each party that,
since the date of the end of the other party's most recent fiscal year, there
will have been no material adverse change in the financial condition, results of
operations, business, assets or prospects of the other party. Finally, it is a
condition of VFSC's obligations to effect the Merger that the number of shares
of Eastern Common Stock held by persons dissenting from the Merger and electing
statutory appraisal rights shall not exceed 20% of the issued and outstanding
shares of Eastern Common Stock. See "THE MERGER--Conditions to Consummation of
the Merger."
Termination. The Merger Agreement may be terminated at any time prior
to the Effective Time by the mutual consent of VFSC and Eastern, or by either
party if: (i) a requisite regulatory approval of the Merger is denied and such
denial becomes final and nonappealable or the requisite approval of the other
party's stockholders is not obtained; (ii) the Merger is not consummated on or
before November 30, 1997, unless the failure to consummate the Merger is due to
the failure of the party seeking to terminate the Merger Agreement to perform
its obligations thereunder; or (iii) the other party materially breaches its
obligations under the Merger Agreement or the Stock Option Agreement (as defined
below) and fails to cure such breach within 30 days after notice of such breach.
13
<PAGE>
The Merger Agreement may also be terminated at Eastern's election if
the Average Closing Price of VFSC Stock is less than $26.06 per share, unless
VFSC elects to adjust upward the consideration payable to holders of Eastern
Common Stock. Reference is made to the Merger Agreement for a designation of
additional termination provisions contained therein. See "THE
MERGER--Termination."
Amendment and Waiver of the Merger Agreement; Extensions
At any time prior to the consummation of the Merger or termination of
the Merger Agreement, the parties may amend the Merger Agreement, extend the
time for performance of any obligations or waive any inaccuracies in
representations and warranties or compliance with any conditions; provided, that
stockholders' approval shall be necessary to amend the Merger Agreement to
change the amount or form of the consideration to be paid in the Merger. See
"THE MERGER--Amendment, Extension and Waiver."
Regulatory Approvals
The Merger is subject to prior approval by the Federal Reserve Board in
accordance with the requirements of Section 4(c)(8) of the BHC Act and
applicable regulations of the Federal Reserve Board. Prior notices of the Merger
will also be filed with the Vermont Commissioner of Banking, Insurance and
Securities (the "Vermont Commissioner"), the United States Department of Justice
("Department of Justice") and the Federal Trade Commission (the "FTC"). There
can be no assurance that the Merger will be approved by the Federal Reserve
Board or any other applicable regulatory agency or body. If such approval is
received, there can be no assurance as to the date of such approval or the
absence of any litigation challenging such approval. The Merger will not occur
until all regulatory approvals, notices or other filings required to consummate
the Merger have been obtained or made and are in full force and effect, and any
statutory waiting periods in respect thereof have expired. See "THE
MERGER--Requisite Regulatory Approvals."
Certain Federal Income Tax and Accounting Consequences
Neither VFSC nor Eastern has requested or will receive an advance
ruling from the Internal Revenue Service as to the tax consequences of the
Merger. The respective obligations of VFSC and Eastern to effect the Merger are
conditioned upon receipt of opinions dated as of the Closing Date of their
respective counsel, substantially to the effect that, for federal income tax
purposes, the Merger constitutes a reorganization within the meaning of section
368 of the Internal Revenue Code of 1986, as amended (the "Code") (noting,
however, that the nontaxability to the stockholders of Eastern resulting from
such reorganization does not extend to cash received as part of the Merger
Consideration, cash in lieu of a fractional share interest in VFSC Common Stock
or cash received by dissenting stockholders, if any).
It is intended that the Merger will constitute a tax-free
reorganization and that no gain or loss will be recognized by VFSC, Eastern or
Vermont Federal and that no gain or loss will
14
<PAGE>
be recognized by Eastern stockholders with respect to their receipt of VFSC
Common Stock in exchange for their shares of Eastern Common Stock. The receipt
of cash by Eastern stockholders in exchange for shares of Eastern Common Stock,
in lieu of fractional shares of VFSC Common Stock or as a dissenting stockholder
will be taxable to the extent of any taxable gain realized upon such receipt of
cash.
Stockholders of Eastern should consult their own tax advisors as to the
tax consequences of the Merger under federal, state, local or any other
applicable law. See "THE MERGER-- Certain Federal Income Tax Consequences."
It is intended that the Merger will be accounted for by VFSC as a
purchase. See "THE MERGER--Accounting Treatment."
Stock Option Agreement
As a condition to, and in consideration for entering into, the Merger
Agreement, Eastern entered into an agreement dated November 13, 1996 (the "Stock
Option Agreement"), pursuant to which it granted VFSC an option to purchase up
to 732,425 shares of Eastern Common Stock (the "Option Shares") at an exercise
price of $21.00 per share (the "Option").
The Option is exercisable only upon the occurrence of certain events
after execution of the Merger Agreement as set forth in the Stock Option
Agreement, none of which has occurred as of the date hereof. In the event that
VFSC's rights to purchase the Option Shares become exercisable under the Stock
Option Agreement, VFSC is also entitled under the Merger Agreement to receive a
fee of up to $1 million. See "THE MERGER--Stock Option Agreement" and
"--Termination."
Appraisal Rights and Dissenting Eastern Stockholders
Holders of Eastern Common Stock who do not vote to approve and adopt
the Merger Agreement and who comply with the requirements of Section 262 of the
Delaware General Corporation Law (the "DGCL") will be entitled to dissenters'
rights under Delaware law. A copy of Section 262 of the DGCL is attached to this
Joint Proxy Statement--Prospectus as Appendix D. Holders of VFSC Common Stock do
not have appraisal rights with respect to the Merger. See "THE SPECIAL
MEETINGS--Appraisal Rights and Dissenting Eastern Stockholders" and "COMPARISON
OF RIGHTS OF HOLDERS OF EASTERN COMMON STOCK AND VFSC COMMON STOCK--Appraisal
Rights."
Certain Differences in the Rights of Stockholders
The rights of stockholders of Eastern are currently governed by the
DGCL, Eastern's Restated Certificate of Incorporation, as amended (the "Eastern
Certificate"), and Eastern's by-laws, as amended (the "Eastern By-laws"). Upon
consummation of the Merger, Eastern stockholders who do not receive all cash in
the Merger will automatically become stockholders
15
<PAGE>
of VFSC, and their rights will be governed by the DGCL, VFSC's Certificate of
Incorporation (the "VFSC Certificate") and VFSC's by-laws (the "VFSC By-laws").
See "COMPARISON OF RIGHTS OF HOLDERS OF EASTERN COMMON STOCK AND VFSC COMMON
STOCK."
Market Prices and Dividend Data
VFSC Common Stock and Eastern Common Stock are both listed for trading
on the Nasdaq NM.
The following table sets forth, for the periods indicated, the range of
high and low asked and bid prices per share for VFSC Common Stock and Eastern
Common Stock on the Nasdaq NM as reported on the Lexis-Nexis IDD Information
Services, Tradeline quotation service. Such prices are approximate and reflect
inter-dealer prices, without retail markup, markdown or commission, and may not
necessarily reflect actual transactions. The table also sets forth, for the
periods indicated, the quarterly cash dividends per share paid by VFSC and
Eastern, respectively, on such shares. All per share information with respect to
Eastern Common Stock has been adjusted to reflect Eastern's June 19, 1996
three-for-two stock split paid to stockholders of record as of June 5, 1996.
<TABLE>
<CAPTION>
Cash Dividends
VFSC Eastern Per Share of
Quarter Ended Common Stock Common Stock Common Stock
------------- ------------ ------------ ------------
High Low High Low VFSC Eastern
---- --- ---- --- ---- -------
<S> <C> <C> <C> <C> <C> <C>
1994
March 31 $19.25 $16.25 $12.33 $10.42 $0.10 $0.03
June 30 20.00 16.50 15.67 10.25 0.12 0.03
September 30 24.25 19.00 16.33 13.33 0.15 0.03
December 31 22.25 19.75 14.83 10.83 0.17 0.03
1995
March 31 23.50 20.75 14.33 12.50 0.20 0.07
June 30 27.25 21.75 15.00 12.33 0.20 0.07
September 30 30.88 26.00 16.00 14.17 0.22 0.08
December 31 35.00 29.50 19.67 14.67 0.25 0.11
1996
March 31 35.00 31.50 17.50 15.67 0.25 0.12
June 30 34.00 31.00 17.67 15.17 0.27 0.12
September 30 35.13 31.25 22.25 16.00 0.27 0.14
December 31 36.50 34.25 24.00 20.00 0.27 0.14
1997
through January 24 40.00 35.25 24.75 22.75 0.30 0.16
</TABLE>
On January 9, 1997, VFSC announced a first quarter dividend of $0.30
per share, payable on February 25, 1997 to stockholders of record as of January
24, 1997. See "RECENT DEVELOPMENTS."
16
<PAGE>
The following table sets forth the last reported bid prices per share
of VFSC Common Stock and Eastern Common Stock, reported as described above, on
November 12, 1996, the last trading day before the announcement of the Merger
Agreement, and on __________, 1997, the latest practicable trading day before
the printing of this Joint Proxy Statement-Prospectus, and equivalent per share
prices for Eastern Common Stock based on the VFSC Common Stock prices using an
assumed Exchange Ratio of 0.69. See Note 1 to "COMPARATIVE UNAUDITED PER SHARE
DATA."
<TABLE>
<CAPTION>
VFSC Eastern Eastern
Common Stock Common Stock Pro Forma
Price Price Equivalent
------------ ------------ ----------
<S> <C> <C> <C>
November 12, 1996.................... $36.50 $22.00 $25.14
__________, 1997.....................
</TABLE>
On __________, 1997, there were approximately 2,500 holders of record
of VFSC Common Stock and approximately 1,100 holders of record of Eastern Common
Stock.
Holders of Eastern Common Stock are urged to obtain current market
quotations for VFSC Common Stock and Eastern Common Stock in connection with
voting their shares and making elections to receive shares of VFSC Common Stock
and/or cash during the election period.
17
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth (i) consolidated historical summary
financial data for the periods and as of the dates indicated for VFSC and its
consolidated subsidiaries and for Eastern and its consolidated subsidiaries and
(ii) pro forma combined summary financial data for the periods and as of the
dates indicated, giving effect to the Merger as if it had been consummated on
January 1, 1995 for income statement information and on September 30, 1996 for
balance sheet information. Pro forma adjustments made to arrive at the pro forma
combined amounts are based on the purchase method of accounting and a
preliminary allocation of the purchase price. However, changes to the
adjustments included in the pro forma combined financial information set forth
below are expected as evaluations of assets and liabilities are completed and
additional information becomes available. Accordingly, the final pro forma
combined amounts will differ from those set forth below.
The following information should be read in conjunction with and is
qualified in its entirety by the consolidated financial statements and
accompanying notes of VFSC included in the documents described under
"INFORMATION INCORPORATED BY REFERENCE," the selected consolidated financial
statements and accompanying notes of Eastern contained in the form of Annual
Report to Stockholders for the fiscal year ended September 30, 1996 accompanying
this Joint Proxy-Prospectus and the pro forma combined financial statements and
accompanying discussion and notes set forth under "PRO FORMA COMBINED FINANCIAL
DATA."
The combined company expects to realize benefits from the Merger,
including operating cost savings and revenue enhancements. The pro forma
earnings, which do not reflect any direct costs, potential savings or revenue
enhancements that are expected to result from the consolidation of operations of
VFSC and Eastern, are not indicative of the results of future operations. No
assurances can be given with respect to the actual amount of expense savings or
revenue enhancements that may be realized, if any. The pro forma combined
summary financial data are intended for informational purposes and are not
necessarily indicative of the future financial position or future results of
operations of the combined company or of the financial position or the results
of operations of the combined company that would have actually occurred had the
Merger been in effect as of the date or for the periods presented.
18
<PAGE>
<TABLE>
<CAPTION>
SELECTED HISTORICAL FINANCIAL DATA OF VFSC
At or for the At or for the
Nine Months Ended Years Ended December 31,
September 30, ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ---------- ---------- ---------- --------- ---------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations:
Interest income................................. $ 73,201 $ 71,615 $ 96,457 $ 84,391 $ 82,142 $ 88,265 $ 102,012
Interest expense................................ 30,977 30,833 41,969 33,293 31,361 41,164 57,869
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.......................... 42,224 40,782 54,488 51,098 50,781 47,101 44,143
Provision for loan losses....................... 2,600 3,000 3,900 4,000 5,053 9,430 15,748
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses.......................... 39,624 37,782 50,588 47,098 45,728 37,671 28,395
Other operating income.......................... 13,784 12,964 17,549 16,692 17,348 15,223 14,365
Other operating expense......................... 34,954 34,547 45,999 46,763 52,459 45,384 41,331
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes................... 18,454 16,199 22,138 17,027 10,617 7,510 1,429
Applicable income tax expense................... 6,337 5,302 7,241 5,159 3,386 2,436 539
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income................................... $ 12,117 $ 10,897 $ 14,897 $ 11,868 $ 7,231 $ 5,074 $ 890
========== ========== ========== ========== ========== ========== ==========
Balance Sheet Data:
Total assets.................................... $1,276,645 $1,229,623 $1,246,669 $1,205,421 $1,158,101 $1,124,578 $1,102,034
Loans, net of unearned income................... 907,229 912,554 893,470 911,503 872,441 856,768 815,690
Securities available for sale................... 263,255 215,083 249,682 173,865 184,400 149,487 179,121
Total deposits.................................. 1,074,314 1,019,752 1,033,957 1,012,869 967,582 941,882 1,005,338
Stockholders' equity............................ 115,454 107,055 111,833 90,457 91,027 83,484 78,770
Per Share Data:
Net Income, primary and fully diluted........... $ 2.51 $ 2.27 $ 3.10 $ 2.51 $ 1.54 $ 1.08 $ 0.19
Total cash dividends declared................... 0.79 0.62 0.87 0.54 0.24 0.13 0.19
Tangible book value at period end,
fully diluted (1): 22.87 21.54 22.47 18.36 18.61 17.00 16.05
Average primary shares outstanding.............. 4,835,044 4,799,898 4,807,553 4,735,480 4,710,228 4,686,116 4,626,064
Selected Financial Ratios:
Return on average total assets (2).............. 1.29% 1.22% 1.23% 1.00% 0.64% 0.46% 0.08%
Return on average stockholders' equity (3)...... 14.20 14.76 14.69 13.23 8.36 6.31 1.16
Net interest margin (4)......................... 4.94 4.99 4.92 4.74 4.97 4.72 4.54
Cash dividends as a percentage of earnings per share 31 27 28 22 16 12 100
Average stockholders' equity to average assets.. 9.28 8.63 8.69 7.97 7.67 7.32 7.11
Core (leverage) capital ratio at period end (5). 8.60 8.49 8.77 7.26 7.59 7.11 6.79
Total risk-based capital ratio at period end (6) 15.05 14.29 14.67 13.03 12.06 11.11 10.80
Allowance for loan losses to period end loans,
net of unearned income....................... 1.56 1.74 1.65 1.78 2.04 2.46 2.34
Nonperforming assets to period end loans,
plus other real estate owed (7).............. 1.20 1.80 1.67 2.32 3.64 5.71 5.97
Net charge-offs to average net loans............ 0.47 0.49 0.59 0.62 0.95 0.90 1.30
<FN>
(1) Equal to stockholders' equity less intangibles divided by fully diluted end of period shares outstanding.
(2) Based on average total assets after adjustment for securities available for sale.
(3) Based on average total equity after adjustment for securities available for sale.
(4) Net interest income stated on a fully taxable equivalent basis divided by average earning assets.
(5) Equal to stockholders' equity less intangibles divided by total assets less intangibles.
(6) Equal to stockholders' equity less intangibles plus the allowable portion of the allowance for loan losses divided by
total risk weighted assets.
(7) Nonperforming assets include nonaccrual loans, restructured loans and other real estate owned.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
SELECTED HISTORICAL FINANCIAL DATA OF EASTERN
At or for the
Years ended September 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Interest income........................................... $61,273 $60,098 $51,546 $49,066 $49,898
Interest expense.......................................... 32,340 32,218 25,613 25,881 30,427
------- ------- ------- ------- -------
Net interest income.................................... 28,933 27,880 25,933 23,185 19,471
Provision for loan losses................................. 895 1,822 797 1,330 2,118
------- ------- -------- ------- -------
Net interest income after provision for loan losses.... 28,038 26,058 25,136 21,855 17,353
Other operating income.................................... 11,273 10,017 8,022 8,208 8,345
Other operating expense................................... 33,952 29,533 27,192 26,471 24,168
------- ------- ------- ------- -------
Income before income taxes............................. 5,359 6,542 5,966 3,592 1,530
Applicable income tax expense............................. 2,055 2,347 2,307 878 513
Cumulative effect of accounting change.................... -- -- -- 1,000 --
------- ------- ------- ------- --------
Net income............................................. $ 3,304 $ 4,195 $ 3,659 $ 3,714 $ 1,017
======= ======= ======= ======= ========
Balance Sheet Data at Year End:
Total assets.............................................. $868,678 $846,085 $819,236 $776,504 $739,263
Loans, net of unearned income............................. 491,644 457,614 422,577 422,024 427,376
Investment and mortgage backed securities
available for sale..................................... 9 4,177 3,878 162,912 7
Securities held to maturity............................... 293,649 312,392 319,102 106,999 227,584
Total deposits............................................ 641,286 616,350 584,389 571,954 573,183
Stockholders' equity...................................... 63,580 60,983 57,203 54,683 49,968
Per Share Data:
Net income, primary and fully diluted..................... $ 0.87 $ 1.13 $ 1.00 $ 1.05 $ 0.29
Total cash dividends paid................................. 0.49 0.24 0.10 0.07 0.05
Tangible book value at period end, fully diluted (1)...... 17.41 17.07 16.15 15.66 14.49
Average primary shares outstanding........................ 3,807,724 3,721,573 3,658,510 3,511,321 3,451,015
Selected Financial Ratios:
Return on average total assets............................ 0.40% 0.50% 0.46% 0.49% 0.16%
Return on average stockholders' equity.................... 5.20 6.95 6.60 7.15 2.06
Net interest margin (2)................................... 3.75 3.63 3.55 3.40 3.30
Cash dividends per share as a percentage of
earnings per share................................... 56.32 21.24 10.00 6.67 17.24
Average stockholders' equity to average assets............ 7.64 7.26 6.94 6.89 7.51
Core (leverage) capital ratio at period end (3)(6)........ 6.50 5.70* 5.50* 5.50* 5.14*
8.0** 7.90** 8.30** 7.76**
Total risk-based capital ratio at period end (4)(6)....... 12.30 10.50 10.30* 10.50* 9.21*
16.10** 15.90** 13.30** 13.26**
Allowance for loan losses to period end
loans, net of unearned income........................ 0.58 0.79 0.88 1.12 1.12
Nonperforming assets to period-end loans
plus other real estate owned & ISF (5)............... 2.42 3.62 3.38 5.85 6.13
Net charge-offs to average net loans...................... 0.36 0.44 0.44 0.40 0.74
20
<PAGE>
Footnotes to preceding page
- ----------------------------------
<FN>
(1) Equal to stockholders' equity divided by end of period shares outstanding.
(2) Net interest income stated on a fully taxable equivalent basis divided by average earning assets.
(3) Equal to stockholders' equity less intangibles divided by total assets less intangibles.
(4) Equal to stockholders' equity less intangibles plus the allowable portion of the allowance for loan losses
divided by total risk weighted assets.
(5) Nonperforming assets include nonaccrual loans, restructured loans and other real estate owned.
(6) Prior to 1996, the capital ratios were separately stated for: * Vermont Federal Bank (VFB)
** First Savings of New Hampshire (FS)
</FN>
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
SELECTED PRO FORMA FINANCIAL DATA
At or for the At or for
Nine Months Ended the Year Ended
September 30, 1996 December 31, 1995
------------------ -----------------
(Dollars in thousands, except per share data)
<S> <C> <C>
Results of Operations:
Interest income.................................................. $ 120,263 $ 159,396
Interest expense................................................. 54,644 75,315
---------- ----------
Net interest income.............................................. 65,619 84,081
Provision for loan losses........................................ 3,060 5,897
---------- ----------
Net interest income after provision for loan losses.............. 62,559 78,184
Other operating income........................................... 21,988 28,379
Other operating expense.......................................... 64,066 78,946
---------- ----------
Income before income taxes....................................... 20,481 27,617
Applicable income tax expense.................................... 8,132 10,351
---------- ----------
Net income....................................................... $ 12,349 $ 17,266
========== ==========
Average Balance Sheet Data:
Total assets..................................................... $2,158,956 --
Loans, net of unearned income.................................... 1,393,248 --
Securities available for sale.................................... 263,264 --
Securities held to maturity...................................... 284,815 --
Total deposits................................................... 1,717,093 --
Stockholders' equity............................................. 187,754 --
Per Share Data:
Net income, primary and fully diluted............................ $1.81 $2.54
Cash dividends declared.......................................... 0.79 0.87
Tangible book value at period end, fully diluted................. 18.55 --
Average primary shares outstanding............................... 6,829,528 6,802,037
</TABLE>
22
<PAGE>
COMPARATIVE UNAUDITED PER SHARE FINANCIAL DATA
The following table sets forth (i) selected unaudited comparative per
share data for each of VFSC Common Stock and Eastern Common Stock and (ii)
selected unaudited pro forma comparative per share data reflecting the
consummation of the Merger for the nine months ended September 30, 1996 and for
the twelve months ended December 31, 1995. The unaudited pro forma comparative
per share data assume that the Merger had been consummated at the beginning of
the periods presented, and are based on the purchase method of accounting and a
preliminary allocation of the purchase price. For a description of the effect of
purchase accounting on the Merger and the historical statements of VFSC, see
"THE MERGER--Accounting Treatment."
The unaudited pro forma comparative per share data reflect the Merger
based upon preliminary purchase accounting adjustments. Actual adjustments,
which may include adjustments to additional assets, liabilities and other items,
will be made on the basis of appraisals and evaluations as of the Effective Time
and, therefore, are likely to differ from those reflected in the unaudited pro
forma comparative per share data. Accordingly, the information herein should be
read in conjunction with the pro forma combined financial information, including
the notes thereto, appearing elsewhere in this Joint Proxy Statement-Prospectus.
See "SUMMARY--Summary Historical and Pro Forma Financial Data" and "PRO FORMA
COMBINED FINANCIAL DATA." Results of VFSC for the nine months ended September
30, 1996 are not necessarily indicative of results expected for the entire year,
nor are pro forma amounts necessarily indicative of results of operations or the
combined financial position that would have resulted had the Merger been
consummated at the beginning of the periods indicated. All adjustments
consisting of only normal recurring adjustments necessary for a fair statement
of results of interim periods have been included.
Nine Months Ended
September 30, Year Ended
1996 December 31, 1995
------------------ -----------------
Income Per Share(1)
VFSC................................... $2.51 $3.10
Eastern................................ $0.47 $1.19
VFSC Pro Forma......................... $1.81 $2.54
Eastern Pro Forma Equivalent........... $1.25 $1.75
Fully Diluted Income Per Share(1)
VFSC................................... $2.51 $3.10
Eastern................................ $0.47 $1.19
VFSC Pro Forma......................... $1.81 $2.54
Eastern Pro Forma Equivalent........... $1.25 $1.75
Dividends Declared Per Share(2)
VFSC................................... $0.79 $0.87
Eastern................................ $0.38 $0.33
VFSC Pro Forma......................... $0.79 $0.87
Eastern Pro Forma Equivalent........... $0.55 $0.60
Book Value Per Share at Period End(3)
VFSC................................... $22.87 $22.47
Eastern................................ $17.41 $17.48
VFSC Pro Forma......................... $18.55 --
Eastern Pro Forma Equivalent........... $12.80 --
23
<PAGE>
footnotes to preceding page
- ------------------------------------
(1) Pro forma income per share data is calculated using pro forma VFSC net
income divided by the average pro forma shares of the combined entity.
The average pro forma shares of the combined entity have been
calculated by combining VFSC's historical average shares with the
historical average shares of Eastern as adjusted by an assumed Exchange
Ratio of 0.69 (computed using the VFSC stock price of $36.25 on
November 11, 1996). The Exchange Ratio is subject to change based on
the determination of a value of VFSC Common Stock according to the
Average Closing Price prior to the Effective Time and there can be no
assurance as to whether the actual Exchange Ratio will be equal to or
smaller than the assumed ratio used in this table or elsewhere in this
Joint Proxy Statement and Prospectus. See "THE MERGER-Conversion of
Shares of Eastern Common Stock Pursuant to the Merger." The Eastern pro
forma equivalent income per share amounts are computed by multiplying
the VFSC pro forma amounts by the above-assumed Exchange Ratio.
(2) VFSC pro forma dividends per share represent historical dividends paid
by VFSC. Eastern pro forma equivalent dividends per share represent
such amounts multiplied by the assumed Exchange Ratio of 0.69. See "The
Merger-Conversion of Shares of Eastern Common Stock Pursuant to the
Merger".
(3) VFSC pro forma book value per share is based on the pro forma
stockholders' equity of the combined entity divided by the pro forma
common shares of the combined entity less intangibles. Eastern pro
forma book value per share represents such amount multiplied by the
assumed Exchange Ratio of 0.69. See "THE MERGER-Conversion of Shares of
Eastern Common Stock Pursuant to the Merger."
24
<PAGE>
RECENT DEVELOPMENTS
VFSC 1996 Fourth Quarter and Year-End Results
On January 22, 1997, VFSC announced the unaudited results of its
consolidated operations for the fourth quarter of 1996 and the fiscal year ended
December 31, 1996.
Net income for the fourth quarter of 1996 was $4.5 million, a 12%
increase over the $4.0 million earned during the fourth quarter of 1995. Net
income per share for the fourth quarter of 1996 was $0.94, a 13% increase over
per share net income of $0.83 for the fourth quarter of 1995. Net overhead
increased by $213,000 or 3.1% from the fourth quarter of 1995, as a result of a
17% increase in noninterest income and a 9% increase in noninterest expense.
Net income for the year was $16.6 million, a 12% increase over the
$14.9 million earned in 1995. Net income per share for 1996 was $3.45, an 11%
increase over per share net income of $3.10 for 1995.
Total assets at December 31, 1996 were $1.3 billion, a 5.3% increase
from 1995. Core deposits increased 4.8% to $1.03 billion. Total loans increased
1.9% to $910.4 million.
Nonperforming assets (nonaccrual loans, restructured loans and other
real estate owned ("OREO")) were $9.2 million at December 31, 1996, down from
$11.0 million at September 30, 1996 and $15.0 million at December 31, 1995, a
decrease of 39%. The decline in nonperforming assets during the year was the
result of loan charge-offs and normal problem asset resolutions and sales. From
December 31, 1995 to December 31, 1996, nonperforming assets were reduced by
$5.8 million or 39%, and nonperforming loans were reduced by $3.5 million or
29%. VFSC's allowance for loan losses of $13.6 million at December 31, 1996
represented 161% of nonperforming loans and 149% of nonperforming assets, as
opposed to 123% and 98%, respectively, at December 31, 1995.
On January 9, 1997, VFSC announced a first quarter dividend of $0.30
per share, payable on February 25, 1997 to stockholders of record as of January
24, 1997.
Summary of VFSC Operating Results
The following table sets forth selected historical data regarding
VFSC's operating results and financial position for and at the periods
indicated. The financial data in the following table for, and as of the end of,
the fiscal year ended December 31, 1995 are derived from VFSC's consolidated
financial statements and the notes thereto which have been audited by Coopers &
Lybrand LLP, VFSC's independent certified public accountants. The data as of and
for the three-month periods ended December 31, 1996 and 1995 and for the
twelve-month period ended December 31, 1996 are derived from unaudited financial
statements, and reflect, in the opinion of management of VFSC, all adjustments
necessary for the fair presentation of such data.
25
<PAGE>
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
December 31, December 31,
-------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net Interest Income....................................... $14,530 $13,796 $58,754 $54,760
Provision for Loan Losses................................. 750 900 3,350 3,900
Noninterest Income (excluding securities transactions).... 5,377 4,495 19,150 17,198
OREO and Collection Expense and Losses.................... 549 528 1,780 2,244
Other Noninterest Expense................................. 11,908 10,924 45,631 43,755
Securities Gains.......................................... -- -- 11 79
Net Income After Taxes.................................... 4,498 4,000 16,615 14,897
Per Common Share:
Net Income........................................... $0.94 $0.83 $3.45 $3.10
Dividend Declared During Period...................... $0.27 $0.25 $1.06 $0.87
Fully Diluted Tangible Book Value at Period End........... $23.73 $22.47 $23.73 $22.47
</TABLE>
26
<PAGE>
THE SPECIAL MEETINGS
This Joint Proxy Statement-Prospectus is being furnished by VFSC to its
stockholders and by Eastern to its stockholders in connection with the
solicitation of proxies from such stockholders for use at the VFSC Meeting and
the Eastern Meeting, respectively.
The Special Meetings will be held for the purpose of considering and
voting on a proposal to approve the Merger Agreement and the transactions
contemplated thereby, including the Merger, which is being submitted to both the
VFSC stockholders and the Eastern stockholders.
THE BOARD OF DIRECTORS OF VFSC HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE MERGER.
THE BOARD OF DIRECTORS OF EASTERN HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE MERGER.
Record Date, Quorum and Voting for Eastern Meeting
Only the holders of record of shares of Eastern Common Stock at the
close of business on __________, 1997 will be entitled to notice of and to vote
at the Eastern Meeting and any adjournments or postponements thereof. At the
Eastern Record Date, ___________ shares of Eastern Common Stock were outstanding
and entitled to vote.
The presence in person or by proxy of the holders of not less than
one-third of the issued and outstanding shares of Eastern Common Stock entitled
to vote as of the Eastern Record Date is required to constitute a quorum for the
transaction of business at any meeting of stockholders. Abstentions are included
in the determination of the number of shares of Eastern Common Stock present and
entitled to vote, but broker non-votes are not. "Broker non-votes" are proxies
with respect to shares held in record name by brokers or nominees, as to which
(i) instructions have not been received from the beneficial owners or persons
entitled to vote, (ii) the broker or nominee does not have discretionary voting
power under applicable national securities exchange rules or the instrument
under which it serves in such capacity or (iii) the record holder has indicated
on the proxy card or otherwise notified Eastern that it does not have authority
to vote such shares on that matter.
27
<PAGE>
Required Vote at Eastern Meeting
The affirmative vote of the holders of two-thirds of the outstanding
shares of Eastern Common Stock (_____ shares) is required for approval of the
Merger Agreement and the transactions contemplated thereby. Abstentions and
broker non-votes will have the same effect as votes against the Merger
Agreement. Stockholders of Eastern are entitled to one vote at the Eastern
Meeting for each share of Eastern Common Stock held of record at the close of
business on the Eastern Record Date.
At the close of business on the Eastern Record Date, __________ shares
of Eastern Common Stock were outstanding and entitled to vote. Certain Eastern
directors who own a total of ____________ shares of Eastern Common Stock,
representing approximately ____% of the shares of Eastern Common Stock issued
and outstanding on the Eastern Record Date, have entered into the Stockholders
Agreement, pursuant to which such stockholders have agreed to certain
restrictions on their respective shares of Eastern Common Stock. Specifically,
such stockholders have agreed, with respect to all Eastern Common Stock owned by
them at the time of the Eastern Meeting, (a) to vote such stock in favor of the
Merger and against any other acquisition transaction with a party other than
VFSC or its affiliates and (b) generally not to sell, assign, transfer, encumber
or otherwise dispose of such stock. The Stockholders Agreement will remain in
effect until the earlier of the consummation of the Merger or the termination of
the Merger Agreement in accordance with its terms. Assuming that all of the
shares subject to the Stockholders Agreement are in fact voted in favor of the
Merger Agreement, the vote of holders of approximately _____ additional shares
of Eastern Common Stock, representing approximately _____% of the shares of
Eastern Common Stock issued and outstanding on the Eastern Record Date, will be
required to approve and adopt the Merger Agreement and the transactions
contemplated thereby.
Proxies in the form enclosed are being solicited by the Eastern Board.
Stockholders are requested to complete, date, sign and promptly return the
accompanying proxy card in the enclosed envelope. Shares represented by a
properly executed proxy received prior to the vote at the Eastern Meeting and
not revoked will be voted at the Eastern Meeting as directed in the proxy. IF A
PROXY IS SUBMITTED AND NO DIRECTIONS ARE GIVEN, THE PROXY WILL BE VOTED FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
The persons named as proxies by an Eastern stockholder may propose and
vote for one or more adjournments or postponements of the Eastern Meeting to
permit further solicitation of proxies in favor of the proposals to be
considered at the Eastern Meeting; provided, that a proxy that withholds
discretionary authority or that is voted against the Merger Agreement will not
be voted in favor of any adjournment or postponement of the Eastern Meeting.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the President of Eastern, at or before the Eastern Meeting, a
written notice of revocation bearing a date later than the date
28
<PAGE>
of the proxy, (ii) duly executing a subsequent proxy relating to the same shares
and delivering it to the President of Eastern at or before the Eastern Meeting
or (iii) attending the Eastern Meeting and voting in person (although attendance
at the Eastern Meeting will not by itself constitute revocation of a proxy). Any
written notice revoking a proxy should be sent to Eastern Bancorp, Inc., 537
Central Avenue, Dover, New Hampshire 03820, Attention:
President.
Record Date, Quorum and Voting for VFSC Meeting
Only holders of record of shares of VFSC Common Stock at the close of
business on __________, 1997 will be entitled to notice of and to vote at the
VFSC Meeting or any adjournments or postponements thereof. As of the VFSC Record
Date, there were [__________] shares of VFSC Common Stock outstanding and
entitled to vote.
The presence in person or by proxy of the holders of a majority of the
issued and outstanding shares of VFSC Common Stock entitled to vote as of the
VFSC Record Date is required to constitute a quorum for the transaction of
business at any meeting of stockholders. Abstentions and broker non-votes are
included in the determination of the number of shares of VFSC Common Stock
present and voting. "Broker non-votes" are proxies with respect to shares held
in record name by brokers or nominees, as to which (i) instructions have not
been received from the beneficial owners or persons entitled to vote, (ii) the
broker or nominee does not have discretionary voting power under applicable
national securities exchange rules or the instrument under which it serves in
such capacity or (iii) the record holder has indicated on the proxy card or
otherwise notified VFSC that it does not have authority to vote such shares on
that matter.
Required Vote at VFSC Meeting
The affirmative vote of the holders of two-thirds of the outstanding
shares of VFSC Common Stock (_____ votes) is required for approval of the Merger
Agreement and the transactions contemplated thereby. Abstentions and broker
non-votes will have the same effect as votes against the Merger Agreement.
Stockholders of VFSC are entitled to one vote at the VFSC Meeting for each share
of VFSC Common Stock held of record at the close of business on the VFSC Record
Date. At the close of business on the VFSC Record Date, [_________] shares of
VFSC Common Stock were outstanding and entitled to vote, of which approximately
[_________] shares, or approximately [____]%, were held by directors and
executive officers of VFSC.
Stockholders of record on the VFSC Record Date are entitled to cast
their votes, in person or by properly executed proxy, at the VFSC Meeting. All
shares represented at the VFSC Meeting by properly executed proxies received
prior to or at the VFSC Meeting and not properly revoked will be voted at the
VFSC Meeting in accordance with the instructions indicated in such proxies. IF
NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR APPROVAL OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
29
<PAGE>
If a quorum is not present at the time the VFSC Meeting is convened, or
if for any other reason VFSC believes that additional time should be allowed for
the solicitation of proxies or for the satisfaction of conditions to the Merger
or the transactions contemplated thereby, VFSC may adjourn the VFSC Meeting with
a vote of the holders of a majority of the voting power represented by the VFSC
Common Stock present at such meeting. If VFSC proposes to adjourn the VFSC
Meeting, the persons named in the enclosed proxy card will vote all shares for
which they have voting authority in favor of such adjournment.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Secretary of VFSC, at or before the VFSC Meeting, a written
notice of revocation bearing a date later than the date of the proxy, (ii) duly
executing a subsequent proxy relating to the same shares and delivering it to
the Secretary of VFSC at or before the VFSC Meeting or (iii) attending the VFSC
Meeting and voting in person (although attendance at the VFSC Meeting will not
in and of itself constitute revocation of a proxy). Any written notice revoking
a proxy should be sent to Vermont Financial Services Corp., 100 Main Street,
Brattleboro, Vermont 05301, Attention:
Richard O. Madden, Secretary.
Solicitation Expenses
Solicitation of proxies may be made in person or by mail, telephone or
facsimile, by directors, officers and employees of VFSC and Eastern, who will
not be specially compensated for such solicitation. Such directors, officers and
employees will not be specifically compensated, but may be reimbursed for
out-of-pocket expenses in connection with such solicitation. Nominees,
fiduciaries and other custodians will be requested to forward solicitation
materials to beneficial owners and to secure their voting instructions, if
necessary, and may be reimbursed for the expenses incurred in sending proxy
materials to beneficial owners. In addition, VFSC intends to engage the services
of Regan & Associates, a proxy solicitation firm, to assist in the solicitation
of proxies at an estimated cost of $5,000 plus expenses, and Eastern intends to
engage the services of Corporate Investor Communications, Inc., a proxy
solicitation firm, to assist in the solicitation of proxies at an estimated cost
of $4,750 plus expenses.
VFSC and Eastern will pay their respective expenses in connection with
the solicitation of proxies.
Beneficial Ownership of Eastern Common Stock
The following table sets forth certain information regarding beneficial
ownership of Eastern Common Stock as of __________, 1997 by (i) each person
known by Eastern to own beneficially more than 5% of Eastern Common Stock, (ii)
each director and executive officer of Eastern, and (iii) all directors and
executive officers of Eastern as a group. The number of shares beneficially
owned by such persons is determined according to rules of the Commission, and
the information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as to
which the individual or entity
30
<PAGE>
has sole or shared voting power or investment power, and also any shares that
the individual or entity has the right to acquire within 60 days of __________,
1997 through the exercise of an option, conversion feature or similar right.
Except as noted below, each holder has sole voting and investment power with
respect to shares of Eastern Common Stock listed as owned by such person or
entity.
<TABLE>
<CAPTION>
Percentage of
Number of Shares Outstanding
of Eastern Eastern Common
Name Common Stock Stock
- ---- ---------------- --------------
<S> <C> <C>
Directors and Executive Officers
John A. Cobb 195,888 5.1%
E. David Humphrey 94,441 2.5%
John K. Dwight 13,200 *
Michael D. Flynn 6,900 *
John S. Kimbell 7,590 *
Mary Alice McKenzie 7,571 *
Garry T. Melia 7,650 *
Ernest A. Pomerleau 14,500 *
W. Stevens Sheppard 43,800 1.2%
James M. Sutton 361,500 9.8%
All Directors and Executive Officers as a group
(12 persons) 753,040 19.0%
5% Stockholders
Kramer Spellman, L.P. 331,450 9.0%
James M. Sutton 361,500 9.8%
Wellington Management Company 353,700 9.6%
- ---------
*Less than 1%
</TABLE>
Appraisal Rights and Dissenting Eastern Stockholders
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW IS REPRINTED IN ITS
ENTIRETY AS APPENDIX D TO THIS JOINT PROXY STATEMENT-PROSPECTUS. THE FOLLOWING
DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW RELATING TO APPRAISAL RIGHTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPENDIX D. THIS DISCUSSION AND
APPENDIX D SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO WISHES TO EXERCISE
STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO, AS
FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH HEREIN OR THEREIN WILL RESULT IN
THE LOSS OF APPRAISAL RIGHTS.
31
<PAGE>
A holder of record of Eastern Common Stock as of the Eastern Record
Date who makes the demand described below with respect to such shares, who
continuously is the record holder of such shares through the Effective Time, who
otherwise complies with the statutory requirements of Section 262 of the DGCL
and who neither votes in favor of the Merger Agreement nor consents thereto in
writing may be entitled to an appraisal by the Delaware Court of Chancery (the
"Delaware Court") of the fair value of his, her or its shares of Eastern Common
Stock. All references in this summary of appraisal rights to a "stockholder" are
to the record holder or holders of shares of Eastern Common Stock. Except as set
forth herein, stockholders of Eastern will not be entitled to appraisal rights
in connection with the Merger.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the Eastern Meeting, not less than 20 days prior
to the meeting, each constituent corporation must notify each of the holders of
its stock for which appraisal rights are available that such appraisal rights
are available and include in each such notice a copy of Section 262. This Joint
Proxy Statement-Prospectus shall constitute such notice to the record holders of
Eastern Common Stock.
Holders of Eastern Common Stock who desire to exercise their appraisal
rights must not vote in favor of the Merger Agreement or the Merger and must
deliver a separate written demand for appraisal to Eastern prior to the vote by
the stockholders of Eastern on the Merger Agreement and the Merger. A
stockholder who signs and returns a proxy without expressly directing by
checking the applicable boxes on the reverse side of the proxy card enclosed
herewith that his or her shares of Eastern Common Stock be voted against the
proposal or that an abstention be registered with respect to his, her or its
shares of Eastern Common Stock in connection with the proposal will effectively
have thereby waived his, her or its appraisal rights as to those shares of
Eastern Common Stock because, in the absence of express contrary instructions,
such shares of Eastern Common Stock will be voted in favor of the proposal. (See
"--Required Vote at Eastern Meeting"). Accordingly, a stockholder who desires to
perfect appraisal rights with respect to any shares of Eastern Common Stock
must, as one of the procedural steps involved in such perfection, either (i)
refrain from executing and returning the enclosed proxy and from voting in
person in favor of the proposal to approve the Merger Agreement or (ii) check
either the "Against" or the "Abstain" box next to the proposal on such proxy or
affirmatively vote in person against the proposal or register in person in
abstention with respect thereto. A demand for appraisal must be executed by or
on behalf of the stockholder of record and must reasonably inform Eastern of the
identity of the stockholder of record and that such stockholder intends thereby
to demand appraisal of the Eastern Common Stock. A proxy or vote against the
Merger does not constitute such a demand for appraisal. A person having a
beneficial interest in shares of Eastern Common Stock that are held of record in
the name of another person, such as a broker, fiduciary or other nominee, must
act promptly to cause the record holder to follow the steps summarized herein
properly and in a timely manner to perfect whatever appraisal rights are
available. If the shares of Eastern Common Stock are owned of record by a person
other than the beneficial owner, including a broker, fiduciary (such as a
trustee, guardian or custodian) or other nominee, such demand must be executed
by or for the record owner. If the shares of Eastern Common Stock are owned of
record by more than
32
<PAGE>
one person, as in a joint tenancy or tenancy in common, such demand must be
executed by or for all joint owners. An authorized agent, including an agent for
two or more joint owners, may execute the demand for appraisal for a stockholder
of record; however, the agent must identify the record owner and expressly
disclose the fact that, in exercising the demand, such person is acting as agent
for the record owner.
A record owner, such as a broker, fiduciary or other nominee, who holds
shares of Eastern Common Stock as a nominee for others, may exercise appraisal
rights with respect to the shares held for all or less than all beneficial
owners of shares as to which such person is the record owner. In such case, the
written demand must set forth the number of shares covered by such demand. Where
the number of shares is not expressly stated, the demand will be presumed to
cover all shares of Eastern Common Stock outstanding in the name of such record
owner.
A stockholder who elects to exercise appraisal rights, if available,
should mail or deliver his, her or its written demand to: Eastern Bancorp, Inc.,
537 Central Avenue, Dover, New Hampshire 03820, Attention: President.
The written demand for appraisal should specify the stockholder's name
and mailing address, the number of shares of Eastern Common Stock owned, and
that the stockholder is thereby demanding appraisal of his, her or its shares. A
proxy or vote against the Merger Agreement will not itself constitute such a
demand. Within ten days after the Effective Time, the surviving corporation must
provide notice of the Effective Time to all stockholders who have complied with
Section 262.
Within 120 days after the Effective Time, either the surviving
corporation or any stockholder who has complied with the required conditions of
Section 262 may file a petition in the Delaware Court, with a copy served on the
surviving corporation in the case of a petition filed by a stockholder,
demanding a determination of the fair value of the shares of all dissenting
stockholders. Accordingly, Eastern stockholders who desire to have their shares
appraised should initiate any petitions necessary for the perfection of their
appraisal rights within the time periods and in the manner prescribed in Section
262. If appraisal rights are available, within 120 days after the Effective
Time, any stockholder who has theretofore complied with the applicable
provisions of Section 262 will be entitled, upon written request, to receive
from the surviving corporation a statement setting forth the aggregate number of
shares of Eastern Common Stock not voting in favor of the Merger Agreement and
with respect to which demands for appraisal were received by Eastern and the
number of holders of such shares. Such statement must be mailed within 10 days
after the written request therefor has been received by the surviving
corporation.
If a petition for an appraisal is timely filed and assuming appraisal
rights are available, at the hearing on such petition, the Delaware Court will
determine which stockholders, if any, are entitled to appraisal rights. The
Delaware Court may require the stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to submit
33
<PAGE>
their certificates of stock to the Register in Chancery for notation thereon of
the pendency of the appraisal proceedings; if any stockholder fails to comply
with such direction, the Delaware Court may dismiss the proceedings as to such
stockholder. Where proceedings are not dismissed, the Delaware Court will
appraise the shares of Eastern Common Stock owned by such stockholders,
determining the fair value of such shares exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest, if any, to be paid upon the amount determined to be the
fair value. In determining fair value, the Delaware Court is to take into
account all relevant factors. In Weinberger v. UOP Inc., the Delaware Supreme
Court discussed the factors that could be considered in determining fair value
in an appraisal proceeding, stating that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered, and that "fair price
obviously requires consideration of all relevant factors involving the value of
a company." The Delaware Supreme Court stated that in making this determination
of fair value, the court must consider market value, asset value, dividends,
earnings prospects, the nature of the enterprise and any other facts
ascertainable as of the date of the merger that throw light on future prospects
of the merged corporation. In Weinberger, the Delaware Supreme Court stated that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." Section 262, however, provides that fair
value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
The cost of the appraisal proceeding may be determined by the Delaware
Court and taxed against the parties as the Delaware Court deems equitable in the
circumstances. Upon application of a dissenting stockholder of Eastern, the
Delaware Court may order that all or a portion of the expenses incurred by any
dissenting stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, be charged pro rata against the value of all shares of stock entitled
to appraisal.
Any holder of shares of Eastern Common Stock who has duly demanded
appraisal in compliance with Section 262 will not, after the Effective Time, be
entitled to vote for any purpose any shares subject to such demand or to receive
payment of dividends or other distributions on such shares, except for dividends
or distributions payable to stockholders of record at a date prior to the
Effective Time.
If no petition for appraisal is filed with the Delaware Court within
120 days after the Effective Time, stockholders' rights to appraisal shall
cease. Any stockholder may withdraw such stockholder's demand for appraisal by
delivering to the surviving corporation a written withdrawal of his or her
demand for appraisal and acceptance of the Merger, except that (i) any such
attempt to withdraw made more than 60 days after the Effective Time will require
written approval of the surviving corporation and (ii) no appraisal proceeding
in the Delaware Court shall be dismissed as to any stockholder without the
approval of the Delaware Court, and such approval may be conditioned upon such
terms as the Delaware Court deems just.
34
<PAGE>
THE MERGER
General
This section of the Joint Proxy Statement-Prospectus describes the
material terms and provisions of the proposed Merger, including the principal
provisions of the Merger Agreement, and related transactions. A copy of the
Merger Agreement is attached to this Joint Proxy Statement-Prospectus as
Appendix A and is incorporated by reference herein. All stockholders are urged
to read the Merger Agreement in its entirety.
The Merger Agreement provides that, subject to the satisfaction or
waiver (where permissible) of certain conditions, which are described more fully
herein and therein, Eastern will be merged with and into VFSC. In connection
with the Merger, each outstanding share of Eastern Common Stock will be
converted into and become exchangeable for either the Stock Distribution or the
Cash Distribution in accordance with the terms of the Merger Agreement. See
"--Conversion of Shares of Eastern Common Stock Pursuant to the Merger."
Background of the Merger
For several years VFSC has been actively following a business strategy
that calls for supplementing its internal growth with carefully selected
acquisitions. Since early 1991, it has acquired one bank from the FDIC, two
branches from another Vermont bank, two credit card portfolios, two trust
departments and a Massachusetts-based savings bank. In pursuing this acquisition
strategy, VFSC's management, with assistance from its financial advisors, has
been continuously evaluating acquisition opportunities both in Vermont and in
adjacent market areas.
Since the first quarter of 1994, Eastern has retained a financial
advisory firm to assist the Eastern Board in comprehensively analyzing and
periodically reviewing Eastern's strategic alternatives for maximizing long-term
stockholder value. These alternatives have included the continuation of
independent operations, growth through acquisitions, growth through merger-of-
equals transactions, and being acquired for cash and/or stock. Since July 1995,
representatives of MB&D have periodically made detailed presentations to
management and the Eastern Board describing changing conditions in the mergers
and acquisitions ("M&A") market and Eastern's strengths and weaknesses either as
potential acquiror or acquiree. Concurrently, management has provided to the
Board its analysis of what Eastern needed to accomplish in order to increase
stockholder value through internal growth and performance.
At the request of the Eastern Board, MB&D developed a list of financial
institutions, primarily but not exclusively headquartered in New England,
believed to have a strategic interest in expanding in New England as well as the
financial and other capacity to do so, including certain Vermont-based
institutions that might be expected to have a particular strategic interest and
the operating ability to derive synergistic benefits. Certain of these
institutions from time to time contacted representatives of MB&D or Eastern, and
MB&D contacted selected institutions which did not contact MB&D or Eastern. Any
expressions of interest were
35
<PAGE>
preliminary and inconclusive, and no agreements or understandings concerning any
transaction were reached.
During the first half of 1995, the Eastern Board focused on the choice
between (i) integrating the operations of Eastern's New Hampshire banking
subsidiary with those of Vermont Federal or (ii) evaluating the potential for
selling the New Hampshire subsidiary and either redeploying the sales proceeds
in Vermont operations or distributing them to Eastern's stockholders. Based upon
the analysis at that time, the Eastern Board concluded that integration of
Vermont and New Hampshire operations was the preferable alternative.
In early August 1996, VFSC's management contacted Eastern's management
to see if Eastern might be interested in a possible combination of the two
companies. On August 9, 1996, John D. Hashagen, Jr., President and Chief
Executive Officer of VFSC, met with John A. Cobb, President and Chief Executive
Officer of Eastern, to discuss on a preliminary basis the possibility of a
combination of the two companies. Although no agreements or understandings
concerning such a possible combination were reached at that meeting, both
parties agreed that there was sufficient mutual interest in a possible
combination of the two companies to continue the discussions. They also agreed
that a confidentiality agreement should be drafted and signed by both parties so
that certain non-public information regarding VFSC and Eastern could be shared.
The confidentiality agreement was signed by VFSC and Eastern as of August 15,
1996.
During the last half of August 1996 and the first three weeks of
September 1996, VFSC senior management and Eastern senior management conducted
off-site due diligence and exchanged detailed information on each's companies,
deposit products, operations, markets, loan portfolios and financial condition.
Senior management of the two companies met in person and held telephone
conference calls several times as a part of this information exchange process.
During these meetings, issues such as potential cost savings, revenue
enhancement opportunities, deposit product compatibility and loan quality were
discussed and possible consolidation strategies were reviewed. During this
process the senior management of the two companies kept their respective Boards
of Directors advised of the status of the preliminary merger discussions and the
content of the information exchanges.
On September 25, 1996, VFSC senior management and the Merger and
Acquisition Committee of the VFSC Board reviewed and evaluated in detail the
business strategy of VFSC and information on Eastern and its operations, and
discussed the business aspects of a potential acquisition of Eastern by VFSC. At
the conclusion of this meeting, the Committee authorized VFSC's senior
management to continue discussions with Eastern regarding a possible merger or
acquisition. During late September 1996 and October 1996, senior management and
the Boards of Directors of VFSC and Eastern continued their evaluation of the
potential combination of the two companies and, with the assistance of their
respective financial advisors, continued discussions of the possible structure
and pricing of an acquisition of Eastern by VFSC. On October 4, 1996 VFSC made
an oral presentation to Eastern outlining for discussion purposes
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a nonbinding proposal for an acquisition of Eastern by VFSC, including a
purchase price and other financial and structural terms.
At an Eastern Board meeting held on October 10, 1996, Fred Schluter of
MB&D made a comprehensive presentation with regard to New England M&A market
conditions and the possibility of receiving other offers; Eastern's current
estimated value as an acquisition candidate, based upon such customary financial
measures as (i) multiples of earnings and cash flow, (ii) premiums to adjusted
book value, deposits and market capitalization and (iii) recent acquisition
prices for comparable companies; and the terms of VFSC's nonbinding discussion
proposal. The directors considered, in particular, structural issues such as an
all-stock transaction versus a transaction involving a mixture of cash and
stock; pooling and purchase accounting; tax-deferred treatment; the possible
combination of Vermont Federal with VNB; the timetable for the transaction; and
factors affecting VFSC's future earnings potential and potentially influencing
future market values for the VFSC stock to be received by Eastern stockholders
in such a transaction. The Eastern Board concluded that VFSC's expression of
interest deserved serious consideration; expressed its preference for a purchase
transaction involving a significant tax-deferred stock component as well as a
cash component; and authorized Messrs. Cobb and Schluter to conduct further
discussions and report back to the Eastern Board.
Starting on October 11, 1996, MB&D and Tucker Anthony were in regular
ongoing communication concerning all aspects of the possible transaction.
On October 23, 1996, VFSC senior management and the Merger and
Acquisition Committee of the VFSC Board, together with its financial advisor,
reviewed once again all aspects of a possible acquisition of Eastern, including
a proposed transaction structure, a possible pricing range and other elements of
such a transaction. At the conclusion of this review, the Committee authorized
VFSC senior management to continue merger negotiations within the parameters
discussed at the meeting.
On October 24, 1996, Messrs. Cobb and Schluter reported to the Eastern
Board that VFSC was prepared to consider a per share payment of as much as $7.25
per share in cash and 0.4892 shares of VFSC Common Stock under a collared
formula, subject to satisfactory due diligence review, agreement upon structure
and timetable, and negotiation of mutually satisfactory agreements. The
directors reviewed and commented on numerous aspects of the proposed transaction
and authorized Messrs. Cobb and Schluter to continue negotiations in the
expectation that, should such negotiations proceed satisfactorily, the parties
would arrange to perform reciprocal on-site due diligence and VFSC's legal
counsel would prepare a draft merger agreement and related documents.
During later October 1996 and early November 1996, the senior
managements of VFSC and Eastern, with the assistance of their respective
financial advisors and legal counsel, continued active discussions of possible
merger terms. In the meantime, on-site due diligence review, which supplemented
the off-site due diligence review that had commenced in August
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1996, took place between November 2 and 11, 1996, and draft documents were
circulated on November 6, 1996.
At a meeting held on November 11, 1996, MB&D updated the Eastern Board
in regard to the status of the ongoing discussions with VFSC. Legal counsel
described the key provisions of the documents that had been or were being
negotiated or which had been left open pending Board review. The directors
considered and stated their views in regard to these issues. Eastern's credit
review team and members of management then presented the results of their due
diligence review of VFSC. Further negotiation with VFSC ensued over the next 48
hours.
Separate special meetings of the VFSC Board and Eastern Board were held
on November 13, 1996 to consider the merger proposal. At the VFSC Board meeting,
presentations were delivered by VFSC senior management concerning the strategic
rationale for the proposed transaction and the results of its due diligence
review, by its financial advisor concerning the financial terms of the proposed
transaction and by its legal counsel regarding the terms of the proposed Merger
Agreement and Stock Option Agreement. After discussion and consideration by the
VFSC Board of the potential financial and strategic benefits and risks of the
proposed transaction and other factors described below under "--Recommendations
of the VFSC Board and Reasons for the Merger," the VFSC Board unanimously
approved the Merger Agreement and Stock Option Agreement that were presented to
them and authorized Mr. Hashagen to execute them on behalf of VFSC.
At the Eastern Board Meeting, the Eastern Board reviewed the changes
agreed to by the negotiators during the previous two days. Legal counsel then
made a presentation and answered directors' questions. MB&D reviewed and updated
its previous financial analysis of the merger consideration, after which it
advised the Eastern Board orally that, in its opinion, and based on facts known
to MB&D at that time, the merger consideration was fair, from a financial point
of view, to Eastern's stockholders as of that date and confirmed its readiness,
in the absence of any intervening significant change, to render a written
opinion to that effect immediately prior to the circulation of proxy materials
for the Special Meeting. The Eastern Board then unanimously approved the Merger
Agreement and related agreements, and authorized Mr. Cobb to sign them on behalf
of Eastern.
Messrs. Hashagen and Cobb executed the Merger Agreement and the Stock
Option Agreement, as authorized, on November 13, 1996.
Recommendation of the Eastern Board and Reasons for the Merger
In reaching its determination to approve and adopt the Merger Agreement
and the transactions contemplated thereby, the Eastern Board considered a number
of factors, including, without limitation, the following:
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(1) its belief, based on the analysis of and presentation to
Eastern's Board by MB&D of Eastern's strategic alternatives,
that the Merger represents an attractive strategic
alternative to Eastern for enhancing stockholder value;
(2) the financial presentation of MB&D and the opinion of MB&D
as to the fairness from a financial point of view of the
Merger Consideration to Eastern and its stockholders (see
"--Opinions of Financial Advisors--Opinion of McConnell,
Budd & Downes, Inc.");
(3) its belief that the Merger will provide an opportunity for
the stockholders of Eastern to receive increased dividends
and to enjoy increased liquidity in their investment;
(4) the ability of Eastern stockholders, subject to the
limitations contained in the Merger Agreement, to specify a
preference for payment in cash or stock; and the expectation
that the Merger will be a tax-deferred transaction for
stockholders who receive payment in stock (see "--Certain
Federal Income Tax Consequences");
(5) its review, with the assistance of management and MB&D, of
the financial condition, results of operations, business and
overall prospects of VFSC, as well as of management's best
estimates of Eastern's prospects as an independent business
entity;
(6) its review of the banking environment in which Eastern is
now, and in the future would be, competing, including, but
not limited to, the significant consolidation and
increasingly competitive climate in the banking and
financial services markets, both in the United States as a
whole and in New England in particular, the prospect for
further changes in these markets and the competitive
constraints facing relatively small, independent financial
institutions;
(7) its view of the increasing importance to a bank's ability to
capitalize on opportunities in the banking and financial
services markets of economies of scale and access to greater
financial resources such as may be expected to be realized
as a result of the Merger;
(8) its assessment that affiliation with another community-based
institution such as VFSC, which has a commitment to
community reinvestment that has been rated "outstanding,"
would put Eastern in a good position to be able to continue
its high level of personal service to its customers and the
Vermont and New Hampshire communities that it serves;
(9) its view that VFSC's approach to the banking business, with
its emphasis on quality products and customer service, is
congruent with that of Eastern and its
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perception that VFSC uniquely values Vermont Federal's
approach, so that the combination of their respective
products and services should enhance the business of the
combined institution; and
(10) the geographic concentration of VFSC's branch network in
central and southern Vermont and the contiguous market of
Greenfield, Massachusetts, the complementary nature of such
concentration to Eastern's geographic concentration in
northern Vermont and southeastern New Hampshire and the
effect such complementary nature would have on the combined
enterprise's ability to prosper in its three-state banking
market.
The Eastern Board did not assign any particular weights to any of the
factors mentioned above.
FOR THE REASONS DESCRIBED ABOVE, THE EASTERN BOARD HAS DETERMINED THE
MERGER TO BE FAIR TO AND IN THE BEST INTERESTS OF EASTERN AND ITS STOCKHOLDERS
AND HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING THE MERGER. ACCORDINGLY, THE BOARD UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
Recommendation of the VFSC Board and Reasons for the Merger
In reaching its determination that the Merger is in the best interests
of the VFSC stockholders, and recommending that the VFSC stockholders approve
the Merger, the VFSC Board considered a number of factors. The following are the
material factors considered by the Board in reaching its determination:
(1) The Merger will enable VFSC to expand and strengthen its
existing franchise in Vermont and to establish a presence in
the market of southeastern New Hampshire, which VFSC
considers attractive;
(2) Given Eastern's existing presence in Vermont, the
acquisition of Eastern offers significant opportunity for
cost savings and represents an opportunity to leverage
VFSC's infrastructure, technology, products, marketing and
lines of business through Eastern's established distribution
network;
(3) Eastern's customer base provides VFSC with significant
cross-selling opportunities;
(4) The Merger is expected to provide revenue growth
opportunities based on the combined company's leadership in
its major markets, its broad product line, its delivery
channels and its brand name; and
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(5) Tucker Anthony's opinion that, subject to certain
assumptions, the consideration to be paid by VFSC to
Eastern's stockholders was fair to the stockholders of VFSC,
from a financial point of view.
The VFSC Board did not assign any particular weights to any of the
factors mentioned above.
FOR THE REASONS DESCRIBED ABOVE, THE VFSC BOARD HAS DETERMINED THE
MERGER TO BE FAIR TO AND IN THE BEST INTERESTS OF VFSC AND ITS STOCKHOLDERS AND
HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE MERGER. ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
Opinion of Financial Advisors
Opinion of McConnell, Budd & Downes, Inc.
MB&D has delivered to the Board of Directors of Eastern its written
opinion, dated as of the date of this Joint Proxy Statement-Prospectus, that
both the Exchange Ratio of VFSC Common Stock to be exchanged for outstanding
shares of Eastern Common Stock and the Cash Distribution for outstanding shares
of Eastern Common Stock are fair, from a financial point of view, to Eastern's
stockholders. The mechanisms for determination of the Exchange Ratio and the
Cash Distribution are each described in detail elsewhere in this Joint Proxy
Statement-Prospectus and shareholders should read this with care. MB&D has acted
as financial advisor to Eastern since July 1995 in connection with Eastern's
evaluation of its strategic alternatives, including hypothetical affiliation
opportunities.
MB&D advised Eastern during the negotiation process leading up to the
execution of the Merger Agreement and provided Eastern with various analyses as
to the range of financially feasible exchange ratios and cash acquisition prices
that might be received in such a transaction. Representatives of MB&D met with
the executive management and the full Board of Directors of Eastern on a number
of occasions in connection with the analysis of Eastern's options. Each of the
Exchange Ratio and alternative Cash Distributions was arrived at in arms length
negotiations between VFSC and Eastern in a process in which MB&D advised
Eastern.
MB&D was retained based on its qualifications and experience in the
financial analysis of banking and thrift institutions, knowledge of the Vermont,
New Hampshire, Massachusetts, New York and Maine banking markets in particular
and New England banking markets in general, and its experience with merger and
acquisition transactions involving banking institutions. Members of the
Corporate Finance Department of MB&D have advised financial
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institution clients on more than 60 successfully completed mergers or
acquisitions of financial institutions, many of those in New England
marketplaces.
The full text of the opinion of MB&D, which sets forth assumptions
made, matters considered and limits on the review undertaken by MB&D, is
attached hereto as a part of Appendix B. Eastern's stockholders are urged to
read the opinion in its entirety. MB&D's opinion is directed only to the
Exchange Ratio or Cash Distribution and does not constitute a recommendation to
any holder of Eastern Common Stock as to how such holder should vote at the
Eastern Meeting. The summary of the opinion of MB&D set forth in this Joint
Proxy Statement-Prospectus was provided to Eastern by MB&D and is qualified in
its entirety by reference to the full text of the opinion itself. MB&D's opinion
was necessarily based upon conditions as they existed and should be evaluated as
of the date of the written opinion and the information made available to MB&D
through such date.
In arriving at its opinion, MB&D (i) reviewed the Merger Agreement and
this Joint Proxy Statement-Prospectus in substantially the form to be sent to
Eastern stockholders; (ii) reviewed publicly available business and financial
information with respect to both Eastern and VFSC and certain internal financial
information and financial projections prepared by the managements of Eastern and
VFSC; (iii) held discussions with members of the senior management and Board of
Directors of Eastern concerning the past and current results of operations of
Eastern, its current financial condition and management's opinion of its future
prospects; (iv) reviewed the historical reported price and record of trading
volume for both Eastern Common Stock and VFSC Common Stock; (v) held discussions
with the senior management of VFSC concerning the current and past results of
operations of VFSC, its current financial condition and management's opinion of
its future prospects; (vi) considered the current state of and future prospects
for the economies of Vermont, New Hampshire and north central Massachusetts
generally and the relevant market areas for Eastern and VFSC in particular;
(vii) reviewed the specific acquisition analysis models employed by MB&D to
evaluate potential business combinations of banking companies; (viii) reviewed
the reported financial terms of certain recent business combinations in the
banking industry; and (ix) performed such other studies and analyses as MB&D
considered appropriate under the circumstances associated with this particular
transaction.
In rendering its opinion, no limitations were imposed by Eastern or
VFSC upon MB&D with respect to the investigations made or procedures followed by
MB&D in rendering its opinion. As part of its ongoing financial advisory
business, MB&D had in 1992 entered into and maintained, a nonexclusive financial
advisory relationship with VFSC. In the context of this transaction, MB&D
rendered financial advisory services exclusively to Eastern and disclosed to the
Eastern Board and management the relationship with VFSC. VFSC retained and
relied upon an independent third party firm as financial advisor for purposes of
this transaction.
MB&D's opinion takes into account its assessment of general economic,
market and financial conditions and its experience in other transactions, as
well as its experience in bank securities valuation and its knowledge of the
banking industry generally. For purposes of
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reaching its opinion, MB&D has assumed and relied upon the accuracy and
completeness of the information provided to it by Eastern and VFSC, including
the adequacy of the reserve for loan losses established by each Company, and
does not assume any responsibility for the independent verification of such
information or any independent valuation or appraisal of any of the assets or
liabilities of either Eastern or VFSC. In the course of reaching its opinion,
MB&D did not make or receive any independent valuation or appraisal of any of
the assets or liabilities of either Eastern or VFSC. With respect to the
financial projections reviewed by MB&D in the course of rendering its opinion,
MB&D has assumed that such projections have been reasonably prepared to reflect
the best currently available estimates and judgment of the management of each of
Eastern and VFSC as to the most likely future performance of their respective
companies.
The following is a summary of material analyses employed by MB&D in
connection with rendering its written opinion. Given that it is a summary, it
does not purport to be a complete and comprehensive description of all the
analyses performed, or an enumeration of all matters considered by MB&D in
arriving at its opinion. The preparation of a fairness opinion is a complicated
process, involving a determination as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances. Therefore, such an opinion is not readily susceptible
to a summary description. In arriving at its fairness opinion, MB&D did not
attribute any particular weight to any one specific analysis or factor
considered by it and made qualitative as well as quantitative judgments as to
the significance of each analysis and factor. Therefore, MB&D believes that its
analyses must be considered as a whole and feels that attributing undue weight
to any single analysis or factor considered could create a misleading or
incomplete view of the process leading to the formation of its opinion. In its
analyses, MB&D has made certain assumptions with respect to banking industry
performance, general business and economic conditions and other factors, many of
which are beyond the control of management of either Eastern or VFSC. Any
estimates which are referred to in MB&D's analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
vary significantly from those set forth.
Analysis of the Anticipated Merger and the Exchange Ratio in Relation
to VFSC. The anticipated consideration to be paid in the merger for each
outstanding share of Eastern Common Stock is (i) cash equal to $7.25 plus the
product of 0.49 times the average closing bid price of VFSC common stock for a
twenty day trading period ending on the fifth business day prior to the
Effective Time of the Merger, or (ii) the number of whole and fractional shares
of VFSC Common Stock, rounded to the nearest ten-thousandth of a share, equal to
the number obtained by dividing the Acquisition Price by the Average Closing
Price. However, if the Average Closing Price is greater than or equal to $39.96
per Common Share, the Acquisition Price shall equal $26.83, and if the Average
Closing Price is less than or equal to $29.54 per share but greater than or
equal to $26.06 per Common Share, the Acquisition Price shall equal $21.72. If
the Average Closing Price is less than $26.06, the Acquisition Price shall be
equal the sum of $7.25 and the product of 0.5553 times the Average Closing
Price.
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When valued at the closing bid price of VFSC Common Stock, $36.00, on
the last day there were trades in VFSC Common Stock prior to the signing of the
transaction on Wednesday, November 13, 1996, as well as the 20-day average
closing bid price of VFSC Common Stock computed as of the last trading day prior
to the signing of the transaction on Wednesday, November 13, 1996, $34.85, the
consideration represents the following transaction multiples:
o Transaction Value (Values and Ratios in this section will change to
reflect date more proximate to proxy mailing): $24.89 per Eastern
Common Share based upon the single day VFSC closing bid price on
Tuesday, November 12, 1996. Based upon the 20-day average closing bid
price for VFSC for the period ending November 12, 1996 the transaction
value would be worth $24.33 per Eastern Common Share.
o Multiple of Earnings based upon the November 12, 1996 VFSC single day
closing bid price: 28.61 times Eastern's reported earnings per share
for the twelve months ended September 30, 1996, and 13.10 times
Eastern's budgeted earnings per share for the fiscal year 1997 ending
September 30, 1997. After removing the one time impact of the federally
mandated SAIF adjustment, the comparable multiple of reported earnings
for the twelve month period ending September 30, 1996 would be 16.59.
o Multiple of Earnings based upon the 20-day average closing bid price
for VFSC for the period ending November 12, 1996: 27.96 times Eastern's
reported earnings per share for the twelve months ended September 30,
1996, and 12.80 times Eastern's budgeted earnings per share for the
fiscal year 1997 ending September 30, 1997. After removing the one time
impact of the federally mandated SAIF adjustment, the comparable
multiple of reported earnings for the twelve month period ending
September 30, 1996 would be 16.22.
o Multiple of Tangible Book Value based upon the November 12, 1996 VFSC
single day closing bid price: 1.514 times Eastern's tangible book value
per share as of September 30, 1996.
o Multiple of Tangible Book Value based upon the 20-day average closing
bid price for VFSC for the period ending November 12, 1996: 1.479 times
Eastern's book value per share as of September 30, 1996.
o Multiple of Accounting Book Value based upon the November 12, 1996 VFSC
single day closing bid price: 1.430 times Eastern's book value per
share as of September 30, 1996.
o Multiple of Accounting Book Value based upon the 20-day average closing
bid price for VFSC for the period ending November 12, 1996: 1.397 times
Eastern's book value per share as of September 30, 1996.
o Multiples of Eastern's Market Value based upon the November 12, 1996
VFSC single day closing bid price: The approximate $24.89 in market
value of the consideration for each
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share of Eastern Common Stock, based upon the VFSC closing bid price on
the day prior to the signing of the transaction, represents a 13.1%
premium over the closing price of Eastern's Common Stock reported on
the Nasdaq NM as of the close of business on Wednesday, November 12,
1996.
o Multiples of Eastern's Market Value based upon the 20-day average
closing bid price for VFSC for the period ending November 12, 1996: The
approximate $24.33 in market value of the consideration for each share
of Eastern Common Stock, based upon the VFSC 20-day average closing bid
price for the period ending on the day prior to the announcement,
represents a 10.6% premium over the closing price of Eastern's Common
Stock reported on the Nasdaq NM as of the close of business on
Wednesday, November 12, 1996.
Specific Acquisition Analysis. MB&D employs a number of proprietary
analysis models to examine hypothetical transactions involving banking and/or
thrift companies. The models involve the use of forecast earnings data, selected
current period balance sheet, fully diluted common share information and income
statement data, current and historic market and trading information and a number
of assumptions as to interest rates for borrowed funds, opportunity costs of
funds, discount rates, dividend streams, effective tax rates and transaction
structures (the alternative or combined uses of common equity, cash, debt or
other securities to fund a transaction). The models distinguish between purchase
and pooling accounting treatments and inquire into the likely economic
feasibility of a given hypothetical transaction at a given price level or
specified exchange rate while employing a specified transaction structure. The
models also permit evaluation of various levels of potential non-interest
expense savings which might be chieved and potential implementation timetables
for such savings as well as the possibility of revenue enhancement opportunities
which may arise in a hypothetical transaction. The models also permit an
examination of pro forma capital adequacy.
In this transaction, MB&D evaluated an exchange ratio of VFSC Common
Stock for each share of Eastern Common Stock and a Cash Distribution price, each
based upon $7.25 plus the product of 0.49 times the average closing bid price of
VFSC Common Stock for a 20-day period (subject to adjustment as provided in the
Merger Agreement and detailed in this proxy statement) in a joint common stock
and cash merger transaction which is to be accounted for as a purchase
transaction.
Discounted Cash Flow Analysis. MB&D reviewed a discounted cash flow
analysis to permit the conceptual examination of the present discounted values
of potential future results employing selected assumptions and discount rates.
In the discounted cash flow analysis, MB&D reviewed a cash flow model
with the management and Board of Directors of Eastern that used a projection of
hypothetical earnings for the three twelve-month periods subsequent to September
1996 of $1.90, $2.18 and $2.45 per common share, respectively, with projected
earnings in two subsequent twelve-month periods equal to a return on assets of
0.95% and 1.00% respectively. A hypothetical dividend payout
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ratio assumption which depicted average annual payouts as a percentage of
earnings increasing gradually from a level of 31.5% to 33.0% over a five-year
period was used. A long-term growth rate of 4.00% was also used. MB&D then
assumed that the control sale price/earnings ratio at the end of a five year
period would approximate 13.0 times earnings, and in a separate exercise, a
price-to-tangible-book-value ratio of 160%. Given the five-year time horizon and
a discount rate of 12.5%, these cash flow calculations resulted in a range of
present discounted values of cash flows of $21.49 to $24.96, which can be
compared to the nominal value of the proposed exchange ratio of approximately
$24.89 based upon the closing bid price of VFSC the day before announcement as
described above and $24.33 based upon the trailing 20-day average closing bid
price of VFSC prior to and including November 12, 1996.
It is important to note that the discount factors employed embody both
the concept of a riskless time value of money and risk factors that reflect the
uncertainty of the forecast cash flows, terminal price/earnings and price/book
multiples, growth assumptions and other economic and financial variables subject
to change. Use of higher discount rates would result in lower discounted present
values. Conversely, use of lower discount rates would result in higher
discounted present values. MB&D advised the Eastern Board that although
discounted cash flow analysis is a widely used valuation methodology, it relies
on numerous assumptions, including discount rates, terminal values, earnings and
asset growth, as well as dividend payout ratios. Any or all of these assumptions
may vary from actual future performance and results.
Analysis of Other Comparable Transactions. MB&D is reluctant to place
much emphasis on "comparables analysis" as a valuation methodology because of
what it considers to be inherent limitations of the process, which application
of the results to specific cases questionable. It has observed that such
analyses as performed by some industry observers and financial advisors often
fail to adequately take into consideration such factors as material differences
in the underlying capitalization of the comparable institutions which are being
acquired; differences in the historic earnings (or loss) patterns recorded by
the compared institutions, which can depict a very different trend than might be
implied by examining only recent financial results; failure to exclude
nonrecurring profit or loss items from the last twelve months' earnings streams
of target companies, which can distort apparent earnings multiples; differences
in the form or forms of consideration used to complete the transaction;
differences between the planned method of accounting for the completed
transaction; and such less accessible factors as the relative population,
business and economic demographics of the acquired entities' markets as compared
or contrasted to such factors for the markets in which comparables are doing
business. Comparables analysis also rarely seems to take into consideration the
degree or absence of facilities overlap between the acquiror's market and that
of the target or the absence of such overlap and the resulting cost savings
differentials between otherwise apparently comparable transactions. MB&D
consequently believes that comparables analysis has serious limitations.
Nevertheless, in the course of its analysis of the proposed
transaction, MB&D reviewed a universe of 21 publicly announced transactions in
the financial institutions industry in which either a savings bank or thrift or
their respective holding companies were acquired by another financial
institution. These transactions were announced after March 1, 1994 and prior to
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November 12, 1996. All of the examined transactions involved entities doing
business in New England.
The 21 transactions reviewed by MB&D are as follows: Citizens Financial
Group's acquisition of Grove Bank, Webster Financial Corp.'s acquisition of DS
Bancorp, UST Corporation's acquisition of Walden Bancorp, Grove Bank's
acquisition of Greater Boston Bank, First Union Corp.'s acquisition of Center
Financial Corp., Peoples Heritage's acquisition of Family Bancorp, CFX
Corporation's acquisition of Milford Co-op Bank, Center Financial Corp.'s
acquisition of Great Country Bank; Albank Financial Corp.'s acquisition of
Marble Financial Corp.; Webster Financial Corp.'s acquisition of Shelton
Bancorp; The Co-operative Bank of Concord's acquisition of Bank of Braintree;
Main Street Community Bancorp's acquisition of Lexington Savings Bank; Baybanks,
Inc.'s acquisition of NFS Financial Corp.; Bank of Ireland's acquisition of
Great Bay Bankshares; CFX Corporation's acquisition of Orange Savings Bank;
Citizens Financial Group's acquisition of Quincy Savings Bank; Shawmut Bank's
acquisition of Northeast Federal Corp.; Fleet Financial Group's acquisition of
NBB Bancorp, Inc.; Shawmut National's acquisition of West Newton SB; Bank of
Boston's acquisition of Pioneer Financial; and Shawmut National's acquisition of
Cohasset Savings Bank.
Within this group of 21 transactions, the median multiple of tangible
book value paid by the acquiror was 159.7%, the maximum multiple paid was 199.3%
and the minimum multiple was 95.6%. These statistics can be compared to
multiples derived using the indicated values on transaction date, which can be
derived for the proposed acquisition of Eastern by VFSC as 151.4% based upon the
nominal present value of the proposed exchange ratio of approximately $24.89
based upon the closing price of VFSC the day before the transaction was signed.
Based upon the trailing 20-day average closing bid price of VFSC before the
announcement, the same ratio was 147.9% using the nominal present value of the
proposed exchange ratio of approximately $24.33.
With respect to trailing 12-months earnings multiples for this same
data sample of 21 transactions, the median price/earnings multiple paid was
13.13 and the maximum multiple was 20.66, while the minimum multiple was 9.95.
These statistics can be compared to multiples derived using the indicated values
on the transaction date, which can be derived for the proposed acquisition of
Eastern by VFSC as 28.61 based upon the nominal present value of the proposed
exchange ratio of approximately $24.89 based upon the closing bid price of VFSC
on the day before the announcement as described above and 27.96 based upon the
nominal present value of the proposed exchange ratio of approximately $24.33
based upon the trailing 20-day average closing bid price of VFSC before the
announcement. For the reasons detailed above, MB&D does not believe that the
comparable data presented should be viewed as the most meaningful analytic tool
with respect to a thorough review and understanding of the proposed transaction.
Pursuant to a letter agreement with Eastern dated November 1, 1996,
MB&D will receive a fee equal to 1.00% of the fair market value of all
consideration received by Eastern shareholders and option holders for services
rendered to Eastern in conjunction with the proposed transaction, if the
transaction is consummated. The fee represents compensation for
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services rendered in connection with the analysis of the hypothetical
transaction, support of the negotiations and for the rendering of its opinions.
Eastern paid MB&D $100,000 upon signing the agreement and $100,000 following the
execution of the Merger Agreement. An additional $200,000 became payable at the
mailing of this proxy statement and the remainder will become payable at the
closing of the transaction. Based upon a hypothetical transaction value at
closing of $95 million, MB&D would receive compensation of $950,000. In
addition, Eastern has agreed to reimburse MB&D for its reasonable out-of-pocket
expenses incurred in connection with the transaction. Eastern also has agreed to
indemnify MB&D and its directors, officers and employees against certain losses,
claims, damages and liabilities relating to or arising out of MB&D's engagement,
including liabilities under the federal securities laws.
Opinion of Tucker Anthony Incorporated
Tucker Anthony was retained by VFSC in October 1996 for the purpose of
providing financial advice and consultation in connection with a potential
acquisition of Eastern, including assistance in developing an overall strategy
for the acquisition of Eastern, advice on valuation and transaction structure,
assistance in bid presentation, negotiations and related strategy and analysis,
and, if appropriate, the rendering of a fairness opinion in connection with a
proposed acquisition.
VFSC selected Tucker Anthony for a number of reasons including its
familiarity with VFSC and Eastern and their respective businesses. VFSC also
considered Tucker Anthony's experience and reputation in the area of valuation
and financial advisory work generally, and in relation to financial institutions
specifically. Tucker Anthony makes a market in VFSC Common Stock and Eastern
Common Stock. Tucker Anthony is a nationally recognized investment banking firm
and is regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, private placements and valuations for corporate and other
purposes.
Tucker Anthony has rendered written opinions to the Board of Directors
of VFSC to the effect that, as of November 13, 1996 and as of the date of this
Joint Proxy Statement-Prospectus, the consideration to be paid to the holders of
Eastern Common Stock in the Merger pursuant to the Merger Agreement is fair,
from a financial point of view, to the holders of VFSC Common Stock. The full
text of the fairness opinion dated as of the date of this Joint Proxy
Statement-Prospectus, setting forth the assumptions made, procedures followed,
matters considered and certain limitations on the review undertaken by Tucker
Anthony, is included as Appendix C to this Joint Proxy Statement-Prospectus.
Holders of VFSC Common Stock are urged to read the fairness opinion in its
entirety. This opinion is directed to the VFSC Board only and does not
constitute a recommendation to any holder of VFSC Common Stock as to how such
stockholder should vote at the meeting. The November 13, 1996 opinion is
substantially identical to the opinion attached hereto as Appendix C.
As compensation for its services as financial advisor, including
issuance of the opinions, VFSC has agreed to pay Tucker Anthony a total of
$500,000 of which amount $300,000 has
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been paid as of the date hereof and the balance is payable at the closing of the
Merger. VFSC has also agreed to reimburse Tucker Anthony for its out-of-pocket
expenses and to indemnify Tucker Anthony against certain liabilities arising out
of its services.
In arriving at its opinion dated as of the date hereof, Tucker Anthony,
among other things, reviewed the Agreement; reviewed the Registration Statement
on Form S-4, including this Joint Proxy Statement-Prospectus in the form first
filed with the Commission; reviewed certain historical financial and other
information concerning VFSC for the five fiscal years ended December 31, 1995
and for the three quarters ended March 31, June 30 and September 30, 1996
including VFSC's reports on Forms 10-K and 10-Q; reviewed certain historical
financial and other information concerning Eastern for the five fiscal years
ended September 30, 1996, including Eastern's reports on Forms 10-K and 10-Q;
held discussions with the senior management of VFSC and Eastern with respect to
their past and current financial performance, financial condition and future
prospects; reviewed certain internal financial data, projections and other
information of VFSC and Eastern including financial projections prepared by
management; analyzed certain publicly available information of other financial
institutions that it deemed comparable or otherwise relevant to its inquiry, and
compared VFSC and Eastern from a financial point of view with certain of these
institutions; compared the consideration to be paid by VFSC pursuant to the
Merger Agreement with the consideration paid by acquirors in other acquisitions
of financial institutions that it deemed comparable or otherwise relevant to its
inquiry; reviewed publicly available earnings estimates, historical trading
activity and ownership data of VFSC Common Stock and Eastern Common Stock and
considered the prospects for dividends and price movement in each; and conducted
such other financial studies, analyses and investigations and reviewed such
other information as it deemed appropriate to enable it to render its opinion.
In its review, it also took into account an assessment of general economic,
market and financial conditions and certain industry trends and related matters.
Tucker Anthony's opinions were necessarily based upon conditions as they existed
and could be evaluated on the date thereof and the information made available to
Tucker Anthony through the date thereof.
No limitations were imposed by the VFSC Board or the Eastern Board upon
Tucker Anthony with respect to the investigations made or procedures followed by
Tucker Anthony in its review and analysis. In its review and analysis and in
arriving at its opinions, Tucker Anthony assumed and relied upon the accuracy
and completeness of all the financial information publicly available or provided
to it by VFSC and Eastern, and did not attempt to verify any of such
information. Tucker Anthony assumed (i) that the financial projections of VFSC
and Eastern provided to it with respect to the results of operations likely to
be achieved by each company were prepared on a basis reflecting the best
currently available estimates and reasonable judgments of VFSC's and Eastern's
management and advisors as to future financial performance and results, and (ii)
that such forecasts and estimates would be realized in the amounts and in the
time periods estimated. Tucker Anthony also assumed, without independent
verification, that the current and projected aggregate reserves for possible
loan losses for VFSC and Eastern were adequate to cover such losses. Tucker
Anthony did not make or obtain any independent evaluations or appraisals of any
assets or liabilities of VFSC, Eastern or any of their
49
<PAGE>
respective subsidiaries nor did it verify any of VFSC's or Eastern's books or
records or review any individual loan credit files.
On November 13, 1996, Tucker Anthony made a presentation, and
subsequently rendered a written fairness opinion, to the VFSC Board. Set forth
below is a summary of the main elements of the financial analyses performed by
Tucker Anthony in connection with rendering its written opinion of November 13,
1996. It does not purport to be a complete description of the analyses performed
by Tucker Anthony or of the presentation of Tucker Anthony to the VFSC Board. In
connection with its opinion dated as of the date of this Joint Proxy
Statement-Prospectus, Tucker Anthony performed procedures to update certain
analyses and reviewed the assumptions on which such analyses were based and the
factors considered in connection therewith.
Pro Forma Accretion/Dilution Analysis. Tucker Anthony developed
financial projections of the expected future performance of the pro forma
combined entity assuming the consummation of the Merger based on: financial
forecasts for VFSC and Eastern prepared by their respective managements;
projected pro forma noninterest income enhancements and noninterest expense
savings, and their respective phase-in schedules, as identified by VFSC; and
one-time transaction-related adjustments and expenses as identified by VFSC.
Tucker Anthony did not develop such forecasts and projections, and assumed their
validity. The projections assumed, among other things, that Eastern's
stand-alone baseline projected earnings per share for its fiscal year ended
September 30, 1997 would be $1.85, and that noninterest income enhancements of
approximately $1.1 million and noninterest expense savings of approximately $9
million (approximately 30% of Eastern's noninterest expense for the twelve
months ended September 30, 1996, excluding a one-time special statutory
assessment of $3.8 million pre-tax paid by Eastern to capitalize the Savings
Association Insurance Fund (the "SAIF")) would be phased in during the year
after the closing of the Merger.
This analysis suggested that the Merger would result in earnings
accretion in VFSC's fiscal year ended December 31, 1998; that is, that earnings
per share for the pro forma combined entity would be higher than for VFSC as a
stand-alone entity. This analysis also suggested that tangible book value per
share and capital ratios for the pro forma combined entity at the time of
closing of the Merger would be lower than for VFSC as a stand-alone entity.
Discounted Dividend Stream Analysis. Tucker Anthony presented the
results of a discounted dividend stream analysis through VFSC's fiscal year
ended December 31, 2002 designed to estimate the internal rate of return ("IRR")
of the future streams of after-tax cash flows, under certain assumptions, that
would be achieved in the Merger. Tucker Anthony based its analysis on the
portion of the detailed financial model developed for the accretion/dilution
analysis referred to above, which focused on the contribution of Eastern to the
pro forma combined entity (including the net effect of noninterest income
enhancements, noninterest expense savings and one-time transaction-related
adjustments and expenses).
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<PAGE>
The projected cash flows from the portion of the pro forma combined
entity representing the contribution of Eastern consisted of dividends (to
maintain a target tangible-equity-to- tangible-assets ratio of 7.00%) in the
quarters ended September 30, 1997 and December 31, 1997 and VFSC fiscal years
ended December 31, 1998 through 2002 plus the terminal value at fiscal year end
2002. In estimating the appropriate terminal value at fiscal year 2002, Tucker
Anthony applied to estimated earnings in fiscal year 2002 multiples of 9.0x,
10.0x and 11.0x, representing a range which approximated the trading range of
VFSC Common Stock in the prior eighteen months. Acquisition and trading
multiples from time to time fluctuate considerably, and no assurance can be made
that future trading multiples will be comparable to historical levels. Under the
terms of the Merger, based on the foregoing assumptions, this analysis suggested
an IRR in the range 16.6% to 26.9% for an Acquisition Price in the range $21.72
to $26.83 per share and terminal earnings multiples in the range 9.0x to 11.0x.
Based upon Tucker Anthony's experience and judgment and its estimate of
VFSC's required return on equity, Tucker Anthony estimated that holders of VFSC
Common Stock would typically expect returns on equity on acquisitions such as
the Merger of approximately 14% to 16%, in view of VFSC's operating projections,
historical performance, financial condition and market capitalization, among
other matters.
Acquisition Price/Exchange Ratio Analysis. Tucker Anthony considered
the ranges of possible acquisition prices and exchange ratios that could result
under the Merger, and the impact of these on its analyses.
Stock Trading Analysis. Tucker Anthony examined the historical trading
prices, volume, price/book value and price/earnings multiples of VFSC Common
Stock and Eastern Common Stock, and compared the historical trading prices of
VFSC Common Stock and Eastern Common Stock in relation to movements in certain
stock indices, specifically the Standard & Poor's Regional Bank Index and the
Standard and Poor's Savings & Loan Index, as well as to other selected publicly
traded financial institutions.
Analysis of Selected Transactions. Tucker Anthony reviewed and
performed analysis on 84 unassisted acquisitions of thrift institutions in the
Northeastern US (the "Selected Northeast Transactions") and 71 unassisted
acquisitions of thrift institutions in the US with a transaction size between
$50 million and $150 million (the "Selected US Transactions") announced since
January 1, 1993, comparing the target financial institutions' capital structure
and profitability to Eastern's current results of operations and financial
condition. The Selected Northeast Transactions and Selected US Transactions were
chosen because they represented merger and acquisition transactions that
involved target financial institutions exhibiting certain
characteristics-including asset size, geographic proximity and business
risk-similar to those exhibited by Eastern. Excluding the highest and lowest
ratios, the target financial institutions involved in the Selected Northeast
Transactions and the Selected US Transactions had an average return on assets
for the latest twelve months prior to announcement date of 0.83% and 0.90% and
an average return on equity for the latest twelve months prior to announcement
date of 8.90% and 11.07%, respectively, as compared to 0.69% and 9.01%
(excluding a one-time
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<PAGE>
special statutory assessment of $2.4 million after tax paid by Eastern to
capitalize the Savings Association Insurance Fund), respectively, for Eastern.
Set forth below is a summary of the analysis with respect to the Selected
Northeast Transactions and the Selected US Transactions.
<TABLE>
<CAPTION>
Selected Northeast Selected US
Transactions Transactions
Vermont ------------------ -------------------
Financial Offer Offer
Offer(1) Median Percentile(2) Median Percentile(2)
--------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C>
Price/Trailing Twelve Months Earnings(3) 16.0x 14.5x 64% 15.1x 59%
Price/Book Value 1.45x 1.53x 42% 1.58x 36%
Premium to Market Price (4) 125% 130% 43% 130% 41%
<FN>
(1) Based upon value of $25.01 per share of Eastern Common Stock (based on the
November 11, 1996 closing price of VFSC Common Stock of $36.25). If the
value of the VFSC Common Stock were based on its average closing bid price
per share during the twenty trading day period ending on the fifth business
day prior to the announcement of the Merger of $34.66, implying a value of
$24.23 per share of Eastern Common Stock, the corresponding multiples in
the table would be: price/trailing twelve months earnings of 15.6x;
price/book value of 1.40x; and premium to market price of 121%.
(2) Position of the VFSC offer in relation to percentile rankings of the
Selected Northeast Transactions and the Selected US Transactions,
respectively.
(3) Excludes a one-time special statutory assessment paid by Eastern to
capitalize the Savings Association Insurance Fund.
(4) Premium to market price for Selected Northeast Transactions and the
Selected US Transactions based on stock price one week prior to
announcement; market price for Eastern of $20.00/share based on price one
month prior to announcement.
</FN>
</TABLE>
Analysis of Selected Publicly Traded Companies. Tucker Anthony compared
selected financial data and financial ratios of VFSC and Eastern to the
corresponding data and ratios of certain publicly traded commercial bank and
thrift institutions located in New England with total assets comparable to VFSC
and Eastern, respectively. The commercial bank and thrift institutions included
in the comparison to VFSC were: Banknorth Group, Inc., Chittenden Corporation,
Merchants Bankshares, Inc., Peoples Heritage Financial Group, Inc. and TrustCo
Bank Corp NY (the "Selected Banks"). The thrift institutions included in the
comparison to Eastern were: Andover Bancorp, Inc., CFX Corporation, Community
Bancshares, Inc., First Essex Bancorp, Inc., MASSBANK Corp., Medford Savings
Bank, MetroWest Bank, New Hampshire Thrift Bancshares, Inc., People's
Bancshares, Inc., Sandwich Co-operative Bank and SIS Bancorp, Inc. (the
"Selected Thrifts"). The Selected Banks and the Selected Thrifts, as groups,
exhibited certain characteristics-including asset size, geographic proximity and
business risk-similar to those exhibited by VFSC and Eastern, respectively.
The comparison of VFSC to the Selected Banks showed among other things
that based on financial data as of September 30, 1996 (other than certain
instances in which June 30, 1996 data was the latest available data): (i) the
ratio of VFSC's net loans to assets was 70.0% compared to an average of 66.2%
for the Selected Banks; (ii) the ratio of VFSC's non-performing assets to total
loans plus real estate owned was 1.2% compared to 1.9% for the Selected Banks;
(iii) the ratio of VFSC's non-performing assets to the sum of stockholders'
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<PAGE>
equity and loan loss reserves was 8.5% compared to an average of 13.0% for the
Selected Banks; (iv) the ratio of VFSC's equity to total assets was 9.04% as
compared to an average of 8.04% for the Selected Banks; (v) the latest quarter
annualized return on assets for VFSC was 1.30% compared to an average of 1.19%
for the Selected Banks; (vi) the latest quarter annualized return on equity for
VFSC was 14.51%, compared to an average of 14.89% for the Selected Banks; (vii)
the ratio of VFSC's market price to its book value per common share was 1.48x
compared to an average of 1.87x for the Selected Banks; (viii) the
price/earnings ratio for the trailing twelve months earnings for VFSC was 10.9x,
compared to an average of 11.4x for the Selected Banks; and (ix) the average
latest quarter annualized dividend yield for VFSC was 3.0% as compared to 3.6%
for the Selected Banks.
The comparison of Eastern to the Selected Thrifts showed among other
things that based on financial data as of September 30, 1996 (other than certain
instances in which June 30, 1996 data was the latest available data): (i) the
ratio of Eastern's net loans to assets was 56.3% compared to an average of 56.3%
for the Selected Thrifts; (ii) the ratio of Eastern's non-performing assets to
total loans plus real estate owned was 2.4% compared to 2.6% for the Selected
Thrifts; (iii) the ratio of Eastern's non-performing assets to the sum of
stockholders' equity and loan loss reserves was 18.1% compared to an average of
11.3% for the Selected Thrifts; (iv) the ratio of Eastern's equity to total
assets was 7.32% as compared to an average of 7.77% for the Selected Thrifts;
(v) the latest quarter annualized return on assets for Eastern was 0.67%
compared to an average of 0.99% for the Selected Thrifts; (vi) the latest
quarter annualized return on equity for Eastern was 8.89%, compared to an
average of 12.73% for the Selected Thrifts; (vii) the ratio of Eastern's market
price to its book value per common share was 1.28x compared to an average of
1.34x for the Selected Thrifts; (viii) the price/earnings ratio for the trailing
twelve months earnings for Eastern was 14.8x, compared to an average of 10.6x
for the Selected Thrifts; and (ix) the average latest quarter annualized
dividend yield for Eastern was 2.5% as compared to 3.1% for the Selected
Thrifts.
The foregoing is a summary of the main elements of the financial
analyses performed by Tucker Anthony, but it does not purport to be a complete
description of such analyses. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to a
summary description. Accordingly, notwithstanding the separate factors
summarized above, Tucker Anthony believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors considered by
it, without considering all analyses and factors, or attempting to ascribe
relative weights to some or all of such analyses or factors, could create an
incomplete view of the evaluation process underlying Tucker Anthony's opinion.
In addition, Tucker Anthony may have used the various analyses for different
purposes and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be Tucker Anthony's
view of the actual value of Eastern to VFSC. The fact that any specific analysis
has been referred to in the summary above is not meant to indicate that such
analysis was given more weight than any other analyses.
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<PAGE>
In performing its analyses, Tucker Anthony made numerous assumptions
with respect to industry performance, general business and economic conditions,
and other matters, many of which are beyond the control of VFSC and Eastern. The
analyses performed by Tucker Anthony are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than those suggested by such analyses. Such analyses were prepared
solely as a part of Tucker Anthony's analysis of the fairness, from a financial
point of view, to the holders of VFSC Common Stock of the consideration to be
paid in the Merger to the holders of Eastern Common Stock, and were provided to
VFSC's Board of Directors in connection with the delivery of Tucker Anthony's
opinion. The analyses do not purport to be appraisals or to reflect the prices
at which Eastern or VFSC might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future. In
addition, as described above, Tucker Anthony's opinion is just one of the many
factors taken into consideration by VFSC's Board of Directors (see
"--Recommendation of the VFSC Board and Reasons for the Merger" and
"--Background of the Merger").
Effective Time of the Merger; Closing Date
If the Merger Agreement is approved and adopted by the requisite vote
of VFSC and Eastern stockholders, and the other conditions to the Merger are
satisfied or (where permissible) waived, the Merger will be consummated and
become effective when the Certificate of Merger is filed with the Secretary of
State of Delaware, or at such later date and time as is specified therein. Under
the terms of the Merger Agreement, the Closing Date shall be the date on which
the Effective Time occurs.
Conversion of Shares of Eastern Common Stock Pursuant to the Merger
At the Effective Time, automatically and without any action on the part
of the holder thereof, each share of Eastern Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares held by dissenting
stockholders ("Dissenting Shares"), shares held directly or indirectly by VFSC,
other than shares in trust accounts, merged accounts and the like which are
beneficially owned by third parties ("Trust Account Shares") and other shares
held in respect of a debt previously contracted ("DPC Shares"), and any shares
held as treasury stock by Eastern) shall become and be converted into either:
(i) an amount in cash equal to the sum of (x) $7.25 plus (y) the
product of 0.49 times the Average Closing Price (such total
per share purchase price being referred to herein as the
"Acquisition Price" and such total per share cash amount being
referred to herein as the "Cash Distribution"); or
(ii) the number of whole and fractional shares of VFSC Common
Stock, rounded to the nearest ten-thousandth of a share, equal
to the number obtained by dividing the Acquisition Price by
the Average Closing Price (such number being referred to
herein as the "Exchange Ratio" or the "Stock Distribution");
provided,
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<PAGE>
however, that if the Average Closing Price is greater than or
equal to $39.96 per share, the Acquisition Price shall equal
$26.83, and if the Average Closing Price is less than or equal
to $29.54 per share but greater than or equal to $26.06 per
share, the Acquisition Price shall equal $21.72. If the
Average Closing Price is less than $26.06, the Acquisition
Price shall equal the sum of (x) $7.25 plus (y) the product of
0.5553 times the Average Closing Price.
If the Average Closing Price is less than $26.06 per share (the "Minimum
Price"), then Eastern shall have the right to terminate the Merger Agreement,
unless VFSC elects, in its sole discretion, to adopt $21.72 as the Adjusted
Acquisition Price. The Acquisition Price shall be identical without regard to
any election made pursuant to Section 2.14 of the Merger Agreement (see
"--Election Procedures").
As of the Effective Time, each share of Eastern Common Stock held
directly or indirectly by VFSC, other than Trust Account Shares, and DPC Shares,
and each share of Eastern Common Stock held by Eastern as treasury stock shall
be canceled and retired and shall cease to exist, and no payment shall be made
with respect thereto.
The Merger Agreement defines "Average Closing Price" as the average of
the closing bid prices of shares of VFSC Common Stock as reported on the Nasdaq
NM composite transactions reporting system for the twenty consecutive trading
days (the "Valuation Period") ending on the fifth business day prior to the
Closing Date. The Merger Agreement defines "Merger Consideration" as the shares
of VFSC Common Stock and/or cash that holders of Eastern Common Stock are
entitled to receive under the Merger Agreement. Subject to the provisions of the
Merger Agreement with respect to Dissenting Shares, each certificate that
immediately prior to the Effective Time represented outstanding shares of
Eastern Common Stock shall on and after the Effective Time be deemed for all
purposes to represent the Merger Consideration into which the shares of Eastern
Common Stock represented by such certificate shall have been converted.
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<PAGE>
TABULAR AND GRAPHIC ILLUSTRATION OF THE MERGER CONSIDERATION
AT VARIOUS AVERAGE CLOSING PRICES
The table below shows the Merger Consideration corresponding to various
possible values of the Acquisition Price and Adjusted Acquisition Price,
respectively. If the Average Closing Price is less than $26.06 and VFSC in its
sole discretion so elects, the Merger Consideration will be based on the
Adjusted Acquisition Price of $21.72. The Merger Consideration will be in the
form of the Cash Distribution per share of Eastern Common Stock or the Stock
Distribution of the number of shares of VFSC Common Stock to be exchanged for
each share of Eastern Common Stock.
There can be no assurance as to what the Average Closing Price will be
or what the value of the Merger Consideration will be at or following the
Effective Time. The table and graph below are intended as illustrative examples
only. This illustration is qualified in its entirety by reference to the Merger
Agreement. The highest and lowest Average Closing Prices depicted in the
illustration are not intended to suggest that the Average Closing Price, when
computed, will not be higher or lower than these respective values.
As shown below, if the Average Closing Price were to be $36.25, the
closing price of VFSC Common Stock on November 11, 1996, the Acquisition Price
would be $25.0125; an Eastern Stockholder receiving all cash would receive
$25.0125 per share of Eastern Common Stock, and an Eastern Stockholder receiving
all stock would receive 0.69 shares of VFSC Common Stock per share of Eastern
Common Stock.
<TABLE>
<CAPTION>
Merger Consideration
--------------------------
Average Acquisition Stock
Closing Price Price Distribution
(of VFSC (per Eastern Cash (VFSC
shares) Share) Distribution shares)
- -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
$44.000 $26.8300 $26.8300 0.6098
42.000 26.8300 26.8300 0.6388
40.000 26.8300 26.8300 0.6708
39.960 26.8300 26.8300 0.6714
38.000 25.8700 25.8700 0.6808
36.000 24.8900 24.8900 0.6914
35.500 24.6450 24.6450 0.6942
34.000 23.9100 23.9100 0.7032 If Eastern elects to terminate the Merger
32.000 22.9300 22.9300 0.7166 but VFSC elects to keep the Merger Agreement in effect:
30.000 21.9500 21.9500 0.7317 Merger Consideration
---------------------
29.540 21.7200 21.7200 0.7353 Adjusted
28.000 21.7200 21.7200 0.7757 Acquisition Price (per Cash Stock Distribution
26.060 21.7200 21.7200 0.8335 Eastern share) Distribution (VFSC shares)
---------------------- ------------ ------------------
26.000 21.6878 21.6878 0.8341 $21.7200 $21.7200 0.8354
24.000 20.5772 20.5772 0.8574 21.7200 21.7200 0.9050
22.000 19.4666 19.4666 0.8848 21.7200 21.7200 0.9873
</TABLE>
[GRAPHIC OMITTED]
Graph showing value of merger consideration plotted against Average Closing
Prices between $20.00 and $45.00 of VFSC stock to be issued, with specific
example at VFSC stock price of $36.25.
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<PAGE>
Election Procedures
Following the Special Meetings and 25 business days prior to the
anticipated Closing Date, or on such other date as may be mutually agreed upon
by the parties (the "Mailing Date"), VNB, acting as an exchange agent appointed
by VFSC (the "Exchange Agent"), will mail to each holder of record of shares of
Eastern Common Stock outstanding as of five business days prior to the Mailing
Date an election form (the "Election Form"), together with appropriate
transmittal materials.
The Election Form will permit a holder of shares of Eastern Common
Stock to elect, with respect to some or all of such holder's shares of Eastern
Common Stock, (i) to receive the Stock Distribution (the "Stock Election
Shares"), (ii) to receive the Cash Distribution (the "Cash Election Shares"), or
(iii) to indicate that such holder makes no election (the "No Election Shares").
Any shares of Eastern Common Stock with respect to which the holder
thereof shall not, as of the Election Deadline (as defined below), have made
such an election by submission to the Exchange Agent of a properly completed
Election Form, will be deemed to be No Election Shares. "Election Deadline"
means 5:00 p.m., local time, on the 15th business day following but not
including the Mailing Date or such other date as VFSC and Eastern shall mutually
agree upon in writing.
Any election shall have been properly made only if the Exchange Agent
has received a properly completed Election Form by the Election Deadline. An
Election Form will be properly completed only if accompanied by either (i)
certificates representing all shares of Eastern Common Stock covered thereby or
(ii) an appropriate guarantee of delivery of such certificates as set forth in
the Election Form from a member of a national securities exchange or the NASD,
or a commercial bank or trust company in the United States, provided that if the
certificates are not delivered by the time set forth in the guarantee of
delivery (which time may not be later than two business days after the Election
Deadline), the holder shall be entitled only to receive in respect of each share
of Eastern Common Stock represented by such certificates the Merger
Consideration to be received by holders of No Election Shares, as determined in
accordance with the allocation provisions set forth below. As a result of this
requirement, stockholders who submit Election Forms will not be able to sell
their shares on the Nasdaq NM, or otherwise, after submitting their Election
Forms and will be irrevocably bound to receive the Merger Consideration rather
than retaining the ability to choose, up to the Effective Time, whether to sell
their shares or to receive the Merger Consideration. Any Election Form may be
revoked or changed by the person submitting such Election Form to the Exchange
Agent by written notice to the Exchange Agent, provided such notice is received
by the Exchange Agent at or prior to the Election Deadline. The Exchange Agent
will have reasonable discretion to determine when any election, modification or
revocation is received and whether any such election, modification or revocation
has been properly made.
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<PAGE>
The total amount of the Cash Distribution to be made to all holders of
shares of Eastern Common Stock will equal the product of $7.25 times the number
of shares of Eastern Common Stock outstanding at the Effective Time (currently
estimated at $26.6 million); the balance of the consideration to be paid to such
holders will consist of shares of VFSC Common Stock. The allocation procedures
contained in the Merger Agreement are intended to cause these aggregate amounts
to be distributed among such holders as nearly as possible in accordance with
their expressed wishes as set forth in their Election Forms.
If the aggregate number of Stock Election Shares does not equal the
Stock Conversion Number (as defined below), the Exchange Agent will within 10
business days after the Election Deadline, unless the Effective Time has not yet
occurred, in which case as soon thereafter as practicable, allocate among
holders of shares of Eastern Common Stock outstanding at the Effective Time the
right to receive with respect to each such share the Stock Distribution or the
Cash Distribution as follows:
(i) if the aggregate number of Stock Election Shares is less than
the Stock Conversion Number (as defined below), then
(a) all Stock Election Shares will be converted into the
right to receive the Stock Distribution;
(b) the Exchange Agent will select, on a pro rata basis,
first from among the holders of No Election Shares
and then (if necessary) from among the holders of
Cash Election Shares, a sufficient number of such
shares ("Stock Designee Shares") such that the number
of Stock Designee Shares will, when added to the
number of Stock Election Shares, equal as closely as
practicable, but in no event be less than, the Stock
Conversion Number, and all Stock Designee Shares will
be converted into the right to receive the Stock
Distribution; and
(c) the Cash Election Shares and the No Election Shares
not so selected as Stock Designee Shares will be
converted into the right to receive the Cash
Distribution; or
(ii) if the aggregate number of Stock Election Shares is greater
than the Stock Conversion Number, then
(a) all Cash Election Shares will be converted into the
right to receive the Cash Distribution;
(b) the Exchange Agent will select, on a pro rata basis,
first from among the holders of No Election Shares
and then (if necessary) from among the holders of
Stock Election Shares, a sufficient number of such
shares ("Cash Designee Shares") such that the number
of Cash Designee Shares
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will, when added to the number of Cash Election
Shares, equal as closely as practicable, but in no
event will it exceed, the Cash Conversion Number (as
defined below), and all Cash Designee Shares will be
converted into the right to receive the Cash
Distribution; and
(c) the Stock Election Shares and the No Election Shares
not so selected as Cash Designee Shares will be
converted into the right to receive the Stock
Distribution.
"Cash Conversion Number" means the number of outstanding shares of
Eastern Common Stock as of the Effective Time, including all Dissenting Shares,
if any, multiplied by the ratio of $7.25 to the Acquisition Price. "Stock
Conversion Number" means the number of outstanding shares of Eastern Common
Stock as of the Effective Time minus the Cash Conversion Number.
The proration process to be used by the Exchange Agent shall be as the
Exchange Agent deems equitable in its sole reasonable discretion, provided that
each holder of Stock Election Shares shall, to the greatest extent possible,
except for rounding to whole numbers of shares, be subject to the same degree of
proration as each other holder of Stock Election Shares.
Certificate Exchange Procedures
Certificates representing shares of Eastern Common Stock outstanding
immediately prior to the Effective Time that are converted into the Merger
Consideration (the "Certificates"), shall, after the Effective Time, be deemed
to represent the Merger Consideration into which such shares have been converted
and shall be exchangeable by the holders thereof for (i) new certificates
representing the shares of VFSC Common Stock into which such shares have been
converted and/or (ii) a check for the total cash amount into which such shares
have been converted.
Upon surrender of a Certificate, together with a duly executed letter
of transmittal and any other required documents, the holder of such Certificate
will be entitled to receive, in exchange therefor, as soon as practicable, a
certificate for the number of shares of VFSC Common Stock and/or a check for the
cash amount to which such holder is entitled, and such Certificate shall
forthwith be canceled. No interest will be paid on the cash amount payable with
respect to any unsurrendered Certificate representing Cash Election Shares.
In lieu of the issuance of fractional shares of VFSC Common Stock, a
payment in cash, without interest, will be made to the holders of Eastern Common
Stock in respect of any fractional share that would otherwise be issuable, equal
to an amount in cash determined by multiplying such holder's fractional interest
by the Acquisition Price (rounded up to the nearest cent). If any Certificate
has been lost, stolen or destroyed, upon receipt of appropriate evidence as to
such loss, theft or destruction and to the ownership of such Certificate by the
person claiming such Certificate to be lost, stolen or destroyed, and the
receipt by VFSC of appropriate
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and customary indemnification, VFSC will deliver in exchange for such lost,
stolen or destroyed Certificate the Merger Consideration and any fractional
share payment.
If any Merger Consideration is to be issued in a name other than that
in which the Certificate surrendered in exchange therefor is registered, it
shall be a condition of the issuance thereof that the Certificate so surrendered
shall be properly endorsed (or accompanied by an appropriate instrument of
transfer) and otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the Exchange Agent in advance any transfer
or other taxes required by reason of the delivery of the Merger Consideration.
Treatment of Eastern Stock Options
As soon as practicable following the Eastern Meeting and in any event
not later than 10 business days prior to the Effective Time, each holder of a
then-outstanding stock option to purchase shares of Eastern Common Stock
pursuant to Eastern's 1984 and 1987 stock option plans (the aggregate number of
shares of Eastern Common Stock subject to purchase under which options shall not
at the Effective Time exceed 398,975 shares) shall be entitled to exercise such
option (whether or not such option would otherwise have been exercisable) at the
exercise price thereof. If such options are not so exercised, then each such
holder shall be entitled to elect by written notice to VFSC, delivered not later
than 10 business days prior to the Effective Time, either (i) to receive,
immediately prior to the Effective Time, from Eastern in cancellation of each
such option a cash payment in an amount equal to the excess of $24.28 over the
per share exercise price of such option, multiplied by the number of shares
covered by such option (less any withholding required under applicable federal
or state income tax law), or (ii) to have each such option, upon the Effective
Time, converted into an option to purchase shares of VFSC Common Stock. Any
option so converted shall have the following terms:
(a) the number of shares of VFSC Common Stock subject to such
option shall be equal to the product of the number of shares
of Eastern Common Stock previously subject thereto multiplied
by the Exchange Ratio, rounded down to the nearest whole
share;
(b) the exercise price per share of VFSC Common Stock subject to
such option shall be equal to the exercise price per share of
Eastern Common Stock previously subject thereto divided by the
Exchange Ratio, rounded up to the nearest cent;
(c) the duration and other terms of such option shall be
unchanged, except that all references to Eastern shall be
deemed to be references to VFSC;
(d) VFSC shall assume the option as contemplated by Section 424(a)
of the Code; and
(e) with respect to any such option that is an incentive stock
option within the meaning of Section 422 of the Code, VFSC
shall take such actions (other than
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delaying the date on which such option becomes exercisable
beyond the date on which it would otherwise become exercisable
pursuant to the terms thereof) as may be necessary or
appropriate to cause such option, upon being converted into an
option to purchase shares of VFSC Common Stock, to remain an
incentive stock option.
If any such holder fails either to exercise such holder's options as
provided for above or to elect one of the other two foregoing alternatives, then
such holder's options shall terminate at the Effective Time as provided in the
applicable Eastern stock option plans.
Conduct of Business Pending the Merger
Pursuant to the Merger Agreement, each of Eastern and Vermont Federal
has agreed that, except as specifically required or permitted pursuant to the
Merger Agreement or as otherwise specifically disclosed therein, it will prior
to the Effective Time carry on its business in the ordinary course consistent
with past practice.
In addition, each of Eastern and Vermont Federal has agreed that,
except as contemplated by the Merger Agreement, prior to the Effective Time, it
will not, directly or indirectly, do any of the following without the prior
written consent of VFSC:
(a) engage or participate in any material transaction or incur or
sustain any material obligation or liability except in the
ordinary, regular and usual course of its business consistent
with past practices, including without limitation entering
into any settlement agreement or understanding with respect to
any material litigation matters;
(b) accept, renew or roll over any "brokered deposit" or offer an
interest rate with respect to any deposit that would either
constitute an impermissible interest rate with respect to
deposits of an undercapitalized insured depository institution
or otherwise set interest rates on deposits that depart from
past practices of Vermont Federal;
(c) except in the ordinary, regular and usual course of business
consistent with past practices and in an immaterial aggregate
amount, sell, lease, transfer, assign, encumber or otherwise
dispose of or enter into any contract, agreement or
understanding to lease, transfer, assign, encumber or dispose
of any of its assets;
(d) relocate, or file any application to relocate, any branch
office;
(e) terminate, or give any notice (written or verbal) to customers
or governmental authorities or agencies to terminate the
operations of any branch office;
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(f) waive any material right, whether in equity or at law, that it
has with respect to any asset except in the ordinary, regular
and usual course of business consistent with past practices;
(g) declare or pay any dividends on or make any other
distributions in respect of the Eastern Common Stock, except
that Eastern shall be permitted to declare and pay regular
quarterly cash dividends to its stockholders of $0.14 per
share for the quarter ending September 30, 1996, $0.16 per
share for the quarters ending December 31 and March 31, 1997
and $0.18 per share for the quarter ending June 30, 1997,
provided, however, that Eastern may not declare or pay any
such regular quarterly cash dividend hereunder greater than
$0.14 per share if the aggregate amount of such dividend would
exceed forty percent (40%) of Eastern's net income for the
fiscal quarter for which the dividend would be declared or
paid;
(h) adopt or amend in any material respect any pension plan or
benefit plan or enter into any employment, severance or
similar contract with any person or amend any such existing
agreement, plan or contract to increase any amounts payable
thereunder or benefits provided thereunder, or grant or permit
any increase in compensation to its employees as a class,
except in the ordinary course of business consistent with past
practices, or pay any bonus except as agreed to by Eastern or
Vermont Federal and VFSC and as disclosed in the Merger
Agreement;
(i) subject to its directors' fiduciary duties and obligations,
authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into an agreement
with respect to, any merger, consolidation, purchase and
assumption transaction or business combination (other than the
Merger), any acquisition of a material amount of assets or
securities or assumption of liabilities, any disposition of a
material amount of assets or securities, or any release or
relinquishment of any material contract rights not in the
ordinary course of business and inconsistent with past
practices;
(j) propose or adopt amendments to its certificate or articles of
incorporation or by-laws;
(k) issue, deliver or sell any shares of its capital stock except
upon exercise or fulfillment of options issued or existing on
the date of the Merger Agreement, or effect any stock split,
reverse stock split, recapitalization, reclassification or
similar transaction or otherwise change its equity
capitalization;
(l) grant, confer or award any options, warrants, conversion
rights or other rights, not existing on the date of the Merger
Agreement, to acquire any shares of its capital stock;
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(m) purchase, redeem or otherwise acquire any shares of its
capital stock or any securities convertible into or
exercisable for any shares of its capital stock, except in a
fiduciary capacity;
(n) impose, or suffer to exist the imposition, on any share of
capital stock held by it or by any of its subsidiaries of any
material lien, charge or encumbrance, or permit any such lien,
charge or encumbrance;
(o) incur, or permit any of its subsidiaries to incur, any
additional debt obligation or other obligation for borrowed
money, or guaranty any additional debt obligation or other
obligation for borrowed money, except in the ordinary course
of business consistent with past practices;
(p) incur or commit to any capital expenditures or any obligations
or liabilities in connection therewith, other than capital
expenditures and such related obligations or liabilities
incurred or committed to in the ordinary and usual course of
business consistent with past practices, which, in all cases,
do not individually exceed $50,000 or cumulatively exceed
$150,000;
(q) change its methods of accounting in effect at September 30,
1995, except as may be required by changes in generally
accepted accounting principles, or change its fiscal year;
(r) make any loan or extension of credit or enter into any
commitment therefor on other than Vermont Federal's customary
terms, conditions and standards and in accordance with
applicable law and regulation and consistent with prudent
banking practices, and in any event Eastern and Vermont
Federal are required to provide VFSC with monthly reports of
all loans, extensions of credit and commitments therefor equal
to or greater than $500,000, individually, and to consult with
VFSC prior to making or entering into any new loan, extension
of credit or commitment therefor equal to or greater than
$750,000 individually, or which, when aggregated with all
other loans, extensions of credit and commitments therefor to
a single borrower or affiliated group of borrowers, equals at
least $1,500,000; and
(s) agree, in writing or otherwise, to take any actions prohibited
under the Merger Agreement or any action that would make any
of its representations or warranties contained in the Merger
Agreement untrue or incorrect or would otherwise violate any
of its other agreements or commitments contained in the Merger
Agreement in any material respect.
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Each of Eastern and Vermont Federal has also agreed that, except as may
be specifically required or permitted pursuant to the Merger Agreement or
specifically described therein or in the accompanying disclosure schedule, it
shall:
(a) use all reasonable efforts, and cause each of its subsidiaries
to use all reasonable efforts, to preserve intact its business
organization and goodwill in all material respects, keep
available the services of its officers and employees as a
group and maintain satisfactory relationships with borrowers,
depositors, other customers and others having business
relationships with it;
(b) at VFSC's request, use all reasonable efforts to cooperate
with VFSC with respect to preparation for the combination and
integration of the businesses, systems and operations of
Eastern and VFSC, and confer on a regular and frequent basis
with one or more representatives of VFSC to report on
operational and related matters;
(c) subject to any restrictions under applicable law or
regulation, promptly notify VFSC of any emergency or other
change in the normal course of its or its subsidiaries'
businesses or in the operation of its or its subsidiaries'
properties and of any governmental complaints, investigations
or hearings (or communications indicating that the same may be
contemplated) if such emergency, change, complaint,
investigation or hearing would be material to its or its
subsidiaries' assets, properties, liabilities, business,
results of operations, condition (financial or regulatory);
and
(d) file all reports, applications and other documents required to
be filed by it with the OTS, the Federal Reserve Board, the
FDIC, any other federal or state banking or other governmental
agency or authority between the date of the Merger Agreement
and the Effective Time and shall furnish to VFSC copies of all
such reports promptly after the same are filed.
Conditions to Consummation of the Merger
Mutual Conditions. The respective obligations of VFSC and Eastern to
consummate the Merger are subject to satisfaction at or prior to the Effective
Time of the following conditions:
(a) The Merger Agreement and the transactions contemplated thereby
shall have been approved and adopted by the requisite vote of
Eastern and VFSC stockholders;
(b) Other than the filing of the Certificate of Merger, all
necessary approvals, authorizations and consents of any
governmental or regulatory authority or agency necessary for
the consummation of the transactions contemplated by the
Merger Agreement shall have occurred or been file or obtained
and shall be in full force and effect, and all statutory
waiting periods in respect thereof shall have expired
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or been terminated (all such approvals and the expiration of
all such waiting periods being referred to herein as the
"Requisite Regulatory Approvals");
(c) No temporary restraining order, preliminary or permanent
injunction or other order issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger or any of the other
transactions contemplated by the Merger Agreement shall be in
effect; and
(d) No stop order suspending the effectiveness of the Form S-4
Registration Statement registering the shares of VFSC Common
Stock to be issued in the Merger of which this Joint Proxy
Statement-Prospectus forms a part shall have been issued, and
no proceedings for that purpose shall have been initiated or
threatened by the Commission.
Conditions to VFSC's Obligations. The obligation of VFSC to effect the
Merger and the transactions contemplated thereby is also subject to the
following conditions, any or all of which may be waived in whole or in part by
VFSC in its sole discretion:
(a) No material adverse change shall have occurred since September
30, 1996 in the business, operations, results of operations,
assets, liabilities or condition of Eastern or Vermont
Federal;
(b) VFSC shall have received assurances that Eastern and Vermont
Federal's representations and warranties are true at the
Closing Date and that all of Eastern's pre-closing obligations
have been complied with;
(c) All required approvals of non-governmental third parties that
are the responsibility of Eastern or Vermont Federal to obtain
shall have been received;
(d) None of the Requisite Regulatory Approvals shall contain any
materially burdensome condition or restriction;
(e) VFSC shall have received a legal opinion from Sullivan &
Worcester LLP, VFSC's outside counsel, that the Merger will
constitute a tax-free reorganization within the meaning of
Section 368(a) of the Code;
(f) VFSC shall have received a legal opinion from Hale and Dorr
LLP, Eastern's outside counsel, regarding certain corporate
and other matters in such form as is customary in transactions
of this type;
(g) Eastern shall have delivered a letter identifying persons
deemed to be its affiliates and, to the extent received by
Eastern, delivery of letters from such persons agreeing to
comply with certain limitations applicable after the Effective
Time to their sales of VFSC Common Stock received in the
Merger; and
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(h) The Dissenting Shares shall not represent more than 20% of the
shares of Eastern Common Stock issued and outstanding
immediately prior to the Effective Time.
Conditions to Eastern and Vermont Federal's Obligations. The obligation
of Eastern to effect the Merger and the other transactions contemplated in the
Merger Agreement is also subject to the satisfaction of the following
conditions, any or all of which may be waived by Eastern in its sole discretion:
(a) No material adverse change shall have occurred since December
31, 1995 in the business, operations, results of operations,
assets, liabilities, or condition of VFSC;
(b) Eastern shall have received assurances that VFSC's
representation and warranties are true at the Effective Time
and that all of VFSC's pre-closing obligations have been
complied with;
(c) All required approvals of non-governmental third parties that
are the responsibility of VFSC to obtain shall have been
received;
(d) Eastern shall have received a legal opinion from Hale and Dorr
LLP that the Merger will constitute a tax-free reorganization
within the meaning of Section 368(a) of the Code and any
taxable gain realized by any Eastern stockholder as a result
of the Merger will not exceed the amount of cash received by
such stockholder;
(e) The shares of VFSC Common Stock issuable at the Effective Time
shall have been authorized for listing on the Nasdaq NM upon
official notice of issuance; and
(f) Eastern shall have received a legal opinion from Sullivan &
Worcester LLP regarding certain corporate and other matters in
such form as is customary in transactions of this type.
Termination
The Merger Agreement will be subject to termination any time prior to
the Effective Time (i) by mutual agreement of the parties; (ii) by either party
if the Merger shall not have been consummated on or before November 30, 1997 or
such later date as the parties may agree; (iii) by either party if any Requisite
Regulatory Approval or the approval of the stockholders of Eastern or the
stockholders of VFSC is not obtained or if consummation of the transactions
contemplated by the Merger Agreement is enjoined or otherwise prohibited; (iv)
by either party for a material breach of any representation, warranty or
covenant or other agreement contained in the Merger Agreement by the other
party, which breach is not cured after 30 days written
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notice thereof is given to the party committing such breach; (v) by Eastern if
the Average Closing Price is less than $26.06 per share, subject to VFSC's right
to elect to increase the number of shares of VFSC Common Stock issuable in the
Merger by using the Adjusted Acquisition Price; and (vi) by VFSC if the Eastern
Board does not recommend to Eastern's stockholders the approval of the proposals
to be submitted to such stockholders in accordance with the Merger Agreement or
if such recommendation is subsequently withdrawn, modified or amended in any way
that is materially adverse to VFSC.
If either party terminates the Merger Agreement for any of the
foregoing reasons, neither party shall have any further liability under the
Merger Agreement; provided, however, in the event of a party's gross negligence
or willful breach of any material representation, warranty, covenant or
agreement contained in the Merger Agreement, the breaching party shall remain
liable for any and all damages, costs and expenses sustained or incurred by the
non-breaching party. In addition, Eastern will be liable for a cash payment of
up to $1 million if there should occur an event that would entitle VFSC to
exercise the option granted to it under the Stock Option Agreement. This
termination fee is intended to increase the likelihood that the Merger will be
consummated in accordance with the terms of the Merger Agreement and may have
the effect of discouraging persons who might now or prior to the Effective Time
be interested in acquiring all of or a significant interest in Eastern from
considering or proposing such an acquisition.
Amendment, Extension and Waiver
At any time prior to the consummation of the transactions contemplated
by the Merger Agreement or termination of the Merger Agreement, whether before
or after the approvals of the parties' respective stockholders, the parties may
amend the Merger Agreement, extend the time for the performance of any of the
obligations or other acts of any other party hereto, waive any inaccuracies in
the representations and warranties contained therein or in any document
delivered pursuant thereto, or waive compliance with any of the agreements or
conditions with respect to covenants of the parties or closing conditions of the
Merger (other than the mutual conditions described above); provided, however,
that there may not be, without further approval of the parties' stockholders, to
the extent required by law, any amendment, extension or waiver of the Merger
Agreement that changes the amount or form of the consideration to be delivered
to the Eastern stockholders other than as may be expressly contemplated by the
Merger Agreement. The Merger Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties thereto. Any
agreement on the part of any party to any extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party,
but such waiver or failure to insist on strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.
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Requisite Regulatory Approvals
The Merger is subject to approval by the Federal Reserve Board upon
notice by VFSC of the Merger pursuant to Section 4(c)(8) of the BHC Act. VFSC
will also provide prior notice of the Merger to the Vermont Commissioner, the
Department of Justice and the FTC. In evaluating whether to approve VFSC's
notice of the Merger, the Federal Reserve Board, or the Federal Reserve Bank of
Boston, acting on delegated authority, will be required to consider whether the
activities of a federal savings bank (i.e. those of Vermont Federal) to be
undertaken by VFSC as a result of the Merger can reasonably be expected to
produce benefits to the public (such as greater convenience, increased
competition or gains in efficiency) that outweigh possible adverse effects (such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices). Such consideration includes an
evaluation of the financial and managerial resources of VFSC and Eastern and the
effect of the Merger on such resources. There can be no assurance that the
Merger will be approved by the Federal Reserve Board or any other applicable
regulatory agency or body. If such approval is received, there can be no
assurance as to the date of such approval or the absence of any litigation
challenging the Merger. The Merger will not occur until all regulatory
approvals, notices or other filings required to consummate the Merger have been
obtained or made and are in full force and effect, and any statutory waiting
periods in respect thereof have expired.
Except for state securities ("blue sky") filings, the parties are not
aware of any other regulatory approvals or filings that are required for
consummation of the Merger, except as described above. Should any other
approvals or filings be required, it is presently contemplated that such
approvals or filings will be sought or made, as appropriate. There can be no
assurances given, however, that any other approvals, if required, will be
obtained.
The Merger will not be consummated unless all of the requisite
regulatory approvals or other filings pertaining to the transactions
contemplated by the Merger Agreement are obtained or made, as appropriate. See
"--Conditions to Consummation of the Merger."
Expenses
In general, each party will pay its own expenses in connection with the
Merger, except that in the event of gross negligence or willful breach, a party
breaching the Merger Agreement shall be liable for damages, costs and expenses
including reasonable attorneys' fees incurred by the nonbreaching party.
Stock Option Agreement
Simultaneously with the execution of the Merger Agreement, VFSC and
Eastern entered into the Stock Option Agreement. Pursuant to the Stock Option
Agreement, Eastern granted to VFSC an option to purchase, subject to adjustment
in certain events, up to 732,425 shares of Eastern Common Stock at an exercise
price of $21.00 per share. The Option becomes
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exercisable in whole or in part, after the occurrence of both an Initial
Triggering Event and a Subsequent Triggering Event (each as defined below).
The term "Initial Triggering Event" means the occurrence at any time
after November 13, 1996 of: (i) the agreement by Eastern or any subsidiary
thereof to enter into, or the approval or acceptance by Eastern's Board of
Directors of or recommendation by Eastern's Board of Directors to Eastern's
stockholders of, any transaction involving a merger or consolidation, a
purchase, lease or other acquisition of all or substantially all of the assets
of Eastern or any significant subsidiary of Eastern (except as contemplated by
the Merger Agreement), or a purchase or other acquisition of securities
representing fifteen percent 15% or more of the voting power of Eastern or any
significant subsidiary of Eastern (each of the foregoing an "Acquisition
Transaction") without VFSC's prior written consent; (ii) the acquisition by any
person (other than VFSC, its subsidiaries and Eastern acting in a fiduciary
capacity) owning beneficially less than 15% of the outstanding shares of Eastern
Common Stock on November 13, 1996 of beneficial ownership or the right to
acquire beneficial ownership of 15% or more of the outstanding shares of Eastern
Common Stock, or the acquisition by any person owning beneficially more than 15%
of the outstanding shares of Eastern Common Stock on November 13, 1996 of
beneficial ownership of an additional 5% of the outstanding shares of Eastern
Common Stock; (iii) the making by any person, other than VFSC or any subsidiary
of VFSC, of a bona-fide proposal to Eastern or its shareholders to engage in an
Acquisition Transaction by public announcement or written communication that
shall be or become the subject of public disclosure; (iv) the breach by Eastern
after a proposal as described in the preceding clause (iii) of certain covenants
in the Merger Agreement, unless remedied within an applicable notice period; or
(v) the filing by any person other than VFSC or any subsidiary of VFSC, other
than in connection with a transaction to which VFSC has given its prior written
consent, of an application or notice with the OTS or Federal Reserve Board or
other federal or state bank regulatory authority, which application or notice
has been accepted for processing, for approval to engage in an Acquisition
Transaction.
The term "Subsequent Triggering Event" means either (i) the acquisition
after November 13, 1996 by any person of beneficial ownership of 24.9% or more
of the then outstanding Eastern Common Stock; or (ii) the occurrence of the
Initial Triggering Event described in subparagraph (i) of the foregoing
paragraph, except that, in respect of the purchase or other acquisition of
securities of Eastern or any significant subsidiary of Eastern, the percentage
of voting power represented by such securities shall be 24.9% rather than 15%.
The Option will expire upon the earliest of:
(i) the Effective Time of the Merger;
(ii) any termination of the Merger Agreement in accordance with the
provisions thereof if such termination (w) occurs prior to the
occurrence of an Initial Triggering Event, (x) is because of a
failure to obtain any Requisite Regulatory Approvals, (y) is
made at the election of Eastern because of a specified decline
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in the price per share of the common stock of VFSC, or (z) by
Eastern because of a material breach by VFSC of a
representation, warranty, covenant or other agreement; or
(iii) except as provided in the foregoing clause (ii), twelve months
after the termination of the Merger Agreement in accordance
with the provisions thereof after the occurrence of an Initial
Triggering Event.
Notwithstanding the termination of the Option, VFSC will be entitled to
purchase those Option Shares with respect to which it has exercised the Option
in whole or in part prior to the termination of the Option.
The Option Agreement also provides that upon the occurrence of any
event which would cause the Option to be exercisable, Eastern shall (i) at the
request of VFSC, prepare and file a registration statement under the Securities
Act with respect to any or all of the Option Shares and shall use its best
efforts to cause such registration statement to become effective and (ii) notify
VFSC of any determination by Eastern to proceed with the preparation and filing
of a registration statement under the Securities Act with respect to any Eastern
Common Stock and cause any or all Option Shares which VFSC shall request to be
included in such registration statement. VFSC may also require, upon the Option
becoming exercisable, that Eastern repurchase the unexercised Option, in whole
or in part, at a purchase price intended to provide VFSC with the same economic
benefit as it would realize if it exercised the Option and subsequently sold the
Option Shares.
The Stock Option Agreement is intended to increase the likelihood that
the Merger will be consummated in accordance with the terms of the Merger
Agreement and may have the effect of discouraging persons who might now or prior
to the Effective Time be interested in acquiring all of or a significant
interest in Eastern from considering or proposing such an acquisition.
Stockholders Agreement
Four members of the Eastern Board, who beneficially own in the
aggregate __________ shares of Eastern Common Stock (not including _______
shares that may be acquired upon the exercise of options), representing
approximately _____% of the shares of Eastern Common Stock issued and
outstanding on the Eastern Record Date, have executed the Stockholders Agreement
with respect to such shares. Pursuant to the Stockholders Agreement, each such
director has agreed (i) to vote all shares of Eastern Common Stock beneficially
owned by such director and entitled to vote thereon in favor of the Merger, (ii)
to vote all such shares against any other proposal involving a merger,
acquisition, consolidation, sale of a material amount of assets or other
business combination with respect to Eastern, (iii) generally not to sell,
assign, transfer, encumber or otherwise dispose of such shares, and (iv) to
recommend the Merger, subject to such director's fiduciary duty, to Eastern's
stockholders. The Stockholders Agreement shall remain in effect until the
earlier of the consummation of the Merger or the termination of the Merger
Agreement in accordance with its terms.
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No Solicitation
Eastern has agreed that it shall not (and shall use all reasonable
efforts to cause its officers, directors, employees, representatives and agents,
not to), directly or indirectly, encourage, solicit, initiate or, subject to the
fiduciary obligations of the Eastern Board (as advised by outside counsel),
participate in any discussions or negotiations with, or provide any information
to, any corporation, partnership, person or other entity or group (other than
VFSC and its affiliates or representatives) concerning any Acquisition
Transaction. Notwithstanding the foregoing, Eastern and the Eastern Board are
not prohibited from taking and disclosing to Eastern's stockholders a position
with respect to a tender offer by a third party pursuant to certain rules
promulgated under the Exchange Act or from making such disclosure to Eastern's
stockholders as, in the judgment of the Eastern Board with the advice of outside
counsel, may be required under applicable law. Eastern will immediately
communicate to VFSC the terms of any proposal, discussion, negotiation or
inquiry and the identity of the party making such proposal or inquiry. Any such
communication shall be delivered no less promptly than by telephone within 24
hours after Eastern's receipt of any such proposal or inquiry or its receipt of
any request for information from the Federal Reserve Board, the OTS, the
Department of Justice or any other governmental agency or authority with respect
to a proposed Acquisition Transaction.
Interests of Certain Persons in the Merger
Indemnification of Directors and Officers. The Merger Agreement
provides that the provisions with respect to indemnification existing in favor
of, and all limitations on the personal liability of, any director, officer or
other employee of Eastern or any of its subsidiaries contained in the Eastern
Certificate and Eastern By-laws on the date of the Merger Agreement with respect
to matters occurring prior to the Effective Time shall survive the Merger and
shall continue in full force and effect in perpetuity. VFSC has also agreed to
use all reasonable efforts to cause to be maintained in effect for a period of
not less than six years from the Effective Time the current policies of the
directors' and officers' liability insurance of Eastern (or substitute policies
of at least the same coverage with terms and conditions that are not less
favorable than those presently maintained by Eastern), with respect to matters
occurring at or prior to the Effective Time. However, VFSC is not required to
expend an aggregate amount in excess of $207,000 for such insurance.
As described under "SUMMARY--Management and Operation after the
Merger," a minimum of three and a maximum of four members to serve as members of
the VFSC Board. VFSC has not yet designated the members of the Eastern Board who
will serve on the VFSC Board.
Employment Agreements with Named Officers. Eastern has employment
agreements (collectively, the "Employment Agreements") with each of Messrs. Cobb
and Humphrey (collectively, the "Named Officers"), pursuant to which each of the
Named Officers is entitled, upon the termination of employment with Eastern in
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<PAGE>
connection with a "change of control," to receive a lump-sum payment equal to
three times his average annual compensation for the five most recent years, less
$1.00 and less any special bonus paid in connection with such change of control.
Eastern also has severance agreements (collectively, the "Severance Agreements")
with Janine Pinel and Robert Hamme, its two executive officers other than the
Named Officers, pursuant to which each is entitled, upon the termination of
employment with Eastern in connection with a "Change of control," to receive a
lump sum payment equal to 12 times such officer's current monthly compensation.
The Merger will constitute a "change of control" under the Employment Agreements
and Severance Agreements. Assuming that the Merger were to be consummated during
1997 and that there were to be no increase in the monthly compensation of Ms.
Pinel and Mr. Hamme, the aggregate amounts of such lump-sum payments would be
approximately $_____, $_____, $_____ and $_____, respectively. Messrs. Cobb and
Humphrey will also be entitled to certain health insurance benefits, as
described under "--Employment Obligations."
Executive Officer Stock Options. Eastern has granted stock options (the
"Eastern Stock Options") to the Named Officers and to certain other executive
level officers under Eastern's stock option plans. As described above under
"--Treatment of Eastern Stock Options," at the Effective Time such stock options
will become immediately exercisable in full pursuant to the accelerated vesting
provisions contained in the agreements under which such options were granted.
The following tables sets forth, as of the Eastern Record Date, with
respect to the Named Officers and all executive officers as a group (i) the
number of shares covered by Eastern Stock Options held by such person, (ii) the
number of shares covered by currently-exercisable Eastern Stock Options held by
any such persons, (iii) the number of additional shares covered by Eastern Stock
Options held by such persons that will become exercisable upon consummation of
the Merger, (iv) the weighted average exercise price of all such Eastern Stock
Options held by such persons, and (v) the aggregate value (i.e. the Acquisition
Price less the weighted average option exercise price per option) of all such
options based upon the $____ per share closing price of Eastern Common Stock on
the Eastern Record Date.
<TABLE>
<CAPTION>
Options Becoming
Options Exercisable Upon Weighted Average
Currently Consummation of Exercise Price Aggregate Value
Name Options Held Exercisable Merger Per Option of Options
- ---- ------------ ----------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
John A. Cobb................... 157,500 157,500 -- $ 8.79
E. David Humphrey.............. 75,000 75,000 -- 8.27
Janine K. Pinel................ 6,000 6,000 -- 14.71
Robert K. Hamme................ 6,000 4,800 1,200 11.85
All executive officers as a group
(4 persons).................... 244,500 243,300 1,200
</TABLE>
Employment Obligations
VFSC is not obligated to employ any person who is employed by Eastern
immediately prior to the Effective Time. Following the Effective Time, VFSC
will, or will cause its subsidiaries to, honor in accordance with their terms
all employment, severance and other compensation contracts between Eastern or
any subsidiary thereof and any director, officer or employee thereof, and all
provisions for benefits or other amounts earned or accrued through the Effective
Time under Eastern's pension or benefit plans. VFSC agrees to provide to those
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<PAGE>
persons who are employees of Eastern or any subsidiary of Eastern at the
Effective Time and who are thereafter employed by VFSC or a subsidiary of VFSC
with the benefits maintained by VFSC and its affiliates from time to time for
the benefit of their employees similarly situated. VFSC will cause each plan,
program or arrangement included among the benefits of VFSC to be provided after
the Effective Time (other than VFSC's defined benefit pension plan) to treat the
prior service of each such employee with Eastern or its affiliates, to the
extent such prior service is recognized under the comparable plan, program or
arrangement of the Eastern, as service rendered to VFSC or its affiliate, as the
case may be, for purposes of eligibility to participate, vesting, and
eligibility for special benefits under each such plan, program or arrangement of
VFSC, but not in any case for benefit accrual attributable to any period before
the Effective Time. Any employee of Eastern or any subsidiary of Eastern who
becomes an employee of VFSC or any subsidiary of VFSC immediately following the
Effective Time who is not otherwise covered by an employment, severance or other
compensation agreement and who has been identified by VFSC within the first six
months from and after the Closing Date as an employee whose employment shall be
terminated as a result of VFSC's consolidation and/or cost-saving efforts
following the Effective Time, shall be entitled to receive from and after the
date of such employee's termination of employment certain salary continuation
payments based on the length of the employee's employment by Eastern (two weeks
of continued salary for each full year of service with Eastern, up to a maximum
of 26 weeks of salary continuation). In addition to the foregoing, Messrs. Cobb
and Humphrey will continue to receive, following any termination of their
employment with VFSC or any VFSC subsidiary following the Effective Time, health
care continuation coverage under VFSC's appropriate group health plan until such
persons reach the age at which they become eligible to receive Medicare health
coverage, subject to certain conditions.
Resale of VFSC Common Stock
The shares of VFSC Common Stock to be issued pursuant to the Merger
Agreement have been registered under the Securities Act by means of the
Registration Statement of which this Joint Proxy Statement-Prospectus forms a
part. Accordingly, such shares will be freely transferable under the Securities
Act, except for shares issued to persons who are affiliates of Eastern at the
time of the Eastern Meeting and persons who are affiliates of VFSC at the time
of such proposed transfer. Such persons will generally be able to resell such
shares only pursuant to an effective registration statement under the Securities
Act or pursuant to a statutory or regulatory exemption or "safe harbor" from the
registration requirements of the Securities Act, including the provisions of
Rule 144 and Rule 145 under the Securities Act discussed below. Affiliates of a
person are other persons who control, are controlled by, or are under common
control with the person. The affiliates of a corporation are generally deemed to
include its executive officers, directors and significant (i.e. 10% or more)
stockholders.
Affiliates of VFSC who desire to dispose of shares of VFSC Common Stock
acquired in the Merger may utilize the "safe harbor" provided by Rule 144
promulgated under the Securities Act ("Rule 144"). Rule 144 permits, among other
things, the resale of such shares if certain conditions are met. These
conditions include the requirement that VFSC have filed all
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<PAGE>
reports required of it under the Exchange Act for the past 12 months, a
limitation on the number of shares sold by the affiliate in any three-month
period, and a restriction on the manner in which the sale is made. In most
cases, a notice of proposed sale must also be filed with the Commission.
Persons who are affiliates of Eastern at the time of the Eastern
meeting and are not affiliates of VFSC at the time of a proposed resale may
utilize the resale provisions of Rule 145 promulgated under the Securities Act
("Rule 145"). During the two years following the Effective Time, such resale
would be subject to the satisfaction of the conditions imposed under Rule 144
which are described above, other than the notice of proposed sale requirements.
After two years, only the condition relating to VFSC's Exchange Act reports is
applied and, after three years, Rule 145 imposes no restriction on dispositions
by persons who were not affiliates of VFSC for at least three months preceding
the proposed disposition.
Certain Federal Income Tax Consequences
The following discussion summarizes certain federal income tax
consequences of the Merger, including certain consequences to stockholders of
Eastern who are citizens or residents of the United States and who hold their
shares as capital assets. It does not discuss all aspects of federal income
taxation that may be relevant to a particular Eastern stockholder in light of
the stockholder's personal circumstances (for example, an Eastern stockholder
who acquired shares of Eastern stock pursuant to the exercise of employee stock
options or otherwise as compensation), or to Eastern stockholders subject to
special federal income tax treatment (such as foreign persons, insurance
companies, regulated investment companies, dealers in securities, certain
retirement plans, financial institutions, tax exempt organizations, persons
subject to the alternative minimum tax, persons that have a functional currency
other than the U.S. dollar, or persons who hold Eastern stock as part of a
straddle, hedging transaction or conversion transaction). In addition, this
summary does not address any aspects of state, local, foreign or other tax laws
that may be relevant to Eastern stockholders.
It is the policy of the Internal Revenue Service (the "IRS") not to
rule directly on the tax status of transactions such as the Merger, and no such
ruling will be sought. The obligations of VFSC and Eastern to effect the Merger
are each conditioned upon receipt by each from its counsel of an opinion dated
as of the Effective Time, in form and substance reasonably satisfactory to it,
regarding certain tax consequences of the Merger. Such opinions are collectively
substantially to the effect that for federal income tax purposes the Merger
constitutes a reorganization within the meaning of section 368 of the Code, that
no gain or loss will be recognized by Eastern or VFSC as a result of the Merger
and that no gain or loss will be recognized by the stockholders of Eastern as a
result of the Merger except to the extent of cash received as part of the Merger
Consideration, cash received in lieu of a fractional share of VFSC Common Stock
or cash received by dissenting stockholders, if any. In rendering their
opinions, counsel will reply upon, and assume the factual accuracy of,
representations of VFSC, Eastern, and certain stockholders of Eastern, including
a representation that there is no plan or intent on the part of the stockholders
of Eastern receiving VFSC stock to engage in a sale or other
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<PAGE>
disposition of such stock that would result in the reduction of the ownership of
shares of VFSC stock received by the Eastern stockholders in the Merger to a
number of shares having a value as of the Effective Time of less than 50% of the
aggregate fair market value of all the outstanding shares of Eastern stock. Such
opinions are not binding on the IRS and would not, in any event, prevent the IRS
from challenging the tax-free nature of the Merger under the Code.
Tax opinions of Hale and Dorr LLP and Sullivan & Worcester LLP have
been filed as exhibits (the "Exhibit Opinions") to the Registration Statement of
which this Joint Proxy Statement-Prospectus is a part. However, it is a
condition of the respective obligations of VFSC and Eastern to consummate the
Merger that VFSC and Eastern receive confirming tax opinions from their
respective counsel to the effect that for federal income tax purposes, the
Merger will constitute a reorganization within the meaning of section 368 of the
Code. The Exhibit Opinions are not intended to satisfy this closing condition.
These closing opinions, which are collectively referred to herein as the "Tax
Opinions," neither bind the IRS nor preclude the IRS from adopting a contrary
position. As with the Exhibit Opinions, the Tax Opinions will be subject to
certain assumptions, exceptions and qualifications and will be based on the
truth and accuracy of certain representations of VFSC, Eastern, and certain
Eastern stockholders.
A successful IRS challenge to the tax-free reorganization status of the
Merger would result in an Eastern stockholder recognizing gain or loss with
respect to each share of Eastern Common Stock surrendered equal to the
difference between the stockholder's basis in such share and the sum of the cash
and fair market value, as of the Effective Time, of the VFSC Common Stock
received in exchange therefor. In such event, a stockholder's aggregate basis in
the VFSC Common Stock so received would equal its fair market value, and the
stockholder's holding period for such stock would begin the day after the
Merger. Even if the Merger qualifies as a tax-free reorganization, a recipient
of shares of VFSC Common Stock would recognize gain to the extent that such
shares were considered to be received in exchange for services or property
(other than solely for Eastern Common Stock), and all or a portion of such gain
may be taxable as ordinary income. Gain would also be recognized to the extent
that an Eastern stockholder was treated as receiving (directly or indirectly)
consideration other than VFSC Common Stock in exchange for such stockholder's
Eastern Common Stock.
The discussion below summarizes certain federal income tax consequences
of the Merger assuming that the Merger will qualify as a tax-free
reorganization.
Tax Consequences to Holders of Eastern Common Stock
In General. As discussed below, the federal income tax consequences of
the Merger to an Eastern stockholder depend on whether such stockholder receives
cash or VFSC Common Stock or some combination thereof for such stockholder's
shares of Eastern Common Stock, as well as for any shares of Eastern Common
Stock that such stockholder constructively owns within the meaning of section
318 of the Code (which generally deems a person to own stock that is owned by
certain family members or related entities or that is the subject of options
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<PAGE>
owned or deemed owned by such person), and may further depend on whether such
stockholder actually or constructively owns any VFSC Common Stock.
Only VFSC Common Stock Received. Except as discussed below with respect
to cash received in lieu of a fractional share of VFSC Common Stock, a
stockholder of Eastern that receives only VFSC Common Stock in exchange for such
stockholder's shares of Eastern Common Stock will not recognize gain or loss.
The tax basis of the VFSC Common Stock received in the Merger will be the same
as the tax basis of the shares of Eastern Common Stock exchanged therefor. The
holding period of the VFSC Common Stock received will include the holding period
of shares of Eastern Common Stock exchanged therefor, assuming that the shares
of Eastern Common Stock are held as capital assets.
Only Cash Received. An Eastern stockholder that receives solely cash in
the Merger in exchange for such stockholder's shares of Eastern Common Stock, or
that exercises such stockholder's right to seek an appraisal of his shares of
Eastern Common Stock and obtain cash therefor, generally will recognize capital
gain or loss measured by the difference between the amount of cash received and
the tax basis of the shares of Eastern Common Stock surrendered. If, however,
any such stockholder constructively owns shares of Eastern Common Stock that are
exchanged for VFSC Common Stock in the Merger, or, possibly, owns VFSC Common
Stock actually or constructively after the Merger, the consequences to such
stockholder may in certain circumstances be similar to the consequences
discussed below in "--VFSC Common Stock and Cash Received," except that the
amount of consideration treated as a dividend, if any, will not be limited to
the amount of such stockholder's gain.
VFSC Common Stock and Cash Received. Except as discussed below with
respect to cash received in lieu of a fractional share of VFSC Common Stock, an
Eastern stockholder that, as a result of prorations or allocations resulting
from limitations on cash (see "The Merger -- Election Procedures") or as a
result of not electing either Stock Election Shares or Cash Election Shares,
receives both VFSC Common Stock and cash in exchange for his Eastern Common
Stock, will not recognize loss in such exchange. However, under section
356(a)(1) of the Code, such stockholder will recognize gain (measured by the sum
of the fair market value of the VFSC Common Stock received plus the amount of
any cash received (other than in lieu of a fractional share of VFSC Common
Stock), minus the tax basis of the shares of Eastern Common Stock exchanged
(less basis allocable to cash received in lieu of a fractional share of VFSC
Common Stock)), if any, but only to the extent of the amount of any cash
received (other than in lieu of a fractional share of VFSC Common Stock). Under
applicable U.S. Supreme Court precedent, such gain will be capital gain except
in the circumstances described in the next paragraph. The tax basis of the VFSC
Common Stock received will be the same as the tax basis of the shares of Eastern
Common Stock exchanged, decreased by the basis allocable to any fractional share
of VFSC Common Stock for which cash is received in the Merger, and further
decreased by the amount of cash received (other than cash received in lieu of a
fractional share of VFSC Common Stock), and increased by the amount of gain
recognized on the exchange (including any portion that is treated as a dividend
but excluding gain recognized on cash received in lieu of a fractional share of
VFSC Common Stock). Provided the Eastern Common Stock surrendered was held as
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<PAGE>
a capital asset at the time of the exchange, the holding period of VFSC Common
Stock received will include the holding period of the shares of Eastern Common
Stock surrendered.
The gain recognized by an Eastern stockholder on the exchange generally
will be capital gain unless the receipt of cash in the Merger by such
stockholder is treated as having the effect of the distribution of a dividend.
This determination is made separately for each Eastern stockholder by treating
the Eastern stockholder as first receiving solely shares of VFSC Common Stock in
the Merger and then receiving cash from VFSC in a hypothetical redemption of a
portion of those shares. The recognized gain will not be treated as having the
effect of a dividend if the hypothetical redemption satisfies the requirements
for a stock redemption to be treated as a sale of stock under section 302 of the
Code. For this purpose, the constructive ownership rules in section 318 of the
Code apply. These rules apply in certain specified circumstances to attribute
ownership of shares of a corporation from the stockholder actually owning the
shares (whether an individual, a trust, a partnership or a corporation) to
certain members of the individual's family or to certain individuals, trusts,
partnerships or corporations in which that stockholder has an ownership or
beneficial interest, or that have an ownership or beneficial interest in that
stockholder. A stockholder is also considered under these rules generally to own
any shares with respect to which he holds exercisable options. The amount of any
such dividend, so determined, is limited to that stockholder's ratable share of
the accumulated earnings and profits of Eastern at the Effective Time.
Under IRS rulings interpreting the rules of section 302(b)(1) of the
Code, if a hypothetical redemption involves a minority VFSC stockholder whose
relative stock interest in VFSC is minimal, who exercises no control over the
affairs of VFSC and who experiences a reduction in his proportionate stock
interest, such stockholder will not receive dividend treatment on cash received.
Because the determination of whether the receipt of cash will be treated as
having the effect of the distribution of a dividend generally will depend in
part upon the facts and circumstances of each stockholder, Eastern stockholders
are strongly advised to consult their own tax advisors regarding the tax
treatment of cash received in the Merger.
Fractional Shares. If a holder of shares of Eastern Common Stock
receives cash in lieu of a fractional share of VFSC Common Stock in the Merger,
such cash amount will be treated as received in exchange for the fractional
share of VFSC Common Stock. Gain or loss recognized as a result of that exchange
will be equal to the cash amount received for the fractional share of VFSC
Common Stock reduced by the proportion of the holder's tax basis in shares of
Eastern Common Stock exchanged and allocable to the fractional share of VFSC
Common Stock.
Tax Consequences to Holders of VFSC Common Stock
The holders of VFSC Common Stock, as such, will not recognize gain or
loss as a result of the Merger.
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Backup Withholding
Under the federal income tax backup withholding rules, unless an
exemption applies, the Exchange Agent will be required to withhold, and will
withhold, 31% of any cash payments to which an Eastern stockholder or other
payee is entitled pursuant to the Merger Agreement unless such stockholder or
other payee provides his tax identification number (social security number or
employer identification number) and certifies that such number is correct. Each
Eastern stockholder and, if applicable, each other payee should complete and
sign the substitute Form W-9 that will be included as part of the transmittal
letter to avoid back-up withholding, unless an applicable exemption exists and
is proved in a manner satisfactory to VFSC and the Exchange Agent. Any amounts
withheld will be allowed as a credit against the payee's federal income tax
liability.
THE ABOVE DISCUSSION SUMMARIZES CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER AND ASSUMES THAT THE MERGER WILL QUALIFY AS A TAX-FREE
REORGANIZATION. THE DISCUSSION IS BASED UPON CURRENTLY EXISTING PROVISIONS OF
THE INTERNAL REVENUE CODE, EXISTING AND PROPOSED U.S. TREASURY REGULATIONS
THEREUNDER, JUDICIAL DECISIONS AND ADMINISTRATIVE AUTHORITY WITH RESPECT
THERETO, ALL AS OF THE DATE HEREOF. THE IRS IS NOT PRECLUDED FROM ADOPTING A
CONTRARY POSITION. IN ADDITION, ALL OF THE FOREGOING AUTHORITIES RELIED UPON ARE
SUBJECT TO CHANGE, POSSIBLY WITH RETROACTIVE EFFECT, AND ANY SUCH CHANGE COULD
ADVERSELY AFFECT THE CONTINUING VALIDITY OF THE DISCUSSION. MOREOVER, THE
DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO. EASTERN STOCKHOLDERS
ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER AND RELATED TRANSACTIONS,
INCLUDING TAX RETURN REPORTING REQUIREMENTS AND THE APPLICATION AND EFFECT OF
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS, AS WELL AS THE
EFFECT OF ANY PROPOSED CHANGES IN SUCH TAX LAWS.
Accounting Treatment
It is anticipated that the Merger will be accounted for as a "purchase"
transaction under generally accepted accounting principles. Under such method of
accounting, the book value of the assets and liabilities of Eastern, as reported
on its balance sheet, will be increased or decreased to their fair value at the
Effective Time and intangible assets will be recorded to the extent that the
purchase price exceeds the fair value of the net assets and liabilities in
addition to any assets or liabilities assumed or incurred as a result of the
Merger. The results of operations of Eastern will be included in the
consolidated income of VFSC from the Effective Time and not for the entire
fiscal year.
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PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined condensed financial data
have been prepared to give effect to the Merger of Eastern with and into VFSC.
The unaudited pro forma combined condensed financial data assume that the Merger
had been consummated at the beginning of the periods presented, and are based on
the purchase method of accounting and a preliminary allocation of the purchase
price. For a description of the effect of purchase accounting on the Merger and
the historical statements of VFSC, see "THE MERGER--Accounting Treatment."
The unaudited pro forma combined condensed financial data reflect the
Merger based upon preliminary purchase accounting adjustments. Actual
adjustments, which may include adjustments to additional assets, liabilities and
other items, will be made on the basis of appraisals and evaluations as of the
Effective Time and, therefore, are likely to differ from those reflected in the
unaudited pro forma comparative per share data. Accordingly, the information
herein should be read in conjunction with the historical consolidated financial
statements, including the notes thereto, of VFSC, contained in VFSC's Annual
Report to Stockholders for 1995, which report is incorporated herein by
reference, and the historical consolidated financial statements of Eastern,
including their notes thereto, contained in Eastern's Annual Report to
Stockholders for the fiscal year ended September 30, 1996, which report
accompanies this Joint Proxy Statement-Prospectus. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
Results of VFSC for the nine months ended September 30, 1996 are not
necessarily indicative of results expected for the entire year, nor are pro
forma amounts necessarily indicative of results of operations or the combined
financial position that would have resulted had the Merger been consummated at
the beginning of the periods indicated. All adjustments consisting of only
normal recurring adjustments necessary for a fair statement of results of
interim periods have been included. The combined company expects to realize
benefits from the Merger, including operating cost savings and revenue
enhancements. The pro forma earnings, which do not reflect any direct costs,
potential savings or revenue enhancements that are expected to result from the
consolidation of operations of VFSC and Eastern, are not indicative of the
results of future operations. No assurances can be given with respect to the
actual amount of expense savings or revenue enhancements that may be realized.
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<TABLE>
<CAPTION>
VERMONT FINANCIAL SERVICES CORP.-EASTERN BANCORP.
Pro Forma Combined Condensed Statement of Condition
September 30, 1996
(Dollars in Thousands)
(unaudited)
VFSC Eastern Pro Forma Pro Forma
Historical Historical Adjustments VFSC
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Cash and Due from Banks.............................. $ 58,178 $ 27,766 $(25,424) (D) $ 60,520
Interest Bearing Balances with Banks................. 66 66
Securities Available for Sale........................ 263,255 9 263,264
Securities Held to Maturity.......................... 293,649 (8,834) (A) 284,815
FHLB Stock........................................... 9,283 9,283
Federal Funds Sold................................... 400 12,043 12,443
Loans................................................ 907,229 491,644 (5,625) (A) 1,393,248
Allowance for Loan Losses......................... (14,193) (2,858) (17,051)
--------- ------- -------- ----------
Net Loans.................................... 893,036 488,786 (5,625) 1,376,197
Premises and Equipment............................... 21,782 16,693 (757) (A) 37,718
Real Estate Held for Investment...................... 1,373 437 1,810
Other Real Estate Owned.............................. 1,867 3,611 5,478
Goodwill and Other Intangibles....................... 6,141 6,589 48,314 (A)(E) 61,044
Other Assets......................................... 30,547 9,812 5,959 (B) 46,318
---------- -------- -------- ----------
Total Assets...................................... $1,276,645 $868,678 $ 13,633 $2,158,956
========== ======== ======== ==========
Liabilities and Stockholders' Equity
Liabilities:
Total Deposits.................................... $1,074,314 $641,286 $ (1,493) (A) $1,717,093
Federal Funds Purchased and Securities Sold
with Agreements to Repurchase................... 65,562 65,562
Borrowed Money.................................... 12,175 153,636 333 (A) 165,478
Other Liabilities................................. 9,140 10,176 (3,753) (C) 23,069
---------- -------- -------- ----------
Total Liabilities.............................. 1,161,191 805,098 (4,913) 1,971,202
Stockholders' Equity:
Common Stock...................................... 4,887 41 41 (E) 6,881
(1,994) (D)
Capital Surplus................................... 49,526 36,384 36,384 (E) 119,832
(70,306) (D)
Undivided Profits................................. 67,893 30,138 30,138 (E) 67,893
Security Valuation Allowance...................... (2,230) 6 6 (E) (2,230)
Treasury Stock, at Cost........................... (4,622) (2,989) (2,989) (E) (4,622)
---------- -------- --------- -----------
Total Stockholders' Equity...................... 115,454 63,580 (8,720) 187,754
---------- -------- --------- -----------
Total Liabilities and Stockholders' Equity..... $1,276,645 $868,678 $(13,633) $2,158,956
========== ======== ========= ==========
</TABLE>
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<TABLE>
<CAPTION>
VERMONT FINANCIAL SERVICES CORP.-EASTERN BANCORP.
Pro Forma Combined Condensed Statement of Income
For the nine months ended September 30, 1996
(Dollars in thousands, except per share data)
(Unaudited)
VFSC Eastern Pro Forma Pro Forma
Historical Historical Adjustments VFSC
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Interest Income
Interest and Fees on Loans $61,027 $31,320 $ (603)(G) $ 92,950
Interest on Securities Available for Sale 11,482 204 (662)(F) 12,348
Interest on Securities Held to Maturity 14,273 14,273
Other 692 692
------- ------- ------- ---------
Total Interest Income 73,201 45,797 (1,265) 120,263
Interest Expense:
Deposits 27,687 17,874 (224) (I) 45,337
Other 3,290 5,892 125 (K) 9,307
------- ------- ------- --------
Total Interest Expense 30,977 23,766 (99) 54,644
Net Interest Income 42,224 22,031 (1,364) 65,619
Provison for loan losses 2,600 460 3,060
------- ------- ------- --------
39,624 21,571 (1,364) 62,559
Other Income 13,784 8,204 21,988
Other Expenses 34,954 26,685 2,427 (H)(J) 64,066
------- ------- ------- --------
Income Before Income Taxes 18,454 3,090 1,063 20,481
Applicable Income Taxes 6,337 1,273 522 (L) 8,132
------- ------- ------- --------
Net Income $12,117 $ 1,817 $ 1,585 $ 12,349
======= ======= ======= ========
Weighted average common shares outstanding 4,835,044 1,994,484 6,829,528
Earnings per share $ 2.51 $ 0.47 $ 1.81
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
VERMONT FINANCIAL SERVICES CORP.-EASTERN BANCORP.
Pro Forma Combined Condensed Statement of Income
For the twelve months ended December 31, 1995
(Dollars in thousands, except per share data)
(Unaudited)
VFSC Eastern Pro Forma Pro Forma
Historical Historical Adjustments VFSC
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Interest Income
Interest and Fees on Loans $83,506 $39,764 $ (804)(G) $124,074
Interest on Securities Available for Sale 11,923 552 (883)(F) 13,358
Interest on Securities Held to Maturity 20,936 20,936
Other 1,028 1,028
------- ------- ------- --------
Total Interest Income 96,457 61,252 (1,687) 159,396
Interest Expense:
Deposits 36,945 23,109 (299)(I) 59,755
Other 5,024 10,369 167 (K) 15,560
------- ------- ------- -------
Total Interest Expense 41,969 33,478 (132) 75,315
Net Interest Income 54,488 27,774 (1,819) 84,081
Provison for loan losses 3,900 1,997 5,897
------- ------- ------- -------
50,588 25,777 (1,819) 78,184
Other Income 17,549 10,830 28,379
Other Expenses 45,999 29,711 3,236 (H)(J) 78,946
------- ------- ------- --------
Income Before Income Taxes 22,138 6,896 1,417 27,617
Applicable Income Taxes 7,241 2,414 696 (L) 10,351
------- ------- ------- --------
Net Income $14,897 $ 4,482 $ 2,113 $ 17,266
======= ======= ======= ========
Weighted average common shares outstanding 4,807,553 1,994,484 6,802,037
Earnings per share $3.10 $1.19 $2.54
</TABLE>
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<PAGE>
VERMONT FINANCIAL SERVICES CORP.--EASTERN BANCORP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL DATA
(Dollars in thousands, except per share data)
Note (A) To adjust assets and liabilities to their estimated fair values:
<TABLE>
<CAPTION>
Dr. (Cr.)
<S> <C>
Investments............................................................................ ($8,834)
Loans.................................................................................. ( 5,625)
Premises and Equipment................................................................. ( 757)
Deposits............................................................................... ( 1,493)
Mortgage Servicing Rights.............................................................. 2,188
FHLB Advances.......................................................................... 333
</TABLE>
Note (B) To reflect tax effects of transaction:
<TABLE>
<CAPTION>
Dr. (Cr.)
<S> <C>
Tax effect of fair value adjustments................................................... ($5,959)
</TABLE>
Note (C) To accrue estimated professional and other costs associated with the
merger of $3,753.
Note (D) To reflect issuance of stock and payment of cash to Eastern:
<TABLE>
<CAPTION>
Dr. (Cr.)
<S> <C>
Market value of 1,801,032 shares of VFSC Common Stock (based on closing bid
price per share of $36.25 for VFSC Common Stock on November 11, 1996).................. $65,286
Cash to be paid........................................................................ 26,648
Consideration for Eastern stock option spread.......................................... 5,790
--------
$97,724
</TABLE>
This assumes that all holders of Eastern stock options exercise
such options and an additional 193,452 shares of VFSC common stock
are issued. See "THE MERGER--Treatment of Eastern Stock Options."
Note (E) Goodwill is calculated as follows:
<TABLE>
<CAPTION>
Dr. (Cr.)
<S> <C>
Stockholders' equity of Eastern at September 30, 1996.................................. $63,580
Increase (decrease) to Eastern's equity as a result of
estimated fair value adjustments:
Investments....................................................................... ( 8,834)
Loans............................................................................. ( 5,625)
Premises and Equipment............................................................ ( 757)
Deposits.......................................................................... ( 1,493)
Mortgage Servicing Rights......................................................... 2,188
FHLB Advances..................................................................... 333
Tax effect of fair value adjustments.............................................. 5,959
-------
55,351
83
<PAGE>
Unallocated purchase price (goodwill)............................................. 46,126
--------
Total purchase price (including merger costs)................................. $101,477
========
</TABLE>
Note (F) To accrete fair value adjustment for investments (10 years).
Note (G) To accrete fair value adjustment for loans (7 years).
Note (H) To accrete fair value adjustment for premises and equipment (5 years).
Note (I) To accrete fair value adjustment for deposits (5 years).
Note (J) To amortize intangibles:
Nine Months Ended Year Ended
September 30, 1996 December 31, 1995
Mortgage Servicing Rights (7 years).... $ 235 $ 313
Goodwill (15 years).................... 2,306 3,075
------ ------
Total ........................ $2,541 $3,338
====== ======
Note (K) To amortize fair value adjustment of FHLB advances (2 years).
Note (L) To record tax impact of accretion and amortization of fair value
adjustments.
Note (M) Pursuant to the Merger Agreement described elsewhere in this
document, VFSC will issue 1,801,032 shares of VFSC Common Stock in
connection with the Merger, provided that the price of VFSC Common
Stock at the Effective Date, as defined in the Merger Agreement, is
greater than $26.06 per share (minimum price) and less than $39.96 per
share (maximum price). The following table presents the pro forma
effect on selected financial data assuming these minimum and maximum
per share prices. This table assumes that all holders of Eastern stock
options exercise such options and an additional 193,452 shares of VFSC
common stock are issued. See "THE MERGER--Treatment of Eastern Stock
Options."
Minimum Maximum
In thousands, except per share data
Purchase Price.................................... $77,404 $105,128
Goodwill .................................... 25,806 53,530
Net Income:
Year ended December 31, 1995............. 18,620 16,772
Nine months ended September 30, 1996..... 13,365 9,251
Earnings per share:
Year ended December 31, 1995............. 2.74 2.47
Nine months ended September 30, 1996..... 1.96 1.35
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<PAGE>
INFORMATION REGARDING VFSC
VFSC is a multi-bank holding company established as a Delaware
corporation in 1990 and is registered under the BHC Act, with its principal
assets being the stock of its subsidiaries. Through its banking subsidiaries,
VFSC provides banking and banking-related services in Vermont and western
Massachusetts. The principal executive offices of VFSC are located at 100 Main
Street, Brattleboro, Vermont 05301. Its telephone number is (802) 257-7151. For
more information about VFSC, reference is made to VFSC's most recent annual
report on Form 10-K and subsequent quarterly reports on Form 10-Q, which are
incorporated herein by reference. See "AVAILABLE INFORMATION" and "INFORMATION
INCORPORATED BY REFERENCE."
DESCRIPTION OF VFSC CAPITAL STOCK
Common Stock
General. As of December 31, 1996, VFSC Common Stock consisted of
20,000,000 authorized shares, $1.00 par value per share, 15,000,000 of which are
shares of VFSC Common Stock, of which 4,705,825 were issued and outstanding
(exclusive of treasury shares), and 5,000,000 of which are shares of VFSC
Preferred Stock, none of which are outstanding. VFSC Common Stock is traded on
the Nasdaq NM under the trading symbol "VFSC."
Shares of VFSC Common Stock may be issued from time to time, in such
amount and proportions and for such consideration as may be fixed by the Board
of Directors of VFSC. No holder of VFSC Common Stock has any preemptive or
preferential rights to purchase or to subscribe for any shares of capital stock
or other securities which may be issued by VFSC. VFSC Common Stock has no
redemption or sinking fund provisions applicable thereto and has no conversion
rights.
The outstanding shares of VFSC Common Stock are fully paid and
nonassessable.
Liquidation. In the event of any liquidation, dissolution or winding up
of VFSC, whether voluntary or involuntary, the holders of VFSC Common Stock are
entitled to receive, on a share-for-share basis, any assets or funds of VFSC
which are distributable to the holders of VFSC Common Stock upon such events,
subject to the prior rights of creditors of VFSC and the holders of outstanding
shares of VFSC Preferred Stock, if any.
Voting. The holders of VFSC Common Stock are entitled to one vote for
each share in all matters voted upon by the stockholders of VFSC. The shares of
VFSC Common Stock have noncumulative voting rights; consequently, the holders of
a majority in interest of VFSC Common Stock can conceivably elect all of the
directors of VFSC and, in such event, the holders of the remaining shares voting
for election of directors would not be able to elect any person or persons to
the Board of Directors of VFSC.
Dividends. When and if dividends, payable as cash, stock or other
property, are declared by the Board of Directors of VFSC out of funds legally
available therefor, the holders of VFSC Common Stock are entitled to share
equally, share for share, in such dividends. The payment of dividends on VFSC
Common Stock is subject to applicable bank regulatory approval.
85
<PAGE>
Preferred Stock
Under the VFSC Certificate, the Board of Directors of VFSC is
authorized, without further stockholder action, to provide for the issuance of
the VFSC Preferred Stock, in one or more series, with such designations or
titles; dividend rates, special or relative rights in the event of liquidation,
distribution or sale of assets or dissolution or winding up of VFSC; any sinking
fund provisions; any redemption or purchase account provision; any conversions;
and any voting rights thereof, as shall be set forth as and when established by
the Board of Directors of VFSC.
86
<PAGE>
MARKET FOR VFSC COMMON STOCK
VFSC Common Stock is traded over-the-counter on the Nasdaq NM under the
symbol "VFSC."
At December 31, 1996, there were 4,705,825 shares outstanding and
approximately 2,500 stockholders of record. This does not reflect the number of
persons or entities who hold their stock in nominee or street name through
various brokerage firms.
The price information regarding VFSC Common Stock in the following
table is based on high and low asked and bid prices on the Nasdaq NM.
<TABLE>
<CAPTION>
Cash Dividends
VFSC Eastern Per Share of
Quarter Ended Common Stock Common Stock Common Stock
------------- ------------ ------------ ------------
High Low High Low VFSC Eastern
---- --- ---- --- ---- -------
<S> <C> <C> <C> <C> <C> <C>
1994
March 31 $19.25 $16.25 $12.33 $10.42 $0.10 $0.03
June 30 20.00 16.50 15.67 10.25 0.12 0.03
September 30 24.25 19.00 16.33 13.33 0.15 0.03
December 31 22.25 19.75 14.83 10.83 0.17 0.03
1995
March 31 23.50 20.75 14.33 12.50 0.20 0.07
June 30 27.25 21.75 15.00 12.33 0.20 0.07
September 30 30.88 26.00 16.00 14.17 0.22 0.08
December 31 35.00 29.50 19.67 14.67 0.25 0.11
1996
March 31 35.00 31.50 17.50 15.67 0.25 0.12
June 30 34.00 31.00 17.67 15.17 0.27 0.12
September 30 35.13 31.25 22.25 16.00 0.27 0.14
December 31 36.50 34.25 24.00 20.00 0.27 0.14
1997
through January 24 40.00 35.25 24.75 22.75 0.30 0.16
</TABLE>
On January 9, 1997, VFSC announced a first quarter dividend of $0.30
per share, payable on February 25, 1997 to its stockholders of record as of
January 24, 1997. See "RECENT DEVELOPMENTS."
On November 12, 1996, the last business day prior to the public
announcement of the Merger, the closing price of VFSC Common Stock on the Nasdaq
NM was $36.50.
Dividends
The Federal Reserve Board has authority to prohibit bank holding
companies from paying dividends if such payment would constitute an unsafe or
unsound practice. The Federal Reserve Board has indicated generally that it may
be an unsound practice for bank holding companies to pay dividends unless the
bank holding company's net income over the preceding year is sufficient to fund
the dividends and the expected rate of earnings retention is consistent with the
organization's capital needs, asset quality, and overall financial condition.
VFSC's ability to pay dividends is dependent upon the flow of dividend income to
it from the Banks, which may be
87
<PAGE>
affected or limited by regulatory restrictions imposed by federal or state bank
regulatory agencies. At September 30, 1996 the Banks had available approximately
$25 million for payment of dividends to VFSC under regulatory guidelines. VFSC
has a policy to pay out over time between 30% and 35% of net income to
shareholders in the form of cash dividends. Earnings for prior years as well as
prospective earnings are analyzed to determine compliance with this policy.
Dividend payout rates for any one year may vary from this long-term payout
policy based on these analyses and projections of future earnings and future
capital needs.
88
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF
EASTERN COMMON STOCK AND VFSC COMMON STOCK
At the Effective Time, the stockholders of Eastern, other than those
stockholders exercising appraisal rights, will become stockholders of VFSC. As
stockholders of Eastern, their rights are presently governed by Delaware law and
by the Eastern Certificate and the Eastern By-laws. As stockholders of VFSC,
their rights will be governed by Delaware law and by the VFSC Certificate and
the VFSC By-laws. The following discussion summarizes the material differences
between the rights of holders of Eastern Common Stock and holders of VFSC Common
Stock and differences between the Eastern and VFSC Certificates and the Eastern
and VFSC By-laws. This summary does not purport to be complete and is qualified
in its entirety by reference to the Eastern Certificate, the Eastern By-laws,
the VFSC Certificate and the VFSC By-laws and the relevant provisions of
Delaware law.
Special Meetings of Stockholders
The Eastern By-laws provide that special meetings of the stockholders
may be called at any time only by a majority of the Eastern Board.
The VFSC By-laws provide that, unless otherwise provided by statute,
special meetings may be called by the Board of Directors or by the Chairman of
the Board or the President.
Inspection Rights
Both the Eastern By-laws and the VFSC By-laws provide that stockholders
may, during ordinary business hours in the period beginning at least 10 days
prior to a meeting of stockholders through the date of such meeting, inspect the
stockholder list prepared for such meeting for any purpose germane to such
meeting.
Action by Consent of Stockholders
Under Delaware law, unless the certificate of incorporation provides
otherwise, any action to be taken by stockholders may be taken without a
meeting, without prior notice, and without a vote, if the stockholders having
the number of votes that would be necessary to take such action at a meeting at
which all stockholders were present and voted consent to the action in writing.
The Eastern Certificate does not so otherwise provide.
Under the VFSC Certificate, any action required or permitted to be
taken by stockholders must be effected at a duly called annual or special
meeting and may not be effected by any consent in writing.
Cumulative Voting
Neither the Eastern Certificate nor the VFSC Certificate provides for
cumulative voting.
89
<PAGE>
Preemptive Rights
The VFSC Certificate does not provide for, and the Eastern Certificate
provides that stockholders do not have, preemptive rights.
Classification of the Board of Directors
Both the Eastern Certificate and the VFSC Certificate provide that
their respective Boards of Directors are to be divided into three classes, with
the directors in each class being elected for staggered three-year terms.
Removal of Directors
The DGCL provides that members of a classified board may be removed
only for cause and only if such removal is approved by a majority of the shares
then entitled to vote for the election of directors. Both the Eastern By-laws
and the VFSC By-laws provide that any director or the entire Board of Directors
may be removed from office only for cause and only by an affirmative vote of at
least a majority of the outstanding shares of voting stock of the corporation.
Additional Directorships and Vacancies on the Board of Directors
The Eastern By-laws provide that the Board of Directors shall consist
of 10 members. The VFSC By-laws provide that the number of directors shall be
determined from time to time by a majority vote of the entire Board of
Directors. Both the Eastern By-laws and the VFSC By-laws provide that vacancies
shall be filled by a majority vote of the directors then in office and that the
director chosen to fill a vacancy shall hold office for the unexpired term of
such director's predecessor.
Exculpation of Directors and Officers
Delaware law permits a corporation to provide, and both the Eastern
Certificate and the VFSC Certificate provide, that no director shall be
personally liable to the corporation or its stockholders for monetary damages
for breaches of fiduciary duty except where such exculpation is expressly
prohibited. In Delaware, a director is not exculpated from liability under
provisions of Delaware law relating to unlawful payments of dividends and
unlawful stock purchases or redemptions. In addition, both the Eastern and the
VFSC Certificate provide that this limitation cannot apply to liability of a
director (i) for breach of the director's duty of loyalty to the corporation or
its stockholders; (ii) for acts and omissions not in good faith or which involve
intentional misconduct or knowing violation of law; (iii) pursuant to Section
174 of the DGCL; or (iv) for any transaction from which the director derived an
improper personal benefit.
Indemnification of Directors, Officers and Others
Delaware law generally permits indemnification of directors and
officers for expenses incurred by them by reason of their position with the
corporation, if the director or officer has acted in good faith and with the
reasonable belief that his conduct was in the best interests of
90
<PAGE>
the corporation. Delaware law does not permit a corporation to indemnify persons
in actions brought by or in the right of the corporation if the person is
adjudged to be liable to the corporation (although it does permit
indemnification in such situations if, and only to the extent, approved by the
Delaware Court of Chancery). Both the Eastern By-laws and the VFSC By-laws
provide indemnification to the fullest extent permitted by the DGCL to
directors, officers, employees and agents designated by the Board of Directors
and any person serving, at the request of the Board, as a director, officer,
employee or agent of another corporation or enterprise affiliated with the
corporation; provided, however, that except with respect to actions to enforce
indemnification rights, the corporation shall indemnify any such person for
actions initiated by that person only if the action was authorized or ratified
by the Board of Directors.
Restrictions upon Certain Business Combinations
Both Eastern and VFSC, as Delaware corporations, are subject to Section
203 of the DGCL, which governs business combinations with interested
stockholders. Subject to certain exceptions set forth therein, Section 203 of
the DGCL provides that a corporation shall not engage in any business
combination with any "interested stockholder" for a three-year period following
the date that such stockholder becomes an interested stockholder unless (i)
prior to such date, the Board of Directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder
becoming an interested stockholder, (ii) the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding certain shares) or (iii) on or subsequent to
such date, the business combination is approved by the Board of Directors of the
corporation and by the affirmative vote of at least 662/3% of the outstanding
voting stock which is not owned by the interested stockholder. Except as
specified therein, an interested stockholder is defined to mean any person that
(a) is the owner of 15% or more of the outstanding voting stock of the
corporation or (b) is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to the relevant date, or any affiliate
or associate of such person referred to in (a) or (b) of this sentence. Under
certain circumstances, Section 203 of the DGCL makes it more difficult for an
interested stockholder to effect various business combinations with a
corporation for a three-year period, although the stockholders may, by adopting
an amendment to the corporation's certificate of incorporation or by-laws, elect
not to be governed by this section, effective twelve months after adoption.
Neither the Eastern Certificate and the Eastern By-laws nor the VFSC
Certificate and the VFSC By-laws exclude Eastern and VFSC, respectively, from
the restrictions imposed by Section 203 of the DGCL.
In addition, the Eastern Certificate contains a "fair price" provision
relating to certain business combinations (including certain mergers, security
issuances, recapitalizations, and the sale, lease or transfer of a substantial
part of Eastern's assets) involving Eastern or a subsidiary and an owner of 10%
or more of the voting power of the outstanding shares of Eastern Common Stock
(an "interested shareholder"). Any such business combination requires the
affirmative vote of (i) the holders of 75% of the voting power of the
outstanding shares of Eastern Common Stock and (ii) the holders of a majority of
the outstanding shares of Eastern Common Stock not held by such interested
shareholder and such shareholder's affiliates, unless either (i) the
91
<PAGE>
business combination is approved by a majority of the directors who are
unaffiliated with the interested shareholder and who were directors prior to the
time such owner became an interested shareholder or (ii) the shareholders
receive the "fair market value" (as defined therein) of their holdings and other
procedural requirements are met. Neither the VFSC Certificate nor the VFSC
By-laws contain a similar provision.
Mergers, Share Exchanges or Asset Sales
Delaware law requires the approval of the directors and the vote of the
holders of a majority of the outstanding stock entitled to vote thereon for the
merger of the corporation into any other corporation, although the certificate
of incorporation may require a higher stockholder vote. The VFSC Certificate
provides that the affirmative vote of holders of two-thirds or more of the
outstanding shares of capital stock of VFSC is required to authorize, or to
approve any agreement, contract or other arrangement providing for, (i) any plan
of merger or consolidation to which VFSC is to be a party and which requires
shareholder approval, (ii) any sale or other disposition of substantially all of
the VFSC's property and assets, if not made in the usual and regular course of
its business, or (iii) a combination or majority share acquisition in which VFSC
is the acquiring corporation and a majority of its voting shares are issued or
transferred to another corporation or another entity or person, or to
shareholders (or their equivalent) of such other corporation or entity. Neither
the Eastern Certificate nor the Eastern By-laws contain a similar provision.
The Eastern Certificate contains provisions limiting certain
acquisitions by any person of beneficial ownership of 10% or more of the voting
stock of the corporation unless such acquisition has been approved prior to its
consummation by the affirmative vote of the holders of at least two-thirds of
the voting power of the outstanding shares of Eastern Common Stock. Neither the
VFSC Certificate nor the VFSC By-laws contain a similar provision.
Certain Issuances of Stock
The Eastern Certificate provides that no shares of capital stock
(except for certain issuances upon conversion, exchange or exercise of other
securities) shall be issued, directly or indirectly, to officers, directors or
controlling persons of Eastern other than as part of a general public offering
or as qualifying shares to a director, unless such issuance or the plan under
which such shares would be issued has been approved by a majority of the total
votes eligible to be cast at a legal meeting. The VFSC Certificate contains no
comparable provision.
Amendments to Charter
Under Delaware law, charter amendments require the approval of the
directors and the vote of the holders of a majority of the outstanding stock and
a majority of each class of stock outstanding and entitled to vote thereon as a
class, unless the certificate of incorporation requires a greater vote. In
addition, Delaware law requires a class vote when, among other things, an
amendment will adversely affect the powers, preferences or special rights of a
class of stock. The VFSC Certificate provides that no amendment, addition,
alteration, change or repeal of Articles 6 (relating to constitution and
classification of the VFSC Board), 9 (relating to certain provisions for conduct
of the corporation, including director liability and indemnification), 10
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<PAGE>
(prohibiting stockholder action by written consent), 12 (providing for greater
than majority stockholder votes to approve mergers, sales of substantially all
assets and other transactions) or 13 (requiring the vote of two-thirds of the
outstanding voting stock to amend the foregoing Articles and Article 13) of the
VFSC Certificate shall be made unless approved by the stockholders by not less
than two-thirds of the total votes entitled to vote thereon.
Amendments to By-laws
Under Delaware law, the power to adopt, amend or repeal by-laws lies in
stockholders entitled to vote; provided, however, that any corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
by-laws upon the directors. The Eastern Certificate provides that the Eastern
By-laws may be amended by the affirmative vote of at least two-thirds of the
directors then in office, or by the affirmative vote of at least two-thirds of
the stockholders to vote thereon. The VFSC Certificate provides that the VFSC
By-Laws may be amended by the affirmative vote of a majority of the directors.
Appraisal Rights
Under Delaware law, appraisal rights are available in connection with a
statutory merger or consolidation in certain specified situations. Appraisal
rights are not available for shares of stock of a corporation which is to be the
surviving corporation if no vote of its stockholders is required to approve the
merger. In addition, unless otherwise provided in the charter, no appraisal
rights are available to holders of shares of any class of stock which is either:
(a) listed on a national securities exchange or designated as a national market
system security on an inter-dealer quotation system by the NASD or (b) held of
record by more than 2,000 stockholders, unless such stockholders are required by
the terms of the merger to accept anything other than: (i) shares of stock of
the surviving corporation; (ii) shares of stock of another corporation which are
or will be so listed on a national securities exchange or designated as a
national market system security on an inter-dealer quotation system by the NASD
or held of record by more than 2,000 stockholders; (iii) cash in lieu of
fractional shares of such stock; or (iv) any combination of the foregoing.
Neither the VFSC Certificate nor the Eastern Certificate provides for such
appraisal rights.
Holders of VFSC Common Stock will not have appraisal rights with
respect to the Merger.
LEGAL MATTERS
The validity of the VFSC Common Stock offered in connection with the
Merger will be passed upon by Sullivan & Worcester LLP, Boston, Massachusetts,
counsel to VFSC. Certain federal income tax consequences of the Merger and other
legal matters in connection with the Merger will be passed upon by Sullivan &
Worcester LLP and Hale and Dorr LLP.
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<PAGE>
EXPERTS
The consolidated financial statements of Eastern Bancorp, Inc. and
subsidiaries as of September 30, 1996 and 1995, and for each of the years in the
three-year period ended September 30, 1996, have been incorporated by reference
herein and in the Registration Statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, incorporated by
reference herein and upon the authority of said firm as experts in accounting
and auditing. The Report of KPMG Peat Marwick LLP refers to the adoption in 1995
of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights, an Amendment of FASB Statement No. 65." Representatives of
KPMG Peat Marwick LLP are expected to be present at the Eastern Meeting, will
have an opportunity to make a statement if they wish to do so and are expected
to be available to respond to appropriate questions.
The consolidated financial statements of VFSC and subsidiaries
appearing in VFSC's Annual Report on Form 10-K for the year ended December 31,
1995 incorporated by reference herein have been certified by Coopers & Lybrand
LLP, independent certified public accountants, as set forth in their report
thereon included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. Representatives of Coopers & Lybrand LLP are expected to be present at
the VFSC Meeting, will have an opportunity to make a statement if they wish to
do so and are expected to be available to respond to appropriate questions.
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<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
By and Among
VERMONT FINANCIAL SERVICES CORPORATION
EASTERN BANCORP, INC.
and
VERMONT FEDERAL BANK, FSB
November 13, 1996
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement"), dated as of
November 13, 1996, by and among Vermont Financial Services Corporation, a
Delaware Corporation (the "Buyer"), Eastern Bancorp, Inc., a Delaware
corporation (the "Seller") and Vermont Federal Bank, FSB, the wholly owned
subsidiary of the Seller and a federal savings bank in stock form (the "Bank").
The parties deem it advisable and in the best interests of their
respective stockholders to consummate the business combination provided for
herein.
In consideration of the mutual covenants, representations, warranties
and agreements contained herein, and in consideration of (a) the execution and
delivery of the Seller Option Agreement (as hereinafter defined in Article I
hereof) between the Seller and the Buyer, pursuant to which the Seller has on
this day granted the Seller Option (as defined in Article I hereof) to the
Buyer, and (b) the execution and delivery by the Principal Stockholders of the
Seller Stockholders' Agreement (as such terms are defined in Article I hereof),
each as a condition and inducement to the Buyer to enter into this Agreement,
the parties agree as follows:
ARTICLE I
DEFINITIONS
Except as otherwise provided herein or as otherwise clearly required by
the context, the following terms shall have the respective meanings indicated
when used in this Agreement:
"Acquisition Merger" shall mean the merger of Seller with and into
Buyer in accordance with the terms and conditions of this Agreement.
"Acquisition Price" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
"Acquisition Transaction" shall have the meaning ascribed thereto in
Section 5.03 hereof.
"Adjusted Acquisition Price" shall have the meaning ascribed thereto in
Section 2.09(a) hereof.
"Agreement" shall mean this Agreement and Plan of Reorganization by and
among the Buyer, the Seller and the Bank.
"Average Closing Price" shall have the meaning ascribed thereto in
Section 2.09(a) hereof.
"Bank" shall have the meaning ascribed thereto in the preamble to this
agreement.
"BHCA" shall mean the Bank Holding Company Act of 1956, as amended.
"Buyer" shall have the meaning ascribed thereto in the preamble to this
Agreement.
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"Buyer Balance Sheet" shall have the meaning ascribed thereto in
Section 3.05 hereof.
"Buyer Common Stock" shall have the meaning ascribed thereto in Section
3.02(a) hereof.
"Buyer Benefit Plan" shall have the meaning ascribed thereto in Section
3.18 hereof.
"Buyer Pension Plan" shall have the meaning ascribed thereto in Section
3.18 hereof.
"Buyer Preferred Stock" shall have the meaning ascribed thereto in
Section 3.02(a) hereof.
"Buyer Registration Statement" shall have the meaning ascribed thereto
in Section 5.04 hereof.
"Buyer Reports" shall have the meaning ascribed thereto in Section 3. l
2 hereof.
"Buyer Requisite Vote" shall have the meaning ascribed thereto in
Section 3.04 hereof.
"Cash Conversion Number" shall have the meaning ascribed thereto in
Section 2.14(e) hereof.
"Cash Designee Shares" shall have the meaning ascribed thereto in
Section 2.14(e) hereof.
"Cash Distribution" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
"Cash Election Designee Shares" shall have the meaning ascribed thereto
in Section 2.14(e) hereof.
"Cash Election Shares" shall have the meaning ascribed thereto in
Section 2.14(b) hereof.
"Certificate" shall have the meaning ascribed thereto in Section
2.11(a) hereof.
"Certificate of Merger" shall have the meaning ascribed thereto in
Section 2.07 hereof.
"Closing Date" shall mean the date on which the Effective Time occurs.
"CMPs" shall have the meaning ascribed thereto in Section 3.13 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Companies" shall have the meaning ascribed thereto in Section 4.10(a)
hereof.
"Confidentiality Agreement" shall mean that certain letter agreement
between the Buyer and the Seller dated August 15, 1996.
"Confidential Information" shall have the meaning ascribed thereto in
Section 5.02(b) hereof.
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"Constituent Corporations" shall have the meaning ascribed thereto in
Section 2.01 hereof.
"DGCL" shall mean the Delaware General Corporation Law, as amended.
"Dissenting Holder" shall have the meaning ascribed thereto in section
2.09(c) hereof.
"Dissenting Shares" shall have the meaning ascribed thereto in Section
2.09(c) hereof.
"DOJ" shall mean the United States Department of Justice.
"DPC Shares" shall have the meaning ascribed thereto in Section 3.16
hereof.
"Effective Time" shall mean the specific time on the Closing Date at
which the Acquisition Merger has become effective pursuant to the laws of the
State of Delaware.
"Election Deadline" shall have the meaning ascribed thereto in Section
2.14(c) hereof.
"Election Form" shall have the meaning ascribed thereto in Section
2.14(a) hereof.
"Election Form Record Date" shall have the meaning ascribed thereto in
Section 2.11(b) hereof.
"EPA" shall mean the United States Environmental Protection Agency.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA Affiliate" shall mean, with reference to any person, within the
meaning of Section 414 (b), (c), (m) or (o) of the Code, (a) any member of a
controlled group of corporations that includes such person, (b) any trade or
business, whether or not incorporated, under common control with such person,
(c) any member of an affiliated service group with such person, and (iv) any
member of a group that is treated as a single employer by regulation and that
includes such person.
"Exchange Act" shall have the meaning ascribed thereto in Section 3.05
hereof.
"Exchange Agent" shall have the meaning ascribed thereto in Section
2.13 hereof.
"Exchange Ratio" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
"FDIA" shall mean the Federal Deposit Insurance Act, as amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of the
Federal Reserve System or the Federal Reserve Bank of Boston, as applicable.
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"FTC" shall mean the Federal Trade Commission.
"GAAP" shall mean generally accepted accounting principles and
practices in effect from time to time within the United States applied
consistently throughout the period involved.
"HOLA" shall mean the Home Owners Loan Act of 1933, as amended.
"Injunction" shall have the meaning ascribed thereto in Section 6.01(d)
hereof.
"IRS" shall mean the United States Internal Revenue Service.
"Loans" shall have the meaning ascribed thereto in Section 4.24 hereof.
"Mailing Date" shall have the meaning ascribed thereto in Section
2.11(b) hereof.
"Material Adverse Effect" shall mean with respect to Buyer or Seller,
or any other entity, a material adverse effect on the assets, liabilities,
business, operations, results of operations or condition (financial or
regulatory) of Buyer or Seller or such other entity, as the case may be, and its
subsidiaries, taken as a whole.
"Merger Consideration" shall have the meaning ascribed thereto in
Section 2.09(a) hereof.
"Minimum Price" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Nasdaq-NM" shall mean the National Association of Securities Dealers
Automated Quotation - National Market.
"No Election Cash Designee Shares" shall have the meaning ascribed
thereto in Section 2.14(e) hereof.
"No Election Designee Shares" shall have the meaning ascribed thereto
in Section 2.14(e) hereof.
"No Election Shares" shall have the meaning ascribed thereto in Section
2.14(b) hereof.
"OCC" shall mean the Office of the Comptroller of the Currency of the
United States Department of the Treasury.
"OTS" shall mean the Office of Thrift Supervision of the United States
Department of the Treasury.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
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"Principal Stockholders" shall mean John A. Cobb, E. David Humphrey, W.
Stevens Sheppard and James M. Sutton.
"Proxy Statement" shall have the meaning ascribed thereto in Section
5.04(a) hereof.
"Recapitalization" shall have the meaning ascribed thereto in Section
2.10 hereof.
"Records" means all records and original documents in the Seller's
possession which pertain to and are utilized by the Seller and its subsidiaries
to administer, reflect, monitor, evidence or record information respecting
Seller's consolidated business and operations, including but not limited to all
records and documents relating to (a) corporate, regulatory, supervisory and
litigation matters, (b) tax planning and payment of taxes, (c) personnel and
employment matters, and (d) the business or conduct of the consolidated business
of the Seller.
"Requisite Regulatory Approvals" shall have the meaning ascribed
thereto in Section 6.01(b) hereof.
"SEC" shall have the meaning ascribed thereto in Section 3.04 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Seller" shall have the meaning ascribed thereto in the preamble to
this Agreement.
"Seller Affiliates" shall have the meaning ascribed thereto in Section
5.06 hereof.
"Seller Affiliates Agreement" shall mean the form of written agreement
to be executed and delivered to the Buyer prior to the Effective Time by the
Seller Affiliates, substantially in the form attached hereto as Exhibit C.
"Seller Balance Sheet" shall have the meaning ascribed thereto in
Section 4.05 hereof.
"Seller Benefit Plans" shall have the meaning ascribed thereto in
Section 4.11(a) hereof.
"Seller Common Stock" shall have the meaning ascribed thereto in
Section 4.02(a) hereof.
"Seller Disclosure Schedule" shall have the meaning ascribed thereto in
Section 4.01(a) hereof.
"Seller Option" shall mean the option granted to the Buyer pursuant to
the Seller Option Agreement.
"Seller Option Agreement" shall mean that certain stock option
agreement of even date herewith by and between the Buyer and the Seller in the
form attached as Exhibit A.
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"Seller Other Plans" shall have the meaning ascribed thereto in Section
4.11(a) hereof.
"Seller Pension Plans" shall have the meaning ascribed thereto in
Section 4.11(a) hereof.
"Seller Preferred Stock" shall have the meaning ascribed thereto in
Section 4.02(a) hereof.
"Seller Reports" shall have the meaning ascribed thereto in Section
4.15 hereof.
"Seller Stock Option Plans" shall mean the 1984 and 1987 stock option
plans of Seller.
"Seller Stockholders' Agreement" shall mean that certain letter
agreement of even date herewith executed and delivered to the Buyer by the
Principal Stockholders in the form attached hereto as Exhibit B.
"Seller Requisite Vote" shall have the meaning ascribed thereto in
Section 4.04 hereof.
"Stock Conversion Number" shall have the meaning ascribed thereto in
Section 2.14(e) hereof.
"Stock Distribution" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
"Stock Election Cash Designee Shares" shall have the meaning ascribed
thereto in Section 2.14(e) hereof.
"Stock Election Shares" shall have the meaning ascribed thereto in
Section 2.14(b) hereof.
"subsidiaries" shall mean, when used with reference to a party, any
corporation or other organization, whether incorporated or unincorporated, of
which such party or any other subsidiary of such party is a general partner
(excluding partnerships the general partnership interests of which held by such
party or any subsidiary of such party do not have a majority of the voting
interests in such partnership) or, with respect to such corporation or other
organization, at least a majority of the securities or other interests having by
their terms ordinary voting power to elect a majority of the board of directors
or others performing similar functions is directly or indirectly owned or
controlled by such party or by any one or more of its subsidiaries, or by such
party and one or more of its subsidiaries.
"Surviving Corporation" shall have the meaning ascribed thereto in
Section 2.01 hereof.
"Tax" shall have the meaning ascribed thereto in Section 4.10(t)(A)
hereof.
"Tax Return" shall have the meaning ascribed thereto in Section
4.10(t)(B) hereof.
"Termination Date" shall have the meaning ascribed thereto in Section
8.01(b) hereof.
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"Trust Account Shares" shall have the meaning ascribed thereto in
Section 3.16 hereof.
"Valuation Period" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
"Vermont Commissioner" shall mean the Vermont Commissioner of Banking,
Insurance and Securities.
ARTICLE II
THE ACQUISITION MERGER
2.01 Surviving Corporation. In accordance with the provisions of this
Article II and Section 251 of the DGCL, at the Effective Time, Seller shall be
merged with and into Buyer (the two merging corporations being sometimes
collectively referred to herein as the "Constituent Corporations") and the
separate corporate existence of Seller shall cease. Buyer shall be the surviving
corporation in the Acquisition Merger (hereinafter sometimes referred to as the
"Surviving Corporation") and shall continue its corporate existence under the
laws of the State of Delaware. The name of the Surviving Corporation shall
continue to be "Vermont Financial Services Corporation".
2.02 Purposes and Authorized Capital Stock of Surviving Corporation. As
of the Effective Time, the purposes and authorized capital stock of the
Surviving Corporation shall be as stated in the Certificate of Incorporation of
Buyer immediately prior to the Effective Time.
2.03 Effect of the Acquisition Merger.
(a) At the Effective Time, all of the estate, property,
rights, privileges, powers and franchises of the Constituent
Corporations and all of their property, real, personal and mixed, and
all the debts due on whatever account to any of them, as well as all
stock subscriptions and other choses in action belonging to any of
them, shall be transferred to and vested in the Surviving Corporation,
without further act or deed, and all claims, demands, property and
other interest shall be the property of the Surviving Corporation, and
the title to all real estate vested in any of the Constituent
Corporations shall not revert or be in any way impaired by reason of
the Acquisition Merger, but shall be vested in the Surviving
Corporation.
(b) From and after the Effective Time, the rights of creditors
of any Constituent Corporation shall not in any manner be impaired, nor
shall any liability or obligation, including taxes due or to become
due, or any claim or demand in any cause existing against such
corporation, or any stockholder, director, or officer thereof, be
released or impaired by the Acquisition Merger, but the Surviving
Corporation shall be deemed to have assumed, and shall be liable for,
all liabilities and obligations of each of the Constituent Corporations
in the same manner and to the same extent as if the Surviving
Corporation had itself incurred such liabilities or obligations. The
stockholders, directors, and officers of the Constituent
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Corporations shall continue to be subject to all liabilities, claims
and demands existing against them as such at or before the Acquisition
Merger. No action or proceeding then pending before any court or
tribunal of the State of Delaware, the State of Vermont, the State of
New Hampshire or otherwise in which any Constituent Corporation is a
party, or in which any such stockholder, director, or officer is a
party, shall abate or be discontinued by reason of the Acquisition
Merger, but any such action or proceeding may be prosecuted to final
judgment as though no merger had taken place, or the Surviving
Corporation may be substituted as a party in place of any Constituent
Corporation by the court in which such action or proceeding is pending.
2.04 Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider 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 either of the Constituent Corporations acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Acquisition Merger or to otherwise carry out this Agreement, the officers and
directors of the Surviving Corporation shall and will be authorized to execute
and deliver, in the name and on behalf of the Constituent Corporations or
otherwise, all such deeds, bills of sale, assignments and assurances and to take
and do, in the name and on behalf of the Constituent 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 or to otherwise carry
out the purposes and intent of this Agreement.
2.05 Certificate of Incorporation and By-laws. The Certificate of
Incorporation and the By-Laws of Buyer, as in effect immediately prior to the
Effective Time, shall be the Certificate of Incorporation and the By-laws of the
Surviving Corporation and shall thereafter continue to be the Surviving
Corporation's Certificate of Incorporation and By-Laws until amended as provided
therein or by applicable law.
2.06 Directors and Officers. The directors and officers of the
Surviving Corporation shall be the directors and officers of Buyer immediately
prior to the Effective Time and, in addition, the Board of Directors of the
Surviving Corporation shall include at least three (3) and up to four (4)
additional persons to be designated by Buyer prior to the Effective Time, who
shall be selected from among the members of Seller's Board of Directors, and
each such director and officer shall hold office in accordance with the
Certificate of Incorporation and By-Laws of the Surviving Corporation. Subject
to the first sentence of this Section 2.06, the exact number of Seller directors
who shall be selected to serve on the Board of Directors of the Surviving
Corporation upon the Effective Time shall be determined by Buyer in its sole
discretion.
2.07 Effective Time; Conditions. If all of the conditions precedent set
forth in Article VI hereof have been satisfied or waived (to the extent
permitted by law), and this Agreement has not otherwise been properly terminated
under Article VIII hereof, the appropriate form of certificate of merger with
respect to the Acquisition Merger shall be prepared by Buyer and Seller and
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filed and recorded pursuant to Section 251 of the DGCL with the Delaware
Secretary of State (as so filed and recorded, the "Certificate of Merger"). The
Acquisition Merger shall become effective at, and the Effective Time shall be,
the time specified in the Certificate of Merger.
2.08 Dissenters' Appraisal Rights. Any Dissenting Holder (i) who files
with Seller an objection to the Acquisition Merger in writing before the
approval of this Agreement by the stockholders of Seller and who states in such
objection that he intends to demand payment for his shares of Seller Common
Stock if the Acquisition Merger is concluded and (ii) whose shares of Seller
Common Stock are not voted in favor of the Acquisition Merger shall be entitled
to demand payment for his shares of Seller Common Stock and an appraisal of the
value thereof, subject to and in accordance with the provisions of Section 262
of the DGCL.
2.09 Effect on Outstanding Shares.
(a) Seller Common Stock. By virtue of the Acquisition Merger,
automatically and without any action on the part of the holder thereof,
and subject to and in accordance with Section 2.14 hereof, each share
of Seller Common Stock issued and outstanding immediately prior to the
Effective Time (other than Dissenting Shares and any such shares held
directly or indirectly by Buyer, other than Trust Account Shares and
DPC Shares, and any such shares held as treasury stock by Seller) shall
become and be converted into either (i) an amount in cash equal to the
sum of (x) $7.25 and (y) the product of 0.4900 and the Average Closing
Price (such total per share purchase price being referred to herein as
the "Acquisition Price" and such total per share cash amount being
referred to herein as the "Cash Distribution") or (ii) the number of
shares or fraction of a share of Buyer Common Stock, rounded to the
nearest ten-thousandth of a share, equal to the number obtained by
dividing the Acquisition Price by the Average Closing Price (such
number being referred to herein as the "Exchange Ratio" or the "Stock
Distribution"); provided, however, that if the Average Closing Price is
greater than or equal to $39.96 per share the Acquisition Price shall
equal $26.83 and if the Average Closing Price is less than or equal to
$29.54 per share but greater than or equal to $26.06 per share the
Acquisition Price shall equal $21.72. If the Average Closing Price is
less than $26.06, the Acquisition Price shall equal the sum of (x)
$7.25 and (y) the product of 0.5553 and the Average Closing Price.
Notwithstanding the foregoing, however, if the Average Closing Price is
less than $26.06 per share (the "Minimum Price"), then Seller shall
have the right to terminate this Agreement pursuant to Section 8.01(f)
of this Agreement, unless Buyer elects, in its sole discretion, to
adopt $21.72 (the "Adjusted Acquisition Price") as the Acquisition
Price. The parties hereto acknowledge and agree that the Acquisition
Price shall be identical without regard to any election made pursuant
to Section 2.14 hereof. As of the Effective Time, each share of Seller
Common Stock held directly or indirectly by Buyer, other than Trust
Account Shares and DPC Shares, and held by Seller as treasury stock
shall be canceled, retired and cease to exist, and no payment shall be
made with respect thereto. For purposes of this Agreement, "Average
Closing Price" shall mean the average of the closing bid prices of
shares of Buyer Common Stock as reported on the Nasdaq-NM composite
transactions reporting system for the twenty consecutive trading days
(the "Valuation Period") ending on the fifth business day prior to
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the Closing Date and "Merger Consideration" shall mean the shares of
Buyer Common Stock and/or cash that holders of Seller Common Stock are
entitled to receive hereunder. Subject to the provisions of Section
2.09(c) with respect to Dissenting Shares, each certificate which
immediately prior to the Effective Time represented outstanding shares
of Seller Common Stock shall on and after the Effective Time be deemed
for all purposes to represent the Merger Consideration into which the
shares of Seller Common Stock represented by such certificate shall
have been converted pursuant to this Section 2.09(a).
(b) Buyer Common Stock. Each share of Buyer Common Stock
issued and outstanding immediately prior to the Effective Time shall
remain issued and outstanding upon the Effective Time and shall
constitute one share of common stock of the Surviving Corporation
("Surviving Corporation Common Stock"). Each certificate which
immediately prior to the Effective Time represented outstanding shares
of Buyer Common Stock shall on and after the Effective Time be deemed
for all purposes to represent such like number of shares of Surviving
Corporation Common Stock issued and outstanding as of the Effective
Time in accordance with this Section 2.09(b).
(c) Dissenting Shares. No conversion under Section 2.09(a)
hereof shall be made with respect to the shares of Seller Common Stock
held by a Dissenting Holder (such shares being referred to herein as
"Dissenting Shares"); provided, however, (i) each Dissenting Share
outstanding immediately prior to the Effective Time and held by a
Dissenting Holder who shall, at or prior to the Effective Time,
withdraw his demand for appraisal or lose his right of appraisal, in
either case pursuant to the applicable provisions of the DGCL shall be
deemed to be converted, as of the Effective Time, into the Merger
Consideration payable with respect to such Dissenting Share in
accordance with the terms of Section 2.09(a) hereof and (ii) each
Dissenting Share outstanding immediately prior to the Effective Time
and held by a Dissenting Holder who shall, after the Effective Time,
withdraw his demand for appraisal or lose his right of appraisal, in
either case pursuant to the applicable provisions of the DGCL, shall be
deemed to be converted, as of the Effective Time, into the Stock
Distribution or the Cash Distribution as the Buyer shall determine in
its sole and absolute discretion. For purposes of this Agreement, the
term "Dissenting Holder" shall mean a holder of shares of Seller Common
Stock who has demanded appraisal rights in compliance with the
applicable provisions of the DGCL concerning the right of such holder
to dissent from the Acquisition Merger and demand appraisal of such
holder's shares of Seller Common Stock.
2.10 Anti-Dilution. In the event that during the period beginning on
the first day of the Valuation Period and ending on the Closing Date the
outstanding shares of Buyer Common Stock shall have been increased, decreased,
changed into or exchanged for a different number or kind of shares or securities
through reorganization, recapitalization, reclassification, stock (or other
non-cash) dividend, stock split, reverse stock split, or other like changes in
Buyer's capitalization (a "Recapitalization"), then an appropriate and
proportionate adjustment shall be made to the number and/or kind of securities
to be delivered to the holders of Seller Common Stock who are to receive the
Stock Distribution so that each such holder of Seller Common Stock shall receive
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under Section 2.09(a) hereof the number of shares of Buyer Common Stock and/or
other securities that such holder would have received if the Recapitalization
had occurred immediately after the Effective Time. Nothing contained in this
Section 2.10 is intended to mean that Buyer may engage in a Recapitalization for
the intended purpose of affecting the Average Closing Price in a way that would
be adverse to the interests of Seller and its stockholders.
2.11 Exchange Procedures.
(a) Certificates which represent shares of Seller Common Stock
that are outstanding immediately prior to the Effective Time (each a
"Certificate") and are converted into the Merger Consideration pursuant
to this Article II shall, after the Effective Time, be deemed to
represent the Merger Consideration into which such shares have been
converted and shall be exchangeable by the holders thereof in the
manner provided in the transmittal materials described below for (i)
new certificates representing the shares of Buyer Common Stock into
which such shares have been converted and/or (ii) a check for the total
cash amount into which such shares have been converted.
(b) Following the meeting of Seller's and Buyer's respective
stockholders contemplated by Section 5.05 hereof and twenty-five
business days prior to the anticipated Closing Date, or on such other
date as may be mutually agreed upon by the parties (the "Mailing
Date"), the Exchange Agent shall send to each holder of record of
shares of Seller Common Stock outstanding as of five business days
prior to the Mailing Date (the "Election Form Record Date"),
transmittal materials and the Election Form as provided for in Section
2.14 hereof (which materials and form shall be approved by Seller,
which approval shall not be unreasonably withheld) for use in
exchanging the Certificates for such shares for the Merger
Consideration into which such shares of Seller Common Stock have been
converted pursuant to this Article II. Upon surrender of a Certificate,
together with a duly executed letter of transmittal and any other
required documents, the holder of such Certificate shall be entitled to
receive, in exchange therefor, as soon as practicable following the
Effective Time, a certificate for the number of shares of Buyer Common
Stock and/or a check for the cash amount to which such holder is
entitled, and such Certificate shall forthwith be canceled. Buyer shall
use all reasonable efforts to cause the Exchange Agent to distribute
the Merger Consideration as promptly as practicable to the former
holders of the Certificates. No dividend or other distribution payable
after the Effective Time with respect to Buyer Common Stock shall be
paid to the holder of any unsurrendered Certificate representing Stock
Election Shares until the holder thereof surrenders such Certificate in
accordance with the provisions of this Article II and the transmittal
materials, at which time such holder shall receive all dividends and
distributions, without interest thereon, previously payable but
withheld from such holder pursuant hereto. No interest shall be paid on
the cash amount payable with respect to any unsurrendered Certificate
representing Cash Election Shares, and such cash amount shall be paid
at such time as such Certificate is properly surrendered by the holder
thereof. After the Effective Time, there shall be no transfers on the
stock transfer books of Seller of shares of Seller Common Stock which
were issued and outstanding at the Effective Time and converted
pursuant to the provisions of this Article II. If, after the
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Effective Time, Certificates are presented for transfer to Seller, they
shall be canceled and exchanged for the Merger Consideration
deliverable in respect thereof as determined in accordance with the
provisions and procedures set forth in this Article II.
(c) In lieu of the issuance of fractional shares of Buyer
Common Stock pursuant to the applicable provisions of Section 2.09(a)
hereof, cash adjustments, without interest, shall be paid to the
holders of Seller Common Stock in respect of any fractional share that
would otherwise be issuable, and the amount of such cash adjustment
shall be equal to an amount in cash determined by multiplying such
holder's fractional interest by the Acquisition Price (rounded up to
the nearest cent). For purposes of determining whether, and in what
amounts, a particular holder of Seller Common Stock would be entitled
to receive cash adjustments under this Section 2.11(c), shares of
record held by such holder and represented by two or more Certificates
shall be aggregated.
(d) After the Effective Time, holders of Seller Common Stock
shall have no rights as stockholders of Seller, other than (i) to
receive the Merger Consideration into which such shares of Seller
Common Stock have been converted and fractional share payments, if any,
pursuant to the provisions of Section 2.11(c) above and (ii) the rights
afforded to any Dissenting Holder under applicable provisions of the
DGCL.
(e) Any amounts remaining unclaimed by stockholders of Seller
twenty-four months after the Effective Time (or such earlier date
immediately prior to such time as such amounts would otherwise escheat
to or become property of any governmental entity) shall, to the extent
permitted by applicable law, become the property of Buyer free and
clear of any claims of interest of any person previously entitled
thereto; provided, however, that Buyer shall send 30-days' prior
written notice to former stockholders of Seller at such stockholders'
last known addresses as reflected in Seller's stockholder records prior
to Buyer's taking possession of any such unclaimed amounts
(f) Notwithstanding anything contained in this Section 2.11,
neither Buyer, Seller, the Surviving Corporation nor any other person
shall be liable to any former holder of shares of Seller Common Stock
for any shares or any dividends or distributions with respect thereto
or any other cash amounts properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(g) In the event any Certificate shall have been lost, stolen
or destroyed, upon receipt of appropriate evidence as to such loss,
theft or destruction and to the ownership of such Certificate by the
person claiming such Certificate to be lost, stolen or destroyed, and
the receipt by Buyer of appropriate and customary indemnification,
Buyer will deliver in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration and the fractional share payment,
if any, deliverable in respect thereof as determined in accordance with
this Article II.
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(h) If any Merger Consideration is to be issued in a name
other than that in which the Certificate surrendered in exchange
therefor is registered, it shall be a condition of the issuance thereof
that the Certificate so surrendered shall be properly endorsed (or
accompanied by an appropriate instrument of transfer) and otherwise in
proper form for transfer (including, but not limited to, that the
signature of the transferor shall be properly guaranteed by a
commercial bank, trust company or member firm of the New York Stock
Exchange or other eligible guarantor institution), and that the person
requesting such exchange shall pay to the Exchange Agent in advance any
transfer or other taxes required by reason of the delivery of the
Merger Consideration in any name other than that of the registered
holder of the Certificate surrendered, or required for any other
reason, or shall establish to the reasonable satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
2.12 Treatment of Seller Stock Options. As soon as practicable
following the date of the meeting of Seller's stockholders contemplated by
Section 5.05 hereof, and in any event not later than ten (10) business days
prior to the Effective Time, each holder of a then outstanding stock option to
purchase shares of Seller Common Stock pursuant to the Seller Stock Option Plans
(it being understood that the aggregate number of shares of Seller Common Stock
subject to purchase under such stock options is not or shall not at the
Effective Time be more than 398,975 shares) shall be entitled to exercise such
option (whether or not such option would otherwise have been exercisable) at the
exercise price thereof, and if such options are not so exercised at such time
prior to the Effective Time, then each such holder shall be entitled to elect by
written notice to Buyer, delivered not later than such ten (10) business days
prior to the Effective Time, one of the two following alternatives: (i) to
receive, immediately prior to the Effective Time, from Seller in cancellation of
each such option a cash payment in an amount equal to the excess of $24.28 over
the per share exercise price of such option, multiplied by the number of shares
covered by such option or (ii) to have each such option, upon the Effective
Time, converted into an option to purchase shares of Buyer Common Stock with the
following terms:
(A) the number of shares of Buyer Common Stock
subject to such option shall be equal to the product of the
number of shares of Seller Common Stock previously subject
thereto and the Exchange Ratio, rounded down to the nearest
whole share;
(B) the exercise price per share of Buyer Common
Stock subject to such option shall be equal to the exercise
price per share of Seller Common Stock previously subject
thereto divided by the Exchange Ratio, rounded up to the
nearest cent;
(C) the duration and other terms of such option shall
be unchanged, except that all references to Seller shall be
deemed to be references to Buyer;
(D) Buyer shall assume the option as contemplated by
Section 424(a) of the Code; and
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(E) with respect to any such option that is an
incentive stock option within the meaning of Section 422 of
the Code, Buyer shall take such actions (other than delaying
the date on which such option becomes exercisable beyond the
date on which it would otherwise become exercisable pursuant
to the terms thereof) as may be necessary or appropriate to
cause such option, upon being converted into an option to
purchase shares of Buyer Common Stock, to remain such an
incentive stock option.
If any such holder fails to either exercise such holder's options as
provided for above or elect either of the other two foregoing alternatives, then
such holder's options shall terminate at the Effective Time as provided in the
Seller Stock Option Plans.
2.13 Exchange Agent. Prior to the Election Form Record Date, Buyer
shall appoint an exchange agent reasonably acceptable to Seller (it being
acknowledged and agreed by Seller that Vermont National Bank is so acceptable)
for the purpose of exchanging certificates representing shares of Buyer Common
Stock for Certificates (the "Exchange Agent"). Buyer shall issue and deliver on
the Closing Date to the Exchange Agent certificates representing the shares of
Buyer Common Stock to be issued and shall deposit with the Exchange Agent the
aggregate cash amount to be paid in consideration of the aggregate Cash
Distribution and in lieu of fractional share interests, all in accordance with
the terms of this Article II.
2.14 Election Procedures. The election to receive shares of Buyer
Common Stock or cash in exchange for shares of Seller Common Stock and the
allocation of shares of Buyer Common Stock and cash among holders of shares of
Seller Common Stock shall be conducted as follows:
(a) The Exchange Agent shall mail to each holder of record
(or, in the case of individuals who have established individual
retirement accounts ("IRAs"), to such individuals, treating each such
individual and his or her IRA(s) as a single holder of record for this
purpose) of shares of Seller Common Stock outstanding at the Election
Form Record Date an election form (the "Election Form"), together with
appropriate transmittal materials, on the Mailing Date.
(b) The Election Form shall permit a holder of shares of
Seller Common Stock to elect, with respect to some or all of such
holder's shares of Seller Common Stock, (i) to receive the Stock
Distribution (the "Stock Election Shares"), (ii) to receive the Cash
Distribution (the "Cash Election Shares"), or (iii) to indicate that
such holder makes no election (the "No Election Shares").
(c) Any shares of Seller Common Stock with respect to which
the holder thereof shall not, as of the Election Deadline (as defined
below), have made such an election by submission to the Exchange Agent,
of a properly completed Election Form shall be deemed to be No Election
Shares. "Election Deadline" means 5:00 p.m., local time, on the
fifteenth
<PAGE>
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business day following but not including the Mailing Date or such other
date as Buyer and Seller shall mutually agree upon in writing.
(d) Any election shall have been properly made only if the
Exchange Agent shall have received a properly completed Election Form
by the Election Deadline. Subject to Section 2.11(g) hereof, an
Election Form will be properly completed only if accompanied by either
(i) certificates representing all shares of Seller Common Stock covered
thereby or (ii) an appropriate guarantee of delivery of such
certificates as set forth in the Election Form from a member of a
national securities exchange or the NASD, or a commercial bank or trust
company in the United States, provided that if the certificates are not
delivered by the time set forth in the guarantee of delivery (which
time may not be later than two business days after the Election
Deadline), the holder shall be entitled only to receive in respect of
each share of Seller Common Stock represented by such certificates the
Merger Consideration to be received by holders of No Election Shares,
subject to the allocation and other provisions of this Section 2.14 and
Section 2.11 hereof. Any Election Form may be revoked or changed by the
person submitting such Election Form to the Exchange Agent by written
notice to the Exchange Agent, provided such notice is received by the
Exchange Agent at or prior to the Election Deadline. The Exchange Agent
shall have reasonable discretion to determine when any election,
modification or revocation is received and whether any such election,
modification or revocation has been properly made.
(e) If the aggregate number of Stock Election Shares does not
equal the Stock Conversion Number (as defined below), within ten
business days after the Election Deadline, unless the Effective Time
has not yet occurred, in which case as soon thereafter as practicable,
the Exchange Agent shall allocate among holders of shares of Seller
Common Stock outstanding at the Effective Time the rights to receive
with respect to each such share the Stock Distribution or the Cash
Distribution as follows:
(i) if the number of Stock Election Shares is less than
the Stock Conversion Number, then
(A) all Stock Election Shares will be converted
into the right to receive the Stock Distribution,
(B) the Exchange Agent will select, on a pro rata
basis, first from among the holders of No Election Shares, a
sufficient number of such shares ("No Election Designee
Shares") such that the number of No Election Designee Shares
will, when added to the number of Stock Election Shares, equal
as closely as practicable the Stock Conversion Number, and all
such No Election Designee Shares will be converted into the
right to receive the Stock Distribution,
(C) if, after giving effect to clauses (A) and (B)
above, the number of Stock Election Shares plus No Election
Designee Shares is less than the Stock Conversion Number, the
Exchange Agent will select, on a pro rata basis, from among
<PAGE>
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the holders of Cash Election Shares, a sufficient number of
such shares ("Cash Election Designee Shares") such that the
number of Cash Election Designee Shares will, when added to
the number of No Election Designee Shares and Stock Election
Shares, equal as closely as practicable the Stock Conversion
Number, and all Cash Election Designee Shares will be
converted into the right to receive the Stock Distribution,
and
(D) the Cash Election Shares and the No Election
Shares not so selected as Cash Election Designee Shares or No
Election Designee Shares, respectively, shall be converted
into the right to receive the Cash Distribution; or
(ii) if the aggregate number of Stock Election Shares is
greater than the Stock Conversion Number, then
(A) all Cash Election Shares will be converted into
the right to receive the Cash Distribution,
(B) the Exchange Agent will select, on a pro rata
basis, first from among the holders of No Election Shares, a
sufficient number of such shares ("No Election Cash Designee
Shares") such that the number of No Election Cash Designee
Shares will, when added to the number of Cash Election Shares
and Dissenting Shares, equal as closely as practicable the
Cash Conversion Number (as defined below), and all No Election
Cash Designee Shares will be converted into the right to
receive the Cash Distribution,
(C) if, after giving effect to clauses (A) and (B)
above, the number of Cash Election Shares plus No Election
Cash Designee Shares plus Dissenting Shares is less than the
Cash Conversion Number, the Exchange Agent will select, on a
pro rata basis, from among the holders of Stock Election
Shares, a sufficient number of such shares ("Stock Election
Cash Designee Shares") such that the number of Stock Election
Cash Designee Shares will, when added to the number of Cash
Election Shares and No Election Cash Designee Shares and
Dissenting Shares, equal as closely as practicable the Cash
Conversion Number, and all Stock Election Cash Designee Shares
will be converted into the right to receive the Cash
Distribution, and
(D) the Stock Election Shares and the No Election
Shares not so selected as Stock Election Cash Designee Shares
or No Election Cash Designee Shares, respectively, will be
converted into the right to receive the Stock Distribution.
"Cash Conversion Number" means the number of outstanding shares of Seller Common
Stock as of the Effective Time, including all Dissenting Shares, if any,
multiplied by the ratio of $7.25 to the Acquisition Price. "Stock Conversion
Number" means the number of outstanding shares of Seller Common Stock as of the
Effective Time minus the Cash Conversion Number.
<PAGE>
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(f) The proration process to be used by the Exchange Agent
shall be as the Exchange Agent deems equitable in its sole reasonable
discretion, provided that each holder of Stock Election Shares shall,
to the greatest extent possible, except for rounding to whole numbers
of shares, be subject to the same degree of proration as each other
holder of Stock Election Shares.
(g) In the event that this Agreement is duly terminated in
accordance with Section 8.01 hereof after the Mailing Date, the
Exchange Agent shall use all reasonable efforts to effect the prompt
return of stock certificates representing shares of Seller Common Stock
submitted thereto with Election Forms as provided for hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller and the Bank as follows:
3.01 Corporate Organization.
(a) The Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
The Buyer has the corporate power and authority to own, lease or
operate all of its properties and assets and to carry on its business
as it is now being conducted, and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties and
assets owned, leased or operated by it makes such licensing or
qualification necessary, except where the failure to be so licensed or
qualified would not result in, with respect to the Buyer, a Material
Adverse Effect. The Buyer is a bank holding company duly registered
with the Federal Reserve Board under the BHCA. The certificate of
incorporation and the by-laws of Buyer, copies of which have been
provided to Seller, are true, complete and correct copies of such
documents as in effect on the date hereof.
(b) Each subsidiary of the Buyer is duly organized, validly
existing and in corporate good standing under the laws of the
jurisdiction of its incorporation. Each subsidiary of the Buyer has the
corporate power and authority to own, lease or operate all of its
properties and assets and to carry on its business as it is now being
conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned, leased, or
operated by it makes such licensing or qualification necessary, except
where the failure to be so licensed or qualified would neither
individually nor in the aggregate, result in, with respect to the
Buyer, a Material Adverse Effect.
3.02 Capitalization. The authorized capital stock of the Buyer consists
of 20,000,000 shares of common stock, par value $1.00 per share (the "Buyer
Common Stock"), and 5,000,000 shares of preferred stock, par value $1.00 per
<PAGE>
-18-
share (the "Buyer Preferred Stock"). As of the close of business on October 31,
1996, there were 4,886,704 shares of the Buyer Common Stock issued and
outstanding and no shares of the Buyer Preferred Stock issued and outstanding.
As of the close of business on October 31, 1996, there were also 184,018 shares
of the Buyer Common Stock held in the Buyer's treasury and 214,125 shares of the
Buyer Common Stock reserved for issuance upon exercise of outstanding stock
options. All issued and outstanding shares of the Buyer Common Stock have been
duly authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership
thereof.
3.03 Authority; No Violation.
(a) The Buyer has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
and validly approved by the Board of Directors of the Buyer. The Board
of Directors of Buyer has directed that this Agreement and the
transactions contemplated hereby be submitted to the stockholders of
Buyer for approval at a meeting of such stockholders and no other
corporate proceedings on the part of the Buyer are necessary to
consummate any of the transactions so contemplated by this Agreement.
This Agreement has been duly and validly executed and delivered by the
Buyer and (assuming due authorization, execution and delivery by the
Seller and the Bank) constitutes the valid and binding obligation of
the Buyer, enforceable against the Buyer in accordance with its terms,
except that enforcement hereof may be limited by the receivership,
conservatorship and supervisory powers of bank regulatory agencies
generally as well as bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting enforcement of creditors' rights
generally and except that enforcement thereof may be subject to general
principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law) and the availability of equitable
remedies.
(b) Neither the execution and delivery of this Agreement by
the Buyer nor the consummation by the Buyer of the transactions
contemplated by this Agreement, nor compliance by the Buyer with any of
the terms or provisions of this Agreement, will (i) assuming that the
consents and approvals referred to in Section 3.04 hereof are duly
obtained, violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to the Buyer or
any of its subsidiaries or any of their respective properties or
assets, or, (ii) violate, conflict with, result in a breach of any
provisions of, constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, result in
the termination of, accelerate the performance required by, or result
in a right of termination or acceleration or the creation of any lien,
security interest, charge or other encumbrance upon any of the
respective properties or assets of the Buyer or any of its subsidiaries
under, any of the terms, conditions or provisions of (A) the
certificate of incorporation or other charter document of like nature
or by-laws of the Buyer, or such Buyer subsidiary, as the case may be,
or (B) any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which the Buyer
<PAGE>
-19-
or any of its subsidiaries is a party thereto as issuer, guarantor or
obligor, or by which they or any of their respective properties or
assets may be bound or affected, except, in the case of clause (ii)(B)
above, for such violations, conflicts, breaches or defaults which
either individually or in the aggregate will not result, with respect
to the Buyer, in a Material Adverse Effect.
3.04 Consents and Approvals. Except for consents, waivers or approvals
of, notice to, or filings or registrations with, the Federal Reserve Board, the
DOJ, the FTC, the Vermont Commissioner, the Securities and Exchange Commission
(the "SEC"), the NASD, the Delaware Secretary of State, and certain state "Blue
Sky" or securities commissioners, no consents, waivers or approvals of, notices
to, or filings or registrations with, any public body or authority are
necessary, and no permits, consents, waivers, clearances, approvals or
authorizations of or notices to any non-governmental or non-regulatory third
parties (which term does not include the stockholders of the Buyer) are
necessary, in connection with the execution and delivery by the Buyer of this
Agreement or the consummation by the Buyer of the transactions contemplated by
this Agreement (except Section 5.17 hereof). The affirmative vote of the holders
of two-thirds of the outstanding shares of the Buyer Common Stock (the "Buyer
Requisite Vote") is the only vote of the holders of any class or series of the
Buyer's capital stock or other securities necessary to approve this Agreement
and the transactions contemplated hereby, including without limitation the
Acquisition Merger.
3.05 Financial Statements. The Buyer has made available to the Seller
copies of (a) the consolidated balance sheets of the Buyer and its subsidiaries
as of December 31 for the fiscal years 1993 through 1995, inclusive, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the fiscal years 1993 through 1995, inclusive, as reported in the
Buyer's Annual Reports on Form 10-K for each of the three fiscal years ended
December 31, 1993 through December 31, 1995 filed with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), in each case
accompanied by the audit report of Coopers & Lybrand LLP, independent
accountants for the Buyer, and (b) the unaudited consolidated balance sheets of
Buyer and its subsidiaries as of September 30, 1996 and September 30, 1995, the
related unaudited consolidated statements of income and changes in stockholders'
equity for the nine months ended September 30, 1996 and September 30, 1995 and
the related unaudited consolidated statements of cash flows for the nine months
ended September 30, 1996 and September 30, 1995, all as reported in Buyer's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 filed
with the SEC under the Exchange Act. The December 31, 1995 consolidated balance
sheet of the Buyer (the "Buyer Balance Sheet") (including the related notes,
where applicable) and the other financial statements referred to herein
(including the related notes, where applicable) fairly present, and the
financial statements to be included in any reports or statements (including
reports on Forms 10-Q, 10-K and 8-K) to be filed by the Buyer with the SEC after
the date hereof will fairly present, the consolidated financial position and
results of the consolidated operations and cash flows and changes in
stockholders' equity of the Buyer and its subsidiaries for the respective fiscal
periods or as of the respective dates therein set forth; and each of such
statements (including the related notes, where applicable) has been and will be
prepared in accordance with GAAP consistently applied during the periods
involved, except as otherwise set forth in the notes thereto (subject, in the
case of unaudited interim statements, to normal year-end adjustments). The books
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and records of the Buyer and its subsidiaries have been, and are being,
maintained in accordance with GAAP and applicable legal and regulatory
requirements and reflect only actual transactions.
3.06 Absence of Undisclosed Liabilities. As of December 31, 1995, none
of the Buyer or any of its subsidiaries had any obligation or liability
(contingent or otherwise) that is material on a consolidated basis to the Buyer,
or that when combined with all similar obligations or liabilities would be
material on a consolidated basis to the Buyer, except as disclosed or reflected
in the Buyer's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.
3.07 Broker's Fees. Neither the Buyer nor any of its officers or
directors has employed any broker or finder or incurred any liability for any
broker's fees, commissions or finder's fees in connection with any of the
transactions contemplated by this Agreement, except that Buyer has engaged, and
will pay a fee or commission to, Tucker Anthony Incorporated.
3.08 Absence of Certain Changes or Events. Since December 31, 1995, the
Buyer and its subsidiaries have not incurred any material liability, except in
the ordinary course of their business consistent with their past practices, nor
has there been any change in the assets, liabilities, business, operations,
results of operations or condition of the Buyer or any of its subsidiaries which
has had or could be reasonably expected to have, individually or in the
aggregate, a Material Adverse Effect on the Buyer.
3.09 Legal Proceedings. There is no pending or, to the Buyer's
knowledge, threatened legal, administrative, arbitral, or other proceeding,
claim, action or governmental investigation against Buyer or any subsidiary of
the Buyer or challenging the validity or propriety of the transactions
contemplated by this Agreement, as to which there is a reasonable probability of
an adverse determination and which, if adversely determined, would have or could
be reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect on the Buyer or otherwise materially adversely affect the Buyer's
ability to perform its obligations under this Agreement, nor is there any
judgment, decree, injunction, rule or order of any legal, administrative or
governmental body or arbitrator outstanding against the Buyer or any subsidiary
of the Buyer having any such effect.
3.10 Agreements with Banking Authorities. Neither Buyer nor any of its
subsidiaries is a party to any commitment letter, written agreement, memorandum
of understanding or order to cease and desist with, or has adopted any
resolutions at the request of, any federal or state governmental entity charged
with the supervision or regulation of banks, bank holding companies, savings
associations or savings and loan holding companies or engaged in the insurance
of bank or savings association deposits which restricts materially the conduct
of its business, or in any manner relates to its capital adequacy, credit
policies, management or overall safety and soundness or such entity's ability to
perform its obligations hereunder.
3.11 Material Agreements. Except as set forth in the index of exhibits
in Buyer's Annual Report on Form 10-K for the year ended December 31, 1995 or in
Buyer's Quarterly Reports for the fiscal quarters ended March 31, 1996, June 30,
<PAGE>
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1996 and September 30, 1996, and except for this Agreement and the agreements
specifically referred to herein, neither the Buyer nor any of its subsidiaries
is a party to or is bound by any other contract or agreement or amendment
thereto that would be required to be filed as an exhibit to a Form 10-K filed by
the Buyer as of the date hereof or is otherwise material to the business,
operations, results of operations or condition of the Buyer on a consolidated
basis.
3.12 Reports. Since January 1, 1993, the Buyer and its subsidiaries
have timely filed, and subsequent to the date hereof will timely file, all
reports, registrations and statements, together with any amendments required to
be made with respect thereto, that were and are required to be filed with (a)
the SEC, including, but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K and
proxy statements (and all such reports, registrations and statements have been
made available by the Buyer to the Seller), (b) the OCC, (c) the FDIC, (d) the
Federal Reserve Board and (e) any applicable state securities or banking
authorities (except, in the case of state securities authorities, no such
representation is made as to filings which are not material) (all such reports,
registrations and statements are collectively referred to herein as the "Buyer
Reports"). As of their respective dates, the Buyer Reports complied and, with
respect to filings made after the date of this Agreement, will at the date of
filing comply, in all material respects with all of the statutes, rules and
regulations enforced or promulgated by the regulatory authority with which they
were filed. As of their respective dates, the Buyer Reports did not contain and,
with respect to filings made after the date of this Agreement, will not at the
date of filing contain, any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
3.13 Compliance with Applicable Law. Buyer and its subsidiaries hold
all material licenses, franchises, permits and authorizations necessary for the
lawful conduct of Buyer's consolidated business, and Buyer and its subsidiaries
have complied with, and are not in default in any respect under any, applicable
law, statute, order, rule, regulation or policy of, or agreement with, any
federal, state or local governmental agency or authority relating to Buyer on a
consolidated basis, other than where such default or noncompliance does not have
and could not reasonably be expected to have a Material Adverse Effect on Buyer
or otherwise materially adversely affect Buyer's ability to perform its
obligations under this Agreement. Buyer has not received any notice of any
violation of, or commencement of any proceeding in connection with any violation
(including without limitation any hearing or investigation relating to the
imposition or contemplated imposition of civil money penalties or other
financial penalty under Section 8(i) of the FDIA or applicable state law
("CMPs")) of any such law, statute, order, rule, regulation, policy or
agreement.
3.14 Environmental Matters. Buyer and its subsidiaries are in
compliance and have always been in compliance with all environmental laws,
rules, regulations and standards promulgated, adopted or enforced by the EPA and
of similar agencies in states in which they conduct their respective business,
except for any noncompliance that singly or in the aggregate would not have a
Material Adverse Effect on Buyer. There is no suit, claim, action or proceeding
now pending before any court, governmental agency or board or other forum or, to
the knowledge of Buyer, threatened by any person, as to which there is a
reasonable probability of an adverse determination and which, if adversely
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determined, would, individually or in the aggregate, have a Material Adverse
Effect on Buyer (i) for alleged noncompliance with any environmental law, rule
or regulation or (ii) relating to the discharge or release into the environment
of any hazardous material or waste at or on a site presently or formerly owned,
leased or operated by Buyer or any subsidiary of Buyer or in which Buyer or any
Buyer subsidiary has a lien or other security interest.
3.15 Buyer Common Stock. The Buyer Common Stock to be issued in
connection with the Acquisition Merger is duly authorized and, when issued in
accordance with Article II hereof, will be validly issued, fully paid and
nonassessable and not subject to preemptive rights, with no personal liability
attaching thereto.
3.16 Ownership of Seller Common Stock. Neither the Buyer nor, to its
best knowledge, any of its affiliates or associates (as such terms are defined
under the Exchange Act), (a) beneficially own, directly or indirectly, or (b)
are parties to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of the Seller, which in the aggregate represent five percent (5%) or more
of the outstanding shares of capital stock of the Seller entitled to vote
generally in the election of directors (other than shares in trust accounts,
managed accounts and the like that are beneficially owned by third parties (any
such shares, "Trust Account Shares") and any other shares held in respect of a
debt previously contracted (any such shares, "DPC Shares").
3.17 Financing. Buyer's ability to pay the total amount of the cash
consideration to be paid with respect to those shares of Seller Common Stock
that are converted into the Cash Distribution in accordance with Section 2.09(a)
above is not contingent upon raising additional equity capital (which does not
include receipt of cash dividends from its banking or other subsidiaries) or
obtaining specific financing from any third-party lender.
3.18 Buyer Benefit Plans.
(a) Buyer represents that with respect to each employee pension benefit
plan (as defined in Section 3(2) of ERISA) ("Buyer Pension Plan") and each
employee welfare benefit plan (as defined in Section 3(1) of ERISA) ("Buyer
Benefit Plan") which the Buyer, any subsidiary of Buyer or any ERISA Affiliate
maintains or to which the Buyer, any subsidiary of Buyer or any ERISA Affiliate
contributes, each such plan has been administered in compliance with its terms
in all material respects and is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other applicable laws, and each of
the Buyer Pension Plans intended to qualify under Section 401(a) of the Code is
so qualified. Neither the Buyer nor any subsidiary of Buyer has taken any
action, nor has any event occurred, that has resulted, or will likely result in
liability under Title IV of ERISA or has engaged in a prohibited transaction
(within the meaning of Section 406 of ERISA or Section 4975 of the Code).
(b) There is no "accumulated funding deficiency" (within the meaning of
Section 302 of ERISA and Section 412 of the Code), whether or not waived, with
respect to any Buyer Pension Plan. The Buyer, its subsidiaries, and their ERISA
Affiliates have made all contributions to the Buyer Pension Plans and Buyer
Benefit Plans required thereunder as of the date of this representation, and
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have established adequate reserves on their books for all contributions to Buyer
Pension Plans and Buyer Benefit Plans required thereunder for the period prior
to the date of this representation, to the extent such contributions are not
required to have been made, and have not been made, prior to the date of this
representation.
3.19 Buyer Information. The information relating to the Buyer and its
subsidiaries to be contained or incorporated by reference in the Buyer
Registration Statement and the Proxy Statement, as described in Section 5.04
hereof, and any other documents filed with the SEC or any regulatory agency in
connection herewith, to the extent such information is provided in writing by
the Buyer, will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make such information not misleading.
3.20 Disclosure. To the best of Buyer's knowledge, no representation or
warranty contained in this Agreement, and no statement contained in any
certificate, list or other writing furnished to the Seller pursuant to the
provisions hereof, contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements herein or
therein not misleading. No information believed by Buyer to be material to
Seller's interests in the transactions contemplated by this Agreement, which has
not otherwise been disclosed to Seller in connection with this Agreement, has
been intentionally withheld from Seller.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER AND THE BANK
Seller and the Bank hereby represent and warrant to Buyer as follows:
4.01 Corporate Organization.
(a) The Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
The Bank is a federal savings bank in stock form duly organized,
validly existing and in good standing under the laws of the United
States. Each of the Seller and the Bank has the corporate power and
authority to own, lease or operate all of its respective properties and
assets and to carry on its respective business as it is now being
conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned, leased or
operated by it makes such licensing or qualification necessary, except
where the failure to be so licensed or qualified would not result in,
with respect to the Seller, any Material Adverse Effect. The deposits
of the Bank are insured by the FDIC in accordance with the FDIA, and,
except as disclosed in Section 4.01(a) of the disclosure schedule
prepared by Seller and delivered to Buyer on the date hereof in
conjunction with the parties' execution and delivery of this Agreement
(the "Seller Disclosure Schedule"), the Bank has paid all assessments
that have become due and payable to the FDIC. The Seller is a savings
and loan holding company registered with the OTS under the HOLA.
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(b) Each subsidiary of the Seller, other than the Bank, is
duly organized, validly existing and in good standing under the laws of
the jurisdiction of its incorporation. Each subsidiary of the Seller
has the corporate power and authority to own, lease or operate all of
its properties and assets and to carry on its business as it is now
being conducted, and is duly licensed or qualified to do business in
each jurisdiction in which the nature of the business conducted by it
or the character or location of the properties and assets owned, leased
or operated by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would, neither
individually nor in the aggregate, result in, with respect to the
Seller, a Material Adverse Effect.
(c) Except as disclosed in Section 4.01(c) of the Seller
Disclosure Schedule, the minute books of the Seller and its
subsidiaries contain complete and accurate records of all meetings and
other corporate actions authorized at such meetings held or taken since
December 31, 1990 by its stockholders and Board of Directors. The
certificate of incorporation and the by-laws of the Seller and the
federal stock charter and by-laws of the Bank, copies of which have
been provided to the Buyer, are true, complete and correct copies of
such documents as in effect on the date hereof.
4.02 Capitalization.
(a) The authorized capital stock of the Seller consists of
5,000,000 shares of common stock, par value $0.01 per share (the
"Seller Common Stock"), and 1,000,000 shares of preferred stock, par
value $0.01 per share (the "Seller Preferred Stock"). As of October 31,
1996, there were 3,677,226 shares of the Seller Common Stock and no
shares of the Seller Preferred Stock issued and outstanding, 418,323
shares of the Seller Common Stock held in the Seller's treasury and
392,775 shares of Seller Common Stock reserved for issuance upon the
exercise of outstanding stock options. All issued and outstanding
shares of the Seller Common Stock have been duly authorized and validly
issued and are fully paid, nonassessable and free of preemptive rights,
with no personal liability attaching to the ownership thereof. Section
4.02(a) of the Seller Disclosure Schedule identifies by name all of the
holders of record as of the date hereof of any options or rights,
whether or not presently exercisable, to purchase any shares of Seller
Common Stock, the number of shares of Seller Common Stock subject to
such outstanding stock options or rights held by each such holder,
together with the various dates on which such options or rights were
granted and the various exercise prices for such options or rights, the
number of shares for which such options or rights are presently vested
and the vesting schedule for the remaining balance of shares for which
such options or rights are not presently vested. Except as referred to
in this Section 4.02 or disclosed in Section 4.02(a) of the Seller
Disclosure Schedule, and except for the Seller Option Agreement and the
Seller Stock Option Plans, the Seller does not have and is not bound by
any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the Seller to issue, deliver or
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sell, or cause to be issued, delivered or sold any shares of the Seller
Common Stock or any other equity security of the Seller or any Seller
subsidiary or any securities convertible into, exchangeable for or
representing the right to subscribe for, purchase or otherwise receive
any shares of the Seller Common Stock or any other equity security of
the Seller or any Seller subsidiary or obligating the Seller to grant,
extend or enter into any such subscriptions, options, warrants, calls,
commitments or agreements. As of the date hereof, there are no
outstanding contractual obligations of the Seller to repurchase, redeem
or otherwise acquire any shares of capital stock of the Seller or any
Seller subsidiary.
(b) Section 4.02(b) to the Seller Disclosure Schedule lists
each of the subsidiaries of the Seller as of the date of this Agreement
and indicates for such subsidiary as of such date, the number,
percentage and type of equity securities owned or controlled by the
Seller and the jurisdiction of incorporation. No subsidiary of the
Seller has or is bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for
such Seller subsidiary to issue, deliver or sell, or cause to be
issued, delivered or sold, any equity security of the Seller or of any
Seller subsidiary or any securities convertible into, exchangeable for
or representing the right to subscribe for, purchase or otherwise
receive any such equity security or obligating a Seller subsidiary to
grant, extend or enter into any such subscriptions, options, warrants,
calls, commitments or agreements. As of the date hereof, there are no
outstanding contractual obligations of any Seller subsidiary to
repurchase, redeem or otherwise acquire any shares of capital stock of
the Seller or any Seller subsidiary. All of the shares of capital stock
of each of the Seller's subsidiaries held by the Seller are fully paid
and nonassessable and are owned by the Seller free and clear of any
claim, lien, encumbrance or agreement with respect thereto.
4.03 Authority; No Violation.
(a) The Seller has full corporate power and authority to
execute and deliver this Agreement and the Seller Option Agreement and
to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Seller Option
Agreement and the consummation of the transactions contemplated hereby
and thereby have been duly and validly approved by the Board of
Directors of the Seller. The Board of Directors of Seller has directed
that this Agreement and the transactions contemplated hereby be
submitted to the stockholders of the Seller for approval at a meeting
of such stockholders and no other corporate proceedings on the part of
Seller are necessary to consummate any of the transactions so
contemplated by this Agreement or the Seller Option Agreement. This
Agreement and the Seller Option Agreement have been duly and validly
executed and delivered by the Seller and (assuming due authorization,
execution and delivery of this Agreement and the Seller Option
Agreement by the Buyer) constitute the valid and binding obligations of
the Seller, enforceable against it in accordance with their respective
terms, except that enforcement thereof may be limited by the
receivership, conservatorship and supervisory powers of bank regulatory
agencies generally as well as bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting enforcement of creditors'
rights generally and except that enforcement thereof may be
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subject to general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law) and the
availability of equitable remedies.
(b) Neither the execution and delivery of this Agreement and
the Seller Option Agreement by the Seller nor the consummation by the
Seller of the transactions contemplated hereby and thereby, nor
compliance by the Seller with any of the terms or provisions hereof or
thereof, will (i) assuming that the consents and approvals referred to
in Section 4.04 are duly obtained, violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to the Seller or any of its subsidiaries or any
of their respective properties or assets, or (ii) except as set forth
in Section 4.03(b) of the Seller Disclosure Schedule, violate, conflict
with, result in a breach of any provisions of, constitute a default (or
an event which, with notice or lapse of time, or both, would constitute
a default) under, result in the termination of, accelerate the
performance required by, or result in a right of termination or
acceleration or the creation of any lien, security interest, charge or
other encumbrance upon any of the respective properties or assets of
the Seller or any of its subsidiaries under, any of the terms,
conditions or provisions of (A) the certificate of incorporation or
other charter documents of like nature or by-laws of the Seller or such
Seller subsidiary, as the case may be, or (B) any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument
or obligation to which the Seller or any of its subsidiaries is a party
thereto as issuer, guarantor or obligor, or by which they or any of
their respective properties or assets may be bound or affected, except,
in the case of clause (ii)(B) above, for such violations, conflicts,
breaches or defaults which either individually or in the aggregate will
not result, with respect to the Seller, in a Material Adverse Effect.
4.04 Consents and Approvals. Except for consents, waivers or approvals
of, notices to, or filings or registrations with, the Federal Reserve Board, the
DOJ, the FTC, the Vermont Commissioner, the SEC, the Delaware Secretary of
State, or as may be set forth in Section 4.04 or 4.03(b) of the Seller
Disclosure Schedule, no consents, waivers or approvals of, notices to, or
filings or registrations with, any public body or authority are necessary, and
no permits, consents, waivers, clearances, approvals or authorizations of or
notices to any non-governmental or non-regulatory third parties (which term does
not include the stockholders of the Seller) are necessary, in connection with
the execution and delivery by the Seller of this Agreement and the Seller Option
Agreement or the consummation by the Seller of the transactions contemplated by
this Agreement (except Section 5.17 hereof) or the Seller Option Agreement. The
affirmative vote of holders of two-thirds of the outstanding shares of the
Seller Common Stock (the "Seller Requisite Vote") is the only vote of the
holders of any class or series of the Seller's capital stock or other securities
necessary to approve this Agreement and the transactions contemplated hereby,
including without limitation the Acquisition Merger.
4.05 Financial Statements. The Seller has made available to the Buyer
copies of (a) the consolidated balance sheets of the Seller and its subsidiaries
as of September 30 for the fiscal years 1993 through 1995, inclusive, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for such fiscal years 1993 through 1995, inclusive, as reported in
the Seller's Annual Reports on Form 10-K for each of the three fiscal years
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ended September 30, 1993 through September 30, 1995 filed with the SEC under the
Exchange Act, in each case accompanied by the audit report of KPMG Peat Marwick
LLP, independent accountants for the Seller, (b) the unaudited consolidated
balance sheets of Seller and its subsidiaries as of June 30, 1996 and June 30,
1995, the related unaudited consolidated statements of income and changes in
stockholders' equity for the nine months ended June 30, 1996 and June 30, 1995
and the related unaudited consolidated statements of cash flows for the nine
months ended June 30, 1996 and June 30, 1995, all as reported in Seller's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 filed with the
SEC under the Exchange Act, and (c) the unaudited consolidated balance sheet of
Seller and its subsidiaries as of September 30, 1996, the related unaudited
consolidated statements of income and changes in stockholders' equity for the
fiscal year ended September 30, 1996 and the related unaudited consolidated
statement of cash flows for the fiscal year ended September 30, 1996, all as
prepared by management, but not yet certified by KPMG Peat Marwick LLP as of the
date hereof. The September 30, 1995 consolidated balance sheet of the Seller
(the "Seller Balance Sheet") (including the related notes, where applicable) and
the other financial statements referred to herein (including the related notes,
where applicable) fairly present, and the financial statements to be included in
any reports or statements (including reports on Forms 10-Q, 10-K and 8-K) to be
filed by the Seller with the SEC after the date hereof will fairly present, the
consolidated financial position and results of the consolidated operations and
cash flows and changes in shareholders' equity of the Seller and its
subsidiaries for the respective fiscal periods or as of the respective dates
therein set forth; and each of such statements (including the related notes,
where applicable) has been and will be prepared in accordance with GAAP
consistently applied during the periods involved, except as otherwise set forth
in the notes thereto (subject, in the case of unaudited interim statements, to
normal year-end adjustments). The books and records of the Seller and its
subsidiaries have been, and are being, maintained in accordance with GAAP and
applicable legal and regulatory requirements and reflect only actual
transactions.
4.06 Absence of Undisclosed Liabilities. As of September 30, 1995, none
of the Seller or any of its subsidiaries had any obligation or liability
(contingent or otherwise) that is material on a consolidated basis to the
Seller, or that when combined with all similar obligations or liabilities would
be material on a consolidated basis to the Seller, except as disclosed or
reflected in the Seller's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996 or Section 4.06 of the Seller Disclosure Schedule.
4.07 Broker's Fees. Neither the Seller or any of its subsidiaries nor
any of their respective officers or directors has employed any broker or finder
or incurred any liability for any broker's fees, commissions or finder's fees in
connection with any of the transactions contemplated by this Agreement, except
that Seller has engaged, and will pay a fee or commission to, McConnell, Budd &
Downes, Inc.
4.08 Absence of Certain Changes or Events. Except as disclosed in
Schedule 4.08 of the Seller Disclosure Schedule, since September 30, 1995 the
Seller and its subsidiaries have not incurred any material liability, except in
the ordinary course of their business consistent with their past practices, nor
has there been any change in the assets, liabilities, business, operations,
results of operations or condition of the Seller or any of its subsidiaries
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which has had or could be reasonably expected to have, individually or in the
aggregate, a Material Adverse Effect on the Seller.
4.09 Legal Proceedings. Except as disclosed in Section 4.09 of the
Seller Disclosure Schedule, there is no pending or, to Seller's knowledge,
threatened legal, administrative, arbitral, or other proceeding, claim, action
or governmental investigation against the Seller or any subsidiary of the Seller
or challenging the validity or propriety of the transactions contemplated by
this Agreement, as to which there is a reasonable probability of an adverse
determination and which, if adversely determined, would have or could be
reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect on the Seller or otherwise materially adversely affect the
Seller's ability to perform its obligations under this Agreement, nor is there
any judgment, decree, injunction, rule or order of any legal, administrative or
governmental body or arbitrator outstanding against the Seller or any subsidiary
of the Seller having any such effect.
4.10 Taxes and Tax Returns. Except as may be set forth in Section 4.10
of the Seller Disclosure Schedule:
(a) The Seller has timely filed all Tax Returns required to be
filed by it, each such Tax Return has been prepared in compliance with
all applicable laws and regulations, and all such Tax Returns are true
and accurate in all respects material to the financial condition of the
Seller and its subsidiaries, taken as a whole. All Taxes shown on such
Tax Returns as due and payable by Seller have been paid and, to
Seller's knowledge, Seller will not be liable for any additional Taxes
for any taxable period ending on or before the Effective Time in excess
of the amounts set up as reserves for taxes on the Seller Balance
Sheet. Seller has made available to Buyer correct and complete copies
of all federal income Tax Returns filed with respect to Seller for
taxable periods ended on or after December 31, 1990, and all
examination reports, and statements of deficiencies assessed against or
agreed to by Seller with respect to such taxable periods;
(b) Seller has neither requested nor been granted an extension
of the time for filing any Tax Return to a date later than the
Effective Time;
(c) With respect to each taxable period of Seller through
September 30, 1992, either such taxable period has been audited by the
relevant taxing authority or the time for assessing or collecting
income Tax with respect to each such taxable period has closed and such
taxable period is not subject to review by any relevant taxing
authority or the statute of limitations for assessing or collecting
income Tax with respect to each such taxable period has not yet
expired;
(d) Seller has not consented to extend the time in which any
Tax may be assessed or collected by any tax authority;
(e) No deficiency or proposed adjustment which has not been
settled or otherwise resolved for any amount of Tax has been asserted
or assessed by any taxing authority against
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Seller, other than such additional Taxes as are being contested in good
faith and which if determined adversely to Seller would not have a
Material Adverse Effect on Seller, and Seller has not executed or
entered into a closing agreement pursuant to Code Section 7121 or any
predecessor provision thereof or any similar provision of state, local
or foreign law;
(f) There is no action, suit, taxing authority proceeding or
audit now in progress, pending or, to the knowledge of Seller,
threatened against or with respect to Seller with respect to any Tax;
(g) To the best of Seller's knowledge, no claim has ever been
made by a taxing authority in a jurisdiction where Seller does not pay
Tax or file Tax Returns that Seller is or may be subject to Taxes
assessed by that jurisdiction;
(h) To the best of Seller's knowledge, there are no liens for
Taxes (other than current Taxes not yet due and payable) on the assets
of Seller;
(i) Seller has not filed or been included in a combined,
consolidated or unitary income Tax Return (other than consolidated Tax
Returns in which it is the parent corporation);
(j) Seller has neither made nor is affected by any elections
under Code Sections 108(b)(5), 338(g), or 565, or Treasury Regulation
Section 1.1502-20(g);
(k) Seller is not a party to or bound by any Tax allocation or
Tax sharing agreement nor does Seller have any current or potential
contractual obligation to indemnify any other person or entity with
respect to Taxes (other than the tax sharing agreement among Seller and
its subsidiaries, a copy of which has been made available to Buyer);
(l) Seller has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any
employee, creditor, independent contractor or other third party;
(m) Seller has no permanent establishment in any foreign
country, as defined in the relevant tax treaty between the United
States of America and such foreign country, nor otherwise operates or
conducts business through any branch in any foreign country;
(n) Seller will not be required, as a result of a change in
method of accounting for any period before and immediately prior to the
Effective Time, to include any adjustment under Section 481(c) of the
Code (or any similar or corresponding provision or requirement of
federal, state, local or foreign income Tax law) in taxable income for
any period ending after the Effective Time;
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(o) None of the assets of Seller directly or indirectly
secures any indebtedness the interest on which is tax-exempt under
Section 103(a) of the Code, and Seller is not directly or indirectly an
obligor or a guarantor with respect to any such indebtedness;
(p) Seller has not filed a consent under Code Sec. 341(f)
concerning collapsible corporations;
(q) Seller has not made any payments, nor is obligated to make
any payments, nor is it a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code Sec. 280G;
(r) Seller and each of its subsidiaries is not currently, has
not been within the last five years and does not anticipate becoming a
"United States real property holding corporation" within the meaning of
Code Section 897(c) .
(s) The liabilities of the Bank will not, as of the Effective
Time, exceed the tax basis of its assets;
(t) For purposes of this Section 4.10:
(A) "Tax" means any federal, state, local or foreign
income, gross receipts, franchise, estimated, alternative
minimum, add-on minimum, sales, use, transfer, registration,
value added, excise, natural resources, severance, stamp,
occupation, premium, windfall profit, environmental, customs,
duties, real property, personal property, capital stock,
intangibles, social security, unemployment, disability,
payroll, license, employee or other tax or levy, of any kind
whatsoever, including any interest, penalties or additions to
tax in respect of the foregoing.
(B) "Tax Return" means any return, declaration,
report, claim for refund, information return or other document
(including any related or supporting estimates, elections,
schedules, statements or information) filed or required to be
filed in connection with the determination, assessment or
collection of any Tax or the administration of any laws,
regulations or administrative requirements relating to any
Tax.
4.11 Employees. Except as set forth in Section 4.11 of the Seller
Disclosure Schedule:
(a) Neither the Seller, any of its subsidiaries, nor any ERISA
Affiliate of the Seller or any of its subsidiaries maintains or
contributes to any "employee pension benefit plan" (the "Seller Pension
Plans"), as such term is defined in Section 3(2) of ERISA, "employee
welfare benefit plan" (the "Seller Benefit Plans"), as such term is
defined in Section 3(1) of ERISA, for the employees of Seller, any of
its subsidiaries, or any ERISA Affiliate of Seller or any of its
subsidiaries, and neither Seller nor any of its subsidiaries maintains
or contributes to any stock option plan, stock purchase plan, deferred
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compensation plan, other employee benefit plan for employees of the
Seller or any subsidiary thereof, or any other plan, program or
arrangement of the same or similar nature that provides benefits to
non-employee directors of the Seller or any subsidiary thereof
(collectively, the "Seller Other Plans").
(b) The Seller shall have delivered or made available to the
Buyer prior to, or contemporaneously with, the delivery of the Seller
Disclosure Schedule a complete and accurate copy of each of the
following with respect to each of the Seller Pension Plans, the Seller
Benefit Plans and the Seller Other Plans: (i) plan document (including
all amendments, if any); (ii) trust agreement or insurance contract, if
any; (iii) most recent IRS determination letter, if any; (iv) most
recent financial statements and actuarial report, if any;(v) most
recent annual report on Form 5500 (including all schedules thereto), if
any; and (vi) summary plan description currently in effect and all
material modifications thereto, if any, and any written communications
to employees to the extent the substance of the plan described therein
differs materially from the other documentation relating to such plan
furnished by Seller to Buyer hereunder.
(c) The current value of the assets of each of the Seller
Pension Plans subject to Title IV of ERISA exceeds that plan's "Benefit
Liabilities" as that term is defined in Section 4001(a)(16) of ERISA,
when determined under actuarial factors that would apply if that plan
terminated in accordance with all applicable legal requirements.
(d) Neither Seller, any of its subsidiaries, any of their
ERISA Affiliates, nor any plan administrator of a Seller Pension Plan
subject to Title IV of ERISA has given notice of intent to terminate
such plan, nor, to the knowledge of Seller or any of its subsidiaries,
has the PBGC instituted proceedings to terminate any such plan.
(e) Neither Seller, any of its subsidiaries, nor any of their
ERISA Affiliates has incurred any liability to the PBGC (other than for
premium payments that are not yet due), to any Seller Pension Plan
subject to Title IV of ERISA, or to any trustee under Section 4042 of
ERISA, on account of the termination of or withdrawal as a contributing
employer from, any Seller Pension Plan, which liability has not been
satisfied in full as of the date of this representation.
(f) Each of the Seller Pension Plans and each of the Seller
Benefit Plans has been administered in compliance with its terms in all
material respects and is in compliance in all material respects with
the applicable provisions of ERISA (including, but not limited to, the
funding and prohibited transactions provisions thereof), the Code and
other applicable laws.
(g) There has been no reportable event within the meaning of
Section 4043(c) of ERISA (except for any such event, notice of which
has been waived by PBGC regulation) or any waived funding deficiency
within the meaning of Section 412(d)(3) (or any predecessor section) of
the Code with respect to any Seller Pension Plan.
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(h) There is no "accumulated funding deficiency" (within the
meaning of Section 302 of ERISA and Section 412 of the Code), whether
or not waived, with respect to any Seller Pension Plan. The Seller, its
subsidiaries, and their ERISA Affiliates have made all contributions to
the Seller Pension Plans and Seller Benefit Plans required thereunder
as of the date of this representation, and have established adequate
reserves on their books for all contributions to Seller Pension Plans
and Seller Benefit Plans required thereunder for the period prior to
the date of this representation, to the extent such contributions are
not required to have been made, and have not been made, prior to the
date of this representation.
(i) Neither the Seller, any of its subsidiaries, nor any of
their ERISA Affiliates has, since September 2, 1974, contributed to any
"Multiemployer Plan," as such term is defined in Section 3(37) of
ERISA.
(j) Each of the Seller Pension Plans which is intended to be a
qualified plan within the meaning of Section 401(a) of the Code is so
qualified, and Seller is not aware of any fact or circumstance which
would adversely affect the qualified status of any such plan.
(k) Neither the Seller nor any of its subsidiaries has engaged
in a prohibited transaction (within the meaning of Section 406 of ERISA
or Section 4975 of the Code) which could have a Material Adverse Effect
on Seller or its subsidiaries.
(l) There are no material pending or, to the knowledge of the
Seller, threatened or anticipated claims by or on behalf of any of the
Seller Pension Plans, Seller Benefit Plans, or Seller Other Plans, by
any employee or beneficiary covered under any such plan, or otherwise
involving such plan, other than routine claims for benefits or actions
seeking qualified domestic relations orders.
(m) Neither Seller, any of its subsidiaries, nor any of their
ERISA Affiliates is party to or maintains any contract or other
arrangement with any employee or group of employees, providing
severance payments, stock or stock-equivalent payments or
post-employment benefits other than health benefit continuation rights
under federal or state law, of any kind or providing that any otherwise
disclosed plan, program or arrangement will irrevocably continue, with
respect to any or all of its participants, for any period of time.
4.12 Agreements with Banking Authorities. Except as disclosed in
Section 4.12 of the Seller Disclosure Schedule, neither the Seller nor any of
its subsidiaries is a party to any commitment letter, written agreement,
memorandum of understanding or order to cease and desist with, or has adopted
any resolutions at the request of, any federal or state governmental entity
charged with the supervision or regulation of savings associations, savings and
loan holding companies, banks or bank holding companies or engaged in the
insurance of savings association or bank deposits which restricts materially the
conduct of its business, or in any manner relates to its capital adequacy,
credit policies, management or overall safety and soundness or such entity's
ability to perform its obligations hereunder.
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4.13 Material Agreements. Except as set forth in the index of exhibits
in Seller's Annual Report on Form 10-K for the year ended September 30, 1995 or
in Seller's Quarterly Reports for the fiscal quarters ended December 31, 1995,
March 31, 1996 and June 30, 1996 or as otherwise disclosed in Section 4.13 of
the Seller Disclosure Schedule, and except for this Agreement and the agreements
specifically referred to herein, neither the Seller nor any of its subsidiaries
is a party to or is bound by (a) any agreement, arrangement, or commitment
(other than contracts entered into in the ordinary course of the Bank's banking
business that are consistent with past practice and have terms of not more than
one year and require payments by the Seller or any subsidiary of not more than
$100,000 annually); (b) any written or oral agreement, arrangement, or
commitment relating to the employment (including severance) of any person; (c)
any contract, agreement, or understanding with any labor union; or (d) any other
contract or agreement or amendment thereto that would be required to be filed as
an exhibit to a Form 10-K filed by the Seller as of the date hereof or is
otherwise material to the business, operations, results of operations or
condition of the Seller on a consolidated basis.
4.14 Ownership of Property. Except as disclosed in Section 4.14 of the
Seller Disclosure Schedule, the Seller and its subsidiaries have good and, as to
real property, marketable title to all assets and properties, whether real or
personal, tangible or intangible (including, without limitation, the capital
stock of its subsidiaries and all other assets and properties), reflected on the
Seller Balance Sheet, or acquired subsequent thereto subject to no encumbrances,
liens, mortgages, security interests or pledges, except (a) those items that
secure liabilities that are reflected in the Seller Balance Sheet or the notes
thereto or incurred in the ordinary course of business after the date of such
balance sheet, (b) statutory liens for amounts not yet delinquent or which are
being contested in good faith, (c) those items that secure public or statutory
obligations or any discount with, borrowing from, or other obligations to any
Federal Reserve Bank, Federal Home Loan Bank, inter-bank credit facilities, or
any transaction by the Seller or any subsidiary acting in a fiduciary capacity,
and (d) such encumbrances, liens, mortgages, security interests, and pledges
that are not in the aggregate material to the Seller on a consolidated basis.
The Seller and its subsidiaries as lessees have the right under valid and
existing leases to use, possess and control all of the personal property and
real estate leased by Seller and its subsidiaries as presently used, possessed
and controlled by the Seller and its subsidiaries.
4.15 Reports. Except as disclosed in Section 4.15 of the Seller
Disclosure Schedule, since January 1, 1993, the Seller and its subsidiaries have
timely filed, and subsequent to the date hereof will timely file, all reports,
registrations and statements, together with any amendments required to be made
with respect thereto, that were and are required to be filed with (a) the SEC,
including but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K and proxy
statements, (b) the OTS, (c) the FDIC, and (d) any applicable state securities
or banking authorities (except, in the case of state securities authorities, no
such representation is made as to filings which are not material) (and all such
reports, registrations and statements have been made available by Seller to
Buyer and are collectively referred to herein as the "Seller Reports"). As of
their respective dates, the Seller Reports complied and, with respect to filings
made after the date of this Agreement, will at the date of filing comply, in all
material respects with all of the statutes, rules and regulations enforced or
promulgated by the regulatory authority with which they were filed. As of their
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respective dates, the Seller Reports did not contain and, with respect to
filings made after the date of this Agreement, will not at the date of filing
contain, any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.16 Compliance with Applicable Law. Except as disclosed in Section
4.16 of the Seller Disclosure Schedule, Seller and its subsidiaries hold all
material licenses, franchises, permits and authorizations necessary for the
lawful conduct of Seller's consolidated business, and each of the Seller, its
subsidiaries and each "institution-affiliated party" of Seller or the Bank, as
such term is defined in Section 3(u) of the FDIA, has complied with and is not
in default in any respect under any, applicable law, statute, order, rule,
regulation or policy of, or agreement with, any federal, state or local
governmental agency or authority relating to the Seller or its business on a
consolidated basis or any such institution-affiliated party, other than where
such default or noncompliance does not have and could not reasonably be expected
to have a Material Adverse Effect on Seller or otherwise materially adversely
affect Seller's or the Bank's ability to perform its obligations under this
Agreement or otherwise result in the imposition of CMPs on the Seller, the Bank
or any such institution-affiliated party, and neither the Seller nor the Bank
has received notice of any violation of, or commencement of any proceeding in
connection with any violation (including without limitation any hearing or
investigation relating to the imposition or contemplated imposition of CMPs) of
any such law, statute, order, rule, regulation, policy or agreement, which could
have any such result.
4.17 Environmental Matters. Except as disclosed in Section 4.17 of the
Seller Disclosure Schedule, Seller and its subsidiaries are in compliance and
have always been in compliance with all environmental laws, rules, regulations
and standards promulgated, adopted or enforced by the EPA and of similar
agencies in states in which they conduct their respective business, except for
any noncompliance that singly or in the aggregate would not have a Material
Adverse Effect on Seller. Except as disclosed in Section 4.17 of the Disclosure
Schedule, there is no suit, claim, action or proceeding now pending before any
court, governmental agency or board or other forum or, to the knowledge of
Seller, threatened by any person, as to which there is a reasonable probability
of an adverse determination and which, if adversely determined, would,
individually or in the aggregate, have a Material Adverse Effect on Seller (i)
for alleged noncompliance with any environmental law, rule or regulation or (ii)
relating to the discharge or release into the environment of any hazardous
material or waste at or on a site presently or formerly owned, leased or
operated by Seller or any subsidiary of Seller or in which Seller or any Seller
subsidiary has a lien or other security interest.
4.18 Antitakeover Statutes Not Applicable. Assuming the accuracy of
Buyer's representation in Section 3.14 above, no "fair price," "moratorium,"
"control share acquisition" or other form of antitakeover statute or regulation
is applicable to the transactions contemplated by this Agreement.
4.19 Ownership of Buyer Common Stock. As of the date hereof, neither
the Seller nor, to its best knowledge, any of its affiliates or associates (as
such terms are defined under the Exchange Act), (a) beneficially own, directly
or indirectly, or (b) are parties to any agreement, arrangement or understanding
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for the purpose of acquiring, holding, voting or disposing of, in each case,
shares of capital stock of the Buyer, which in the aggregate represent five
percent (5%) or more of the outstanding shares of capital stock of the Buyer
entitled to vote generally in the election of directors (other than Trust
Account Shares or DPC Shares).
4.20 Insurance. Except as disclosed in Section 4.20 of the Seller
Disclosure Schedule, the Seller and each of its subsidiaries is presently
insured, and since January 1, 1993 has been insured, for reasonable amounts
against such risks as companies engaged in a similar business in a similar
location would, in accordance with good business practice, customarily be
insured.
4.21 Labor. No work stoppage involving the Seller or any of its
subsidiaries is pending or, to the best knowledge of the Seller, threatened.
Except as disclosed in Section 4.21 of the Seller Disclosure Schedule, neither
the Seller nor any of its subsidiaries is involved in, or, to the best knowledge
of the Seller, threatened with or affected by, any dispute, arbitration, lawsuit
or administrative proceeding relating to labor or employment matters which might
reasonably be expected to result in a Material Adverse Effect with respect to
the Seller. No employees of the Seller or any of its subsidiaries are
represented by any labor union, and, to the best knowledge of the Seller, no
labor union is attempting to organize employees of the Seller or any of its
subsidiaries.
4.22 Material Interests of Certain Persons. Except as disclosed in
Section 4.22 of the Seller Disclosure Schedule, no officer or director of the
Seller, or any "associate" (as such term is defined in Rule 14a-1 under the
Exchange Act) of any such officer or director, has any material interest in any
material contract or property (real or personal), tangible or intangible, used
in or pertaining to the business of the Seller or any of its subsidiaries.
4.23 Absence of Registration Obligations. Neither the Seller nor any of
its subsidiaries is under any obligation, contingent or otherwise, by reason of
any agreement to register or otherwise issue any of its securities which will
continue after the Effective Time.
4.24 Loans. All currently outstanding loans of, or current extensions
of credit by, Seller or the Bank (individually, a "Loan," and collectively, the
"Loans") were solicited, originated and currently exist in compliance with all
applicable requirements of federal and state statutory and common law and
regulations and regulatory policies promulgated thereunder, except to the extent
that any such non-compliance, individually or in the aggregate, would not have a
Material Adverse Effect with respect to Seller. Except as disclosed in Section
4.24 of the Seller Disclosure Schedule, each note evidencing a Loan or loan or
credit agreement or security instrument related to the Loans constitutes a
valid, legal and binding obligation of the obligor thereunder, enforceable in
accordance with the terms thereof, except where the failure thereof,
individually or in the aggregate, would not have a Material Adverse Effect with
respect to Seller. There are no oral modifications or amendments or additional
agreements related to the Loans that are not reflected in Seller's records, no
claims of defense as to the enforcement of any Loan has been asserted and Seller
has committed no acts or omissions which would give rise to any claim or right
of rescission, set-off, counterclaim or defense, except where any of the
foregoing would not have, either individually or in the aggregate, a Material
Adverse Effect with respect to Seller. Seller currently maintains, and shall
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continue to maintain, an allowance for loan losses allocable to the Loans which
is adequate to provide for all known and estimable losses, net of any recoveries
relating to such extensions of credit previously charged off, on the Loans, such
allowance for loan losses complying in all material respects with all applicable
loan loss reserve requirements established in accordance with GAAP and by any
governmental authorities having jurisdiction with respect to Seller or any of
its subsidiaries, except to the extent that any such inadequacy or
non-compliance would not have, either individually or in the aggregate, a
Material Adverse Effect with respect to Seller. Except as disclosed in Section
4.24 of the Seller Disclosure Schedule, (i) none of the Loans are presently
serviced by third parties and there is no obligation which could result in any
Loan becoming subject to any third party servicing and (ii) no Loan has been
sold with continuing recourse liability on the part of Seller or any of its
subsidiaries.
4.25 Investment Securities. Except as disclosed in Section 4.25 of the
Seller Disclosure Schedule, none of the investments reflected in the
consolidated balance sheet contained in Seller's Quarterly Report on Form 10-Q
filed with the SEC for the quarter ended June 30, 1996, and none of the
investments made by the Seller or the Bank since June 30, 1996, is subject to
any restriction (contractual, statutory or otherwise) that would materially
impair the ability of the entity holding such investment freely to dispose of
such investment at any time, except to the extent that any such restriction
would not have, either individually or in the aggregate, a Material Adverse
Effect with respect to Seller. Seller and the Bank have (a) properly reported as
such any investment securities which are required under GAAP to be classified as
"available for sale" at fair value, and (b) accounted for any decline in the
market value of its securities portfolio in accordance with Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 115, including
without limitation the recognition through the Seller's consolidated statement
of income of any unrealized loss with respect to any individual security as a
realized loss in the accounting period in which a decline in the market value of
such security is determined to be "other than temporary", except to the extent
that any such failure to so properly report or to so properly account would not
have, either individually or in the aggregate, a Material Adverse Effect with
respect to Seller.
4.26 Derivative Transactions. Except as disclosed in Section 4.26 of
the Seller Disclosure Schedule, neither Seller nor the Bank has engaged in
transactions in or involving forwards, futures, options on futures, swaps or
other derivative instruments.
4.27 Intellectual Property. Seller and the Bank each owns or, to
Seller's knowledge, possesses valid and binding licenses and other rights to use
all material patents, copyrights, trade secrets, trade names, servicemarks and
trademarks used in its businesses, each without payment, and neither Seller nor
the Bank has received any notice of conflict with respect thereto that asserts
the rights of others. Seller and the Bank have performed in all material
respects all the obligations required to be performed by them and are not in
default in any material respect under any contract, agreement, arrangement or
commitment relating to any of the foregoing.
4.28 Seller Information. The information relating to the Seller and its
subsidiaries to be contained or incorporated by reference in the Buyer
Registration Statement and the Proxy Statement as described in Section 5.04
hereof, and any other documents filed with the SEC or any regulatory
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agency in connection herewith, to the extent such information is provided in
writing by the Seller, will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make such information not
misleading.
4.29 Disclosure. To the best of Seller's knowledge, no representation
or warranty contained in this Agreement, and no statement contained in any
certificate, list or other writing, including but not necessarily limited to the
Seller Disclosure Schedules, furnished to the Buyer pursuant to the provisions
hereof, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements herein or therein not
misleading. No information believed by Seller to be material to Buyer's
interests in the transactions contemplated by this Agreement, which has not
otherwise been disclosed to Buyer in connection with this Agreement, has been
intentionally withheld from Buyer.
ARTICLE V
COVENANTS OF THE PARTIES
5.01 Conduct of Business. During the period from the date of this
Agreement to the Effective Time or for such other period as may otherwise be
expressly provided for below, and except as may be specifically required or
permitted pursuant to this Agreement or as specifically described in Section
5.01 of the Seller Disclosure Schedule, the parties shall comply with the
following applicable requirements:
(a) Seller and the Bank shall, and shall cause each of its
subsidiaries to, conduct its business and engage in transactions only
in the ordinary and usual course of business consistent with past
practices, which shall mean (i) conducting its banking, trust and other
businesses in the ordinary and usual course, (ii) refraining from any
of the activities described in Section 5.01(b) below and (iii) not
entering into any material transactions except in the ordinary and
usual course of business consistent with past practices;
(b) Seller and the Bank shall not and shall not permit any of
its subsidiaries to, without the prior written consent of the Buyer:
(i) engage or participate in any material transaction or
incur or sustain any material obligation or liability
except in the ordinary, regular and usual course of
its businesses consistent with past practices,
including without limitation entering into any
settlement agreement or understanding with respect to
any material litigation matters;
(ii) accept, renew or roll over any "brokered deposit" as
defined under 12 C.F.R. 337.6(a)(3) or offer an
interest rate with respect to any deposit that would
either constitute an impermissible interest rate with
respect to deposits of an undercapitalized insured
depository institution pursuant to the limitations
contained under 12 C.F.R. 337.6(b)(3)(ii) or
otherwise set interest rates on
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deposits that depart from past practices of the Bank
with respect to the setting of interest rates on
deposits;
(iii) except in the ordinary, regular and usual course of
business consistent with past practices and in an
immaterial aggregate amount, sell, lease, transfer,
assign, encumber or otherwise dispose of or enter
into any contract, agreement or understanding to
lease, transfer, assign, encumber or dispose of any
of its assets;
(iv) relocate, or file any application to relocate, any
branch office;
(v) terminate, or give any notice (written or verbal) to
customers or governmental authorities or agencies to
terminate the operations of any branch office; or
(vi) waive any material right, whether in equity or at
law, that it has with respect to any asset except in
the ordinary, regular and usual course of business
consistent with past practice;
(c) each of Buyer, on the one hand, and Seller and the Bank,
on the other hand, shall use all reasonable efforts, and cause each of
its subsidiaries to use all reasonable efforts, to preserve intact its
respective business organization and goodwill in all material respects,
keep available the services of its respective officers and employees as
a group and maintain satisfactory relationships with its respective
borrowers, depositors, other customers and others having business
relationships with it;
(d) each of Buyer, on the one hand, and Seller and the Bank,
on the other hand, shall use all reasonable efforts to cooperate with
the other with respect to preparation for the combination and
integration of the businesses, systems and operations of Buyer and
Seller, including without limitation their respective banking
subsidiaries, and shall confer on a regular and frequent basis with one
or more representatives of the other to report on operational and
related matters;
(e) each of Buyer, on the one hand, and Seller and the Bank,
on the other hand, shall, subject to any restrictions under applicable
law or regulation, promptly notify the other of any emergency or other
change in the normal course of its or its subsidiaries' businesses or
in the operation of its or its subsidiaries' properties and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated) if such emergency,
change, complaint, investigation or hearing would be material to the
assets, properties, liabilities, business, operations, results of
operations or condition (financial or regulatory) of Buyer or Seller,
as the case may be, or any of its respective subsidiaries;
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(f) Seller shall not declare or pay any dividends on or make
any other distributions in respect of the Seller Common Stock, except
that Seller shall be permitted to declare and pay regular quarterly
cash dividends to its stockholders of $0.14 per share for the quarter
ending September 30, 1996, $0.16 per share for the quarters ending
December 31 and March 31, 1997 and $0.18 per share for the quarter
ending June 30, 1997; provided, however, that in no event shall Seller
be permitted to declare or pay any such regular quarterly cash dividend
hereunder greater than $0.14 per share if the aggregate amount of such
dividend would exceed forty percent (40%) of Seller's net income for
the fiscal quarter for which the dividend would be declared or paid, as
such net income is calculated in accordance with GAAP and then adjusted
to include the amount of all non-recurring expenses incurred by Seller
in such fiscal quarter that result from actions taken by Seller to
prepare for or otherwise complete the consummation of the Acquisition
Merger; and provided further, however, that the parties agree to
consult with respect to the amount of the last Seller quarterly cash
dividend payable prior to the Effective Time with the objective of
ensuring that the stockholders of Seller do not receive a shortfall or
a premium based on the record and payment dates of their last dividend
prior to the Effective Time and the record and payment dates of the
first dividend of Buyer following the Effective Time, and that Seller
may pay a special dividend to holders of record of Seller Common Stock
immediately prior to the Effective Time consistent with the objective
described herein;
(g) Buyer shall not declare or pay any dividend on or make any
other distribution in respect of the Buyer Common Stock during the
Valuation Period, except that Buyer shall be permitted to declare and
pay a cash dividend to its stockholders for the quarter in which the
Valuation Period occurs or the quarter immediately following thereafter
if such dividend does not exceed, on a per share basis, the dividend
paid by Buyer to stockholders for the immediately preceding quarter or
if it does so exceed such prior dividend then the aggregate amount of
such dividend shall not exceed forty percent (40%) of Buyer's net
income for such quarter, as such net income is calculated in accordance
with GAAP and then adjusted to include the amount of all non-recurring
expenses incurred by Buyer in such quarter that result from actions
taken by Buyer to prepare for or otherwise complete the consummation of
the Acquisition Merger;
(h) neither Seller nor the Bank shall adopt or amend (other
than amendments required by applicable law or amendments that reduce
amounts payable by it or its subsidiaries) in any material respect any
Seller Pension Plan, any Seller Benefit Plan or any Seller Other Plan
or enter (or permit any of its subsidiaries to enter) into any
employment, severance or similar contract with any person (including,
without limitation, contracts with management which might require that
payments be made upon the consummation of the transactions contemplated
hereby, including without limitation the consummation of the
Acquisition Merger) or amend any such existing agreements, plans or
contracts to increase any amounts payable thereunder or benefits
provided thereunder, or grant or permit any increase in compensation to
its or its subsidiaries' employees as a class, except in the ordinary
course of business consistent with past practices, or pay any bonus
except as agreed to by the parties and disclosed in Section 5.12 of the
Seller Disclosure Schedule;
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(i) Seller, subject to its directors' fiduciary duties and
obligations referred to in Section 5.03 below, shall not, with respect
to itself or any of its subsidiaries, authorize, recommend, propose or
announce an intention to authorize, recommend or propose, or enter into
an agreement with respect to, any merger, consolidation, purchase and
assumption transaction or business combination (other than the
Acquisition Merger), any acquisition of a material amount of assets or
securities or assumption of liabilities (including deposit
liabilities), any disposition of a material amount of assets or
securities, or any release or relinquishment of any material contract
rights not in the ordinary course of business and consistent with past
practices;
(j) neither Seller nor the Bank shall propose or adopt any
amendments to its certificate of incorporation or other charter
documents or by-laws;
(k) Buyer, on the one hand during the Valuation Period, and
Seller and the Bank, on the other hand at all times during the term of
this Agreement, shall not issue, deliver or sell any shares (whether
original issuance or from treasury shares) of its capital stock or
securities convertible into or exercisable for shares of its capital
stock (or permit any of its subsidiaries to issue, deliver or sell any
shares of such subsidiaries' capital stock or securities convertible
into or exercisable for shares of such subsidiaries' capital stock),
except, in the case of Buyer, upon exercise or fulfillment of options
issued or existing immediately prior to the Valuation Period pursuant
to stock option or other plans of Buyer, and, in the case of Seller,
upon exercise or fulfillment of options issued or existing on the date
hereof pursuant to the Seller Stock Option Plans or as required under
the terms of any other Seller Benefit Plans in effect as of the date
hereof and in all such cases listed in Section 4.02(a) of the Seller
Disclosure Schedule, or effect any stock split, reverse stock split,
recapitalization, reclassification or similar transaction or otherwise
change its equity capitalization as it exists, in the case of Buyer, on
the date immediately prior to the commencement of the Valuation Period,
and, in the case of Seller and the Bank, on the date hereof;
(l) Buyer, on the one hand during the Valuation Period, and
Seller and the Bank, on the other hand at all times during the term of
this Agreement, shall not grant, confer or award any options, warrants,
conversion rights or other rights, not existing, in the case of Buyer,
on the date immediately prior to the commencement of the Valuation
Period, and, in the case of Seller and the Bank, on the date hereof, to
acquire any shares of its capital stock;
(m) Buyer, on the one hand during the Valuation Period, and
Seller and the Bank, on the other hand at all times during the term of
this Agreement, shall not purchase, redeem or otherwise acquire, or
permit any of its subsidiaries to purchase, redeem or otherwise
acquire, any shares of its capital stock or any securities convertible
into or exercisable for any shares of its capital stock, except in a
fiduciary capacity;
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(n) neither Seller nor the Bank shall impose, or suffer the
imposition, on any share of capital stock held by it or by any of its
subsidiaries of any material lien, charge, or encumbrance, or permit
any such lien, charge, or encumbrance to exist;
(o) neither Seller nor the Bank shall incur, or permit any of
its subsidiaries to incur, any additional debt obligation or other
obligation for borrowed money, or to guaranty any additional debt
obligation or other obligation for borrowed money, except in the
ordinary course of business consistent with past practices, which shall
include but not necessarily be limited to creation of deposit
liabilities, purchases of federal funds, sales of certificates of
deposit, borrowings from the Federal Home Loan Bank of Boston and entry
into repurchase agreements or other similar arrangements commonly
employed by banks;
(p) neither Seller nor the Bank shall incur or commit to any
capital expenditures or any obligations or liabilities in connection
therewith, other than capital expenditures and such related obligations
or liabilities incurred or committed to in the ordinary and usual
course of business consistent with past practices, which do not
individually exceed $50,000 or cumulatively exceed $150,000;
(q) Buyer, on the one hand during the Valuation Period, and
Seller and the Bank, on the other hand at all times during the term of
this Agreement, shall not change its methods of accounting in effect,
in the case of Buyer, at December 31, 1995, and, in the case of Seller
and the Bank, at September 30, 1995, except as may be required by
changes in GAAP as concurred in by the Seller's and the Buyer's
respective independent auditors, and Buyer, during the Valuation
Period, and Seller, at all time during the term of this Agreement,
shall not change its fiscal year;
(r) Each of Buyer, on the one hand, and Seller and the Bank,
on the other hand, shall file all reports, applications and other
documents required to be filed by it with the OTS, FDIC, Federal
Reserve Board and any other federal or state banking or other
governmental agency or authority between the date of this Agreement and
the Effective Time and shall furnish to the other copies of all such
reports promptly after the same are filed;
(s) neither Seller nor the Bank shall make any loan or
extension of credit or enter into any commitment therefor on other than
the Bank's customary terms, conditions and standards and in accordance
with applicable law and regulation and consistent with prudent banking
practices, and in any event shall provide Buyer with monthly reports of
all loans, extensions of credit and commitments therefor equal to or
greater than $500,000, individually, and shall consult with Buyer prior
to making or entering into any new loan, extension of credit or
commitment therefor equal to or greater than $750,000 individually, or
which, when aggregated with all other loans, extensions of credit and
commitments therefor to a single borrower or affiliated group of
borrowers equals at least $1,500,000; and
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(t) neither Seller nor the Bank nor Buyer shall agree, in
writing or otherwise, to take any of the actions applicable to it
prohibited under this Section 5.01 or any action which would make any
of its representations or warranties contained in this Agreement untrue
or incorrect or would otherwise violate any of its other agreements or
commitments contained in this Agreement in any material respect.
5.02 Access to Properties and Records; Confidentiality.
(a) The Seller shall permit the Buyer reasonable access, upon
reasonable advance notice, to its properties and those of its
subsidiaries, and shall disclose and make available to the Buyer all
Records, including all books, papers and records relating to the
assets, stock ownership, properties, operations, obligations and
liabilities of the Seller and its subsidiaries, including, but not
limited to, all books of account (including the general ledger), tax
records, minute books of directors and stockholders meetings,
organizational documents, by-laws, material contracts and agreements,
filings with any regulatory authority, accountants' work papers,
litigation files, plans affecting employees, and any other business
activities or prospects in which the Buyer may reasonably have an
interest in light of the transactions contemplated hereby. The Seller
shall use all reasonable efforts to make arrangements with each third
party provider of services to the Seller to permit the Buyer reasonable
access to all of the Seller's Records held by each such third party.
The Buyer shall permit the Seller reasonable access to such properties
and records of the Buyer and/or its subsidiaries in which the Seller
may reasonably have an interest in light of the transactions
contemplated hereby. Neither the Buyer nor the Seller nor any of their
respective subsidiaries shall be required to provide access to or to
disclose information where such access or disclosure would violate or
prejudice the rights of any customer, would jeopardize the
attorney-client privilege of the institution in possession or control
of such information, or would contravene any law, rule, regulation,
order, judgment, decree or binding agreement. The parties will use all
reasonable efforts to make appropriate substitute disclosure
arrangements under circumstances in which the restrictions of the
preceding sentence apply.
(b) All Confidential Information, as such term is defined
below, furnished by each party hereto to the other, or to any of its
affiliates or to any of its affiliates' directors, officers, employees,
or representatives or agents (such persons being referred to
collectively herein as "Representatives") shall be treated as the sole
property of the party furnishing the information until consummation of
the transactions contemplated hereby, and, if such transactions shall
not occur, the party receiving the information, or any of its
affiliates or Representatives, as the case may be, shall, upon request,
return to the party which furnished such information all documents or
other materials containing, reflecting or referring to such
information, shall keep confidential all such information for the
period hereinafter referred to, and shall not directly or indirectly at
any time use such information for any competitive or other commercial
purpose; provided, however, that the Buyer and its affiliates shall be
permitted to retain and share with their regulators, examiners and
auditors (who need to know such information and are informed of the
confidential nature thereof and directed to treat such information
confidentially), and with no other persons, such materials, files and
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information relating to or constituting the Buyer's or any of its
affiliates' or Representatives' work product, presentations or
evaluation materials as the Buyer deems reasonably necessary or
advisable in connection with auditing or examination purposes, and
Buyer shall not make use of any such materials, files or information
for any other purpose. The obligation to keep such information
confidential shall continue for two years from the date this Agreement
is terminated or as long as may be required by law. In the event that
either party or its affiliates or Representatives are requested or
required in the context of a litigation, governmental, judicial or
regulatory investigation or other similar proceeding (by oral
questions, interrogatories, requests for information or documents,
subpoenas, civil investigative demands or similar process) to disclose
any Confidential Information, the party or its affiliate or its
Representative so requested or required will directly or through the
party or such affiliate or Representative, if practicable and legally
permitted, prior to providing such information, and as promptly as
practicable after receiving such request, provide the other party with
notice of each such request or requirement so that the other party may
seek an appropriate protective order or other remedy or, if
appropriate, waive compliance with the provisions of this Agreement.
If, in the absence of a protective order or the receipt of a waiver
hereunder, the party or affiliate or Representative so requested or
required is, in the written opinion of its counsel, legally required to
disclose Confidential Information to any tribunal, governmental or
regulatory authority, or similar body, the party or affiliate or
Representative so required may disclose that portion of the
Confidential Information which it is advised in writing by such counsel
it is legally required to so disclose to such tribunal or authority or
similar body without liability to the other party hereto for such
disclosure. The parties and their affiliates and Representatives will
exercise reasonable efforts, at the expense of the party who disclosed
Confidential Information to the other party, to obtain assurance that
confidential treatment will be accorded the information so disclosed.
As used in this Section 5.02(b), "Confidential Information" means all
data, reports, interpretations, forecasts and records (whether in
written form, electronically stored or otherwise) containing or
otherwise reflecting information concerning the disclosing party or its
affiliates which is not available to the general public and which the
disclosing party or any affiliate or any of their respective
Representatives provides or has previously provided to the receiving
party or to the receiving party's affiliates or Representatives at any
time in connection with the transactions contemplated by this
Agreement, including but not limited to any information obtained by
meeting with Representatives of the disclosing party or its affiliates,
together with summaries, analyses, extracts, compilations, studies,
personal notes or other documents or records, whether prepared by the
receiving party or others, which contain or otherwise reflect such
information. Notwithstanding the foregoing, the following information
will not constitute "Confidential Information": (i) information that is
or becomes generally available to the public other than as a result of
a disclosure by the receiving party or any affiliate or Representative
of the receiving party without the consent of the party providing such
information (including without limitation all information of Seller
disclosed or otherwise utilized by Buyer, with the knowledge of Seller,
in connection with presentations to securities analysts or other
investor relations-related activities), (ii) information that was
previously known to the receiving party or its affiliates or
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Representatives on a nonconfidential basis prior to its disclosure by
the disclosing party, its affiliates or Representatives, (iii)
information that became or becomes available to the receiving party or
any affiliate or Representative thereof on a nonconfidential basis from
a source other than the disclosing party or any affiliate or
Representatives of the disclosing party, provided that such source is
not known by the disclosing party or its affiliates or Representatives
to be subject to any confidentiality agreement or other legal
restriction on disclosing such information and (iv) information that
has been independently acquired or developed by the receiving party or
its affiliates or Representatives without violating the obligations of
this Section 5.02(b).
5.03 No Solicitation. Neither the Seller nor any of its subsidiaries
shall (and the Seller and each of its subsidiaries shall use all reasonable
efforts to cause its officers, directors, employees, representatives and agents,
including, but not limited to, investment bankers, attorneys and accountants,
not to), directly or indirectly, encourage, solicit, initiate or, subject to the
fiduciary obligations of the Seller's Board of Directors (as advised by outside
counsel), participate in any discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other entity or group
(other than the Buyer and its affiliates or representatives) concerning any
merger, tender offer, sale of substantial assets, sale of shares of capital
stock or debt securities or similar transaction involving the Seller or any of
its subsidiaries (any of the foregoing being referred to herein as an
"Acquisition Transaction"). Notwithstanding the foregoing, nothing contained in
this Section 5.03 shall prohibit the Seller or its Board of Directors from
taking and disclosing to the Seller's stockholders a position with respect to a
tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a) promulgated
under the Exchange Act or from making such disclosure to the Seller's
stockholders which, in the judgment of the Board of Directors, with the advice
of outside counsel, may be required under applicable law. The Seller will
immediately communicate to the Buyer the terms of any proposal, discussion,
negotiation or inquiry relating to an Acquisition Transaction and the identity
of the party making such proposal or inquiry which it may receive in respect of
any such transaction (which shall mean that any such communication shall be
delivered no less promptly than by telephone within twenty-four (24) hours of
the Seller's receipt of any such proposal or inquiry) or its receipt of any
request for information from the Federal Reserve Board, OTS, DOJ or any other
governmental agency or authority with respect to a proposed Acquisition
Transaction.
5.04 Regulatory Matters; Consents.
(a) The parties will cooperate in connection with (i) the
preparation and filing by the Buyer with the SEC under the Securities
Act of a registration statement on Form S-4 and/or such other form as
may be necessary or appropriate relating to the shares of the Buyer
Common Stock to be issued in connection with the Acquisition Merger
(the "Buyer Registration Statement"), and (ii) the preparation and
filing by the Buyer and the Seller of a joint proxy statement (the
"Proxy Statement") as shall be necessary or desirable in order to
consummate the transactions contemplated by this Agreement, each to be
undertaken as promptly as practicable, and the Buyer and the Seller
will use their respective best efforts to have the Buyer Registration
Statement declared effective by the SEC and to mail the
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Proxy Statement to the Buyer's and the Seller's stockholders as
promptly as practicable. The parties shall also take any reasonable
action required to be taken under any state "Blue Sky" laws in
connection with the consummation of the transactions contemplated by
this Agreement. In addition to the foregoing, neither party shall take
or permit any of its subsidiaries to take any action that materially
adversely affects its ability to consummate the transactions
contemplated under this Agreement in a timely manner.
(b) Each of the Seller and the Buyer will cooperate with the
other and use its best efforts to prepare all documentation, to effect
all filings and to obtain all permits, consents, approvals and
authorizations of all third parties and governmental bodies necessary
or appropriate to consummate the transactions contemplated by this
Agreement as promptly as practicable, including without limitation that
Seller shall use its best efforts to obtain all of the non-governmental
third-party permits, consents, approvals and authorizations disclosed
in Sections 4.03(c) and 4.04 of the Seller Disclosure Schedule. Each
party hereto shall have the right to review and approve in advance all
descriptions of it and its subsidiaries which appear in any filing made
in connection with the transactions contemplated by this Agreement,
including without limitation all filings contemplated by Section
5.04(a) above, with any governmental body. In exercising the foregoing
right, the parties hereto shall act reasonably and as promptly as
practicable.
(c) The Buyer shall take all actions necessary or appropriate
to ensure that all shares of Buyer Common Stock received in the
Acquisition Merger are fully registered on the appropriate form to
facilitate sale of such shares by the holders in accordance with the
Securities Act (including in accordance with any applicable exemption
from registration requirements) to the extent customary in transactions
of this nature.
5.05 Approval of Stockholders. Each of the Buyer and Seller will (a) as
promptly as practicable, take all steps necessary to duly call, give notice of,
convene and hold a meeting of its stockholders for the purpose of approving this
Agreement and the transactions contemplated hereby, including without limitation
the Acquisition Merger, and, in each case, for such other purposes as may be
necessary or desirable, (b) subject to the fiduciary duties of its Board of
Directors as advised by outside counsel, recommend to its stockholders the
approval of such foregoing matters to be submitted by it to its stockholders,
and (c) cooperate and consult with each other with respect to each of the
foregoing matters. Subject to the fiduciary duties of its Board of Directors as
advised in writing by outside counsel, each of the Buyer and the Seller will use
all reasonable efforts to obtain the necessary approvals of its stockholders of
the proposals described above to be submitted by it in connection with this
Agreement. If the Board of Directors of either party is required by applicable
law to review or restate the recommendation to its stockholders contemplated in
clause (b) of the preceding sentence, this Section 5.05 shall not prohibit
accurate disclosure by a party that is required in any release or regulatory
filing (including the Proxy Statement and the Buyer Registration Statement) or
otherwise under applicable law in the opinion of such party's Board of
Directors, upon the written advice of outside counsel, as of the date of such
release or regulatory filing or such other required disclosure as to the
transactions contemplated hereby or, in the case of the Seller, as to any
Acquisition Transaction.
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5.06 Agreements of Seller's Affiliates. The Seller shall identify in a
letter to the Buyer, after consultation with counsel, all persons who, at the
time of the meeting of its stockholders referred to in Section 5.05 hereof, it
believes may be deemed to be "affiliates" of the Seller, as that term is defined
for purposes of paragraphs (c) and (d) of Rule 145 under the Securities Act (the
"Seller Affiliates"). The Seller shall use all reasonable efforts to cause each
person who is identified as a Seller Affiliate in the letter referred to above
to deliver to the Buyer at least forty (40) days prior to the Closing Date an
executed copy of the Seller Affiliates Agreement. Prior to the Closing Date, the
Seller shall amend and supplement such letter and use all reasonable efforts to
cause each additional person who is identified as a Seller Affiliate as of the
Closing Date to execute a copy of the Seller Affiliates Agreement.
5.07 Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to, as
promptly as practicable, 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. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of each party to this Agreement
shall take all such necessary action.
5.08 Disclosure Supplements. On the Closing Date, Seller will
supplement or amend the Seller Disclosure Schedule with respect to any matter
hereafter arising which, if existing, occurring or known at the date of this
Agreement, would have been required to be set forth or described in the Seller
Disclosure Schedule or which is necessary to correct any information in the
Seller Disclosure Schedule which has become inaccurate. To the extent that any
such supplement or amendment to the Seller Disclosure Schedules pursuant to this
Section 5.08 discloses the existence of any material misstatement of fact or
other material misrepresentation contained in any of Seller's representations or
warranties as made as of the date of this Agreement or otherwise discloses facts
or circumstances which constitute or have resulted in the occurrence of a
Material Adverse Effect on Seller, Seller's delivery of such supplement or
amendment to Buyer shall have no effect for the purpose of determining Seller's
satisfaction of any of the conditions set forth in Article VI hereof.
5.09 Public Announcements. Except as otherwise required by law or the
rules of the Nasdaq-NM, the Seller and the Buyer will cooperate with each other
in the development and distribution of all news releases and other public
information disclosures with respect to this Agreement or any of the
transactions contemplated hereby.
5.10 Tax-Free Reorganization Treatment. None of the parties hereto or
any of their respective subsidiaries or affiliates has taken, shall take or
cause to be taken any action, whether before or after the Effective Time, which
would disqualify the Acquisition Merger as a reorganization within the meaning
of Section 368(a) of the Code. Each of the parties hereto shall use all
reasonable efforts to cause the Acquisition Merger to qualify as a tax-free
reorganization under Section 368(a) of the Code and to obtain the opinions of
counsel referred to in Sections 6.02(d) and 6.03(d) hereof.
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5.11 Stock Exchange Listing. The Buyer shall cause the shares of the
Buyer Common Stock to be issued in connection with the Acquisition Merger to be
approved for listing on the Nasdaq-NM, subject to official notice of issuance,
as of or prior to the Effective Time.
5.12 Employment and Benefit Matters.
(a) Termination of Existing Seller Plans; Benefits Service
Credit. Except as otherwise provided herein, Buyer agrees to provide to
those persons who are employees of Seller or any subsidiary of Seller
at the Effective Time and who are employed by Buyer or a subsidiary of
Buyer thereafter with the benefits maintained by Buyer and its
affiliates from time to time for the benefit of their employees
similarly situated. Buyer shall not be required to provide any benefits
with respect to persons who at the Effective Time are former employees
or beneficiaries of former employees of Seller, except as provided
under the terms of the governing documents of the Buyer Pension Plans
and Buyer Benefit Plans or as may be otherwise required under any
health benefit continuation rights provisions of federal or state law.
Buyer shall provide all such Buyer benefits as soon as practicable
following the Effective Time. Until such time as Buyer is able to
provide such benefits to such persons (such time being referred to as
the "Transition Date"), Buyer agrees to provide such persons with the
employee benefits set forth in Section 4.11 of the Seller Disclosure
Schedule as maintained for their benefit immediately prior to the
Effective Time. Buyer shall cause each plan, program or arrangement
included among the benefits of Buyer to be provided after the Effective
Time, except for the Buyer's defined benefit pension plan, to treat the
prior service of each such employee with the Seller or its affiliates,
to the extent such prior service is recognized under the comparable
plan, program or arrangement of the Seller, as service rendered to
Buyer or its affiliate, as the case may be, for purposes of eligibility
to participate, vesting, and eligibility for special benefits under
each such plan, program or arrangement of Buyer, but not in any case
for benefit accrual attributable to any period before the Effective
Time. Without limiting the foregoing, Buyer and its affiliates shall
not treat any employee of Seller or any of its affiliates as a "new"
employee for purposes of any exclusion under any health or similar plan
of Buyer or any of its affiliates for a preexisting medical condition.
Nothing herein shall impose any obligation upon Buyer and its
subsidiaries to maintain, continue or adopt any employee pension plans,
employee benefit plans, or other benefit arrangements after the
Transition Date, nor prohibit the Buyer or its subsidiaries from
amending any such plan or plans after the Transition Date, to the
extent permitted by the terms of such plans and applicable law.
(b) Additional Benefits Matters. Following the Effective Time,
Buyer shall, or shall cause its subsidiaries to, honor in accordance
with their terms all employment, severance and other compensation
contracts between Seller or any subsidiary thereof and any director,
officer or employee thereof, and all provisions for benefits or other
amounts earned or accrued through the Effective Time under the Seller
Pension Plans or the Seller Benefit Plans. Any employee of Seller or
any subsidiary of Seller who becomes an employee of Buyer or any
subsidiary of Buyer immediately following the Effective Time
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who is not otherwise covered by an employment, severance or other
compensation agreement and who has been identified by Buyer within the
first six months from and after the Closing Date as an employee whose
employment shall be terminated as a result of Buyer's consolidation
and/or cost-saving efforts in respect of the Acquisition Merger
following the Effective Time, shall be entitled to receive from and
after the date of such employee's termination of employment two weeks
of salary continuation for each full year of prior service with Seller
prior to the Effective Time, such salary continuation to continue for a
maximum period, regardless of such employee's length of such prior
service, of twenty-six weeks. Buyer shall not be obligated under any
circumstances to employ any person who is employed by Seller
immediately prior to the Effective Time. In addition to the foregoing,
(i) Buyer has agreed to provide the employee benefits set forth in
Section 5.12 of the Seller Disclosure Schedule and (ii) those persons
who are identified in Section 5.12 of the Seller Disclosure Schedule
shall continue to receive, following any termination of their
employment with Buyer or any Buyer subsidiary following the Effective
Time, health care continuation coverage under Buyer's appropriate group
health plan until such persons reach the age at which they become
eligible to receive Medicare health coverage; provided, however, that
such persons must pay to Buyer at all times during which they receive
such continuing coverage the same premium amounts as would be required
of persons receiving such health care continuation coverage pursuant to
the requirements of COBRA and such health care continuation coverage
shall terminate for any such person at such time as he becomes eligible
to receive substantially equivalent health care coverage from any other
employer after the Effective Time.
5.13 Directors' and Officers' Indemnification and Insurance.
(a) In the event of any threatened or actual claim, action,
suit, proceeding or investigation, whether civil, criminal or
administrative, including, without limitation, any such claim, action,
suit, proceeding or investigation in which any person who is now, or
has been at any time prior to the date of this Agreement, or who
becomes prior to the Effective Time, a director or officer or employee
of the Seller or any of Seller's subsidiaries or a trustee of any
Seller Benefit Plans, Seller Pension Plans or Seller Other Plans (the
"Indemnified Parties") is, or is threatened to be, made a party based
in whole or in part on, or arising in whole or in part out of, or
pertaining to (i) the fact that he or she is or was a director, officer
or employee of the Seller or any of Seller's subsidiaries or (ii) this
Agreement or any of the transactions contemplated hereby, whether in
any case asserted or arising before or after the Effective Time, the
parties hereto agree to cooperate and use all reasonable efforts to
defend against and respond thereto. It is understood and agreed that
prior to the Effective Time, Seller shall indemnify and hold harmless,
and that from and after the Effective Time the Surviving Corporation
shall indemnify and hold harmless, as and to the fullest extent
permitted by applicable law, each such Indemnified Party against any
losses, claims, damages, liabilities, costs, expenses (including
reasonable attorney's fees and expenses), judgments, fines and amounts
paid in settlement in connection with any such threatened or actual
claim, action, suit, proceeding or investigation. In the event of any
such threatened or actual claim, action, suit, proceeding or
investigation (whether asserted or
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arising before or after the Effective Time), (i) Seller and, from and
after the Effective Time, the Surviving Corporation shall promptly pay
all reasonably documented expenses in advance of the final disposition
of any claim, action, suit, proceeding or investigation to each
Indemnified Party to the full extent permitted by law, (ii) the
Indemnified Parties may retain counsel mutually satisfactory to them
and Seller and, from and after the Effective Time, the Surviving
Corporation shall pay all reasonable fees and expenses of such counsel
for the Indemnified Parties within thirty days after statements
therefor are received, and (iii) Seller and, from and after the
Effective Time, the Surviving Corporation will use all reasonable
efforts to assist in the vigorous defense of any such matter; provided,
however, that neither Seller, Buyer nor the Surviving Corporation shall
be liable for any settlement effected without its prior written consent
(which consent shall not be unreasonably withheld); and provided
further, however, that the Surviving Corporation shall have no
obligation hereunder to any Indemnified Party when and if a court of
competent jurisdiction shall ultimately determine, and such
determination shall have become final and non-appealable, that
indemnification of such Indemnified Party in the manner contemplated
hereby is prohibited by applicable law. Any Indemnified Party wishing
to claim indemnification, upon learning of any such claim, action,
suit, proceeding or investigation, shall notify Seller and, from and
after the Effective Time, the Surviving Corporation thereof, provided
that the failure to so notify shall not affect the obligations of
Seller, Buyer or the Surviving Corporation, except to the extent such
failure to notify materially prejudices such party.
(b) Buyer agrees that all rights to indemnification existing
in favor, and all limitations on the personal liability, of any
director, officer or other employee of Seller or any of its
subsidiaries provided for in Seller's certificate of incorporation or
by-laws as in effect as of the date hereof with respect to matters
occurring prior to the Effective Time shall survive the Acquisition
Merger and shall continue in full force and effect in perpetuity. In
the event Buyer or the Surviving Corporation or any of its successors
or assigns (i) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers or conveys all or
substantially all of its properties and assets to any person, then, and
in each such case, to the extent necessary, proper provision shall be
made so that the successors and assigns of Buyer or the Surviving
Corporation, as the case may be, assume the obligations set forth in
this Section 5.13.
(c) Buyer shall use all reasonable efforts to cause the
persons serving as officers and directors of the Seller and any
subsidiary of Seller immediately prior to the Effective Time to be
covered for a period of six (6) years from the Closing Date by the
directors' and officers' liability insurance policy maintained as of
the date hereof by the Seller (provided that Buyer may substitute
therefor policies of at least the same coverage and amounts containing
terms and conditions which are not less advantageous than such policy)
with respect to acts or omissions occurring at or prior to the
Effective Time, which were committed by such officers and directors in
their capacity as such; provided, however, that if such coverage cannot
be obtained at a total cost to Buyer of not more than $207,000 then
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Buyer shall only be required hereunder to obtain such lesser coverage
as may be obtained for such amount.
5.14 Accountants' Letters. Each of the parties shall cause to be
delivered to the other "comfort" letters from its independent public
accountants, dated the date on which the Buyer Registration Statement (or last
amendment thereto) shall become effective and dated the Closing Date, relating
to the information about such party included in the Buyer Registration
Statement, including the Proxy Statement, and addressed to the other party, in
form and substance which is reasonably satisfactory to the receiving party and
customary in transactions of the nature contemplated hereby.
5.15 Maintenance of Records. Through the Effective Time, the Seller
will maintain the Records in the same manner and with the same care that the
Records have been maintained prior to the execution of this Agreement. The Buyer
may, at its own expense, make such copies of and excerpts from the Records as it
may deem desirable. All Records, whether held by the Buyer or the Seller, shall
be maintained for such periods as are required by law, unless the parties shall,
applicable law permitting, agree in writing to a different period. From and
after the Effective Time, the Buyer shall be solely responsible for continuing
maintenance of the Records.
5.16 Leases. Seller shall consult with Buyer before renewing or
extending any lease of Seller or any subsidiary of real property or any material
lease of Seller or any subsidiary relating to furniture, fixtures or equipment
or other personal property , in each case that is currently in effect but that
would otherwise expire on or prior to the Effective Time. Seller shall not
cancel, terminate or take any other action that is likely to result in any
cancellation or termination of any such lease without first consulting with
Buyer.
5.17 Bank Merger. To the extent requested by Buyer, Seller shall take,
and cause the Bank to take, all necessary and appropriate actions to effect the
merger of the Bank with and into Buyer's principal banking subsidiary, Vermont
National Bank, on or after the Closing Date, in accordance with the requirements
of all applicable laws and regulations.
5.18 Certain Policies of Seller. At the request of Buyer, after the
time at which all Requisite Regulatory Approvals have been received for the
Acquisition Merger, all other conditions precedent to Seller's obligations under
this Agreement have been satisfied or waived and Buyer has confirmed in writing
that all other conditions precedent to Buyer's obligations under this Agreement
have been satisfied or waived, and prior to the Effective Time, Seller shall
cooperate with Buyer with the objective of modifying and changing its
receivables, loan accrual, charge-off, real estate valuation, loan loss reserve
and investment policies and practices and such other accounting and/or financial
policies and practices as may be requested by Buyer to reflect Buyer's plans
with respect to the conduct of Seller's business following the Acquisition
Merger and to make adequate provision for the cost and expenses relating
thereto. The Seller's representations, warranties and covenants contained in
this Agreement shall not be deemed to be untrue or breached in any respect for
any purpose as a consequence of any modifications or changes undertaken solely
on account of this Section 5.18.
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ARTICLE VI
CLOSING CONDITIONS
6.01 Conditions to Each Party's Obligations Under This Agreement. The
respective obligations of each party under this Agreement shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions,
none of which may be waived:
(a) Stockholders' Approvals. This Agreement and/or the
transactions contemplated hereby shall have been approved by the Buyer
Requisite Vote and the Seller Requisite Vote.
(b) Governmental Consents. All authorizations, consents,
orders or approvals of, or declarations or filings with, and all
expirations of waiting periods imposed by, any governmental or
regulatory authority or agency which are necessary for the consummation
of the transactions contemplated by this Agreement, including without
limitation the Acquisition Merger, shall have been filed, occurred or
been obtained (all such authorizations, orders, declarations,
approvals, filings and consents and the lapse of all such waiting
periods being referred to as the "Requisite Regulatory Approvals") and
all such Requisite Regulatory Approvals shall be in full force and
effect. In addition, the Buyer shall have received all state securities
or blue sky permits and other authorizations necessary to issue the
Buyer Common Stock in connection with the Acquisition Merger in
accordance with all applicable state securities or blue sky laws.
(c) Buyer Registration Statement. The Buyer Registration
Statement shall have been declared effective under the Securities Act
and shall not be subject to a stop order or a threatened stop order.
(d) 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
(an "Injunction") preventing the consummation of the transactions
contemplated by this Agreement shall be in effect.
6.02 Conditions to the Obligations of Buyer Under This Agreement. The
obligations of the Buyer under this Agreement shall be further subject to the
satisfaction or waiver by the Buyer, at or prior to the Effective Time, of the
following conditions:
(a) Absence of Material Adverse Changes. There shall not have
occurred any change since September 30, 1995 in the assets,
liabilities, business, operations, results of operations or condition
of the Seller or any of its subsidiaries which has had, individually or
in the aggregate, a Material Adverse Effect on the Seller.
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(b) Representations and Warranties; Performance of
Obligations. The obligations of the Seller to the Bank required to be
performed by them at or prior to the Effective Time pursuant to the
terms of this Agreement shall have been duly performed and complied
with and the representations and warranties of the Seller and the Bank
contained in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Effective Time
as though made at and as of the Effective Time (except as otherwise
specifically contemplated by this Agreement and except as to any
representation or warranty which specifically relates to an earlier
date) and the Buyer shall have received certificates to that effect
signed by the chairman or president and the chief financial officer or
chief accounting officer of each of the Seller and the Bank.
(c) Third-Party Approvals. Any and all permits, consents,
waivers, clearances, approvals and authorizations of or notices to all
non-governmental and non-regulatory third parties which are necessary
in connection with the consummation of the transactions contemplated by
this Agreement and are required to be received, made or obtained by the
Seller or the Bank, shall have been so received, made or obtained by
the Seller or the Bank, as applicable, other than permits, consents,
waivers, clearances, approvals, authorizations and notices the failure
of which to have received, made or obtained would neither make it
impossible to consummate the transactions contemplated by this
Agreement nor result in any Material Adverse Effect on the Buyer after
the Effective Time.
(d) Tax Opinion. The Buyer shall have received an opinion
dated the Closing Date from its counsel, Sullivan & Worcester LLP, or
other counsel selected by the Buyer and reasonably acceptable to the
Seller, substantially to the effect that (A) the Acquisition Merger
should be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, (B) each of the Buyer
and the Seller should be a party to a reorganization within the meaning
of Section 368(b) of the Code, and (C) no gain or loss should be
recognized by the Buyer or the Seller as a result of the Acquisition
Merger. In rendering such opinion, Sullivan & Worcester LLP shall be
entitled to require delivery of, and to refer to and rely upon, such
facts and representations set forth in certificates received from the
Buyer, the Seller, their respective officers, directors and affiliates,
and from the stockholders of the Seller, as Sullivan & Worcester LLP
shall deem necessary or appropriate to enable it to render such
opinion, and the parties hereto agree to use their respective best
efforts to obtain such representations and certificates.
(e) Seller Affiliates Agreements. Seller shall have delivered
to Buyer the letter pertaining to the Seller Affiliates, as
contemplated under Section 5.06 above, and each of the executed Seller
Affiliates Agreements that have been received by Seller as of the
Effective Time.
(f) Burdensome Condition. None of the Requisite Regulatory
Approvals shall impose any term, condition or restriction upon Buyer or
any Buyer subsidiary that Buyer in good faith reasonably determines
would so materially adversely impact the economic or business benefits
of the transactions contemplated by this Agreement as to render
inadvisable in the reasonable judgment of Buyer the consummation of the
Acquisition Merger.
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(g) Dissenting Shares. The Dissenting Shares, as defined in
Section 2.09(c) hereof, shall not represent more than 20% of the shares
of Seller Common Stock issued and outstanding immediately prior to the
Effective Time.
(h) Legal Opinion. Buyer shall have received the opinion of
Hale and Dorr, counsel to Seller and the Bank, dated the Closing Date,
in a form that is customary for transactions of this type.
In addition to the foregoing, the Seller and the Bank will furnish the
Buyer with such additional certificates, instruments or other documents in the
name or on behalf of the Seller or the Bank, as the case may be, executed by
appropriate officers or others, including without limitation certificates or
correspondence of governmental agencies or authorities or nongovernmental third
parties, to evidence fulfillment of the conditions set forth in this Section
6.02 as the Buyer may reasonably request.
6.03 Conditions to the Obligations of Seller and Bank Under This
Agreement. The obligations of the Seller and the Bank under this Agreement shall
be further subject to the satisfaction or waiver by the Seller, at or prior to
the Effective Time, of the following conditions:
(a) Absence of Material Adverse Changes. There shall not have
occurred any change since December 31, 1995 in the assets, liabilities,
business, operations, results of operations or condition (financial or
otherwise) of the Buyer or any of its subsidiaries which has had,
individually or in the aggregate, a Material Adverse Effect on the
Buyer.
(b) Representations and Warranties; Performance of
Obligations. The obligations of the Buyer required to be performed by
it at or prior to the Effective Time pursuant to the terms of this
Agreement shall have been duly performed and complied with and the
representations and warranties of the Buyer contained in this Agreement
shall be true and correct in all material respects as of the date of
this Agreement and as of the Effective Time as though made at and as of
the Effective Time (except as otherwise specifically contemplated by
this Agreement and except as to any representation or warranty which
specifically relates to an earlier date) and the Seller and the Bank
shall have received a certificate to that effect signed by the
executive vice president and chief financial officer (or other
authorized officer(s)) of the Buyer.
(c) Third-Party Approvals. Any and all permits, consents,
waivers, clearances, approvals and authorizations of or notices to all
non-governmental and non-regulatory third parties which are necessary
in connection with the consummation of the transactions contemplated by
this Agreement and are required to be received, made or obtained by the
Buyer, shall have been so received, made or obtained by the Buyer,
other than permits, consents, waivers, clearances, approvals,
authorizations and notices the failure of which to
<PAGE>
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obtain would neither make it impossible to consummate the transactions
contemplated by this Agreement nor result in a Material Adverse Effect
on the Buyer after the Effective Time.
(d) Tax Opinion. The Seller shall have received an opinion
dated the Closing Date from its counsel, Hale and Dorr, or other
counsel selected by the Seller and reasonably acceptable to the Buyer,
substantially to the effect that (A) the Acquisition Merger should be
treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, (B) each of the Buyer and the
Seller should be a party to a reorganization within the meaning of
Section 368(b) of the Code, and (C) gain, if any, realized will be
recognized by a stockholder of the Seller as a result of the
Acquisition Merger, but not in excess of the amount of cash received by
such stockholder. In rendering such opinion, Hale and Dorr shall be
entitled to require delivery of, and to refer to and rely upon, such
facts and representations set forth in certificates received from the
Buyer and the Seller, their respective officers, directors and
affiliates, and from the stockholders of the Seller, as Hale and Dorr
shall deem necessary or appropriate to enable it to render such
opinion, and the parties hereto agree to use their respective best
efforts to obtain such representations and certificates.
(e) Nasdaq-NM Listing. The shares of the Buyer Common Stock
issuable upon the Effective Time shall have been authorized for listing
on the Nasdaq-NM upon official notice of issuance.
(f) Legal Opinion. Seller shall have received the opinion of
Sullivan & Worcester LLP, counsel to Buyer, dated the Closing Date, in
a form that is customary for transactions of this type.
In addition to the foregoing, the Buyer will furnish the Seller with
such additional certificates, instruments or other documents in the name or on
behalf of the Buyer, executed by appropriate officers or others, including
without limitation certificates or correspondence of governmental agencies or
authorities or nongovernmental third parties, to evidence fulfillment of the
conditions set forth in this Section 6.03 as the Seller may reasonably request.
ARTICLE VII
CLOSING
7.01 Time and Place. Subject to the provisions of Articles VI and VIII
hereof, the closing of the transactions contemplated by this Agreement shall
take place at the Boston, Massachusetts offices of Sullivan & Worcester LLP at
10:00 A.M., local time, on such date that is not later than the fifth business
day after the date on which all of the conditions contained in Article VI hereof
are satisfied or waived; or at such other place, at such other time, or on such
other date as Seller and Buyer may mutually agree upon for such closing to take
place.
<PAGE>
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7.02 Deliveries at the Closing. Subject to the provisions of Articles
VI and VIII hereof, at the closing contemplated by Section 7.01 above there
shall be delivered to Seller and Buyer and their respective subsidiaries as
applicable, the opinions, certificates, and other documents and instruments
required to be delivered under Article VI hereof.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.01 Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of this Agreement and the
transactions contemplated hereby by the parties' respective stockholders:
(a) by mutual written consent of the Seller and the Buyer
authorized by their respective Boards of Directors;
(b) by either Buyer or Seller, if the Effective Time shall not
have occurred on or prior to November 30, 1997 (the "Termination Date")
or such later date as shall have been agreed to in writing by the Buyer
and the Seller, unless the failure of such occurrence shall be due to
the failure of the party seeking to terminate this Agreement to perform
or observe its agreements herein required to be performed or observed
at or prior to the Effective Time;
(c) by the Buyer or the Seller (i) thirty days after the date
on which any request or application for a Requisite Regulatory Approval
shall have been denied, unless within the thirty-day period following
such denial a petition for rehearing or an amended application has been
filed with such governmental regulatory authority or agency, except
that no party shall have the right to terminate this Agreement pursuant
to this clause (i) if such denial shall be due to the failure of the
party seeking to terminate this Agreement to perform or observe in any
material respects the covenants and agreements of such party set forth
herein, or (ii) if any governmental or regulatory authority or agency,
or court of competent jurisdiction, shall have issued a final permanent
order or Injunction enjoining or otherwise prohibiting the consummation
of the transactions contemplated by this Agreement and the time for
appeal or petition for reconsideration of such order or Injunction
shall have expired without such appeal or petition being granted or
such order or Injunction shall otherwise have become final and
non-appealable;
(d) by the Buyer or the Seller (provided that the terminating
party is not then in material breach of any representation, warranty,
covenant or other agreement contained herein or in the Seller Option
Agreement), in the event of a material breach by the other party of any
representation, warranty, covenant or other agreement contained herein,
or in the Seller Option Agreement, which breach is not cured after
thirty (30) days written notice thereof is given to the party
committing such breach;
<PAGE>
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(e) by Buyer or Seller (provided that the terminating party is
not then in material breach of any representation, warranty or covenant
or other agreement contained herein or in the Seller Option Agreement),
if the approval of either party's stockholders specified in Section
5.05 above shall not have been obtained by reason of such party's
failure to have obtained the requisite stockholder vote at a duly held
meeting of such party's stockholders or at any adjournment thereof;
(f) by Seller, by action of its Board of Directors, by giving
written notice of such election to Buyer within two business days after
the Valuation Period, in the event the Average Closing Price is less
than the Minimum Price; provided, however, that no right of termination
shall arise under this Section 8.01(f) if Buyer elects within two
business days of receipt of such written notice to increase the
Acquisition Price by notifying Seller in writing that it has elected to
utilize the Adjusted Acquisition Price in lieu of the Acquisition Price
that would otherwise be required under Section 2.09(a) hereof; or
(g) by Buyer if Seller's Board of Directors does not publicly
recommend in the Proxy Statement that Seller's stockholders approve the
proposals submitted to them in accordance with this Agreement, or if
after recommending in the Proxy Statement that Seller's stockholders
approve such proposals, Seller's Board of Directors shall have
withdrawn, modified or amended such recommendation in any respect
materially adverse to Buyer.
8.02 Effect of Termination.
(a) In the event of termination of this Agreement by either
the Seller or the Buyer as provided above, this Agreement shall
forthwith become null and void (other than Sections 5.02(b), 8.02 (if
applicable) and 9.01 hereof, which shall remain in full force and
effect) and there shall be no further liability on the part of any of
the parties hereto or their respective officers or directors to the
others, except (i) any liability of any party under said Sections
5.02(b), 8.02 (as may be applicable) and 9.01, (ii) that the Seller
Option Agreement shall be governed by its own terms as to termination,
and (iii) in the event of a party's gross negligence or willful breach
of any material representation, warranty, covenant or agreement
contained in this Agreement, in which case, the breaching party shall
remain liable for any and all damages, costs and expenses, including
all reasonable attorneys' fees, sustained or incurred by the
non-breaching party as a result thereof or in connection therewith or
with the enforcement of its rights hereunder.
(b) As a condition of Buyer's willingness, and in order to
induce Buyer, to enter into this Agreement and to reimburse Buyer for
incurring the costs and expenses related to entering into this
Agreement and consummating the transactions contemplated by this
Agreement, Seller shall make a cash payment to Buyer of $1,000,000 if a
Subsequent Triggering Event occurs at any time after the date hereof
and prior to an Exercise Termination Event (as such terms are defined
in Sections 2(b) and 2(e), respectively, of the Seller Option
Agreement). Any payment required under this Section 8.02(b) shall be
<PAGE>
-57-
(i) payable by Seller to Buyer (by wire transfer of immediately
available funds to an account designated by Buyer) within five business
days after demand by Buyer and (ii) net of any expense reimbursement
paid or to be paid by Seller to Buyer in accordance with Section 7(a)
of the Seller Option Agreement and any other payments made on or prior
to the date of such payment under this Section 8.02(b) by Seller to
Buyer pursuant to the provisions of Section 8.02(a) (but in no event
shall the amount payable under this Section 8.02(b) be less than zero).
8.03 Amendment, Extension and Waiver. Subject to applicable law and as
may be authorized by their respective Boards of Directors, at any time prior to
the consummation of the transactions contemplated by this Agreement or
termination of this Agreement in accordance with the provisions of Section 8.01
hereof, whether before or after the approvals of the parties' respective
stockholders contemplated by Section 5.05 above, the parties may, (a) amend this
Agreement, (b) extend the time for the performance of any of the obligations or
other acts of any other party hereto, (c) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto, or (d) waive compliance with any of the agreements or
conditions contained in Articles V and VI (other than Section 6.01) hereof;
provided, however, that there may not be, without further approval of the
parties' stockholders, to the extent required by law, any amendment, extension
or waiver of this Agreement which changes the amount or form of the
consideration to be delivered to Seller's stockholders hereunder other than as
may be expressly contemplated by this Agreement. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto. Any agreement on the part of a party hereto to any extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party, but such waiver or failure to insist on strict compliance
with such obligation, covenant, agreement or condition shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure.
ARTICLE IX
MISCELLANEOUS
9.01 Expenses. Except as otherwise agreed to in Section 8.02 hereunder
or in other writing by the parties, all legal and other costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such costs and expenses.
9.02 Non-Survival. None of the representations, warranties, covenants
and agreements of the parties shall survive after the Effective Time, except for
the agreements and covenants contained or referred to in Article II, Section
5.02(b), the last sentence of Section 5.07 and Sections 5.10, 5.12, 5.13, 8.02,
9.01 and 9.02, which agreements and covenants shall survive the Effective Time.
<PAGE>
-58-
9.03 Notices. All notices or other communications hereunder shall be in
writing and shall be deemed given if delivered personally or mailed by prepaid
registered or certified mail (return receipt requested) or by telecopy, cable,
telegram or telex addressed as follows:
(a) If to the Seller, to:
Eastern Bancorp, Inc.
537 Central Avenue
Dover, New Hampshire 03820
Attention: John A. Cobb
President and Chief Executive Officer
Copy to:
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Attention: Edward G. Young, Esq.
(b) If to the Buyer, to:
Vermont Financial Services Corporation
100 Main Street
Brattleboro, Vermont 05302
Attention: John D. Hashagen, Jr.
President and Chief Executive Officer
Copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Attention: Christopher Cabot, Esq.
and Stephen J. Coukos, Esq.
or such other address as shall be furnished in writing by any party, and any
such notice or communication shall be deemed to have been given as of the date
delivered to the recipient party.
9.04 Parties in Interest. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any party hereto
without the prior written consent of the other parties, and that nothing in this
Agreement, except for Sections 5.12 and 5.13 above, is intended to confer,
expressly or by implication, upon any other person any rights or remedies under
or by reason of this Agreement.
<PAGE>
-59-
9.05 Entire Agreement. This Agreement, including the documents and
other writing referred to herein or delivered pursuant hereto, including the
Seller Disclosure Schedule, the Seller Option Agreement and the Seller
Stockholders' Agreement, is complete, and all promises, representations,
understandings, warranties and agreements with reference to the subject matter
hereof, and all inducements to the making of this Agreement relied upon by
either party hereto, have been expressed herein. This Agreement (including the
aforementioned documents and writings) supersedes any prior or contemporaneous
agreement or understanding between the parties hereto, oral or written,
pertaining to any such matters, including without limitation the Confidentiality
Agreement, which agreements or understandings shall be of no further force or
effect for any persons.
9.06 Counterparts. This Agreement may be executed in counterparts, all
of which shall be considered one and the same agreement and each of which shall
be deemed to be an original and shall become effective when a counterpart has
been signed by each of the parties and delivered to each of the other parties.
9.07 Governing Law. This Agreement shall be governed by the laws of the
State of Delaware, without giving effect to the principles of conflicts of laws
thereof, and, to the extent applicable, by federal law.
9.08 Captions. The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.09 Effect of Investigations. No investigation by the parties hereto
made heretofore or hereafter, whether pursuant to this Agreement or otherwise
shall affect the representations and warranties of the parties which are
contained herein and each such representation and warranty shall survive such
investigation, subject, however, to Section 9.02 hereof.
9.10 Severability. In the event that any one or more provisions of this
Agreement shall for any reason be held invalid, illegal or unenforceable in any
respect, by any court of competent jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement and the
parties shall use their best efforts to substitute a valid, legal and
enforceable provision which, insofar as practicable, implements the purposes and
intents of this Agreement.
9.11 Specific Enforceability. The parties recognize and hereby
acknowledge that it is impossible to measure in money the damages that would
result to a party by reason of the failure of either of the parties to perform
any of the obligations imposed on it by this Agreement. Accordingly, if any
party should institute an action or proceeding seeking specific enforcement of
the provisions hereof, each party against which such action or proceeding is
brought hereby waives the claim or defense that the party instituting such
action or proceeding has an adequate remedy at law and hereby agrees not to
assert in any such action or proceeding the claim or defense that such a remedy
at law exists.
<PAGE>
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IN WITNESS WHEREOF, the parties have caused this Agreement and Plan of
Reorganization to be executed as a sealed instrument by their duly authorized
officers as of the day and year first above written.
VERMONT FINANCIAL SERVICES CORPORATION
By:/s/ John D. Hashagen, Jr.
John D. Hashagen, Jr.
President and Chief Executive Officer
EASTERN BANCORP, INC.
By:/s/ John A. Cobb
John A. Cobb
President and Chief Executive Officer
VERMONT FEDERAL BANK, FSB
By:/s/ E. David Humphrey
E. David Humphrey
President and Chief Operating Officer
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
ARTICLE I: DEFINITIONS.......................................................................................... 1
ARTICLE II: THE ACQUISITION MERGER.............................................................................. 7
2.01 Surviving Corporation................................................................. 7
2.02 Purposes and Authorized Capital Stock of Surviving Corporation........................ 7
2.03 Effect of the Acquisition Merger...................................................... 7
2.04 Additional Actions.................................................................... 8
2.05 Certificate of Incorporation and By-laws.............................................. 8
2.06 Directors and Officers................................................................ 8
2.07 Effective Time; Conditions............................................................ 8
2.08 Dissenters' Appraisal Rights.......................................................... 9
2.09 Effect on Outstanding Shares.......................................................... 9
2.10 Anti-Dilution......................................................................... 10
2.11 Exchange Procedures................................................................... 11
2.12 Treatment of Seller Stock Options..................................................... 13
2.13 Exchange Agent........................................................................ 14
2.14 Election Procedures................................................................... 14
ARTICLE III: REPRESENTATIONS AND WARRANTIES OF BUYER............................................................ 17
3.01 Corporate Organization................................................................ 17
3.02 Capitalization........................................................................ 17
3.03 Authority; No Violation............................................................... 18
3.04 Consents and Approvals................................................................ 19
3.05 Financial Statements.................................................................. 19
3.06 Absence of Undisclosed Liabilities.................................................... 20
3.07 Broker's Fees......................................................................... 20
3.08 Absence of Certain Changes or Events.................................................. 20
3.09 Legal Proceedings.................................................................... 20
3.10 Agreements with Banking Authorities................................................... 20
3.11 Material Agreements................................................................... 20
3.12 Reports............................................................................... 21
3.13 Compliance with Applicable Law........................................................ 21
3.14 Environmental Matters................................................................. 21
3.15 Buyer Common Stock.................................................................... 22
3.16 Ownership of Seller Common Stock...................................................... 22
3.17 Financing............................................................................. 22
3.18 Buyer Benefit Plans................................................................... 22
3.19 Buyer Information..................................................................... 23
3.20 Disclosure............................................................................ 23
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<PAGE>
ARTICLE IV: REPRESENTATIONS AND WARRANTIES OF
SELLER AND THE BANK.......................................................................... 23
4.01 Corporate Organization................................................................ 23
4.02 Capitalization........................................................................ 24
4.03 Authority; No Violation............................................................... 25
4.04 Consents and Approvals................................................................ 26
4.05 Financial Statements.................................................................. 26
4.06 Absence of Undisclosed Liabilities.................................................... 27
4.07 Broker's Fees......................................................................... 27
4.08 Absence of Certain Changes or Events.................................................. 27
4.09 Legal Proceedings..................................................................... 28
4.10 Taxes and Tax Returns................................................................. 28
4.11 Employees............................................................................. 30
4.12 Agreements with Banking Authorities................................................... 32
4.13 Material Agreements................................................................... 33
4.14 Ownership of Property................................................................. 33
4.15 Reports............................................................................... 33
4.16 Compliance with Applicable Law........................................................ 34
4.17 Environmental Matters................................................................. 34
4.18 Antitakeover Statutes Not Applicable.................................................. 34
4.19 Ownership of Buyer Common Stock....................................................... 34
4.20 Insurance............................................................................. 35
4.21 Labor................................................................................. 35
4.22 Material Interests of Certain Persons................................................. 35
4.23 Absence of Registration Obligations................................................... 35
4.24 Loans................................................................................. 35
4.25 Investment Securities................................................................. 36
4.26 Derivative Transactions............................................................... 36
4.27 Intellectual Property................................................................. 36
4.28 Seller Information.................................................................... 36
4.29 Disclosure............................................................................ 37
ARTICLE V: COVENANTS OF THE PARTIES............................................................................. 37
5.01 Conduct of Business................................................................... 37
5.02 Access to Properties and Records; Confidentiality..................................... 42
5.03 No Solicitation...................................................................... 44
5.04 Regulatory Matters; Consents.......................................................... 44
5.05 Approval of Stockholders.............................................................. 45
5.06 Agreements of Seller's Affiliates..................................................... 46
5.07 Further Assurances.................................................................... 46
5.08 Disclosure Supplements................................................................ 46
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<PAGE>
5.09 Public Announcements.................................................................. 46
5.10 Tax-Free Reorganization Treatment..................................................... 46
5.11 Stock Exchange Listing................................................................ 47
5.12 Employment and Benefit Matters........................................................ 47
5.13 Directors' and Officers' Indemnification and Insurance................................ 48
5.14 Accountants' Letters.................................................................. 50
5.15 Maintenance of Records................................................................ 50
5.16 Leases................................................................................ 50
5.17 Bank Merger........................................................................... 50
5.18 Certain Policies of Seller............................................................ 50
ARTICLE VI: CLOSING CONDITIONS.................................................................................. 51
6.01 Conditions to Each Party's Obligations Under This Agreement........................... 51
6.02 Conditions to the Obligations of Buyer Under This Agreement........................... 51
6.03 Conditions to the Obligations of Seller and
Bank Under This Agreement............................................................. 53
ARTICLE VII: CLOSING............................................................................................ 54
7.01 Time and Place........................................................................ 54
7.02 Deliveries at the Closing............................................................. 55
ARTICLE VIII: TERMINATION, AMENDMENT AND WAIVER................................................................. 55
8.01 Termination........................................................................... 55
8.02 Effect of Termination................................................................. 56
8.03 Amendment, Extension and Waiver....................................................... 57
ARTICLE IX: MISCELLANEOUS....................................................................................... 57
9.01 Expenses.............................................................................. 57
9.02 Non-Survival.......................................................................... 57
9.03 Notices............................................................................... 58
9.04 Parties in Interest................................................................... 58
9.05 Entire Agreement...................................................................... 59
9.06 Counterparts.......................................................................... 59
9.07 Governing Law......................................................................... 59
9.08 Captions.............................................................................. 59
9.09 Effect of Investigations.............................................................. 59
9.10 Severability.......................................................................... 59
9.11 Specific Enforceability............................................................... 59
-iii-
</TABLE>
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
SCHEDULES
Seller Disclosure Schedule
4.01(a) FDIC Assessments
4.01(c) Minute Books
4.02(a) Holders of Seller Stock Options
4.02(b) Seller Subsidiaries
4.03(b) Non Contravention Exceptions
4.04 Consents and Approvals
4.06 Liabilities
4.08 Material Changes
4.09 Legal Proceedings
4.10 Taxes
4.11 Seller Plans
4.12 Regulatory Agreements
4.13 Material Agreements
4.14 Ownership of Property
4.15 Seller Reports
4.16 Compliance With Laws
4.17 Environmental Matters
4.20 Insurance Matters
4.21 Labor Matters
4.22 Material Interests of Certain Persons
4.24 Loans
4.25 Investment Securities
4.26 Derivative Transactions
5.01 Conduct of the Business
5.12 Additional Employee Benefits; Senior Executives to
Receive Continuing Health Care Coverage
EXHIBITS
A. Form of Seller Option Agreement
B. Form of Seller Stockholders' Agreement
C. Form of Seller Affiliates Agreement
-iv-
<PAGE>
EXHIBIT A
TO MERGER AGREEMENT
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of November 13, 1996, between Eastern
Bancorp, Inc., a Delaware corporation (the "Issuer"), and Vermont Financial
Services Corporation, a Delaware corporation (the "Grantee").
WHEREAS, the Grantee, the Issuer and Issuer's wholly owned banking
subsidiary, Vermont Federal Bank, FSB, are entering into an Agreement and Plan
of Reorganization of even date herewith (the "Acquisition Agreement"), which
agreement is being executed by the parties thereto simultaneously with this
Agreement; and
WHEREAS, as a condition to the Grantee's entry into the Acquisition
Agreement and in consideration for such entry, the Issuer has agreed to grant
the Grantee the Option (as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Acquisition Agreement, the
parties hereto agree as follows:
1. (a) The Issuer hereby grants to the Grantee an unconditional,
irrevocable and non-transferable option (the "Option") to purchase, subject to
the terms hereof, up to 732,425 fully paid and nonassessable shares (the "Option
Shares") of common stock, $0.01 par value per share, of the Issuer ("Common
Stock") at a price of $21.00 per share (the "Option Price"). The number of
shares of Common Stock that may be received upon the exercise of the Option and
the Option Price are subject to adjustment as herein set forth provided that in
no event shall the number of shares for which this Option is exercisable exceed
19.9% of the Issuer's issued and outstanding shares of Common Stock (without
giving effect to any shares of Common Stock issuable pursuant to the Option)
less the number of shares, if any, previously issued pursuant to exercise of the
Option.
(b) In the event that any additional shares of Common Stock
are issued or otherwise become outstanding after the date of this Agreement
(other than pursuant to exercise of the Option pursuant to this Agreement or as
contemplated by Section 5(a) of this Agreement), including, without limitation,
pursuant to stock option or other employee plans or as a result of the exercise
of conversion rights, the number of Option Shares shall be increased so that,
after such issuance, it equals 19.9% of the number of shares of Common Stock
then issued and outstanding without giving effect to any shares subject or
issued pursuant to the Option less the number of shares, if any, previously
issued pursuant to exercise of the Option. Nothing contained in this Section
1(b) or elsewhere in this Agreement shall be deemed to authorize the Issuer or
the Grantee to breach any provision of the Acquisition Agreement.
2. (a) Provided that the Grantee is not in material breach of the
Acquisition Agreement, the Grantee may exercise the Option, in whole or part,
if, but only if, both an Initial Triggering Event (as defined in paragraph (e)
<PAGE>
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below) and a Subsequent Triggering Event (as defined in paragraph (f) below)
shall have occurred prior to the occurrence of an Exercise Termination Event (as
defined in paragraph (b) below), provided that the Grantee shall have sent the
written notice of such exercise (as provided in paragraph (h) of this Section 2)
within thirty (30) days following such Subsequent Triggering Event and prior to
the Exercise Termination Event.
(b) The term "Exercise Termination Event" shall mean the
earliest of (i) the Effective Time of the Acquisition Merger, (ii) any
termination of the Acquisition Agreement in accordance with the provisions
thereof if such termination occurs prior to the occurrence of an Initial
Triggering Event or if such termination is pursuant to Section 8.01(c) or
8.01(f) or by the Issuer pursuant to Section 8.01(d) thereof, and (iii) except
as provided in subparagraph 2(b)(ii) hereof, in the event of any termination of
the Acquisition Agreement in accordance with the provisions thereof after the
occurrence of an Initial Triggering Event, the passage of twelve (12) months
after such termination. Notwithstanding the termination of the Option, the
Grantee shall be entitled to purchase those Option Shares with respect to which
it has exercised the Option in whole or in part prior to the termination of the
Option.
(c) [This paragraph intentionally omitted]
(d) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) The Issuer or any subsidiary of the Issuer, without having
received the Grantee's prior written consent, shall have entered into
an agreement to engage in an Acquisition Transaction with any Person
(the term "person" for purposes of this Agreement having the meaning
assigned thereto in Sections 3(a)(9) and 13(d)(3) of the Exchange Act
and the rules and regulations thereunder), other than the Grantee or
any subsidiary of the Grantee, or, without the consent of the Grantee,
the Board of Directors of the Issuer shall have approved an Acquisition
Transaction or recommended that the shareholders of the Issuer approve
or accept any Acquisition Transaction other than as contemplated by the
Acquisition Agreement. For purposes of this Agreement, the term
"Acquisition Transaction" shall mean (A) a merger or consolidation, or
any similar transaction, with the Issuer or any subsidiary of the
Issuer that is a "significant subsidiary" as defined in Regulation S-X
promulgated by the Securities and Exchange Commission (a "Significant
Subsidiary"), or any subsidiary of the Issuer which, after such
transaction, would be a Significant Subsidiary of the Issuer, (B) a
purchase, lease or other acquisition of all or substantially all of the
assets of the Issuer or any Significant Subsidiary of the Issuer
(except as contemplated by the Acquisition Agreement), or (C) a
purchase or other acquisition (including by way of merger,
consolidation, share exchange or otherwise) of securities representing
fifteen percent (15%) or more of the voting power of the Issuer or any
Significant Subsidiary of the Issuer;
(ii) Any Person, other than the Grantee or any subsidiary of
the Grantee or the Issuer in a fiduciary capacity, shall have acquired
beneficial ownership (as hereinafter defined) or the right to acquire
beneficial ownership of fifteen percent (15%) or more of the
outstanding shares of Common Stock if such Person owned beneficially
less than fifteen percent (15%) of the outstanding shares of Common
Stock on the date of this Agreement, or any Person shall have acquired
beneficial ownership of an additional five percent (5%)
<PAGE>
-3-
of the outstanding shares of Common Stock if such Person owned
beneficially fifteen percent (15%) or more of the outstanding shares of
Common Stock on the date of this Agreement (the term "beneficial
ownership" for purposes of this Agreement having the meaning assigned
thereto in Section 13(d) of the Exchange Act, and in the rules and
regulations thereunder);
(iii) Any Person, other than the Grantee or any subsidiary of
the Grantee, shall have made a bona-fide proposal to the Issuer or its
shareholders to engage in an Acquisition Transaction by public
announcement or written communication that shall be or become the
subject of public disclosure;
(iv) After any Person other than the Grantee or any subsidiary
of the Grantee has made a proposal to the Issuer or its shareholders to
engage in an Acquisition Transaction, the Issuer shall have breached
any covenant or obligation contained in Sections 5.01, 5.03, 5.04 or
5.05 of the Acquisition Agreement and such breach (A) would entitle the
Grantee to terminate the Acquisition Agreement and (B) shall not have
been remedied prior to the Notice Date (as defined in paragraph (h)
below); or
(v) Any Person other than the Grantee or any subsidiary of the
Grantee, other than in connection with a transaction to which the
Grantee has given its prior written consent, shall have filed an
application or notice with the OTS or Federal Reserve Board or other
federal or state bank regulatory authority, which application or notice
has been accepted for processing, for approval to engage in an
Acquisition Transaction.
(e) The term "Subsequent Triggering Event" shall mean either
of the following events or transactions occurring after the date hereof:
(i) The acquisition by any Person of beneficial ownership of
24.9% or more of the then outstanding Common Stock; or
(ii) The occurrence of the Initial Triggering Event described
in subparagraph (i) of paragraph (d) of this Section 2, except that the
percentage referenced in clause (C) shall be 24.9% in lieu of fifteen percent
(15%).
(f) The Issuer shall notify the Grantee promptly in writing of
the occurrence of any Initial Triggering Event or Subsequent Triggering Event
(together, a "Triggering Event"), it being understood that the giving of such
notice by the Issuer shall not be a condition to the right of the Grantee to
exercise the Option.
(g) In the event the Grantee is entitled to and wishes to
exercise the Option, it shall send to the Issuer a written notice (the date of
which being herein referred to as the "Notice Date") specifying (i) the total
number of shares of Common Stock it will purchase pursuant to such exercise, and
(ii) a place and date not earlier than three (3) business days nor later than
forty-five (45) business days from the Notice Date for the closing of such
purchase (the "Closing"); provided that if prior notification to or approval of
the OTS or Federal Reserve Board or any other regulatory agency is required in
connection with such purchase, the Grantee shall promptly file the required
notice or application for approval and shall expeditiously process the same and
<PAGE>
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the period of time that otherwise would run pursuant to this sentence shall run
instead from the date on which any required notification periods have expired or
been terminated or such approvals have been obtained and any requisite waiting
period or periods shall have passed; provided, however, that in no event shall
the Closing be more than twelve (12) months after the Notice Date, and if the
Closing shall not have occurred within twelve (12) months after the Notice Date
due to the failure of the Grantee to obtain any such required approval, the
exercise of the Option effected on the Notice Date shall be deemed to have
expired. The term "business day" for purposes of this Agreement means any day,
excluding Saturdays, Sundays and any other day that is a legal holiday in the
Commonwealth of Massachusetts or a day on which banking institutions in the
Commonwealth of Massachusetts are authorized by law or executive order to close.
(h) At the Closing, the Grantee shall pay to the Issuer the
aggregate purchase price for the shares of Common Stock purchased pursuant to
the exercise of the Option in immediately available funds by a wire transfer to
a bank account designated by the Issuer, provided that failure or refusal of the
Issuer to designate such a bank account shall not preclude the Grantee from
exercising the Option.
(i) At such Closing, simultaneously with the delivery of
immediately available funds as provided in paragraph (i) above, the Issuer shall
deliver to the Grantee a certificate or certificates representing the number of
shares of Common Stock purchased by the Grantee and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Grantee
thereof to purchase the balance of the shares purchasable hereunder and in
accordance with the provisions hereof, and the Grantee shall deliver to the
Issuer a copy of this Agreement and a letter agreeing that the Grantee will not
offer to sell or otherwise dispose of such shares in violation of applicable law
or the provisions of this Agreement.
(j) Certificates for the Common Stock delivered at a Closing
hereunder may (in the sole discretion of the Issuer) be endorsed with a
restrictive legend that shall read substantially as follows:
"THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND PURSUANT
TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF NOVEMBER 13, 1996, A COPY
OF WHICH AGREEMENT WILL BE PROVIDED TO THE HOLDER HEREOF WITHOUT CHARGE UPON
RECEIPT BY THE ISSUER OF A WRITTEN REQUEST THEREFOR."
It is understood and agreed that (i) the reference to the resale restrictions of
the Securities Act in the above legend shall be removed by delivery of
substitute certificate(s) without such reference if the Grantee shall have
delivered to the Issuer a copy of a letter from the staff of the Securities and
Exchange Commission, or an opinion of counsel, in form and substance reasonably
satisfactory to the Issuer, to the effect that such legend is not required for
purposes of the Securities Act; (ii) the reference to the provisions of this
Agreement in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference; and (iii) the
<PAGE>
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legend shall be removed in its entirety if the conditions in the preceding
clauses (i) and (ii) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law.
(k) Upon the giving by the Grantee to the Issuer of the
written notice of exercise of the Option provided for under paragraph (h) above,
the tender of the applicable purchase price in immediately available funds and
the tender of a copy of this Agreement to the Issuer, the Grantee shall be
deemed to be the holder of record of the shares of Common Stock issuable upon
such exercise, notwithstanding that the stock transfer books of the Issuer shall
then be closed or that certificates representing such shares of Common Stock
shall not then be actually delivered to the Grantee. The Issuer shall pay all
expenses, and any and all United States federal, state and local taxes and other
charges that may be payable in connection with the preparation, issue and
delivery of stock certificates under this Section 2 in the name of the Grantee
or its assignee, transferee or designee.
3. The Issuer agrees (a) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without requiring the Issuer's
stockholders to approve an increase in the number of authorized shares of Common
Stock after giving effect to all other options, warrants, convertible securities
and other rights to purchase Common Stock, (b) that it will not, by charter
amendment or through reorganization, consolidation, merger, dissolution or sale
of assets, or by any other voluntary act, avoid or seek to avoid the observance
or performance of any of the covenants, stipulations or conditions to be
observed or performed hereunder by the Issuer, and (c) promptly to take all
action as may from time to time be required (including without limitation (i)
complying with all applicable premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. ss. 18a and regulations promulgated
thereunder and (ii) cooperating fully with any Holders in preparing any
applications or notices required under the Home Owners Loan Act of 1933, as
amended, the Bank Holding Company Act of 1956, as amended, or the Change in Bank
Control Act of 1978, as amended, or any state banking law), in order to permit
the Grantee to exercise the Option and the Issuer duly and effectively to issue
shares of Common Stock pursuant hereto.
4. This Agreement and the Option granted hereby are exchangeable,
without expense, at the option of the Grantee, upon presentation and surrender
of this Agreement at the principal office of the Issuer, for other Agreements
providing for Options of different denominations entitling the Grantee thereof
to purchase, on the same terms and subject to the same conditions as are set
forth herein, in the aggregate the same number of shares of Common Stock
purchasable hereunder. The terms "Agreement" and "Option" as used herein include
any Stock Option Agreements and related Options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by the Issuer of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Agreement, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Agreement, if mutilated, the Issuer will execute and deliver a new
Agreement of like tenor and date. Any such new Agreement executed and delivered
shall constitute for all purposes and under all circumstances an additional
contractual obligation on the part of the Issuer.
5. (a) In addition to the adjustment in the number of Option Shares
pursuant to Section 1 of this Agreement, the number of Option Shares shall be
subject to adjustment from time to time as provided in this Section 5.
<PAGE>
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(i) In the event of any change in the shares of Common Stock
by reason of stock dividend, split-up, merger, recapitalization,
subdivision, conversion, combination, exchange of shares or similar
transaction, the type and number of Option Shares, and the Option Price
therefor, shall be adjusted appropriately in accordance with subsection
(b) of this Section 5, and proper provision shall be made in the
agreements governing such transaction, so that Grantee shall receive
upon exercise of the Option the number and class of shares of Common
Stock that Grantee would have held immediately after such event if the
Option had been exercised immediately prior to such event, or the
record date therefor, as applicable.
(ii) Issuer may (but in no event shall be required to) make
such increases in the number of Option Shares, in addition to those
required under subsection (a)(i), as shall be determined by its Board
of Directors to be advisable in order to avoid taxation so far as
practicable, of any dividend of stock or stock rights or any event
treated as such for Federal income tax purposes to the recipients.
(b) Whenever the number of Option Shares is adjusted as
provided in this Section 5, the Option Price shall be adjusted by multiplying
the Option Price by a fraction, the numerator of which is equal to the number of
Option Shares prior to the adjustment and the denominator of which is equal to
the number of Option Shares after the adjustment.
6. Upon the occurrence of a Subsequent Triggering Event that occurs
prior to an Exercise Termination Event, and provided that the Grantee is not
precluded, pursuant to subsection (a) of Section 2 hereof, from exercising the
Option, the Issuer shall, at the request of the Grantee delivered within thirty
(30) days following such Subsequent Triggering Event, promptly prepare, file and
keep current, with respect to the Option and the Option Shares, a "shelf "
registration statement under Rule 415 of the Securities Act or any successor
provision and the Issuer shall use all reasonable efforts to qualify such shares
under any applicable state securities laws. The Issuer will use all reasonable
efforts to cause such registration statement first to become effective and then
to remain effective for such period not in excess of 120 days from the day such
registration statement first becomes effective or such shorter time as may be
reasonably necessary to effect sales or other dispositions of Option Shares. The
Grantee shall have the right to demand two (2) such registrations, at least one
of which shall be on Form S-3. The foregoing notwithstanding, if, at the time of
any request by the Grantee for registration of the Option or Option Shares as
provided above, the Issuer is in registration with respect to any underwritten
public offering of share of Common Stock, and if in the good faith judgment of
the managing underwriter or managing underwriters, or, if none, the sole
underwriter or underwriters, of such offering, the inclusion of the Option or
Option Shares would interfere with the successful marketing of the shares of
Common Stock offered by the Issuer in such underwritten public offering, the
number of shares represented by the Option and/or the number of Option Shares
otherwise to be covered in the registration statement contemplated hereby may be
reduced (to zero, if necessary or advisable); provided, however, that if such
reduction occurs, then the Issuer shall file a registration statement for the
balance as promptly as practicable in the good faith judgment of such
underwriters and no reduction shall thereafter occur. The Grantee shall provide
all information reasonably requested by the Issuer for inclusion in any
registration statement to be filed hereunder. If requested by the Grantee in
connection with such registration, the Issuer shall become a party to any
underwriting agreement relating to the sale of such shares, but
<PAGE>
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only to the extent of obligating itself in respect of representations,
warranties, indemnities and other agreements customarily included in such
underwriting agreements for the Issuer.
7. (a) Upon the occurrence of a Subsequent Triggering Event that occurs
prior to an Exercise Termination Event, and provided that the Grantee is not
precluded, pursuant to subsection (a) of Section 2 hereof, from exercising the
Option, (i) at the request of the Grantee, delivered within thirty (30) days
following such occurrence (or such later period as provided in Section 10), the
Issuer or any successor shall repurchase the Option from the Grantee at a price
(the "Option Repurchase Price") equal to the amount by which (A) the
market/offer price (as defined below) exceeds (B) the Option Price, multiplied
by the number of shares for which this Option may then be exercised, plus, to
the extent not previously reimbursed, the Grantee's reasonable out-of-pocket
expenses incurred in connection with the transactions contemplated by, and the
enforcement of the Grantee's rights under, the Acquisition Agreement, including
without limitation legal, accounting and investment banking fees (the "Grantee's
Out-of-Pocket Expenses"), and (ii) at the request of any owner of Option Shares
from time to time (the "Owner"), delivered within thirty (30) days following
such occurrence (or such later period as provided in Section 10), the Issuer
shall repurchase such number of the Option Shares from such Owner as the Owner
shall designate at a price per share ("Option Share Repurchase Price") equal to
the greater of (A) the market/offer price and (B) the average exercise price per
share paid by the Owner for the Option Shares so designated, plus, to the extent
not previously reimbursed, the Grantee's Out-of-Pocket Expenses. The term
"market/offer price" shall mean the highest of (w) the price per share of the
Common Stock at which a tender offer or exchange offer therefor has been made,
(x) the price per share of the Common Stock to be paid by any Person, other than
the Grantee or a subsidiary of the Grantee, pursuant to an agreement with the
Issuer of the kind described in Section 2(e)(i), (y) the highest closing price
for shares of Common Stock within the shorter of the period from the date of
this Agreement up to the date on which such required repurchase of Options or
Option Shares, as the case may be, occurs or the six (6) month period
immediately preceding the date of such required repurchase of Options or Option
Shares, as the case may be, or (z) in the event of a sale of all or
substantially all of the Issuer's assets, the sum of the price paid in such sale
for such assets and the current market value of the remaining assets of the
Issuer as determined in good faith by a nationally recognized investment banking
firm selected by the Grantee and reasonably acceptable to the Issuer, divided by
the number of shares of Common Stock of the Issuer outstanding at the time of
such sale. In determining the market/offer price, the value of consideration
other than cash shall be determined in good faith by a nationally recognized
investment banking firm selected by the Grantee and reasonably acceptable to the
Issuer.
(b) The Grantee may exercise its right to require the Issuer
to repurchase the Option and any Option Shares pursuant to this Section 7 by
surrendering for such purpose to the Issuer, at its principal office, a copy of
this Agreement or certificates for Option Shares, as applicable, accompanied by
a written notice or notices stating that the Grantee elects to require the
Issuer to repurchase this Option and/or Option Shares in accordance with the
provisions of this Section 7. As promptly as practicable, and in any event
within ten (10) business days after the surrender of the Option and/or
certificates representing Option Shares and the receipt of such notice or
notices relating thereto, the Issuer shall deliver or cause to be delivered to
the Grantee the Option Repurchase Price and/or the Option Share Repurchase Price
therefor or the portion thereof that the Issuer is not then prohibited under
applicable law and regulation from so delivering.
<PAGE>
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(c) To the extent that the Issuer is prohibited under
applicable law or regulation, or as a consequence of administrative policy, or
as a result of a written agreement or other binding obligation with a
governmental or regulatory body or agency, from repurchasing the Option and/or
the Option Shares in full, the Issuer shall immediately so notify the Grantee
and thereafter deliver or cause to be delivered, from time to time, to the
Grantee the portion of the Option Repurchase Price and/or the Option Share
Repurchase Price that it is no longer prohibited from delivering, within ten
(10) business days after the date on which the Issuer is no longer so
prohibited; provided, however, that if the Issuer at any time after delivery of
a notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation, or as a consequence of administrative
policy, from delivering to the Grantee the Option Repurchase Price and/or the
Option Share Repurchase Price in part or in full (and the Issuer hereby
undertakes to use all reasonable efforts to receive all required regulatory and
legal approvals and to file any required notices as promptly as practicable in
order to accomplish such repurchase), the Grantee may revoke its notice of
repurchase of the Option or the Option Shares, as applicable, either in whole or
to the extent of the prohibition, whereupon the Issuer shall promptly (i)
deliver to the Grantee that portion of the Option Purchase Price or the Option
Share Repurchase Price that the Issuer is not prohibited from delivering with
respect to Options or Option Shares as to which the Grantee has not revoked its
repurchase demand; and (ii) deliver, as appropriate, either (A) a new Stock
Option Agreement evidencing the right of the Grantee to purchase that number of
shares of Common Stock obtained by multiplying the number of shares of Common
Stock for which the surrendered Stock Option Agreement was exercisable at the
time of delivery of the notice of repurchase by a fraction, the numerator of
which is the Option Repurchase Price less the portion thereof theretofore
delivered to the Grantee and the denominator of which is the Option Repurchase
Price, or (B) a certificate for the Option Shares it is then so prohibited from
repurchasing.
8. (a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or any subsidiary of Grantee, and Issuer shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) to
permit any person, other than Grantee or a subsidiary of Grantee, to merge into
Issuer and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Common Stock shall
be changed into or exchanged for stock or other securities of any other person
or cash or any other property, or the then outstanding shares of Common Stock
shall, after such merger, represent less than 50% of the outstanding shares and
share equivalents of the merged company, or (iii) to sell or otherwise transfer
all or substantially all of its assets to any person, other than Grantee or a
subsidiary of Grantee, then, and in each such case, the agreement governing such
transaction shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option (the "Substitute
Option"), at the election of the Grantee, of either (y) the Acquiring
Corporation (as hereinafter defined) or (z) any corporation or other business
entity that controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) The term "Acquiring Corporation" shall mean (A) the
continuing or surviving corporation of a consolidation or merger with
Issuer (if other than Issuer), (B) Issuer in a merger in which Issuer
is the continuing or surviving person, and (C) the transferee of all or
substantially all of Issuer's assets.
<PAGE>
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(ii) The term "Substitute Common Stock" shall mean the common
stock issued by the issuer of the Substitute Option upon exercise of
the Substitute Option.
(iii) The term "Assigned Value" shall mean the "market/offer
price", as defined in Section 7.
(iv) The term "Average Price" shall mean the average closing
price of a share of the Substitute Common Stock for the one year
immediately preceding the consolidation, merger or sale in question,
but in no event higher than the closing price of the shares of the
Substitute Common Stock on the day preceding such consolidation, merger
or sale; provided that if Issuer is the issuer of the Substitute
Option, the Average Price shall be computed with respect to a share of
common stock issued by the person merging into Issuer or by any company
which controls such person, as the Grantee may elect.
(c) The Substitute Option shall have the same terms as the
Option, provided, that if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall, to the extent legally
permissible, be as similar as possible to, and in no event less advantageous to
the Grantee than, the terms of the Option. The issuer of the Substitute Option
shall also enter into an agreement with the Grantee in substantially the same
form as this Agreement, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number
of shares of the Substitute Common Stock as is equal to the Assigned Value
multiplied by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of the Substitute Common Stock shall then be equal to the
Option Price multiplied by a fraction in which the numerator is the number of
Option Shares and the denominator is the number of shares of the Substitute
Common Stock for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs,
shall the Substitute Option be exercisable for more than 19.9% of the aggregate
of the shares of the Substitute Common Stock outstanding prior to exercise of
the Substitute Option (without giving effect to any shares of Substitute Common
Stock issued pursuant to the Substitute Option) less the number of shares, if
any, previously issued pursuant to the Substitute Option. In the event that the
Substitute Option would be exercisable for more than 19.9% of the shares of
Substitute Common Stock outstanding prior to exercise but for this clause (e),
the issuer of the Substitute Option (the "Substitute Option Issuer") shall make
a cash payment to the Grantee equal to the excess of (i) the value of the
Substitute Option without giving effect to the limitation in this clause (e)
over (ii) the value of the Substitute Option after giving effect to the
limitation in this clause (e). The difference in value shall be determined by a
nationally recognized investment banking firm selected by the Grantee.
(f) Issuer shall not enter into any transaction described in
subsection (a) of this Section 8 unless the Acquiring Corporation and any
corporation or other business entity that controls the Acquiring Corporation
shall have assumed in writing all the obligations of Issuer hereunder.
<PAGE>
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9. (a) At the request of the Grantee, as the holder of the Substitute
Option (referred to herein as the "Substitute Option Holder"), the issuer of the
Substitute Option (the "Substitute Option Issuer") shall repurchase the
Substitute Option from the Substitute Option Holder at a price (the "Substitute
Option Repurchase Price") equal to the amount by which (i) the Highest Closing
Price (as hereinafter defined) exceeds (ii) the exercise price of the Substitute
Option, multiplied by the number of shares of the Substitute Common Stock for
which the Substitute Option may then be exercised, plus the Grantee's
Out-of-Pocket Expenses, and at the request of the Grantee as the owner (referred
to herein as the "Substitute Share Owner") of shares of the Substitute Common
Stock (the "Substitute Shares"), the Substitute Option Issuer shall repurchase
the Substitute Shares at a price per share (the "Substitute Share Repurchase
Price") equal to the greater of (y) the Highest Closing Price and (z) the
average exercise price per share paid by the Substitute Share Owner for the
Substitute Shares so designated, plus Grantee's Out-of-Pocket Expenses. The term
"Highest Closing Price" shall mean the highest closing price for shares of the
Substitute Common Stock within the six-month period immediately preceding the
date the Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
(b) The Grantee, as the Substitute Option Holder and/or the
Substitute Share Owner, as the case may be, may exercise its right to require
the Substitute Option Issuer to repurchase the Substitute Option and the
Substitute Shares pursuant to this Section 9 by surrendering for such purpose to
the Substitute Option Issuer, at its principal office, the agreement for such
Substitute Option (or, in the absence of such an agreement, a copy of this
Agreement) and certificates for Substitute Shares accompanied by a written
notice or notices stating that the Substitute Option Holder or Substitute Share
Owner, as applicable, elects to require the Substitute Option Issuer to
repurchase the Substitute Option and/or the Substitute Shares in accordance with
the provisions of this Section 9. As promptly as practicable, and in any event
within five business days after the surrender of the Substitute Option and/or
the certificates representing Substitute Shares and the receipt of such notice
or notices relating thereto, the Substitute Option Issuer shall deliver or cause
to be delivered to the Grantee, as the Substitute Option Holder, the Substitute
Option Repurchase Price, and/or as the Substitute Share Owner, the Substitute
Share Repurchase Price therefor, or the portion(s) thereof which the Substitute
Option Issuer is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that the Substitute Option Issuer is
prohibited under applicable law or regulation, or as a consequence of
administrative policy, or as a result of a written agreement or other binding
obligation with a governmental or regulatory body or agency, from repurchasing
the Substitute Option and/or the Substitute Shares in full, the Substitute
Option Issuer shall immediately so notify the Grantee, as the Substitute Option
Holder and/or the Substitute Share Owner, and thereafter deliver or cause to be
delivered, from time to time, to the Grantee, as the Substitute Option Holder
and/or Substitute Share Owner, as appropriate, that portion of the Substitute
Option Repurchase Price and/or the Substitute Share Repurchase Price which it is
no longer prohibited from delivering, within five business days after the date
on which the Substitute Option Issuer is no longer so prohibited; provided,
however, that if the Substitute Option Issuer is, at any time after delivery of
a notice of repurchase pursuant to subsection (b) of this Section 9 prohibited
under applicable law or regulation, or as a consequence of administrative
policy, or as a result of a written agreement or other binding obligation with a
governmental or regulatory body or agency, from delivering to the Grantee, as
the Substitute Option Holder and/or the Substitute Share Owner, as appropriate,
<PAGE>
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the Substitute Option Repurchase Price and/or the Substitute Share Repurchase
Price, in part or in full (and the Substitute Option Issuer shall use its best
efforts to receive all required regulatory and legal approvals as promptly as
practicable in order to accomplish such repurchase), the Grantee, as the
Substitute Option Holder or Substitute Share Owner, as applicable, may revoke
its notice of repurchase of the Substitute Option or the Substitute Shares
either in whole or to the extent of the prohibition, whereupon the Substitute
Option Issuer shall promptly (i) deliver to the Grantee, as the Substitute
Option Holder or Substitute Share Owner, as appropriate, that portion of the
Substitute Option Repurchase Price or the Substitute Share Repurchase Price that
the Substitute Option Issuer is not prohibited from delivering; and (ii)
deliver, as appropriate, either (A) a new Substitute Option evidencing the right
of the Substitute Option Holder to purchase that number of shares of the
Substitute Common Stock obtained by multiplying the number of shares of the
Substitute Common Stock for which the surrendered Substitute Option was
exercisable at the time of delivery of the notice of repurchase by a fraction,
the numerator of which is the Substitute Option Repurchase Price less the
portion thereof theretofore delivered to the Substitute Option Holder and the
denominator of which is the Substitute Option Repurchase Price, or (B) a
certificate for the Substitute Option Shares it is then so prohibited from
repurchasing.
10. The thirty (30) day period for exercise of certain rights under
Sections 2, 6, 7 and 12 hereof shall be extended in each such case: (i) in the
manner, and subject to the limitations, provided in Section 2(g) hereof, to the
extent necessary to obtain all regulatory approvals for the exercise of such
rights and for the expiration of all statutory waiting periods; and (ii) to the
extent necessary to avoid liability under Section 16(b) of the Exchange Act by
reason of such exercise, provided that notice of intent to exercise such rights
shall be given to the Issuer within the requisite thirty (30) day period and the
Grantee shall use all reasonable efforts to promptly obtain all requisite
approvals and cause the expiration of all requisite waiting periods.
11. The Issuer hereby represents and warrants to the Grantee as follows:
(a) The Issuer has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of the Issuer and no other corporate
proceedings on the part of the Issuer are necessary to authorize this Agreement
or to consummate the transactions so contemplated. This Agreement has been duly
and validly executed and delivered by the Issuer. This Agreement is the valid
and legally binding obligation of the Issuer, enforceable against it in
accordance with its terms, except that enforcement thereof may be limited by the
receivership, conservatorship and supervisory powers of bank regulatory agencies
generally as well as bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting enforcement of creditors' rights generally and except
that enforcement thereof may be subject to general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law) and the availability of equitable remedies.
(b) The Issuer has taken all necessary corporate action to
authorize and reserve and to permit it to issue, and at all times from the date
hereof through the termination of this Agreement in accordance with its terms
will have reserved for issuance upon the exercise of the Option, that number of
shares of Common Stock equal to the maximum number of shares of Common Stock at
any time and from time to time issuable hereunder, and all such shares, upon
<PAGE>
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issuance pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrances and security interests and not subject to any preemptive rights.
12. Neither of the parties hereto may assign any of its rights or
obligations under this Option Agreement or the Option created hereunder to any
other Person, whether by operation of law or otherwise, without the express
written consent of the other party, except that in the event a Subsequent
Triggering Event shall have occurred prior to an Exercise Termination Event and
the Grantee is not precluded, pursuant to Section 2(a), from exercising the
Option, the Grantee may, subject to the right of first refusal set forth in
Section 13, assign, transfer or sell in whole or in part its rights in any
Option Shares held by the Grantee following any exercise, in whole or in part,
of the Option.
13. If at any time after the occurrence of a Subsequent Triggering
Event and, with respect to shares of Common Stock or other securities acquired
by the Grantee pursuant to an exercise of the Option, prior to the expiration of
twenty-four (24) months after the expiration of the Option pursuant to Section
2(b), the Grantee shall desire to sell, assign, transfer or otherwise dispose of
all or any of the shares of Common Stock or other securities acquired by the
Grantee pursuant to the Option, the Grantee shall give the Issuer written notice
of the proposed transaction (an "Offeror's Notice"), identifying the proposed
transferee, accompanied by a copy of a binding offer to purchase such shares or
other securities signed by such transferee and setting forth the terms of the
proposed transaction. An Offeror's Notice shall be deemed an offer by the
Grantee to the Issuer, which may be accepted within ten (10) business days of
the receipt of such Offeror's Notice, on the same terms and conditions and at
the same price at which the Grantee is proposing to transfer such shares or
other securities to such transferee. The purchase of such shares or other
securities by the Issuer shall be settled within ten (10) business days of the
date of the acceptance of the offer and the purchase price shall be paid to the
Grantee in immediately available funds, provided that, if prior notification to
or approval, consent or waiver of the OTS or Federal Reserve Board or any other
regulatory authority is required in connection with such purchase, the Issuer
shall promptly file the required notice or application for approval, consent or
waiver and shall expeditiously process the same (and the Grantee shall cooperate
with the Issuer in the filing of any such notice or application and the
obtaining of any such approval) and the period of time that otherwise would run
pursuant to this sentence shall run instead from the date on which, as the case
may be, (a) the required notification period has expired or been terminated or
(b) such approval has been obtained and, in either event, any requisite waiting
period shall have passed. In the event of the failure or refusal of the Issuer
to purchase the shares or other securities covered by an Offeror's Notice or if
the OTS or Federal Reserve Board or any other regulatory authority disapproves
the Issuer's proposed purchase of such shares or other securities, the Grantee
may, within sixty (60) days following the date of the Offeror's Notice (subject
to any necessary extension for regulatory notification, approval, or waiting
periods), sell all, but not less than all, of such shares or other securities
proposed to be transferred to the proposed transferee identified in the
Offeror's Notice at no less than the price specified and on terms no more
favorable to the proposed transferee than those set forth in the Offeror's
Notice. The requirements of this Section 13 shall not apply to any sale by means
of a public offering registered under the Securities Act in which steps are
taken to reasonably ensure that no purchaser will own securities representing
more than two percent (2%) of the outstanding shares of Common Stock of the
Issuer or any transfer to a direct or indirect wholly-owned subsidiary of the
Grantee which agrees in writing to be bound by the terms hereof.
<PAGE>
-13-
14. Notwithstanding anything to the contrary herein, in the event that
the Grantee or any Related Person thereof (as hereinafter defined) is a person
making an offer or proposal to engage in an Acquisition Transaction (other than
the transaction contemplated by the Acquisition Agreement), then the Option held
by it shall immediately terminate and be of no further force or effect and the
Option Shares held by it shall, at the Issuer's election, be immediately
repurchasable by Issuer at the Option Price. For purposes of this Agreement, a
Related Person of the Grantee means any Affiliate (as defined in Rule 12b-2 of
the rules and regulations under the Exchange Act) of the Grantee and any person
that is required to file a Schedule 13D with the Grantee with respect to shares
of Common Stock or options to acquire the Common Stock.
15. Each of the Grantee and the Issuer will use all reasonable efforts
to make all filings with, and to obtain consents of, all third parties and
governmental authorities necessary to the consummation of the transactions
contemplated by this Agreement, including without limitation applying to the OTS
or the Federal Reserve Board, as applicable, for approval to acquire the shares
issuable hereunder.
16. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief.
17. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Grantee is not permitted to acquire, or the Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section l(a) hereof (as adjusted pursuant to Sections l(b) or 5
hereof), it is the express intention of the Issuer to allow the Grantee to
acquire or to require the Issuer to repurchase such lesser number of shares as
may be permissible, without any amendment or modification hereof.
18. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Acquisition Agreement.
19. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws thereof.
20. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
21. Except as otherwise expressly provided herein or in the Acquisition
Agreement, each of the parties hereto shall bear and pay all costs and expenses
<PAGE>
-14-
incurred by it or on its behalf in connection with the transactions contemplated
hereunder, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel.
22. Except as otherwise expressly provided herein, this Agreement
contains the entire agreement between the parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereof, written or oral. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns. Nothing in this
Agreement, express or implied, is intended to confer upon any party, other than
the parties hereto, and their respective successors and permitted assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided herein.
23. Capitalized terms used in this Agreement and not defined herein
shall have the meanings assigned thereto in the Acquisition Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Stock Option
Agreement to be executed as a sealed instrument on its behalf by its officers
thereunder duly authorized, all as of the day and year first above written.
EASTERN BANCORP, INC.
By:_________________________________
John A. Cobb
President and Chief Executive Officer
VERMONT FINANCIAL SERVICES CORPORATION
By:_________________________________
John D. Hashagen, Jr.
President and Chief Executive Officer
<PAGE>
EXHIBIT B
TO MERGER AGREEMENT
November 13, 1996
Vermont Financial Services Corporation
100 Main Street
Brattleboro, Vermont 05302
Ladies and Gentlemen:
Each of the undersigned (each a "Stockholder") beneficially owns and
has sole or shared voting power with respect to the number of shares of the
common stock, par value $0.01 per share (the "Shares"), of Eastern Bancorp,
Inc., a Delaware corporation (the "Seller"), indicated opposite such
Stockholder's name on Schedule 1 attached hereto.
Simultaneously with the execution of this letter agreement, Vermont
Financial Services Corporation (the "Buyer"), the Seller and Seller's wholly
owned banking subsidiary, Vermont Federal Bank, FSB, are entering into an
Agreement and Plan of Reorganization (the "Acquisition Agreement") providing,
among other things, for the acquisition of Seller by Buyer by means of a merger
of Seller with and into Buyer (the "Acquisition"). Each of the undersigned
understands that the Buyer has undertaken and will continue to undertake
substantial expenses in connection with the negotiation and execution of the
Acquisition Agreement and the subsequent actions necessary to consummate the
transactions contemplated by the Acquisition Agreement.
In consideration of, and as a condition to, the Buyer's entering into
the Acquisition Agreement, and in consideration of the expenses incurred and to
be incurred by the Buyer in connection therewith, each Stockholder and the Buyer
agree as follows:
1. Each Stockholder, while this letter agreement is in effect, shall
vote or cause to be voted all of the Shares that such Stockholder shall be
entitled to so vote, whether such Shares are beneficially owned by such
Stockholder on the date of this letter agreement or are subsequently acquired,
whether pursuant to the exercise of stock options or otherwise, at any meeting
of the Seller's stockholders that may be called and held following the date
hereof, for the approval of the Acquisition, as contemplated under the
Acquisition Agreement, and shall vote or cause to be voted all such Shares, at
any such meeting or any other meeting of the Seller's stockholders following the
date hereof, against the approval of any other agreement providing for a merger,
acquisition, consolidation, sale of a material amount of assets or other
business combination of the Seller or any of its subsidiaries with any person or
entity other than the Buyer or any subsidiary of the Buyer. Each Stockholder,
while this letter agreement is in effect, shall support at all times, and
recommend for approval by the Seller's
<PAGE>
Vermont Financial Services Corporation
November 13, 1996
Page 2
stockholders, the Acquisition, subject only to the Stockholder's fiduciary
obligations as a director of the Seller, to the extent applicable, and each
Stockholder shall conduct himself or herself, both publicly and privately, in a
manner consistent with such support and recommendation of the Acquisition,
subject to the Stockholder's fiduciary obligations as a director of the Seller
as applicable.
2. Each Stockholder will not sell, assign, transfer or otherwise
dispose of (including, without limitation, by the creation of a Lien (as defined
in paragraph 4 below)), or permit to be sold, assigned, transferred or otherwise
disposed of, any Shares owned by such Stockholder, whether such Shares are held
by the Stockholder on the date of this letter agreement or are subsequently
acquired, whether pursuant to the exercise of stock options or otherwise, except
(a) transfers by will or by operation of law (in which case this letter
agreement shall bind the transferee), (b) transfers pursuant to any pledge
agreement (subject to the pledgee agreeing in writing to be bound by the terms
of this letter agreement), (c) transfers, in connection with estate planning
purposes, to members of the Stockholder's immediate family, trusts or charitable
organizations, subject to the transferee agreeing in writing to be bound by the
terms of this letter agreement, and (d) such other transfers (subject to the
transferee agreeing in writing to be bound by the terms of this letter
agreement) as may be consented to by the Buyer, which consent shall not be
unreasonably withheld. The Buyer shall have the option to elect to have any
existing certificates representing Shares subject to this letter agreement
canceled and reissued bearing the following legend:
THIS CERTIFICATE, AND THE SHARES REPRESENTED HEREBY, ARE
SUBJECT TO CERTAIN VOTING AND TRANSFER RESTRICTIONS CONTAINED
IN A VOTING AGREEMENT BY AND BETWEEN VERMONT FINANCIAL
SERVICES CORPORATION AND THE BENEFICIAL OWNER OF THESE SHARES
AND MAY BE TRANSFERRED ONLY IN COMPLIANCE THEREWITH. COPIES OF
THE ABOVE- REFERENCED AGREEMENT ARE ON FILE AT THE OFFICES OF
VERMONT FINANCIAL SERVICES CORPORATION
3. The agreements contained herein are intended to relate to
restrictions on transferability and to continue only for such time as may
reasonably be necessary to obtain all necessary approvals, including all
necessary shareholder and governmental approvals, of the Acquisition and all
other transactions contemplated by the Acquisition Agreement.
4. Each Stockholder represents that such Stockholder has the complete
and unrestricted power and the unqualified right to enter into and perform the
terms of this letter agreement. Each Stockholder further represents that this
letter agreement (assuming this letter agreement constitutes a valid and binding
agreement of the Buyer) constitutes a valid and binding agreement with respect
to the Stockholder, enforceable against the Stockholder in accordance with its
terms, except as enforcement may be limited by general principles of equity
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
Except as may be set forth in Schedule 1, each Stockholder represents that such
Stockholder beneficially owns the number of Shares indicated opposite such
Stockholder's name on said Schedule 1, free and clear of any liens, claims,
<PAGE>
Vermont Financial Services Corporation
November 13, 1996
Page 3
charges or other encumbrances or restrictions of any kind whatsoever ("Liens"),
and has sole or shared, and otherwise unrestricted, voting power with respect to
such Shares.
5. Notwithstanding anything herein to the contrary, the agreements
contained herein shall remain in full force and effect until the earlier of (a)
the consummation of the Acquisition or (b) the termination of the Acquisition
Agreement in accordance with Article VIII thereof.
6. Each Stockholder has signed this letter agreement intending to be
bound hereby. Each Stockholder expressly agrees that this letter agreement shall
be specifically enforceable in any court of competent jurisdiction in accordance
with its terms against such Stockholder. All of the covenants and agreements
contained in this letter agreement shall be binding upon, and inure to the
benefit of, the respective parties and their permitted successors, assigns,
heirs, executors, administrators and other legal representatives, as the case
may be.
7. This letter agreement may be executed in one or more counterparts,
each of which will be deemed an original but all of which together shall
constitute one and the same instrument.
8. No waivers of any breach of this letter agreement extended by the
Buyer to any Stockholder shall be construed as a waiver of any rights or
remedies of the Buyer with respect to any other Stockholder with respect to
Shares held by such other Stockholder or with respect to any subsequent breach
of the Stockholder or any other Stockholder hereunder.
9. This letter agreement is deemed to be signed as a sealed instrument
and is to be governed by the laws of the State of Delaware, without giving
effect to the principles of conflicts of laws thereof. If any provision hereof
is deemed unenforceable, the enforceability of the other provisions hereof shall
not be affected.
If the foregoing accurately reflects your understanding of the subject
matter intended to be contained herein, please confirm our agreement by signing
this letter where indicated below.
Very truly yours,
/s/John A. Cobb /s/E. David Humphrey
John A. Cobb E. David Humphrey
/s/W. Stevens Sheppard /s/James M. Sutton
W. Stevens Sheppard James M. Sutton
<PAGE>
Vermont Financial Services Corporation
November 13, 1996
Page 4
AGREED TO AND ACCEPTED BY AS
OF THE DATE FIRST ABOVE WRITTEN
VERMONT FINANCIAL SERVICES CORPORATION
By: /s/ John D. Hashagen, Jr.
John D. Hashagen, Jr.
President and Chief Executive Officer
<PAGE>
Vermont Financial Services Corporation
November 13, 1996
Page 5
SCHEDULE I
Number of Shares
Name of Stockholder Beneficially Owned* Shares Subject to Pledge
- ------------------- ------------------ ------------------------
John A. Cobb 195,888.64 -0-
E. David Humphrey 94,441.15 -0-
W. Stevens Sheppard 57,801 -0-
James M. Sutton 363,357 -0-
* Includes the following numbers of shares subject to stock options: Mr.
Cobb: 157,500; Mr. Humphrey: 75,000; Mr. Sheppard: 8,250 and Mr. Sutton:
5,250.
<PAGE>
EXHIBIT C
TO MERGER AGREEMENT
________________ __, 199_
Vermont Financial Services Corporation
100 Main Street
Brattleboro, Vermont 05302
Gentlemen:
I have been advised that, as of the date hereof, I may be deemed to be
an "affiliate" of Eastern Bancorp, Inc. ("Seller"), as the term "affiliate" is
defined for purposes of paragraphs (c) and (d) of Rule 145 of the Rules and
Regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"). In accordance with the terms of that certain Agreement and Plan of
Reorganization, dated as of November 13, 1996 (the "Agreement"), by and among
Vermont Financial Services Corporation ("Buyer"), Seller and Seller's wholly
owned banking subsidiary, Vermont Federal Bank, FSB, Seller will be merged with
and into Buyer (the "Merger").
Following the consummation of the Merger, I may receive shares of the
common stock of Buyer, par value $1.00 per share ("Buyer Common Stock"). I would
receive such shares of Buyer Common Stock in exchange for shares of the common
stock of Seller, par value $0.01 per share ("Seller Common Stock"), held by me
immediate prior to the consummation of the Merger.
I represent, warrant and covenant to Buyer that, in the event I receive
any shares of Buyer Common Stock following the Merger:
1. I shall not make any sale, transfer or other disposition of such
shares of Buyer Common Stock in violation of the Act or the Rules and
Regulations.
2. I have carefully read this letter and the Agreement and discussed
its requirements and other applicable limitations upon my ability to sell,
transfer or otherwise dispose of shares of Buyer Common Stock to the extent I
felt necessary, with my counsel or counsel for Seller.
3. I have been advised that the issuance of shares of Buyer Common
Stock to me in accordance with the terms of the Agreement has been registered
with the Commission under the Act. However, I have also been advised that,
since, at the time the Merger was submitted for a vote of the stockholders of
Seller, I may be deemed to have been an affiliate of Seller, and that the
distribution by me of shares of Buyer Common Stock has not been registered under
the Act, that I may not sell, transfer or otherwise dispose of any shares of
Buyer Common Stock issued to me following the Merger unless (i) such sale,
transfer or other disposition has been registered under the Act, (ii) such sale,
transfer or other disposition is made in conformity with the volume and other
limitations of Rule 145 promulgated by the Commission under the Act, or (iii) in
the opinion of counsel reasonably acceptable to Buyer, such sale, transfer or
other disposition is otherwise exempt from registration under the Act.
4. Except as may be otherwise contemplated by the Agreement, I
understand that Buyer is under no obligation to register the sale, transfer or
<PAGE>
-2-
other disposition of shares of Buyer Common Stock by me or on my behalf under
the Act or to take any other action necessary in order to make compliance with
an exemption from such registration available.
5. I also understand that stop transfer instructions will be given to
Buyer's transfer agents with respect to the Buyer Common Stock and that there
will be placed on the certificates for the shares of Buyer Common Stock issued
to me, or any substitutions therefor, a legend stating in substance:
The shares represented by this certificate were issued in a transaction to which
Rule 145 promulgated under the Securities Act of 1933 applied. The shares
represented by this certificate may only be transferred in accordance with the
terms of an agreement dated as of ___________, 199_, between the registered
holder hereof and Vermont Financial Services Corporation, a copy of which
agreement is on file at the principal offices of Vermont Financial Services
Corporation.
It is understood and agreed that the legend set forth in paragraph 5
above shall be removed by delivery of substitute certificates without such
legend if the undersigned shall have delivered to Buyer a copy of a letter from
the staff of the Commission, or an opinion of counsel in form and substance
reasonably satisfactory to Buyer, to the effect that such legend is not required
for purposes of the Act.
Very truly yours,
---------------------------
Accepted this ___ day of ________, 19__, by
VERMONT FINANCIAL SERVICES CORPORATION
By:______________________________
Name:
Title:
<PAGE>
APPENDIX B
FORM OF OPINION OF MCCONNELL, BUDD & DOWNES, INC.
[DRAFT]
[DATE]
The Board of Directors
Eastern Bancorp, Inc.
537 Central Avenue
Dover, NH 03820
The Board of Directors:
You have requested our opinion as to the fairness from a financial point
of view to the shareholders of Eastern Bancorp, Inc. ("Eastern") of the
consideration to be paid to the shareholders of Eastern in connection with the
proposed acquisition of Eastern by Vermont Financial Services Corp., ("VFSC")
pursuant to the Agreement and Plan of Merger (the "Merger Agreement") dated
November 13, 1996 by and between Eastern and VFSC. Pursuant to the Merger
Agreement Eastern will merge with and into VFSC (the "Merger").
As is more specifically set forth in the Merger Agreement, upon
consummation of the Merger, each outstanding share of the common stock of
Eastern, par value $0.01 per share ("Eastern Common Stock"), except for any
dissenting shares and except for shares held by VFSC and its subsidiaries or by
Eastern (in both cases, other than shares held in a fiduciary capacity or as a
result of debts previously contracted), will be entitled to receive Merger
Consideration payable in cash or shares of common stock, $1.00 par value per
share, of VFSC ("VFSC Common Stock") or a combination of cash and stock, based
on the average closing bid price per share of VFSC Common Stock on the Nasdaq
Stock Market during the 20 day trading period ending on the fifth business day
prior to the effective date of the Merger (the "Average VFSC Closing Price"),
which will be equal to the sum of (i) $7.25 plus (ii) the product of 0.49 and
the Average VFSC Closing Price, subject to the maximum and minimum collars
described below. If the Average VFSC Closing Price is equal to or greater than
$39.96, the acquisition price per share of eastern Common Stock will be fixed at
$26.83 and if the Average VFSC Closing Price is equal to or greater than $29.54
but not less than $26.06, the acquisition price per share of Eastern Common
Stock will be fixed at $21.72.
Eastern shareholders may elect to receive cash, VFSC Common Stock or a
combination of cash and VFSC Common Stock, subject to pro rata adjustment as set
forth in the Merger Agreement.
1
<PAGE>
In addition, upon consummation of the Merger, each stock option with
respect to Eastern Common Stock granted by Eastern under Eastern's Stock Option
Plans (the "Eastern Stock Option Plans") which is outstanding at the effective
time, whether or not then exercisable, will receive either (i) an amount equal
to the excess of $24.28 over the per share exercise price of such option in
cash, or (ii) have such options to purchase Eastern Common Stock converted into
options to purchase shares of VFSC Common Stock in accordance with the
provisions of the Agreement.
The reader is urged to carefully read all the terms of the Merger
Agreement, which is reproduced in its entirety elsewhere in the Proxy
Statement-Prospectus.
McConnell, Budd & Downes, Inc., as part of its investment banking
business, is engaged in the valuation of bank holding companies and banks,
thrift holding companies and thrifts and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements,
competitive bidding processes, market making as a NASD market maker, secondary
distributions of listed securities and valuations for corporate, estate and
other purposes. Our experience arid familiarity with Eastern includes having
worked as a financial advisor to Eastern since July of 1995 on a contractual
basis and specifically includes our participation in the process and
negotiations leading up to the proposed transaction with VFSC. In the course of
our role as financial advisor to Eastern in connection with the transaction we
have received fees for our services and will receive additional fees contingent
on the occurrence of certain defined events. We will receive a fee in connection
with the rendering of this opinion. In the ordinary course of our business, we
may, from time to time, trade the equity securities of Eastern in our capacity
as a NASD market maker, for our own account, for the accounts of our customers
and for the accounts of individual employees of McConnell, Budd & Downes, Inc.
Accordingly we may, from time to time, hold a long or short position in the
equity securities of Eastern.
In arriving at our opinion, we have reviewed the Merger Agreement and
Proxy Statement-Prospectus in substantially the form to be mailed to Eastern and
VFSC shareholders. We have also reviewed publicly available business, financial
and shareholder information relating to Eastern and its subsidiaries, certain
publicly available financial information relating to VFSC and certain financial
information relating to VFSC and its subsidiaries provided to Eastern by VFSC
management. In addition, we have reviewed certain other information, including
internal reports and documents of Eastern and VFSC and certain management
prepared financial information provided to us by Eastern and VFSC. We have also
met with and had discussions with members of the senior management of Eastern
2
<PAGE>
and VFSC to discuss their past and current business operations, current
financial condition and future prospects. In connection with the foregoing, we
have reviewed the annual reports to shareholders and annual report on form 10-K
of VFSC for the fiscal years ended December 31, 1993, 1994 and 1995. We have
similarly reviewed the annual reports of Eastern for the fiscal years ended
September 30, 1992, 1993, 1994 and 1995. We have reviewed and studied the
historical stock prices and trading volumes of the common stock of Eastern and
VFSC as well as the terms and conditions of 10 recent acquisition transactions,
selected from a larger universe of 32 transactions involving New England banking
institutions, involving publicly traded financial institutions conducting
business in the northeast which can be compared to the proposed acquisition of
Eastern by VFSC. We also considered the current state of and future prospects
for the economies of Vermont, New Hampshire and Massachusetts generally and the
relevant market areas for VFSC and Eastern in particular. We have also conducted
such other studies, analyses and investigations as we deemed appropriate under
the circumstances surrounding this proposed transaction.
In the course of our review and analysis we considered, among other
things, such topics as relative capitalization, capital adequacy, profitability,
availability of non-interest income, relative asset quality, adequacy of the
reserve for loan losses and the composition of the loan portfolio of each of
Eastern and VFSC. We also considered management's estimates of cost savings and
revenue enhancements which might result from a consolidation of Eastern and
VFSC. In the conduct of our review and analysis we have relied upon and assumed,
without independent verification, the accuracy and completeness of the financial
information provided to us by Eastern and VFSC and or otherwise publicly
obtainable. In reaching our opinion we have not assumed any responsibility for
the independent verification of such information or any independent valuation or
appraisal of any of the assets or the liabilities of either Eastern or VFSC nor
have we obtained from any other source, any current appraisals of the assets or
liabilities of either Eastern or VFSC. We have also relied on the management of
Eastern as to the reasonableness of various financial and operating forecasts
and of the assumptions on which they are based, which were provided to us for
use in our analyses.
In the course of rendering this opinion, which is being rendered prior
to the receipt of certain required regulatory approvals necessary before
consummation of the transaction, we have assumed that no conditions will be
imposed by any regulatory agency in connection with its approval of the
transaction that will have a material adverse effect on the results of
operations, the financial condition or the prospects of VFSC following
consummation of the transaction.
3
<PAGE>
Based upon and subject to the foregoing, it is our opinion, that as of
the date of this letter, the Exchange Ratio is fair to the shareholders of
Eastern from a financial point of view.
Very truly yours,
McConnell, Budd & Downes, Inc.
By:_____________________
David A. Budd
Managing Director
4
<PAGE>
APPENDIX C
FORM OF OPINION OF TUCKER ANTHONY INCORPORATED
[DRAFT]
November 13, 1996
Board of Directors
Vermont Financial Services Corp.
100 Main Street
Brattleboro, VT
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of Vermont Financial Services Corp. (the "Company") common
stock (the "Buyer Common Stock"), par value $1.00, of the consideration to be
paid by the Company to the holders of Eastern Bancorp, Inc. ("Eastern") common
stock (the "Seller Common Stock"), par value $0.01 per share, pursuant to the
Agreement and Plan of Reorganization (the "Agreement") by and between the
Company and Eastern. On the Closing Date, as defined in the Agreement, each
share of Seller Common Stock held by Eastern's shareholders (other than shares
held by dissenting shareholders) shall become and be converted into either (i)
an amount in cash equal to the sum of (x) $7.25 and (y) the product of 0.4900
and the Average Closing Price (such total per share purchase price being
referred to herein as the "Acquisition Price" and such total per share cash
amount being referred to as the "Cash Distribution") or (ii) the number of
shares or fraction of a share of Buyer Common Stock, rounded to the nearest
ten-thousandth of a share, equal to the number obtained by dividing the
Acquisition Price by the Average Closing Price (such number being referred to as
the "Exchange Ratio" or the "Stock Distribution"); provided, however, that if
the Average Closing Price is greater than or equal to $39.96 per share the
Acquisition Price shall equal $26.83 and if the Average Closing Price is less
than or equal to $29.54 per share but greater than or equal to $26.06 per share
the Acquisition Price shall equal $21.72. If the Average Closing Price is less
than $26.06, the Acquisition Price shall equal the sum of (x) $7.25 and (y) the
product of 0.5553 and the Average Closing Price. Notwithstanding the foregoing,
however, if the Average Closing Price is less than $26.06 per share (the
"Minimum Price"), then Eastern shall have the right to terminate the Agreement,
unless the Company elects, in its sole discretion to adopt $21.72 as the
Acquisition Price. The "Average Closing Price" as referenced above shall be
determined by calculating the average of the daily closing bid prices of the
<PAGE>
November 13, 1996
Page Two of Two
Buyer Common Stock on each of the twenty (20) trading days ending on the fifth
business day prior to the Closing Date. The Company and Eastern have agreed that
the Acquisition Price shall be identical without regard to any election made by
holders of Seller Common Stock to receive Buyer Common Stock or cash.
Tucker Anthony Incorporated ("Tucker Anthony") as part of its investment banking
business is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for corporate and other
purposes. In the ordinary course of our business, we may actively trade the
securities of both the Company and Eastern for our own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. Tucker Anthony has served as financial advisor to
the Company in the negotiation of the Agreement, and will receive a fee from the
Company for those services.
In arriving at our opinion, we have among other things:
Reviewed the most recent draft of the Agreement;
Reviewed certain historical financial and other information concerning
the Company for the five fiscal years ended December 31, 1995 and for
the two quarters ended March 31 and June 30, 1996, including the
Company's reports on Forms 10-K and 10-Q;
Reviewed certain historical financial and other information concerning
Eastern for the five fiscal years ended September 30, 1995 and for the
three quarters ended December 31, 1995 and March 31 and June 30, 1996,
including Eastern's reports on Forms 10-K and 10-Q;
Held discussions with the senior management of the Company and Eastern
with respect to their past and current financial performance, financial
condition and future prospects;
Reviewed certain internal financial data, projections and other
information of the Company and Eastern, including financial projections
prepared by management;
Analyzed certain publicly available information of other financial
institutions that we deemed comparable or otherwise relevant to our
inquiry, and compared the Company and Eastern from a financial point of
view with certain of these institutions;
Compared the consideration to be paid by the Company pursuant
to the Agreement with the consideration paid by acquirors in
<PAGE>
November 13, 1996
Page Two of Two
other acquisitions of financial institutions that we deemed
comparable or otherwise relevant to our inquiry;
Reviewed publicly available earnings estimates, historical trading
activity and ownership data of both the Buyer Common Stock and Seller
Common Stock and considered the prospects for dividends and price
movement in each; and
Conducted such other financial studies, analyses and investigations and
reviewed such other information as we deemed appropriate to enable us
to render our opinion. In our review, we have also taken into account
an assessment of general economic, market and financial conditions and
certain industry trends and related matters.
In our review and analysis and in arriving at our opinion we have assumed and
relied upon the accuracy and completeness of all the financial information
publicly available or provided to us by the Company and Eastern and have not
attempted to verify any of such information. We have assumed that (i) the
financial projections of the Company and Eastern provided to us with respect to
the results of operations likely to be achieved by each company have been
prepared on a basis reflecting the best currently available estimates and
judgments of the Company's and Eastern's management and advisors as to future
financial performance and results and (ii) that such forecasts and estimates
will be realized in the amounts and in the time periods currently estimated. We
have also assumed, without independent verification, that the current and
projected aggregate reserves for possible loan losses for the Company and
Eastern are adequate to cover such losses. We did not make or obtain any
independent evaluations or appraisals of any assets or liabilities of the
Company, Eastern or any of their respective subsidiaries nor did we verify any
of the Company's or Eastern's books or records or review any individual loan
credit files. Our opinion is necessarily based upon market, economic and other
conditions as they exist and can be evaluated as of the date of this letter.
This opinion is being furnished for the use and benefit of the Board of
Directors of the Company and is not a recommendation to shareholders. Tucker
Anthony has advised the Board that it does not believe any person other than the
Board has the legal right to rely on the opinion and, absent any controlling
precedent, would resist any assertion otherwise.
Based upon and subject to the foregoing, it is our opinion that as of the date
hereof the consideration to be paid by the Company pursuant to the Agreement is
fair to the Company's stockholders from a financial point of view.
Very truly yours,
<PAGE>
APPENDIX D
TEXT OF DGCL SECTION 262 -- APPRAISAL RIGHTS
262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d)
of this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in favor
of the merger or consolidation nor consented thereto in writing pursuant to
Section 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss.251 (other than a merger effected pursuant to subsection
(g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
<PAGE>
-2-
terms of an agreement of merger or consolidation pursuant to Sections 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
<PAGE>
-3-
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within twenty days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such holder's shares.
If such notice did not notify stockholders of the effective date of the merger
or consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation notifying
each of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective date of the
merger or consolidation or (ii) the surviving or resulting corporation shall
send such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more than
20 days following the sending of the first notice, such second notice need only
be sent to each stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this subsection.
An affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
<PAGE>
-4-
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given;
provided that, if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
<PAGE>
-5-
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest, which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
<PAGE>
-6-
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that it no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
349, L.'96, eff. 7-1-96.)
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL")
provides, in effect, that a corporation may, and in certain cases must,
indemnify any person made a party to any action by reason of the fact that he is
or was a director, officer, employee or agent of the corporation against, in the
case of a nonderivative action, judgments, fines, amounts paid in settlement and
reasonable expenses (including attorney's fees) incurred by him as a result of
such action, and in the case of a derivative action, against expenses (including
attorney's fees), if in either type of action he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation. This indemnification does not apply, in a derivative action, to
matters as to which it is adjudged that the director, officer, employee or agent
is liable to the Company, unless upon court order it is determined that, despite
such adjudication of liability, but in view of all the circumstances of the
case, he is fairly and reasonable entitled to indemnity for expenses, and, in a
nonderivative action, to any criminal proceeding in which such person had
reasonable cause to believe his conduct was unlawful.
Article Nine of VFSC's Certificate of Incorporation provides that VFSC
shall indemnify each person who is or was an officer or director of VFSC to the
fullest extent permitted by Section 145 of the DGCL.
Article Nine of VFSC's Certificate of Incorporation states that no
director of the Company shall be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent that exculpation from liability is not permitted under the DGCL as in
effect when such breach occurred.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits
Number Description
------ --------------
2.1 Agreement and Plan of Reorganization dated as of November 13,
1996 (incorporated by reference to Exhibit A to VFSC's Report
on Schedule 13D dated November 25, 1996; included as Appendix
A to Joint Proxy Statement-Prospectus).
3.1 Certificate of Incorporation of VFSC (incorporated by
reference to Exhibit 3.1 to VFSC's Report on Form 8-K dated
April 23, 1990).
3.2 Bylaws of VFSC (incorporated by reference to Exhibit 3.2 to
VFSC's Report on Form 8-K dated April 23, 1990).
4 Form of certificate of VFSC Common Stock (not required to be
filed under EDGAR).
II-1
<PAGE>
Number Description
------ --------------
5 Opinion of Sullivan & Worcester LLP as to legality (to be
filed by amendment).
8.1 Opinion of Sullivan & Worcester LLP as to tax matters (to be
filed by amendment).
8.2 Opinion of Hale and Dorr LLP as to tax matters (to be filed by
amendment).
10.1 Management Continuity Agreements dated February 9, 1990
between VFSC's predecessor and each of the following four
executive officers:
(a) John D. Hashagen, Jr.
(b) Richard O. Madden
(c) W. Bruce Fenn
(d) Robert G. Soucy
(incorporated by reference to Exhibit 3.2 to VFSC's Annual
Report on Form 10-K for the year ended December 31, 1990).
10.2 Management Continuity Agreement dated March 17, 1994 between
VFSC and Louis J. Dunham. (incorporated by reference to
Exhibit 10.1 of VFSC's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.3 Executive Deferred Compensation Agreement dated July 19, 1988
by and between VFSC, as and for VNB, and W. Bruce Fenn
(incorporated by reference to Exhibit 10.2 of VFSC's
Registration Statement on Form S-4, File No. 33-72554, filed
on December 3, 1993).
10.4 Executive Deferred Compensation Agreement dated August 9, 1988
by and between VFSC, as and for VNB, and Robert G. Soucy
(incorporated by reference to Exhibit 10.3 of VFSC's
Registration Statement on Form S-4, File No. 33-72554, filed
on December 3, 1993).
10.5 Executive Deferred Compensation Agreement dated May 13, 1988
by and between VNB and William H. George (incorporated by
reference to Exhibit 10.4 of VFSC's Registration Statement on
Form S-4, File No. 33-72554, filed on December 3, 1993).
10.6 Executive Deferred Compensation Agreement dated April 11, 1989
by and between VFSC, as an for VNB, and Richard O. Madden
(incorporated by reference to Exhibit 10.5 of VFSC's
Registration Statement on Form S-4, File No. 33-72554, filed
on December 3, 1993).
10.7 Executive Deferred Compensation Agreement dated August 1, 1988
by and between VFSC, as and for VNB, and John D. Hashagen
(incorporated by reference to Exhibit 10.6 of VFSC's
Registration Statement on Form S-4, File No. 33-72554, filed
on December 3, 1993).
10.8 Employment Agreement dated October 19, 1993 by and among
United Savings Bank, VFSC and Kenneth R. Cole (incorporated by
reference to Exhibit 10.8 of VFSC's Registration Statement on
Form S-4, File No. 33-72554, filed on December 3, 1993).
10.9 Agreement of Merger dated February 28, 1990 between Vermont
Financial Services Corp., a Vermont corporation, and VFSC
(incorporated by reference to Exhibit 3.2 to VFSC's Annual
Report on Form 10-K for the year ended December 31, 1990).
10.10 Agreement and Plan of Reorganization dated as of August 24,
1993 Merger dated February 28, 1990 between West Mass
Bankshares, Inc. and VFSC (incorporated by reference to
Exhibit 2.1 of VFSC's Registration Statement on Form S-4, File
No. 33-72554, filed on December 3, 1993).
10.11 Stock Purchase Agreement, dated as of February 26, 1996,
between Arrow Financial Corporation, Arrow Vermont
Corporation, Green Mountain Bank and Vermont National Bank
(incorporated by reference Exhibit 2 to VFSC's 8-K filed on
March 18, 1996).
10.12 Stock Option Agreement dated as of November 13, 1996
(incorporated by reference to Exhibit 4 to VFSC's Report on
Schedule 13D dated November 25, 1996; contained as Exhibit A
in Appendix A to Joint Proxy Statement-Prospectus).
10.13 Stockholders Agreement dated as of November 13, 1996 among
certain stockholders of Eastern and VFSC (incorporated by
reference to Exhibit 99.1 to VFSC's Report on Schedule 13D
dated November 25, 1996; contained as Exhibit B in Appendix A
to Joint Proxy Statement-Prospectus).
21 Subsidiaries of VFSC (incorporated by reference to Exhibit 22
to VFSC's Annual Report on Form 10-K for the year ended
December 31, 1995).
22.1 Form of Proxy for Eastern Meeting.
II-2
<PAGE>
Number Description
------ --------------
22.2 Form of Proxy for VFSC Meeting (to be filed by amendment).
22.3 Opinion of McConnell, Budd & Downes, Inc. (draft included as
Appendix B to the Joint Proxy Statement--Prospectus; final
opinion to be filed by amendment).
22.4 Opinion of Tucker Anthony Incorporated (draft included as
Appendix C to the Joint Proxy Statement--Prospectus; final
opinion to be filed by amendment).
23.1 Consent of Coopers & Lybrand LLP with respect to VFSC.
23.2 Consent of KPMG Peat Marwick LLP with respect to Eastern..
23.3 Consent of Sullivan & Worcester LLP (included in Exhibit 5-to
be filed by amendment).
23.4 Consent of Hale and Dorr LLP (included in Exhibit 8.2-to be
filed by amendment).
23.5 Consent of McConnell, Budd & Downes, Inc.
23.6 Consent of Tucker Anthony Incorporated.
24 Powers of Attorney of certain directors and officers of VFSC
(included in pages II-5 and II-6).
99.1 Form of Eastern Bancorp, Inc. Annual Report to Stockholders
for fiscal year ended September 30, 1996.
(b) Financial Statement Schedules - Not applicable.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the registrant, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") (and where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act), that is incorporated by reference in this Registration Statement
shall be
II-3
<PAGE>
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Vermont Financial Services Corp. has duly caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Brattleboro, State of Vermont, on January 31, 1997.
VERMONT FINANCIAL SERVICES CORP.
By:/s/John D. Hashagen, Jr.
Name: John D. Hashagen, Jr.
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-4 relating to the Common Stock of Vermont
Financial Services Corp. has been signed below by the following persons in the
capacities and on the dates indicated; and each of the undersigned officers and
directors of Vermont Financial Services Corp. hereby severally constitutes and
appoints John D. Hashagen, Jr. and Richard O. Madden, and each of them, to sign
for him, and in his name in the capacity indicated below, such Registration
Statement for the purpose of registering such securities under the Securities
Act of 1933, as amended, and any and all amendments thereto, including without
limitation any registration statement or post-effective amendment thereof filed
under and meeting the requirements of Rule 462(b) under the Securities Act,
hereby ratifying and confirming our signatures as they may be signed by our
attorneys to such Registration Statement and any and all amendments thereto.
Signature Title Date
/s/John D. Hashagen, Jr. President, Director and Chief January 31, 1997
John D. Hashagen, Jr. Executive Officer
/s/Richard O. Madden Executive Vice President, January 31, 1997
Richard O. Madden Treasurer and Chief Financial
Officer
/s/Anthony F. Abatiell Director January 31, 1997
Anthony F. Abatiell
/s/Zane V. Akins Director January 31, 1997
Zane V. Akins
II-5
<PAGE>
/s/Charles A. Cairns Director January 31, 1997
Charles A. Cairns
/s/William P. Cody Director January 31, 1997
William P. Cody
/s/Allyn W. Coombs Director January 31, 1997
Allyn W. Coombs
/s/Beverly G. Davidson Director January 31, 1997
Beverly G. Davidson
/s/Philip M. Drumheller Director January 31, 1997
Philip M. Drumheller
/s/James E. Griffin Director January 31, 1997
James E. Griffin
/s/Francis L. Lemay Director January 31, 1997
Francis L. Lemay
/s/Kimball E. Mann Director January 31, 1997
Kimball E. Mann
/s/Stephan A. Morse Director January 31, 1997
Stephan A. Morse
/s/Donald E. O'Brien Director January 31, 1997
Donald E. O'Brien
/s/Roger M. Pike Director January 31, 1997
Roger M. Pike
/s/Mark W. Richards Director January 31, 1997
Mark W. Richards
II-6
Exhibit 22.1
EASTERN BANCORP, INC.
REVOCABLE PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned stockholder of Eastern Bancorp, Inc. (the "Company") hereby
authorizes John A. Cobb, E. David Humphrey and Janine K. Pinel and each of them
singly, with full power of substitution, to vote and otherwise represent all of
the shares of stock of the Company at the Special Meeting of Stockholders (the
"Special Meeting") to be held at the offices of
___________________________________________, on _______________, April _____,
1997 at _____________a.m. Eastern Standard Time, and any adjournments thereof.
The undersigned may revoke this Proxy at any time before it is voted by filing
with the secretary of the Company a written notice of revocation, by delivering
to the Company a duly executed Proxy bearing a later date, or by attending the
Special Meeting and voting in person. The undersigned stockholder hereby
acknowledges receipt of the Notice of Special Meeting of Stockholders and Joint
Proxy Statement-Prospectus and hereby revokes any Proxy or Proxies heretofore
given.
This Proxy, when properly completed, will be voted in the manner directed herein
by the undersigned stockholder. UNLESS CONTRARY DIRECTIONS ARE GIVEN, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1 AND IN ACCORDANCE WITH THE DETERMINATION OF THE
MAJORITY OF THE BOARD OF DIRECTORS AS TO ALL OTHER MATTERS, IF ANY. ABSTENTIONS
WILL BE COUNTED AS VOTES AGAINST PROPOSAL 1.
If you receive more than one proxy card, please sign and return all cards in the
accompanying envelope.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE.
Please sign this proxy exactly as your name appears on the books of the Company.
Joint owners should each sign personally. Trustees and other fiduciaries should
indicate the capacity in which they sign, and where more than one name appears,
a majority must sign. If a corporation, this signature should be that of an
authorized officer who should state his or her title.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS
__________________________ _________________________
__________________________ _________________________
<PAGE>
1. To approve and adopt the Agreement and Plan of Reorganization (the
"Merger Agreement"), dated as of November 13, 1996, by and among the Company,
the Company's wholly owned subsidiary, Vermont Federal Bank, and Vermont
Financial Services Corp. ("VFSC"), and each of the transactions contemplated
thereby, pursuant to which Merger Agreement the Company would be merged with and
into VFSC, and shareholders of the Company would receive cash and/or shares of
Common Stock of VFSC, all as more fully described in the Joint Proxy
Statement-Prospectus of the Company and VFSC.
/ / FOR / / AGAINST / / ABSTAIN
2. As determined by a majority of the Company's Board of Directors, the
Proxies are authorized to vote upon such other matters as may properly come
before the Special Meeting or any adjournments thereof.
Please be sure to sign and date this Proxy.
Signature of Shareholder:________________ Date:__________________
Signatures of Co-Owner:__________________ Date:__________________
-2-
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Vermont Financial Services Corp. on Form S-4 of our report, which includes
explanatory paragraphs regarding (i) our responsibility related to the Company's
consolidated balance sheet as of December 31, 1993 and the related consolidated
statements of income, changes in stockholders' equity and cash flow for the year
ended December 31, 1993; and (ii) the Company's change in its method of
accounting for certain investments in debt and equity securities and accounting
for postretirement benefits other than pensions in 1993, dated January 18, 1996,
on our audit of the consolidated financial statements of Vermont Financial
Services Corp. and subsidiaries as of December 31, 1995 and 1994 and for each of
the two years in the period ended December 31, 1995, which report is included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
We also consent to the reference to our firm under the captions "Selected
Historical Financial Data of VFSC and Subsidiaries" and "Experts."
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Springfield, Massachusetts
January 31, 1997
Exhibit 23.2
Independent Auditors' Consent
The Board of Directors and Stockholders
Eastern Bancorp, Inc.:
We consent to incorporation by reference in the registration statement on Form
S-4 of Vermont Financial Services Corp. of our report dated November 8, 1996,
except as to note 20 which is as of November 13, 1996, relating to the
consolidated statements of financial condition of Eastern Bancorp, Inc. and
subsidiaries as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended September 30, 1996, which report appears in
the September 30, 1996, annual report on Form 10-K of Eastern Bancorp, Inc. and
to the reference to our Firm under the heading "Experts" in the registration
statement. Our report refers to the adoption in 1995 of Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an
Amendment of FASB Statement No. 65."
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 22, 1997
EXHIBIT 23.5
[TUCKER ANTHONY INCORPORATED LETTERHEAD]
January 31, 1997
Members of the Board of Directors
Vermont Financial Services Corp.
100 Main Street
Brattleboro, Vermont 05301
Members of the Board of Directors
Eastern Bancorp, Inc.
537 Central Avenue
Dover, New Hampshire 03820
Members of the Board:
We hereby consent to the reference to the opinion of our Firm under the
heading "The Merger -- Opinion Financial Advisors" and to the inclusion of the
foregoing opinion in the Registration Statement of Vermont Financial Services
Corp. on Form S-4 to be filed with the Securities and Exchange Commission in
connection with the proposed merger of Eastern Bancorp., Inc. with Vermont
Financial Services Corp. In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933 or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
TUCKER ANTHONY INCORPORATED
By: /s/Gregory W. Benning
Gregory W. Benning
Managing Director
EXHIBIT 23.6
MCCONNELL, BUDD & DOWNES, INC.
365 South Street
Morristown, New Jersey 07960
201-538-7800
Fax: 201-538-0522
CONSENT OF FINANCIAL ADVISOR
We hereby consent to the inclusion of the Opinion of McConnell, Budd & Downes,
Inc. on the Form S-4 Registration Statement of Vermont Financial Services Corp.,
("VFSC") to be filed with the Securities and Exchange Commission in connection
with the proposed merger of Eastern Bancorp, Inc. with VFSC and to the
references to our firm as Financial Advisor to Eastern Bancorp, Inc. in the text
of the related Proxy Statement-Prospectus. In giving such consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Securities and Exchange Commission.
McConnell, Budd & Downes, Inc.
By:/s/David A. Budd
David A. Budd
Managing Director
January 31, 1997
EXHIBIT 99.1
EASTERN BANCORP, INC.
FORM OF ANNUAL REPORT TO STOCKHOLDERS
FOR FISCAL YEAR ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
Page
Business
Market for Registrant's Common Stock and Related
Stockholder Matters 2
Selected Financial Data 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Financial Statements and Supplementary Data 17
Directors and Executive Officers of the Registrant 41
<PAGE>
EASTERN BANCORP, INC.
1996 Annual Report
This Annual Report for the fiscal year ended September 30, 1996 is
being furnished to stockholders of Eastern Bancorp, Inc. in conjunction with the
Joint Proxy Statement-Prospectus of Eastern Bancorp, Inc. and Vermont Financial
Services Corp. dated ______________ __, 1997.
General
Preliminary Note In Regard To Forward-Looking Statements. This annual
report on contains forward-looking statements. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the registrant's actual results to differ materially
from those contemplated by such forward- looking statements. These factors
include, without limitation, those set forth below under the caption "Certain
Factors That May Affect Future Results."
Certain Factors That May Affect Future Results. The following important
factors, among others, could cause actual results to differ materially from
those contemplated by forward-looking statements made in this annual report or
presented elsewhere by management from time to time. Defined terms used
elsewhere in this annual report have the same meanings herein as therein.
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, the Bank's continued ability
to originate quality loans (loan originations increased significantly for fiscal
1996 compared to fiscal 1995), fluctuation of interest rates, real estate market
conditions in the Bank's lending areas, general and local economic conditions,
the Bank's continued ability to attract and retain deposits, the Company's
ability to control costs, new accounting pronouncements, and changing regulatory
requirements.
A new concern involves regulatory and stockholder approval of the
Agreement and Plan of Reorganization (the Merger Agreement) dated November 13,
1996 by and among the Company. The Bank, and Vermont Financial Services Corp.
(VFSC) which is described in Item 1 and note 20 of the notes to consolidated
financial statements. While management does not anticipate a negative response
from the regulatory bodies or the stockholders of the Company or VFSC, failure
to approve the agreement could materially impact the future performance of the
Company because of distraction of management's attention, fees, and restrictions
on interim operations.
The Merger Agreement sets forth certain restrictions on activities of
the Company and its subsidiaries which are not in the ordinary and usual course
of business consistent with past practices and must be adhered to until the
effective date of the Merger. These restrictions include ,but are not limited
to, (i) the execution of any material contract or incurrence of any material
obligation outside the ordinary course of business, (ii) the declaration or
payment of any dividends or other distributions to stockholders that are in any
way inconsistent with prior practices, (iii) the amendment, in any material
respect, of the Company's employee benefit plans or employment
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contracts, (iv) the issuance of any shares of its capital stock or grant of any
options except in fulfillment of pre-existing option plans, (v) the incurrence
of any additional debt obligation except in the ordinary course of business
consistent with past practices or to any capital expenditures above certain
monetary limits, (vi) and the making of any loans or extensions of credit other
than those which are on customary terms, conditions and standards.
As a result of the Deposit Insurance Funds Act of 1996 the Secretary of
the Treasury is to review recommendations in 1997 for the establishment of a
common charter for banks and savings associations. Accordingly, the Bank may be
required to convert its federal savings bank charter to either a national bank
charter, a state depository institution charter, or a newly designed charter.
The Company may also become regulated at the holding company level by the Board
of Governors of the Federal Reserve System (Federal Reserve) rather than by the
OTS. Regulation by the Federal Reserve could subject Eastern to capital
requirements that are not currently applicable to the Company as a holding
company under OTS regulation and may result in statutory limitations on the type
of business activities in which the Company may engage at the holding company
level, which business activities currently are not restricted. The Company is
unable to predict whether such initiatives will result in enacted legislation
requiring a charter change and if so whether the charter change would
significantly impact the Company's operations.
Revenue generated by the Company is highly dependent on its
asset/liability management policies. While management has considerable
experience in asset/liability management, future changes in the general
direction of interest rates and the overall economy could negatively impact net
interest margin. Currently, a 100 basis point increase or decrease would not
impact net interest margin by more than ten percent.
The Company's operating results are negatively affected by its
nonperforming assets. Management strives to reduce nonperforming assets. (The
Company was unable to reduce nonperforming assets during the first quarter of
fiscal 1996 primarily because of increased delinquencies in the Bank's consumer
loan portfolio. Nonperforming assets began to decrease again during the second
quarter of fiscal 1996 and continued to decline through the fourth quarter of
fiscal 1996). Future changes in the national or local economy, fluctuations in
interest rates, and changes in the real estate market could limit or prevent
future nonperforming asset reduction and negatively impact results.
Operating results are affected by the adequacy of the Company's loan
loss reserve to cover loan losses. Management has considerable experience in
evaluating the loan portfolio; however, changes in the national or local economy
or fluctuations in interest rates could create the need for additional
provisions, thereby adversely affecting operating results.
Other significant recurrent sources of income for the Company include
gain on sale of loans, service fees on loans sold, and customer service fees.
Gain on sale of loans and service fees on loans sold are affected by market
conditions. Customer service fees are a function of customer banking activity.
If the Company were to fail to maintain or grow these sources of income, the
Company's operating results would be adversely affected.
Because of these and other factors, past financial performance should
not be considered an indicator of future performance. Investors should not
solely use historical trends to anticipate future results and should be aware
that the trading price of the Company's common stock may be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
general
3
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conditions in the thrift industry, changes in earnings estimates and
recommendations by analysts or other events.
Eastern Bancorp, Inc. Eastern Bancorp, Inc. ("Eastern" or the
"Company"), a Delaware corporation, was incorporated in April 1986 for the
purpose of becoming the savings and loan holding company of Vermont Federal
Bank, FSB (VFB), a federally chartered stock savings bank headquartered in
Williston, Vermont. On July 30, 1986, following approval by VFB's stockholders
and regulatory authorities, the Company became the holding company for VFB.
On August 31, 1989, the Company acquired Rockingham Bancorp
(Rockingham). Rockingham has been dissolved. On October 1, 1995, the Company
merged First Savings of New Hampshire (FS) with and into VFB to form one unified
bank under the name Vermont Federal Bank, FSB (the FS-VFB Merger), and moved the
primary operations of the holding company to Dover, New Hampshire. Rockingham,
no longer a bank holding company, has been dissolved.
All references herein to the "Bank" are to VFB and FS as one
consolidated entity following the FS-VFB Merger.
The Company is currently conducting business as a nondiversified
savings and loan holding company. At September 30, 1996, the Company's principal
assets on an unconsolidated basis consisted of the outstanding capital stock of
the Bank and $3.4 million of short-term investments and investment securities.
See note 18 of notes to consolidated financial statements. The Company also owns
Vermont Service Corporation (VSC), a real estate development company which it
purchased from VFB in December 1991. VSC and its subsidiary, Vermont East Coast
Company (VECC), are joint venture partners in the ownership of development
rights in a mobile home association known as "Williston Woods." At present, the
Company is not significantly engaged in operating business activities other than
management of its investments and operations through the Bank, VSC, and VECC.
See note 1 of notes to consolidated financial statements.
As a nondiversified savings and loan holding company, the Company is
subject to Office of Thrift Supervision (OTS) regulations, examinations,
supervision, and reporting requirements.
Eastern's executive offices are located at 537 Central Avenue, Dover,
New Hampshire 03820 (telephone 603-749-2150).
General Business of the Bank. The business of the Bank consists
primarily of attracting deposits from the general public and originating and
servicing first mortgage loans on one- to four-family homes and consumer loans
(including second mortgage home equity loans and lines of credit, mobile home
loans, motor vehicle loans and other types of personal loans). The Bank also
makes commercial real estate loans and some non-real estate commercial loans
which, in most instances, are secured by equipment, accounts receivable, and
inventory. The Bank has made and continues to make a limited number of first
mortgage loans on investment properties and leisure homes. The Bank also invests
in federal government and agency obligations and other investment securities
permitted by applicable law and regulations, including mortgage backed
securities.
The principal sources of funds for the Bank's lending and investment
activities are deposits, amortization and prepayment of loans, sales of loans,
and borrowings. The Bank's principal sources of income are interest and fees on
loans and investments, gains on sales of loans originated for sale, and fees on
deposit products and from servicing loans for other investors. The Bank's
principal
4
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expenses are interest paid on deposit accounts and borrowings, general and
administrative expenses (including losses from other real estate operations),
and provisions for loan losses.
The Bank is subject to comprehensive regulation, examination, and
supervision by the OTS and the FDIC. The Bank is also subject to additional
regulation by the Board of Governors of the Federal Reserve System (Federal
Reserve Board) relating to reserves required to be maintained against deposits
and certain other matters.
Market Area. The Bank's Vermont operations are headquartered in
Williston, Vermont. At September 30, 1996, the Bank operated six offices in
Chittenden County and nine offices elsewhere throughout the state. Based on the
most recent census data, approximately 80 percent of Vermont's population
resides in VFB's market areas.
At September 30, 1996, there were six FS offices in Rockingham County,
New Hampshire, one office in Merrimack County, New Hampshire, one office in
Belknap County, New Hampshire, and two offices in Strafford County, New
Hampshire.
Employees
At September 30, 1996, the Bank employed 409 full-time equivalent
employees (FTEs), and Eastern employed three and a half FTEs. Management
considers relations with its employees to be good. The Bank's employees are not
represented by any collective bargaining group. See note 12 of notes to
consolidated financial statements.
Asset/Liability Management
As a holding company for the Bank, Eastern does not engage in any
business activities, other than through the Bank, the management of its
investments, and VSC. The Bank's principal business consists of attracting
deposits from the general public and making residential mortgage and consumer
loans. The Bank's profitability depends in part on the amount of net interest
income, non-interest income or fees and miscellaneous income, non-interest
expense, and provisions for loan losses.
One of the principal factors in maintaining planned levels of net
interest income is the ability to anticipate fluctuations in future net interest
income because of changes in interest rates and to design effective strategies
to cope with such fluctuations. The balancing of the changes in income from
interest earning assets and the expense of interest bearing liabilities is done
through asset/liability management. The Bank primarily uses computer simulation
models to assess interest rate risk under different scenarios of rising and
falling interest rates. The Bank also reviews traditional GAP analysis (GAP).
GAP is the difference between interest earning assets and interest bearing
liabilities maturing or repricing within designated time periods. The Company
believes that computer simulation provides a more reliable estimation of future
net interest income than traditional GAP analysis because sophisticated models
can simulate changes in prepayment speeds on amortizing assets, and the effect
of lifetime and period interest rate caps on adjustable rate assets and
liabilities, and early withdrawal options on certificates of deposit under
varying interest rate assumptions. Asset/liability management strategies are
reviewed on an ongoing basis and revised based on changes in interest rate
levels and general economic conditions.
5
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The most significant components of the Company's asset management
program have involved emphasizing adjustable rate mortgage lending for the
Bank's own portfolio and the sale of long term fixed rate loans in the secondary
market. Cash flow from the amortization and prepayments on loans and investments
increased in 1996 compared to 1995 as rates declined during mid-year which
increased prepayment speeds. This increased the available funds for purchases of
portfolio investments, mortgage backed securities and loans.
The most significant components of the Company's liability management
program have involved the following: (1) promoting low cost non-interest and
interest bearing demand deposit accounts; (2) the use of early withdrawal
penalties on certificates of deposit to assist in maintaining maturity and cost
structure; and (3) extending the term on fixed-rate fixed-term liabilities to
match the increase in fixed-rate assets outlined in the asset management
components above.
Eastern's one-year GAP position has decreased from the previous year
due to decreases in consumer loans and investment and mortgage backed securities
maturing within one year and an increase in certificates of deposit maturing
within one year. These developments more than offset a decrease in borrowings
maturing within one year. For an institution such as Eastern with a positive
one-year GAP, the amount of income earned on its assets fluctuates more than the
cost of its liabilities in response to changes in the prevailing rates of
interest during the one-year period. Accordingly, in a rising interest rate
environment, institutions with a positive one-year GAP will experience a greater
increase in the yield on their assets than in the cost of funds of their
liabilities. Conversely, the cost of funds of institutions with a positive GAP
will decrease less than the yield on their assets in a falling interest rate
environment. Institutions with a negative one-year GAP face the opposite
situation. A rising interest rate environment imposes risks on institutions with
a negative GAP because more of their liabilities than their assets adjust during
the year as a result of the increase in interest rates. Accordingly, the
increase in the cost of funds on the liabilities of institutions with a negative
one-year GAP is greater than the increase in the yield on their assets.
Table 4, in Part II, Item 7, in Management's Discussion and Analysis of
Financial Condition and Results of Operations incorporated herein by reference
sets forth the estimated maturity/repricing structure of the Company's
interest-earning assets and interest-bearing liabilities at September 30, 1996.
Management believes the prepayment and attrition rates used in Table 4 to be
reasonable based on the Bank's experience.
Lending Activities
General. The Bank has traditionally concentrated its lending activities
primarily on the origination of conventional first mortgage loans for the
purchase, construction, or refinance of residential real property, and these
loans continue to be the primary focus of the Bank's lending activities. In
recent years, however, in order to improve their net interest margin, the Bank
placed additional emphasis on consumer lending activities. The Bank's consumer
loan portfolio includes second mortgage home equity loans and lines of credit,
mobile home loans, motor vehicle loans, and other types of personal loans. The
volume of commercial real estate loans and other commercial loans in the Bank's
portfolio has varied considerably over the last decade. Deterioration in local
economic conditions caused the Bank to curtail origination of such loans from
fiscal 1990 through fiscal 1992, but slight economic improvements allowed such
loan originations to increase thereafter.
The largest portion of the Bank's loans have been made to home buyers
on the security of residential dwellings. At September 30, 1996, the total loan
portfolio of the Bank amounted to
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$495.1 million (before allowance for loan losses and other deductions),
representing 57.0 percent of the Company's total assets. At that date, 54.0
percent of the total outstanding loans consisted of loans secured by first
mortgages on residential properties, 27.7 percent of the total outstanding loans
were consumer loans, and 18.3 percent were commercial and multi-family
residential loans.
Investment Activities
The Bank has authority to invest in various types of liquid assets,
including short-term U.S. Treasury obligations and securities of various federal
agencies, certificates of deposit at insured banks and savings institutions,
bankers' acceptances, and federal funds. Subject to various restrictions, the
Bank also may invest a portion of its assets in commercial paper, corporate debt
securities, and mutual funds whose assets conform to the investments that the
Bank is authorized to make directly.
The Company's investment activities have been principally in mortgage
backed and other marketable investment securities. See note 18 of notes to
consolidated financial statements.
Sources of Funds
General. Deposit accounts are the principal source of funds for use in
lending and other general business purposes. In addition to deposit accounts,
funds are derived from loan repayments, sales of loans, loan participations and
advances from the FHLB of Boston and from other borrowings, including proceeds
from securities sold under agreement to repurchase. Scheduled loan repayments
are a relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates, money market rates, and
general economic conditions. Borrowings may be used on a short-term basis to
compensate for reductions in normal sources of funds such as deposit inflows at
less than projected levels. They may also be used on a longer-term basis to
support expanded lending activities. Savings institutions have access to the
Federal Reserve Board's discount window under certain circumstances, but to date
this has not been a source of borrowing for the Bank.
In fiscal 1996, the Company's sources of funds consisted of interest on
its investment securities portfolio and dividends of $2.7 million received from
the Bank. See note 18 of notes to consolidated financial statements.
REGULATION
Savings and Loan Holding Company Regulation
General. Under the Home Owners Loan Act (HOLA), as amended by the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA),
savings and loan holding companies, including the Company, are subject to
regulation, supervision and examination by, and the reporting requirements of,
the OTS.
The HOLA prohibits a savings and loan holding company such as Eastern,
directly or indirectly, from (i) acquiring control of, or acquiring by merger or
purchase of assets, another savings institution or savings and loan holding
company without the prior written approval of the OTS; (ii) acquiring more than
5 percent of the issued and outstanding shares of voting stock of another
savings institution or savings and loan holding company without prior OTS
approval, with
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certain exceptions; or (iii) acquiring or retaining control of a financial
institution that does not have SAIF or BIF insurance of accounts. The HOLA
allows the OTS to approve transactions resulting in the creation of multiple
savings and loan holding companies controlling savings institutions located in
more than one state in both supervisory and non-supervisory transactions,
subject to the requirement that, in non-supervisory transactions, the law of the
state in which the savings institution to be acquired is located must expressly
authorize the proposed acquisition. As a result, the Company may, with the prior
approval of the OTS, acquire control of savings institutions located in states
other than Vermont and New Hampshire if the acquisition is expressly permitted
by the laws of the state in which the savings institution to be acquired is
located.
Transactions engaged in by a savings association or one of its
subsidiaries with affiliates of the savings institution are generally subject to
the restrictions contained in Sections 23A and 23B of the Federal Reserve Act.
Section 23A imposes both quantitative and qualitative restrictions on such
transactions, while Section 23B requires, among other things, that all such
transactions be on terms substantially the same, and at least as favorable to
the depository institution, as in a comparable transaction with an unaffiliated
party.
Restrictions on Activities of Savings and Loan Holding Companies. As a
savings and loan holding company, the Company is prohibited from engaging in any
activities other than (i) furnishing or providing management services for the
Bank; (ii) conducting an insurance agency or escrow business; (iii) holding,
managing, or liquidating assets owned or acquired from the Bank; (iv) holding or
managing properties used or occupied by the Bank; (v) acting as trustee under
deeds of trust; (vi) engaging in any other activity in which savings and loan
holding companies were authorized by regulation to engage as of March 5, 1987;
and (vii) engaging in any activity which the Federal Reserve Board by regulation
has determined to be permissible for bank holding companies under Section 4(c)
of the Bank Holding Company Act (BHCA) (unless the OTS, by regulation, prohibits
or limits any such activity for savings and loan holding companies). The
activities which the Federal Reserve Board by regulation has permitted for bank
holding companies under Section 4(c) of the BHCA generally consist of those
activities that the Federal Reserve Board has found to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto, and
include, among other things, various lending activities, certain real and
personal property leasing activities, certain securities brokerage activities,
acting as an investment or financial advisor subject to certain conditions, and
providing management consulting to depository institutions subject to certain
conditions. Prior OTS approval is required to commence any such activity.
The Company could be prohibited from engaging in any activity
(including those otherwise permitted under the HOLA) not allowed for bank
holding companies if the Bank failed to constitute a qualified thrift lender.
See "Regulation-Savings Institution Regulation - Qualified Thrift Lender
Requirement."
Possible Liability for Obligations of Subsidiaries. The Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA) requires any company that
controls a savings institution that becomes undercapitalized, in connection with
the submission of a capital restoration plan by the savings institution, to
guarantee that the institution will comply with the plan and to provide
appropriate assurances of performance. The aggregate liability of any such
controlling company under such guaranty is limited to the lesser of (i) 5
percent of the savings institution's assets at the time it becomes
undercapitalized, or (ii) the amount necessary to bring the savings institution
into capital compliance as of the time the institution fails to comply with the
terms of its capital plan.
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Savings Institution Regulation
General. As a SAIF-insured savings institution, the Bank is subject to
supervision and regulation by the OTS. Under OTS regulations, the Bank is
required to obtain audits by independent accountants and to be examined
periodically by the OTS. Examinations must be conducted no less frequently than
every 12 months. The Bank is subject to assessments by the OTS and FDIC to cover
the costs of such examinations. The OTS may revalue assets of the Bank, based
upon appraisals, and require the establishment of specific reserves in amounts
equal to the difference between such revaluation and the book value of the
assets. The OTS also is authorized to promulgate regulations to ensure the safe
and sound operations of savings institutions and may impose various requirements
and restrictions on the activities of savings institutions. FIRREA requires that
the regulations and policies of the OTS for the safe and sound operations of
savings institutions be no less stringent than those established by the Office
of the Comptroller of the Currency (OCC) for national banks.
Capital Requirements. The capital standards established by the OTS for
savings institutions must generally be no less stringent than those applicable
to national banks. The OTS has adopted capital standards under which savings
associations must maintain (i) "core capital" in an amount not less than 3
percent of adjusted total assets, (ii) "tangible capital" in an amount not less
than 1.5 percent of total adjusted assets, and (iii) risk-based capital equal to
8.0 percent of risk-weighted assets.
Under OTS regulations, "core capital" includes common stockholders'
equity, noncumulative perpetual preferred stock and related surplus, and
minority interests in the equity accounts of consolidated subsidiaries, less
intangible assets and the lesser of the fair market value or 90 percent of the
fair market value of readily marketable PMSRs, subject to certain conditions.
The term "tangible capital" is defined as core capital minus intangible assets,
provided, however, that savings institutions may include 90 percent of the fair
market value of readily marketable PMSRs as tangible capital, subject to certain
conditions. Total capital, for purposes of the risk-based capital requirement,
equals the sum of core capital plus supplementary capital (which includes, among
other items, perpetual preferred stock not counted as core capital, limited life
preferred stock, subordinated debt, and general loan and lease loss allowances
up to 1.25 percent of risk-weighted assets less certain deductions). The amount
of supplementary capital that may be counted towards satisfaction of the total
capital requirement may not exceed 100 percent of core capital, and OTS
regulations require the maintenance of a minimum ratio of core capital to total
risk-weighted assets of 4.0 percent. In determining total risk-weighted assets
for purposes of the risk-based requirement, (i) each off-balance sheet asset
must be converted to its on-balance sheet credit equivalent amount by
multiplying the face amount of each such item by a credit conversion factor
ranging from 0 percent to 100 percent (depending upon the nature of the asset),
(ii) the credit equivalent amount of each off- balance sheet asset (after giving
effect to the calculation in clause (i) above) and the book value of each
on-balance sheet asset must be multiplied by a risk factor ranging from 0
percent to 100 percent (again depending upon the nature of the asset), and (iii)
the resulting amounts are added together with total assets and constitute total
risk-weighted assets.
In determining compliance with the capital standards, a savings
institution must deduct from core capital its entire investment in and loans to
any subsidiary engaged as principal in activities not permissible for a national
bank, other than subsidiaries (i) engaged in such non-permissible activities
solely as agent for their customers; (ii) engaged in mortgage banking
activities, or (iii) that are themselves savings institutions, or companies the
only investment of which is another savings institution acquired prior to May 1,
1989.
9
<PAGE>
At September 30, 1996, the Bank exceeded required minimum levels of
regulatory capital. See "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Stockholders'
Equity," and note 11 of notes to consolidated financial statements.
FDICIA defines an institution as either well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, or critically
undercapitalized, imposing progressively more scrutiny and restrictions on an
institution with less favorable capitalizations. The definitions are based on an
institution's ability to meet all of the capitalization requirements imposed on
the institution by its primary federal regulator, in the case of the Bank, the
OTS. Well capitalized institutions and adequately capitalized institutions are
defined to be institutions which exceed, or simply meet, all relevant capital
requirements, respectively. Undercapitalized and significantly undercapitalized
are defined to be institutions which fail to meet, or significantly fail to
meet, all such capital requirements, respectively. The level of capital below
which an institution is deemed to be critically undercapitalized may not be less
than 2 percent of total assets nor more than 65 percent of the required minimum
level of capital under the leverage limit. The Bank was defined as well
capitalized as of September 30, 1996.
The OTS has promulgated regulations under FDICIA requiring savings
associations classified as adequately capitalized to have (i) a ratio of total
capital to risk-weighted assets of 8.0 percent or greater, (ii) a ratio of core
capital to risk-weighted assets of 4.0 percent or greater, and (iii) a ratio of
core capital to adjusted total assets of either (A) 4.0 percent or greater, or
(B) 3.0 percent or greater if the savings association is rated composite 1 under
the CAMEL rating system in the most recent examination of the savings
association. Savings associations which fail the foregoing capitalization
requirements are subject to prompt corrective action, as described below.
Capital requirements higher than the generally applicable minimum institution
requirements may be established for a particular savings institution if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances. The management of the Bank does not anticipate
that the prompt corrective action required under the FDICIA for undercapitalized
institutions will have a material impact upon the operations of the Bank as long
as current capital levels are maintained.
The OTS has published a description of the methodologies used in
calculating an interest rate risk component for the risk-based capital
requirement. FDICIA requires that those methodologies take adequate account of
(i) interest rate risk, (ii) concentration of credit risk, (iii) the risks of
nontraditional activities, and (iv) the actual performance and expected risk of
loss on multi-family mortgages.
Any insured depository institution which falls below the minimum
capital standards will be subject to numerous restrictions and possibly severe
administrative sanctions, including closure.
Qualified Thrift Lender Requirement. In order for the Bank to exercise
the powers granted to federally chartered savings institutions and maintain full
access to FHLB advances, it must constitute a "qualified thrift lender" (QTL).
This requires its qualified thrift investments to continue to equal or exceed 65
percent of portfolio assets on a monthly average basis in 9 out of every 12
months. QTL status is determined monthly for the preceding 12-month period.
Qualified thrift investments generally consist of (i) various housing related
loans and investments (such as residential construction and mortgage loans, home
improvement loans, mobile home loans, home equity loans and mortgage backed
securities), (ii) certain obligations of the FSLIC, the FDIC, the
10
<PAGE>
FSLIC Resolution Fund, and the Resolution Trust Corporation (RTC) (for limited
periods of time), and (iii) shares of stock issued by any Federal Home Loan
Bank, the Federal Home Loan Mortgage Corporation, or the Federal National
Mortgage Corporation (shares of stock of the latter two entities not to exceed
20 percent of an association's portfolio assets). Other types of housing related
assets, together with certain consumer loans, may be categorized as qualified
thrift investments in an amount not to exceed 20 percent in the aggregate of
portfolio assets. For purposes of the QTL test, the term "portfolio assets"
means the savings institution's total assets minus goodwill and other intangible
assets, the value of property used by the savings institution to conduct its
business, and liquid assets held by the savings institution in an amount up to
20 percent of its total assets.
OTS regulations provide that any savings institution that fails to
constitute a QTL must either convert to a bank charter, other than a savings
bank charter (but must retain its SAIF insurance until its conversion to BIF
membership), or limit its future investments and activities (including branching
and payments of dividends) to those permitted for both savings institutions and
national banks. Additionally, any such savings institution that does not convert
to a bank charter will be ineligible to receive further FHLB advances and,
beginning three years after the loss of QTL status, will be required to repay
all outstanding FHLB advances and dispose of or discontinue any preexisting
investment or activities not permitted for both savings institutions and
national banks. Further, within one year of the loss of QTL status, the holding
company of a savings institution that does not convert to a bank charter must
register as a bank holding company and will be subject to all statutes
applicable to bank holding companies. Management of the Bank does not anticipate
any difficulty in meeting the 65 percent QTL test under current conditions.
As a result in the Deposit Insurance Funds Act of 1996 the Secretary of
the Treasury is to review recommendations in 1997 for the establishment of a
common charter for banks and savings associations. Accordingly, the Bank may be
required to convert its federal savings bank charter to either a national bank
charter, a state depository institution charter, or a newly designed charter.
The Company may also become regulated at the holding company level by the Board
of Governors of the Federal Reserve System (Federal Reserve) rather than by the
OTS. Regulation by the Federal Reserve could subject Eastern to capital
requirements that are not currently applicable to the Company as a holding
company under OTS regulation and may result in statutory limitations on the type
of business activities in which the Company may engage at the holding company
level, which business activities currently are not restricted. The Company is
unable to predict whether such initiatives will result in enacted legislation
requiring a charter change and if so whether the charter change would
significantly impact the Company's operations.
Liquidity. Savings institutions are required to maintain an average
daily balance of liquid assets (including cash, certain time deposits, certain
bankers' acceptances, certain corporate debt securities and highly rated
commercial paper, securities of certain mutual funds and specified United States
government, state or federal agency obligations) equal to a monthly average of
not less than a specified percentage of the average daily balance of the savings
institution's net withdrawable deposits plus short-term borrowings. Under HOLA,
this liquidity requirement may be changed from time to time by the OTS to any
amount within the range of 4 percent to 10 percent depending upon economic
conditions and the deposit flows of member institutions. The liquidity
requirement currently is 5 percent. Savings institutions also are required to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1 percent) of the total of the average daily balance of
its net withdrawable deposits and short-term borrowings. At September 30, 1996,
the Bank was in compliance with these liquidity requirements.
11
<PAGE>
Loans to One Borrower Limitations. The HOLA requires savings
institutions to comply with the loans to one borrower limitations applicable to
national banks, subject to various exceptions and additional provisions for the
financing of sales of OREO and other items. In general, national banks may make
loans to one borrower in amounts up to 15 percent of the bank's unimpaired
capital and surplus, plus an additional 10 percent of capital and surplus for
loans secured by readily marketable collateral. At September 30, 1996, the Bank
had loans to one borrower limits of approximately $8.9 million.
Commercial Real Property Loans. The HOLA limits the aggregate amount of
commercial real estate loans that a federal savings institution may make to an
amount not in excess of 400 percent of the savings institution's capital,
subject to the discretion of the OTS, but does not require divestiture of loans
made prior to 1989.
Limitation on Capital Distributions. OTS regulations limiting capital
distributions by savings associations (including dividends, stock repurchases
and cash-out mergers) classify every savings association as a tier 1
institution, a tier 2 institution, or a tier 3 institution, depending on its
level of regulatory capital both before and after giving effect to a proposed
capital distribution. A tier 1 institution (i.e., one that both before and after
a proposed capital distribution has net capital equal to or in excess of its
fully phased-in regulatory capital requirement applicable as of January 1, 1995)
may, subject to any otherwise applicable statutory or regulatory requirements or
agreements entered into with the regulators, make capital distributions in any
calendar year up to the higher of (i) 75 percent of its net income over the most
recent four quarter period or (ii) 100 percent of its net income to date during
the calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (i.e., the percentage by which the association's
capital-to-assets ratio exceeds the ratio of its fully phased-in capital
requirement to its assets) at the beginning of the calendar year. No regulatory
approval of the capital distribution is required, but prior notice must be given
to the OTS. For purposes of this regulation, as of September 30, 1996, the Bank
was a tier 1 institution.
Limitation on Equity Risk Investments. Under applicable regulations,
savings institutions are generally prohibited from investing directly in equity
securities and real estate (other than that used for offices and related
facilities or acquired through, or in lieu of, foreclosure or on which a
contract purchaser has defaulted). In addition, OTS regulations limit the
aggregate investment by savings institutions in certain equity risk investments,
including equity securities, real estate, service corporations and operating
subsidiaries and loans for the purchase of land and construction loans made
after February 27, 1987 on non-residential properties with loan-to-value ratios
exceeding 80 percent. At September 30, 1996, the Bank was in compliance with the
requirements of the equity risk investment limitations.
12
<PAGE>
Market for Registrant's Common Stock and Related Stockholder Matters
From August 4, 1986 to April 30, 1995, the common stock of the Company
traded on the Nasdaq National Market under the symbol "VFBK." Effective May 1,
1995, the Company changed its Nasdaq National Market symbol to "EBCP."
The following table sets forth market price information (last reported
sales price) for the common stock of the Company for the periods indicated. All
per share information has been adjusted to reflect the Company's June 19, 1996
three-for-two stock split paid to stockholders of record on June 5, 1996.
<TABLE>
<CAPTION>
Cash dividend Stock price Stock price
Fiscal Year paid high low
<S> <C> <C> <C>
1996:
Fourth quarter ended September 30, 1996 $.14 $22.25 $16.00
Third quarter ended June 30, 1996 .12 17.67 15.17
Second quarter ended March 31, 1996 .12 17.50 15.67
First quarter ended December 31, 1995 .11 19.67 14.67
1995:
Fourth quarter ended September 30, 1995 $.08 $16.00 $14.17
Third quarter ended June 30, 1995 .07 15.00 12.33
Second quarter ended March 31, 1995 .07 14.33 12.50
First quarter ended December 31, 1994 .03 14.83 10.83
1994:
Fourth quarter ended September 30, 1994 $.03 $16.33 $13.33
Third quarter ended June 30, 1994 .03 15.67 10.25
Second quarter ended March 31, 1994 .03 12.33 10.42
First quarter ended December 31, 1993 .02 12.50 9.50
</TABLE>
Payment of cash dividends in future periods is subject to, among other
things, Company earnings, tax and regulatory considerations, and certain
contractual restrictions in the Merger Agreement.
13
<PAGE>
Selected Financial Data
The following tables summarize certain selected consolidated financial
data of the Company at the dates or for the periods indicated. This information
should be read in conjunction with the consolidated financial statements and
notes thereto. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Financial Condition
and Other Data: At September 30,
(Dollars in thousands, except per share amounts)
1996 19951994 1993 1992 (a)
<S> <C> <C> <C> <C> <C>
Total assets $868,678 $846,085 $819,236 $776,504 $739,263
Investment and mortgage
backed securities 305,701 319,056 325,612 283,494 243,861
FHLB stock 9,283 9,283 8,923 7,514 7,411
Net loans 488,786 453,992 418,859(b) 417,302(b) 422,574(b)
Allowance for loan losses 2,858 3,622 3,718 4,722 4,802
Nonperforming assets 12,004 16,784 14,569 25,559 27,304
Excess of cost over net
assets acquired 3,528 3,908 4,290 4,670 5,111
Deposits 641,286 616,350 584,389 571,954 573,183
Borrowings 153,909 161,882 171,988 142,874 109,743
Stockholders' equity 63,580 60,983 57,203 54,683 49,968
Stockholders' equity per share 17.41 17.07 16.15 15.66 14.49
Number of banking offices 25 23 23 23 23
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
Operating Data:
1996 1995 1994 1993 1992 (a)
---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C>
Interest income 61,273 $60,098 $51,546 $49,066 $49,898
Interest expense 32,340 32,218 25,613 25,881 30,427
------ ------ ------ ------ ------
Net interest income 28,933 27,880 25,933 23,185 19,471
Provision for loan losses 895 1,822 797 1,330 2,118
Gain (loss) on sale of
investment and mortgage backed
securities net 808 -- 443 (40) 295
Other non-interest income 10,465 10,017 7,579 8,248 8,050
Other real estate owned
operations expense 1,358 3,054 2,726 4,122 4,349
Other non-interest expense 32,594 26,479 24,466 22,349 19,819
------ ------ ------ ------ ------
Income before taxes and
accounting change 5,359 6,542 5,966 3,592 1,530
Federal and state tax expense 2,055 2,347 2,307 878 513
Cumulative effect of
accounting change -- -- -- 1,000 --
---------- ---------- ---------- ----- ----------
Net income $3,304 $4,195 $3,659 $3,714 $1,017
====== ====== ====== ====== ======
14
<PAGE>
Years Ended September 30,
Operating Data:
(continued)
Net income per common
and common equivalent
share before cumulative
effect of accounting change $ 0.87 $1.13 $1.00 $0.77 $0.29
Net income per common
and common equivalent share 0.87 1.13 1.00 1.05 0.29
Cash dividends paid per share (c) 0.49 0.24 0.10 0.07 0.05
Dividend payout ratio 56.32% 21.30% 10.00% 6.96% 18.18%
Increase (decrease) in deposits $24,936 $31,961 $12,435 $(1,229) $103,143
Loans originated:
Mortgage $163,255 $95,195 $177,088 $198,033 $182,827
Consumer 38,219 32,560 52,702 45,527 40,799
Commercial 13,585 34,931 16,524 12,243 6,531
Total loans originated
and purchased 268,131 174,612 247,933 279,066 244,452
Loans sold or securitized
and sold 139,339 61,021 148,767 196,076 160,506
Loans serviced for others 647,653 563,021 666,732 617,984 438,077
Loans purchased or acquired 53,072 11,926 1,619 23,263 70,497
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
Significant Statistical
Data:
1996 1995 1994 1993 1992 (a)
---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C>
Combined yield on loan,
investment and mortgage
backed security portfolio 7.94% 7.83% 7.07% 7.18% 8.46%
Total cost of funds 4.54 4.49 3.70 3.93 5.34
Interest rate spread(d) 3.40 3.34 3.37 3.25 3.12
Net interest margin(e) 3.75 3.63 3.55 3.40 3.30
Return on average assets 0.40 0.50 0.46 0.49 0.16
Return on average equity 5.20 6.95 6.60 7.15 2.06
Average equity to average
assets 7.64 7.26 6.94 6.89 s7.54
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Regulatory Capital of Subsidiary
At September 30, 1996
(Dollars in thousands)
Vermont Federal Bank ACTUAL REQUIRED EXCESS
- ---------------------------------------- -------------------------------------- ------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Core $56,152 6.5% $25,819 3.0% $30,333
Tangible 56,152 6.5 12,909 1.5 43,243
Risk-based 58,929 12.3 38,276 8.0 20,653
(a) All 1992 information includes results of acquisitions by FS during
fiscal 1992. See Item 1, General, under the heading "Rockingham Bancorp
and First Savings of New Hampshire."
(b) In-substance foreclosure loans were not reclassified to loans in
accordance with SFAS No. 114 because of the lack of appropriate detail
to make required reclassifications.
(c) The quarterly cash dividend paid to stockholders was increased from
$0.01 per share to $0.02 per share in January 1993, increased to $0.03
per share in January 1994, increased to $0.07 per share in January
1995, increased to $0.08 per share in July 1995, increased to $0.11 per
share in November 1995, increased to $0.12 per share in January 1996,
and increased to $0.14 per share in July 1996
(d) Difference between combined yield on loan, investment and mortgage
backed securities portfolios, and total cost of funds.
(e) Net interest income divided by average earning assets.
16
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Management's discussion and analysis should be read in conjunction with
the consolidated financial statements, the notes thereto and other financial and
statistical information contained in this Annual Report .
During fiscal 1996, the Company operated as the nondiversified unitary
savings and loan holding company of the Bank. The Company also owns VSC, a real
estate development company, which together with its subsidiary company, VECC, is
a joint venture partner in the ownership of development rights in a mobile home
development known as "Williston Woods."
The Company conducted its fiscal 1996 business primarily through the
Bank, which provided retail banking services to customers in its geographic
regions. The Bank operated fifteen branch locations in Vermont, including six in
Chittenden County, which is the state's most populous county, and operated ten
branch locations in New Hampshire, seven of which are in the New Hampshire
seacoast region. The Bank offered a variety of checking, savings, and
certificate of deposit products to meet its customers' deposit needs. The Bank
used such deposits to fund loans and other investment purchases. It used
borrowings when deposit inflows were not sufficient to fund these asset
acquisitions. Primary lending activities were residential mortgage and consumer
lending, including second mortgage and mobile home loans. The Bank originated
only a limited number of commercial loans because of the lack of quality
commercial loan demand in the lending areas.
On November 13, 1996, the Company entered into the Merger Agreement
together with the Bank and VFSC. Pursuant to the merger described in the Merger
Agreement, the Company will merge with and into VFSC and the Bank will become a
wholly-owned subsidiary of VFSC. Consummation of the Merger is conditioned,
among other things, upon stockholder approval and regulatory approval. The
Merger is described in more detail in Eastern's Current Report on Form 8-K dated
November 21, 1996.
All per share information has been adjusted to reflect the Company's
June 19, 1996 three-for-two stock split paid to stockholders of record on June
5, 1996.
On October 1, 1995, the Company merged its two subsidiary banks, First
Savings of New Hampshire and Vermont Federal Bank, FSB, to form one unified
bank, Vermont Federal Bank, FSB. The New Hampshire branches retained the name of
First Savings of New Hampshire, operating as a division of Vermont Federal Bank,
FSB.
Certain prior year financial disclosures contained herein refer to VFB
and FS as the "Banks," which operated independently during fiscal 1995.
Disclosures that refer to operations during fiscal 1996 and subsequently refer
to the Banks as one consolidated entity (the Bank).
Results of Operations
Comparison of years ended September 30, 1996 and 1995
The Company's results of operations have varied significantly from year
to year, for the reasons set below. Prior years' results should not be
considered as predictors of results in
17
<PAGE>
subsequent years. Notwithstanding the foregoing, management does not expect that
certain provisions of the Merger Agreement, which require the Company and the
Bank to operate in the ordinary course of business consistent with past practice
and to observe certain restrictions on capital expenditures, dividends, and
other similar matters, to have a material adverse effect on the future results
of operation.
General
The Company had net income during fiscal 1996 of $3.3 million or $0.87
per share, compared with net income for fiscal 1995 of $4.2 million or $1.13 per
share. The decrease in fiscal 1996 net income compared to fiscal 1995 net income
resulted primarily from a non-recurring charge of $3.8 million (pre-tax) for the
SAIF special assessment by the FDIC. This special assessment was mandated by
legislation signed into law on September 30, 1996, to recapitalize the SAIF
Fund. Without giving effect to this one-time assessment, earnings for fiscal
year 1996 would have been $5.7 million, or $1.50 per share. Return on assets
would have been 0.69 percent and return on equity would have been 9.01 percent
without the SAIF assessment. Significantly offsetting the decrease in net income
due to this assessment was a $0.9 million decrease in the provision for the loan
losses, a $0.8 million gain on sale of investment and mortgage backed
securities, and a $1.7 million decrease in OREO expense.
Table 1
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30, 1996 1995 1994
---- ---- ----
Interest Rate Interest Rate Interest Rate
Average income/ earned/ Average income/ earned/ Average income/ earned/
balance expense paid balance expense paid balance expense paid
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans (a) $463,230 $ 41,561 8.97% $435,058 $ 38,549 8.86% $414,064 $ 32,856 7.94%
Investments and mortgage-
backed securities(b) 308,160 19,712 6.40 333,214 21,549 6.48 315,525 18,690 5.93
------- ------ ------- ------ ------- ------
Total interest-earning assets 771,390 61,273 7.94 768,272 60,098 7.83 729,589 51,546 7.07
Other real estate owned 4,351 10,313 16,702
Non-interest-earning assets 56,464 52,667 52,659
------ ------ ------
Total Assets $832,205 $831,252 $798,950
-------- -------- --------
Liabilities and
Stockholders' Equity
Savings $116,429 3,064 2.63 $126,794 3,384 2.67 $139,413 3,736 2.68
Interest-bearing checking 142,049 3,527 2.48 130,003 3,485 2.68 131,013 2,919 2.23
Time deposits 316,317 17,525 5.54 285,857 14,798 5.18 262,987 11,097 4.22
Borrowings 137,292 8,224 5.99 175,523 10,551 6.01 158,397 7,861 4.96
------- ----- ------- ------ ------- -----
Total interest-earning
liabilities 712,087 32,340 4.54 718,177 32,218 4.49 691,180 25,613 3.70
------- ------ ------- ------ ------- ------
Non-interest bearing
deposits 51,031 47,219 44,895
Other non-interest bearing
liabilities 5,514 5,469 6,825
------- ------- -------
Total liabilities 768,632 770,865 743,530
Stockholders' equity 63,573 60,387 55,420
------ ------ ------
Total liabilities and
stockholders' equity $832,205 $831,252 $798,950
-------- -------- --------
Net interest income $28,933 $27,880 $25,933
------- ------- -------
Net interest spread (c) 3.40 3.34 3.37
Net interest margin (d) 3.75 3.63 3.55
18
<PAGE>
(a) Includes nonperforming loans and loan fees considered an adjustment of yield
but does not include the undisbursed portion of loans in process.
(b) The rate earned on investment and mortgage backed securities reflects
tax-exempt income on a fully taxable equivalent basis.
(c) Average yield on all interest-earning assets during the period less average
cost of all interest-bearing liabilities.
(d) Net interest income divided by average interest-earning assets.
</TABLE>
Net Interest Income
Net interest income increased $1.0 million in fiscal 1996 to $28.9
million from $27.9 million in fiscal 1995. A $1.1 million increase in interest
income on interest earning assets was partially offset by the $122,000 increase
in interest expense on deposits and borrowings. Items affecting net interest
income were interest rates, the ability of the Company's assets and liabilities
to react to changes in interest rates, and the balance and mix of the Company's
financial assets and liabilities. See Tables 1 through 4 for average balance,
average rate, and repricing information.
Interest income from loans increased $3.0 million during fiscal 1996.
Higher interest rates, during the second half of fiscal 1996, resulted in a 11
basis point increase in the average yield on the loan portfolios for the entire
year. The average yield increased from 8.86 percent in fiscal 1995 to 8.97
percent in fiscal 1996 as adjustable-rate mortgages repriced at higher rates.
Fixed-rate mortgages, priced principally by reference to long-term interest
rates, originated at interest rates between 6.5 and 9.5 percent during fiscal
1996. Adjustable rate mortgages, priced by reference to short term indices such
as the U.S. Treasury constant one-year maturity indexes, increased their yields
as they repriced to higher interest rates. This matched the overall increase in
their respective indexes. The Company expects that if interest rates in fiscal
1997 remain unchanged from fiscal 1996 rates, loan yields attributable to
adjustable-rate mortgages will remain relatively stable. If interest rates fall,
loan refinancing activity should increase and loan yields should fall due to
repayment of higher rate loans as well as repricing of variable rate loans. If
interest rates rise, loan yields should increase due to repricing of variable
rate loans.
Investment interest income decreased $1.8 million to $19.7 million
during fiscal 1996 from $21.5 million during fiscal 1995, due primarily to a
decrease in average balances of $25.1 million and a decrease in the weighted
average yield of 8 basis points. The Company does not invest a significant
amount in derivative securities or similar type securities. At September 30,
1996, the Company's mortgage backed securities included $13.2 million of
collateralized mortgage obligations (CMOs). The Company considers these bonds
relatively low risk derivative securities because the Company expects them to
react to changes in interest rates in a way that is not materially different
from other fixed rate mortgage backed securities in the held-to-maturity
portfolio. The Company expects that if interest rates remain unchanged, the
yield on investment and mortgage backed securities should remain relatively
stable. If interest rates decline, portfolio yields should fall due to increases
in prepayment speeds and premium amortization. If interest rates increase,
reinvestment of principal repayments should lead to higher portfolio yields.
19
<PAGE>
Table 2
<TABLE>
<CAPTION>
COMPONENTS OF INVESTMENT INCOME
(As a percentage of average investment Fiscal years ended September 30,
and mortgage backed securities)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income 6.58% 6.67% 6.45%
(Premium amortization), discount (0.18) (0.19) (0.52)
accretion, net
Total investment income 6.40% 6.48% 5.93%
</TABLE>
Interest expense on deposits increased $2.4 million during fiscal 1996
compared to fiscal 1995. The weighted average rate on interest-bearing deposits
increased 21 basis point to 4.20 percent correlating to the increase in market
interest rates. At September 30, 1996, non-interest bearing deposits were 8.73
percent of total deposits, and interest-bearing NOW accounts were 12.51 percent
of total deposits. These deposits provide the Company with a source of low-cost
funds due their insensitivity to changes in interest rates.
20
<PAGE>
Table 3
RATE/VOLUME ANALYSIS
The following table reconciles changes in interest income and interest
expense of the Company for the periods indicated due to changes in average
balances, rates, or a combination of both. Loan fees not considered as an
adjustment to yield have been excluded from the analysis.
<TABLE>
<CAPTION>
Years ended September 30,
1996 v. 1995 Increase (decrease) 1995 v. 1994 Increase (decrease)
--------- -- ---- -------- -------------------- --------- -- ---- -------- ----------
Average Average
Average Average rate and Average Average rate and
(Dollars in thousands) rate balance balance Total rate balance balance Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loan portfolio $484 $2,497 $31 $3,012 $3,833 $1,666 $194 $5,693
Investment and
mortgage backed
securities portfolios (234) (1,621) 18 (1,837) 1,715 1,048 96 2,859
- ---------------------------------------------------------------------------------------------------------------------------------
Total 250 876 49 1,175 5,548 2,714 290 8,552
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposit accounts 1,100 1,284 65 2,449 3,096 630 189 3,915
Borrowings (36) (2,299) 8 (2,327) 1,660 850 180 2,690
- ---------------------------------------------------------------------------------------------------------------------------------
Total 1,064 (1,015) 73 122 4,756 1,480 369 6,605
- ---------------------------------------------------------------------------------------------------------------------------------
Net change in net
interest income $(814) $1,891 $(24) $1,053 $792 $1,234 $(79) $1,947
</TABLE>
Interest expense on borrowed funds decreased $2.3 million to $8.2
million during fiscal 1996 from $10.5 million during fiscal 1995. The decrease
resulted primarily from a decrease in the average balances of borrowed funds
from $175.5 million for fiscal 1995 to $137.3 million for fiscal 1996. The Bank
used borrowed funds for loan originations and for investment and mortgage backed
securities purchases. Interest expense on borrowed funds will change in direct
correlation to interest rate changes due to the short duration of the borrowed
funds portfolio.
The Company's one-year GAP decreased from the previous year due to
increases in certificates of deposit maturing within one year and a decrease in
investment and mortgage backed securities and consumer loans maturing within one
year. These changes offset an increase in mortgage loans and a decrease in
borrowings maturing within one year. With a positive one-year GAP, the amount of
income earned on assets fluctuates more than the cost of liabilities in response
to changes in the prevailing rates of interest during the one-year period.
Accordingly, in a rising interest rate environment, financial institutions with
a positive one-year GAP will experience greater increase in the yield on assets
than in the cost of funds. Conversely, the cost of funds of financial
institutions with a positive one-year GAP will decrease less than the yield on
assets in a falling interest rate enviornment.
21
<PAGE>
Financial institutions with a negative one-year GAP face the opposite situation.
While management has considerable experience in asset/liability management,
future changes in the general direction of interest rates and the overall
economy could negatively impact net interest margin. See Table 4 for further
information regarding maturity and rate sensitivity.
22
<PAGE>
Table 4
MATURITY AND RATE SENSITIVITY
The following table sets forth the Company's maturity and repricing
information for the periods indicated.
<TABLE>
<CAPTION>
At September 30,1996
Percent of Within 1 - 5 5 - 10 10 - 20 Over
(Dollars in thousands) Amount Total 1 year years years years 20 years
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing Assets
Mortgage loans
Short term and variable $190,736 23.55% $176,442 $ 14,294 $ ---- $ ---- $ ---
rate
Long term fixed rate 76,936 9.50 18,186 39,439 15,270 3,854 187
Consumer loans 136,927 16.90 94,437 39,922 95 ---- 2,473
Commercial loans 90,486 11.17 71,880 9,784 3,833 1,296 3,693
Investment and mortgage backed
securities 314,984 38.88 105,709 105,016 70,970 33,166 123
------- ----- ------- ------- ------ ------ ---
Total rate-sensitive $810,069 100.00% $466,654 $208,455 $ 90,168 $ 38,316 $ 6,476
======= ======= ======= ======= = ====== ====== =====
assets
Interest-bearing Liabilities
and Non-interest-
bearing Deposits
Deposits
NOW and other demand
accounts $136,195 17.13% $ 29,397 $ 64,926 $ 27,867 $ 12,263 $ 1,742
Money market accounts 67,148 8.44 21,038 35,854 8,689 1,567 ----
Passbook accounts 115,466 14.52 16,177 45,004 28,760 19,882 5,643
Certificate accounts 322,477 40.56 248,353 74,124 ---- ---- ----
Borrowings
FHLB and securities sold
under
agreement to repurchase 153,636 19.32 120,800 32,836 ---- ---- ----
Capital Lease Obligation 273 0.03 144 129 ---- ---- ----
--- ---- --- --- ---- ---- ----
Total rate-sensitive
liabilities $795,195 100.00% $435,909 $252,873 $ 65,316 $ 33,712 $ 7,385
======= ======= ======= ======= ====== ====== =====
Interest sensitivity GAP $ 30,745 $(44,418) $ 24,852 $ 4,604 $ (909)
Cumulative GAP 30,745 (13,673) 11,179 15,783 14,874
as a percentage of assets 3.54% (1.57%) 1.29% 1.82% 1.71%
----- ------- ----- ----- -----
September 30, 1995
Cumulative GAP $ 46,121 $ 9,187 $ 8,131 $ 15,062 $ 9,614
as a percentage of assets 5.45% (1.09)% 0.96% 1.78% 1.14%
----- ------- ----- ----- -----
September 30, 1994 (a)
Cumulative GAP $ 82,242 $(26,720) $(21,972) $ 10,394 $ 4,588
as a percentage of assets 10.04% (3.26)% (2.68)% 1.27% 0.56%
====== ======= ======= ===== =====
</TABLE>
23
<PAGE>
The maturity and repricing information is derived from the OTS Thrift Financial
Report, Schedule CMR. Different prepayment rates are applied to loans and
mortgage backed securities based on their interest rate to simulate cash flows.
Annual prepayment rates range from 2.0 percent on the lowest coupon rates to
40.0 percent on the highest coupons. Attrition rates are applied to deposit
accounts that can reprice immediately or are payable on demand. These accounts
include savings accounts, NOW and DDA accounts, and money market accounts.
Attrition rates are used to estimate the cash outflows on these accounts. Rates
used were derived from estimation formulas provided by the OTS and approximate
the Bank's internally estimated rates. (a) Data has not been restated to reflect
the adoption of SFAS No. 114 due to lack of sufficient detail to make
appropriate reclassifications.
Provision for Loan Losses
During fiscal 1996, the Bank made provisions to the loan loss reserve
of $895,000 compared to $1.8 million in fiscal 1995. The Bank establishes loan
loss reserves based on a systematic and detailed analysis of all loans. Among
several criteria considered in this analysis are the underlying market values of
collateral, historic loan loss experience, local economic conditions, and the
level of classified loans. The Bank analyzes its classified loans (including
nonperforming loans) on a periodic basis and provides loan loss reserves in
accordance with the level, quality, and collateral value of these loans. In
addition, historic loan loss experience, adjusted for the expected impact of
changing market values, is used to assist in determining total loan loss reserve
requirements. At September 30, 1996, the Bank had classified loans (loans rated
as "substandard," "doubtful," or "loss") totaling $14.9 million, compared to
$18.0 million at September 30, 1995. Additionally, the Bank had $2.0 million of
loans identified as "special mention," as compared with $2.9 million at
September 30, 1995. Of the $14.9 million in classified loans at September 30,
1996, $7.9 million were nonperforming (non-accruing loans including loans 90
days or more past due) and the balance of $7.0 million were performing. Total
nonperforming loans of $7.9 million at September 30, 1996, represented a
decrease of $3.1 million from September 30, 1995. The decrease was primarily due
to a decrease in nonperforming commercial loans which was partially offset by an
increase in nonperforming consumer loans. Management believes that the increase
in nonperforming consumer loans, primarily equity loans and equity credit lines
(ECLs), resulted from the continued economic weakness in the Bank's lending
areas and the inability of some borrowers to maintain payments on
adjustable-rate loans at higher interest rates. Continued real estate market and
economic weakness could result in increases in nonperforming loans.
Table 5
NONPERFORMING ASSETS
The following table sets forth information regarding nonperforming
assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30, 1996(b) 1995 1994
------- ---- ----
Percent of Percent of Percent of
(Dollars in thousands) Amount Assets Amount Assets Amount Assets
<S> <C> <C> <C> <C> <C> <C>
Nonaccruing loans:
Commercial $3,693 0.43% $ 6,872 0.81% $ 2,509 0.31%
Consumer 2,473 0.28 1,782 0.21 1,436 0.18
Residential mortgage 1.779 0.20 2,422 0.29 1,509 0.18
----- ---- ----- ---- ----- ----
Total nonaccruing loans 7,945 0.91 11,076 1.31 5,454 0.67
In-substance foreclosures (a) -- -- -- -- 3,610 0.44
Real estate owned, net 3,611 0.42 5,398 0.64 5,273 0.64
Other repossessed assets 448 0.05 310 0.03 232 0.03
----- ---- ----- ---- ----- ----
24
<PAGE>
Total nonperforming assets $12,004 1.38% $16,784 1.98% $14,569 1.78%
======= ===== ======= ===== ======= =====
Restructured troubled debt:
Performing $ 4,154 0.48% $ 4,801 0.57% $ 2,996 0.37%
Nonperforming (included above) -- -- 985 0.11 2,003 0.24
Impaired performing 1,819 0.21 -- -- -- ----
Impaired nonperforming 952 0.11 -- -- -- ----
------- ----- ------- ----- ------- ----
Total $ 6,925 0.80% $ 5,786 0.68% $ 4,999 0.61%
======= ===== ======= ===== ======= =====
Allowance for loan losses $ 2,858 0.33% $ 3,622 0.43% $ 3,718 0.45%
------- ----- ------- ----- ------- -----
Allowance for loan losses to:
Nonaccruing loans (a) 35.97% 32.70% 68.17%
Total loans 0.58 0.79 0.87
==== ==== ====
(a) ISF loans have been reclassified to the loan portfolio for fiscal 1996 and 1995 in accordance with SFAS
No. 114. Data has not been restated to reflect the adoption of SFAS No. 114 for fiscal 1994 due to the
lack of appropriate detail to make the required reclassifications.
(b) Impaired loans included in nonperforming loans for fiscal 1996 were $3.5 million.
</TABLE>
The allowance for loan losses allocated to commercial and to
residential mortgage loans decreased from September 30, 1995 to September 30,
1996, while nonaccruing commercial and residential mortgage loans decreased. The
allowance for loan losses allocated to consumer loans decreased from September
30, 1995 to September 30, 1996, while nonaccruing consumer loans increased. The
level and allocation of the allowance for loan losses is based upon a systematic
migration analysis. After evaluation of past due loans, management believes the
allowance allocated to such loans is adequate. For further information regarding
nonperforming loans and the allowance for loan losses, see Table 5 and note 4 of
the notes to consolidated financial statements.
In accordance with generally accepted accounting principles (GAAP),
when the Bank transfers a loan to other real estate owned (OREO), the loan
transfers at the lower of cost or fair value less selling costs. The Bank
determines fair value using current independent appraisals. Charges to the
allowance for loan losses occur for reductions in market value below the Bank's
book value. As part of its resolution efforts, the Bank charged $1.9 million to
the allowance during fiscal 1996 and $2.1 million in fiscal 1995. At September
30, 1996, the Company's total loan loss reserves represented 36.0 percent of
nonperforming loans, compared to 32.7 percent at September 30, 1995.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which was amended in October 1994 by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosure." Under SFAS No. 114, a loan is considered impaired when it is
probable that the Company will not be able to collect all amounts due according
to the contractual terms of the loan agreement. Large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, such as
residential mortgage and installment loans, are exempt from the provisions of
SFAS No. 114. The statements, which were adopted by the Company on October 1,
1995, generally require all creditors to account for impaired loans, except
those loans that are accounted for at fair value or at the lower of cost or fair
value, at the present value of the expected future cash flows discounted at the
loan's effective interest rate. In addition, the statements modify the criteria
for classification of a loan as an in-substance foreclosure such that
classification is made only when the lender is in possession of the collateral.
Adoption of SFAS Nos. 114 and 118 had no material impact on the Company's
financial condition or results of operations.
25
<PAGE>
As of September 30, 1996, the Company believes its loan loss reserve is
adequate to cover potential loan losses currently in its loan portfolio.
Although the Bank has considerable experience in evaluating classified loans,
because of the impact of such factors as the overall economic conditions and the
fluctuation of interest rates on such loans, there can be no assurance that the
provisions made to the Bank's loan loss reserve will prove adequate, and, to the
extent that additional provisions to the Bank's loan loss reserve are required
in the future, the Company's results of operations would be adversely affected.
For further information, see notes 3 and 4 of the notes to the consolidated
financial statements.
Non-interest Income
Total non-interest income was $11.3 million or 1.35 percent of average
assets, during fiscal 1996, compared to $10.0 million or 1.21 percent of average
assets during fiscal 1995. The primary reasons for the $1.3 million increase in
1996 were a $808,000 increase in the gain on sale of investment and mortgage
backed securities, and a $449,000 increase in customer service fees. See Table 6
for further information regarding non-interest income.
The FASB issued a special report on SFAS No. 115 in November 1995 that
allowed the Company a one-time reclassification from the held-to-maturity
portfolio to the available-for-sale portfolio. The Bank reclassified $43.7
million of held-to-maturity securities and subsequently sold a majority of those
securities for a net gain of $808,000.
The Company included in its stockholders' equity at September 30, 1996
$6,000 in net unrealized gains from its portfolio of investment and mortgage
backed securities available-for-sale, compared to $175,000 of net unrealized
losses at September 30, 1995. The Company had a net unrealized loss from its
portfolio of investment and mortgage backed securities held-to-maturity of $8.8
million at September 30, 1996, compared to an unrealized loss of $5.4 million at
September 30, 1995. Substantially all of these investments are securities
guaranteed by the U.S. Government or a related agency, and the increase in the
unrealized loss results primarily from the increase in interest rates during the
latter part of fiscal 1996. In order to satisfy the requirements of SFAS No.
115, management has the positive intent to hold these securities to maturity and
believes the Company has the ability to do so. For further information, see
notes 1 and 2 of the notes to consolidated financial statements.
Table 6
NON-INTEREST INCOME
<TABLE>
<CAPTION>
Years ended September 30,
(As a percentage of average assets)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Gain on sale of investment and mortgage
backed securities, net 0.10% ----% 0.05%
Gain on sale of loans and servicing, net 0.22 0.23 0.10
Service fees on loans sold 0.14 0.16 0.13
Customer service fees 0.72 0.67 0.64
Miscellaneous 0.17 0.15 0.08
---- ---- ----
Total non-interest income 1.35% 1.21% 1.00%
===== ===== =====
</TABLE>
Gains from the sale of loans and mortgage servicing rights were $1.9
million for both fiscal 1996 and fiscal 1995. Gains from sale of mortgage loans
are dependent on volume, price, and management's asset/liability decisions.
Loans sold or securitized and sold increased to $139.3 million in fiscal 1996
from $61.0 million in fiscal 1995. The Bank's ability to originate loans is
highly dependent on the
26
<PAGE>
fluctuation of interest rates. The Company expects that if interest rates rise,
the volume of refinancing activity should decrease. Conversely, if interest
rates fall, originations should increase. The fiscal 1995 results include a gain
on sale of PMSR of approximately $777,000 and $566,000 in increased gains on
sales of mortgage loans due to the adoption of SFAS No. 122, "Accounting for
Mortgage Servicing Rights, an Amendment of FASB Statement No. 65." See notes 1
and 3 of the notes to consolidated financial statements for further information
regarding SFAS No. 122.
Service fees on loans sold were $1.1 million, or .14 percent of average
assets, for fiscal 1996 and $1.3 million, or .16 percent of average assets, for
fiscal 1995. The Bank's portfolio of loans serviced for other investors
increased to $647.7 million at September 30, 1996 from $563.0 million at
September 30, 1995. The Banks sell loans without recourse primarily to the
Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage
Association (FNMA). During fiscal 1996 and 1995, the Bank purchased the rights
to service $54.1 million and $106.0 million, respectively, of residential first
mortgage loans. Premiums paid to purchase PMSR totaled $594,000 and $971,000 in
fiscal 1996 and fiscal 1995, respectively. The Bank intends to continue
purchasing mortgage servicing rights and originating mortgage loans for sale
with the servicing rights retained to increase the use of existing servicing
capacity and increase loan service fee revenue.
Customer service fees increased to $6.0 million, or .72 percent of
average assets, in fiscal 1996 from $5.6 million, or .67 percent of average
assets, in fiscal 1995. The Bank generates service fees primarily from checking
and other transaction accounts. Because of the Bank's strategy of emphasizing
checking accounts, the Bank believes this general level of fee income will
continue in future periods. The 1996 increase resulted primarily from overdraft
fees on totally free checking deposit accounts as fiscal 1996 results included,
for the first time, a full year of such deposit product in the New Hampshire
branches.
Miscellaneous non-interest income increased to $1.4 million, or .17
percent of average assets, in fiscal 1996 from $1.2 million, or .15 percent of
average assets, in fiscal 1995. The fiscal 1996 increase was primarily an
increase in ATM card fees and foreign ATM fees.
Non-interest Expense
Total non-interest expense increased $4.4 million during fiscal 1996 to
$34.0 million or 4.08 percent of average assets. The 1996 increase resulted
primarily from a $3.8 million non-recurring charge assessed by the FDIC to
recapitalize SAIF. Partially offsetting these increases were decreases in OREO
expenses, restructuring and merger related expenses, and professional fees. See
Table 7 for further information regarding non-interest expense.
In connection with the legislation that was signed into law on September
30, 1996 to recapitalize SAIF, the FDIC assessed the Bank a one-time charge of
$3.8 million, that was paid on November 27, 1996. In addition, the FDIC is
proposing to lower the insurance premium rates on SAIF assessments effective
January 1, 1997 for all SAIF insured institutions. The proposal is based upon a
risk-based matrix ranging from 0 to 27 basis points. The Financing Corporation
(FICO) assessments for SAIF members will be approximately $0.0644 for every $100
of domestic deposits annually from 1997 through 1999. After 1999 the rate for
both SAIF insured and BIF insured institutions will equal $0.0243 for every $100
of domestic deposits annually.
Costs associated with office occupancy increased $951,000 to $6.1
million, or .73 percent of average assets, for fiscal 1996. This increase was
due primarily to an increase of approximately
27
<PAGE>
$310,000 in equipment maintenance, an increase of approximately $330,000 in
depreciation expense primarily related to the amortization of technology
advancements, and an increase of approximately $270,000 in general office
building expense. General office building expense increased due to branch
expansions, higher than normal snow removal costs, building maintenance, and
additional administrative office space.
28
<PAGE>
Table 7
NON-INTEREST EXPENSE
The following table sets forth non-interest expense as a percentage of
average assets for the periods indicated.
<TABLE>
<CAPTION>
Years ended September 30,
(As a percentage of average assets)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Compensation and benefits 1.46% 1.37% 1.36%
Office occupancy, net 0.73 0.62 0.61
Marketing 0.20 0.18 0.14
Professional fees 0.09 0.14 0.17
Restructuring and merger related 0.05 0.12 --
Supplies 0.16 0.11 0.09
Telephone 0.10 0.07 0.07
Postage 0.11 0.10 0.09
Other 0.34 0.26 0.26
---- ---- ----
Total non-interest expense excluding
FDIC insurance, OREO, and
amortization of intangibles 3.24% 2.97% 2.79%
----- ----- -----
FDIC Premium 0.63% 0.17% 0.18%
Amortization of intangibles 0.05 0.04 0.09
OREO 0.16 0.37 0.34
---- ---- ----
Total non-interest expense 4.08% 3.55% 3.40%
===== ===== =====
</TABLE>
29
<PAGE>
Compensation and benefits increased $754,000 to $12.1 million, or 1.46
percent of average assets, for fiscal 1996. Employment service fees increased
approximately $240,000 and overtime expense increase approximately $115,000
during fiscal 1996. These increases were due primarily to an increase in
temporary help hired to assist in the merger of FS into VFB. In addition,
commissions for loan origination personnel increased approximately $411,000 from
fiscal 1995, due to increased originations during fiscal 1996. Payroll expense
increased approximately $394,000 from fiscal 1995 levels and payroll tax expense
increased approximately $110,000 from fiscal 1995 levels. Somewhat offsetting
these increases was an increase in deferred origination costs of approximately
$361,000, a decrease of approximately $118,000 in the Company's discretionary
401(K) plan contributions, and a decrease of approximately $134,000 in employee
medical insurance. Total FTEs at September 30, 1996 were 412, of which 409 were
at VFB and three and a half at Eastern. This compares to 370 FTEs at the end of
fiscal 1995. During fiscal 1996, the Bank added approximately 20 FTEs at the
branch level, approximately 12 FTEs for nontraditional supermarket branches,
approximately 6 FTEs for loan originations in New Hampshire, and approximately 5
FTEs in information systems to support technology developments.
Other non-interest expense increased $610,000 to $2.8 million, or .34
percent of average assets, for fiscal 1996. The fiscal 1996 increase was due
primarily to an increase in miscellaneous operating losses of approximately
$254,000. Management reserved approximately $180,000 for old, outstanding cash
letter adjustments that may remain unresolved. Mileage expense increased
approximately $58,000, due to increased travel between Vermont and New
Hampshire. ATM expense increased approximately $42,000, due to increased volumes
and the use of an outside vendor to service New Hampshire ATMs previously
serviced by the New Hampshire branches. Bank service charges increased
approximately $38,000. Bank service charges are assessed based on the level of
available funds on deposit or through account maintenance fees. During fiscal
1996, the Bank, due to cash flow needs, was assessed through monetary charges as
opposed to through increased compensating balances as in previous years.
Community events increased approximately $31,000 due to an increase in branches
holding customer appreciation days.
Supplies expense increased to $1.3 million, or .16 percent of average
assets, for the year ended September 30, 1996, a $459,000 increase from fiscal
1995. Costs associated with the FS-VFB Merger included a consolidation of
products and services which created the need for new brochures, forms, pamphlets
and general office supplies such as letterhead. Another consequence of the
FS-VFB Merger, was the disposal of outdated supplies which represented a $57,000
increase from fiscal 1995 levels.
Partially offsetting these increases were decreases in OREO expenses,
restructuring and merger related expenses, and professional fees.
OREO expense decreased $1.7 million to $1.4 million, or .16 percent of
average assets, for the year ended fiscal 1996. Provisions for loss on OREO
decreased from $1.3 million for fiscal 1995 to $389,000 for fiscal 1996. In
addition, the Company experienced a decrease in carrying costs of OREO due to
sales during fiscal 1996. Management continues to focus on the reduction and
resolution of OREO.
Restructuring and FS-VFB Merger related expenses were $401,000 for
fiscal 1996 compared to $1.0 million for fiscal 1995. Fiscal 1996 results
included charges from contractual obligations to employees due to the change of
control of FS. Fiscal 1995 results includes $839,000 in restructuring costs
associated with such merger as well as $190,000 of additional related expenses
such as start-up expenses, technology updates, and miscellaneous expenses.
30
<PAGE>
Professional fees decreased $380,000 from fiscal 1995 results to
$764,000, or .09 percent of average assets, for fiscal 1996. This is due
primarily to a $212,000 decrease in consulting fees as fiscal 1995 results
included expenses incurred for specific management projects.
Federal and State Taxes
During fiscal 1996, the Company recognized income tax expense of $2.1
million on its income before income taxes of $5.4 million, resulting in an
effective tax rate of 38.3 percent compared to income tax expense of $2.3
million on income before taxes of $6.5 million in fiscal 1995, an effective tax
rate of 35.9 percent. Included in fiscal 1995 tax expense was a $293,000 tax
credit that resulted from an IRS audit.
At September 30, 1996, the Company had a net deferred income tax asset
of approximately $1.3 million. Management believes the existing net deductible
temporary differences that give rise to the net deferred income tax asset will
reverse during periods in which the Company generates net taxable income and in
which gross taxable temporary differences are expected to reverse. For fiscal
1996, the Company generated approximately $6.5 million in taxable income.
Factors beyond management's control, such as the general state of the economy
and real estate values, can affect future levels of taxable income and no
assurance can be given that sufficient taxable income will be generated to fully
absorb gross deductible temporary differences. For further information on income
taxes, see notes 1 and 10 of the notes to consolidated financial statements.
Results of Operations
Comparison of years ended September 30, 1995 and 1994
General
The Company had net income during fiscal 1995 of $4.2 million or $1.13
per share, compared with net income for fiscal 1994 of $3.7 million or $1.00 per
share. The improvement in fiscal 1995 net income compared to fiscal 1994 net
income came primarily from two sources. First, interest income increased $8.6
million, due primarily to higher average interest rate levels on
interest-earning assets. Second, non-interest income increased $2.0 million as a
result of additional gains on sale of loans and mortgage servicing rights and
continued growth in customer service fees. These improvements more than offset a
$6.6 million increase in interest expense due to rising interest rates; a $1.0
million increase in the provision for loan losses due to an increase in
nonperforming loans; and a $2.3 million increase in non-interest expense due
primarily to restructuring and other merger-related charges, compensation and
benefits, marketing, and OREO expense.
Net Interest Income
Net interest income for fiscal 1995 was $27.9 million compared to $25.9
million in 1994, an increase of $2.0 million. A $6.6 million increase in
interest expense on deposits and borrowings partially offset the $8.6 million
increase in income on interest-earning assets. Items affecting net interest
income were interest rates, the ability of the Company's assets and liabilities
to react to changes in interest rates, and the balance and mix of the Company's
financial assets and liabilities. See Tables 1 through 4 for average balance,
rate, and repricing information.
Interest income from loans increased $5.7 million during fiscal 1995.
Higher interest rates, during fiscal 1994 and early in fiscal 1995, resulted in
a 92 basis point increase in the average yield on the loan
31
<PAGE>
portfolios. The average yield increased from 7.94 percent in fiscal 1994 to 8.86
percent in fiscal 1995 as ARMs repriced at higher rates. Fixed-rate mortgages,
priced principally by reference to long-term interest rates, originated at
interest rates between 7.0 and 10.0 percent during fiscal 1995. ARMs, priced by
reference to short-term indices like the U.S. Treasury constant one-year
maturity indexes, increased their yields as they repriced to higher interest
rates. This matched the overall increase in their respective indexes.
Investment interest income increased $2.9 million during fiscal 1995
compared to fiscal 1994, due primarily to an increase in average balances of
$17.7 million and an increase in the weighted average yield of 55 basis points.
At September 30, 1995, the Company's mortgage backed securities included $13.5
million of CMOs. The Company considers these bonds relatively low risk
derivative securities because the Company expects them to react to changes in
interest rates in a way that is not materially different from other fixed rate
mortgage backed securities in the held-to-maturity portfolio. Also classified as
held-to- maturity at September 30, 1995, were $12.0 million in FHLB "step-up"
debentures. These structured bonds are notes with guaranteed annual interest
rate increases and are payable in full at maturity. They are callable by the
FHLB semi-annually after the first year.
Interest expense on deposits increased $3.9 million during fiscal 1995
compared to fiscal 1994. The weighted average rate on interest-bearing deposits
increased 66 basis point to 3.99 percent, correlating to the increase in market
interest rates. At September 30, 1995, non-interest bearing deposits were 7.94
percent of total deposits, and interest-bearing NOW accounts were 12.58 percent
of total deposits.
Interest expense on borrowed funds increased $2.7 million during fiscal
1995 compared to fiscal 1994. The increase results from a rise in both the
weighted average rate and the average balances of borrowed funds. The weighted
average rate increased to 6.0 percent during fiscal 1995, from 5.0 percent
during fiscal 1994.
Provision for Loan Losses
During fiscal 1995, the Banks made provisions to the loan loss reserve
of $1.8 million compared to $797,000 in fiscal 1994. At September 30, 1995, the
Banks had classified loans (loans rated as "substandard," "doubtful," or "loss")
totaling $18.0 million, compared to $14.8 million at September 30, 1994.
Additionally, the Banks had $2.9 million of loans identified as "special
mention," as compared with $4.7 million at September 30, 1994. Of the $18.0
million in classified loans at September 30, 1995, $11.1 million were
nonperforming (non-accruing loans including loans 90 days or more past due) and
the balance of $6.9 million were performing. Total nonperforming loans of $11.1
million at September 30, 1995, represented an increase of $5.6 million from
September 30, 1994. Reclassification of in-substance foreclosure loans in fiscal
1995 results account for approximately $3.6 million of the increase. The
remaining $2.0 million increase was due to the reclassification to nonperforming
status of one previously restructured loan as well as increased delinquencies in
the consumer and residential mortgage loan portfolios.
The allowance for loan losses allocated to commercial loans decreased
from September 30, 1994 to September 30, 1995, while nonaccruing commercial
loans increased. The increase in nonaccruing commercial loans resulted from one
previously restructured loan placed on nonaccrual. This loan had been classified
as substandard in prior periods with an allocated allowance. Accordingly,
classification of this loan as nonaccrual did not materially impact the
allowance allocated to commercial loans.
32
<PAGE>
The allowance for loan losses allocated to residential mortgage loans
decreased from September 30, 1994 to September 30, 1995, while nonaccruing
residential mortgage loans increased. After evaluation of past due loans,
management believes the allowance allocated to such loans is adequate.
The allowance for loan losses allocated to consumer loans increased
from September 30, 1994, to September 30, 1995. Such increase relates directly
to the increase in consumer loan delinquencies, particularly mobile home loans.
For further information regarding nonperforming loans and the allowance for loan
losses, see Table 5 and note 4 of the notes to consolidated financial
statements.
The Banks charged $2.1 million to the allowance during both fiscal 1995
and 1994. At September 30, 1995, the Company's total loan loss reserves
represented 32.7 percent of nonperforming loans, compared to 68.2 percent at
September 30, 1994. For further information, see notes 3 and 4 of the notes to
the consolidated financial statements.
Non-interest Income
Total non-interest income was $10.0 million or 1.21 percent of average
assets, during fiscal 1995, compared to $8.0 million or 1.00 percent of average
assets during fiscal 1994. The primary reasons for the 1995 increase were a $1.1
million increase in the gain on sale of loans and mortgage servicing rights, a
$577,000 increase in miscellaneous non-interest income, and a $497,000 increase
in customer service fees.
See Table 6 for further information regarding non-interest income.
Gain on sale of investments and mortgage backed securities for fiscal
1995 was $0 compared to $443,000 during fiscal 1994. The Company had no sales
from its available-for-sale portfolio during fiscal 1995.
The Company included in its stockholders' equity at September 30, 1995,
$175,000 in net unrealized losses from its portfolio of investment and mortgage
backed securities available-for-sale, compared to $220,000 of net unrealized
losses at September 30, 1994. The Company had a net unrealized loss from its
portfolio of investment and mortgage backed securities held-to-maturity of $5.4
million at September 30, 1995, compared to an unrealized loss of $19.2 million
at September 30, 1994. For further information, see notes 1 and 2 of the notes
to consolidated financial statements.
Gains from the sale of loans and mortgage servicing rights were $1.9
million for fiscal 1995, compared to $783,000 for fiscal 1994. The fiscal 1995
results include a gain on sale of PMSR of approximately $777,000. In addition,
the Company recorded $566,000 in increased gains on sales of mortgage loans due
to the adoption of SFAS No. 122, "Accounting for Mortgage Servicing Rights, an
Amendment of FASB Statement No. 65." See notes 1 and 3 of the notes to
consolidated financial statements for further information regarding SFAS No.
122.
Offsetting these increases was a $259,000 decrease in gains from the
sale of mortgage loans originated for sale during fiscal 1995 compared to fiscal
1994. Gains from the sale of mortgage loans are dependent on volume, price, and
management's asset/liability decisions. Loans sold or securitized and sold
decreased to $61.0 million in fiscal 1995 from $148.8 million in fiscal 1994.
The Banks' ability to originate loans is highly dependent on the fluctuation of
interest rates.
Service fees on loans sold were $1.3 million for fiscal 1995 and $1.1
million for fiscal 1994. The Banks' portfolio of loans serviced for other
investors decreased from $666.7 million at September 30, 1994, to $563.0 million
at September 30, 1995. During fiscal 1995 and 1994, VFB purchased the rights to
service
33
<PAGE>
$106.0 million and $61.0 million, respectively, of residential first mortgage
loans. Premiums paid to purchase PMSR totaled $971,000 and $521,000 in fiscal
1995 and fiscal 1994, respectively.
Customer service fees increased to $5.6 million in fiscal 1995 from
$5.1 million in fiscal 1994. The Banks generate service fees primarily from
checking and other transaction accounts.
Miscellaneous non-interest income increased to $1.2 million in fiscal
1995 from $661,000 in fiscal 1994. Fiscal 1995 included a $155,000 non-recurring
gain from an asset disposition and $92,000 of interest income from an IRS refund
and the PMSR sale.
Non-interest Expense
Total non-interest expense increased $2.3 million during fiscal 1995 to
$29.5 million or 3.55 percent of average assets. The 1995 increase resulted
primarily from $839,000 in restructuring charges and $190,000 in other FS-VFB
Merger related expenses, a $497,000 increase in compensation and benefits
expense, a $359,000 increase in marketing expense, and a $328,000 increase in
OREO expense. See Table 7 for further information regarding non-interest
expense.
The Company provided for $839,000 in restructuring costs associated
with the October 1, 1995, FS- VFB Merger, or .10 percent of average assets. In
addition, the Company incurred other FS-VFB Merger related expenses of $190,000,
or .02 percent of average assets, such as startup expenses, technology updates,
and miscellaneous expenses. These expenses, as well as the restructuring
charges, are non-recurring. For further information, see note 17 of the notes to
consolidated financial statements.
Total compensation and benefit expense increased $497,000 to $11.4
million or 1.37 percent of average assets compared to fiscal 1994's 1.36
percent. The increase of the $497,000 was due to annual merit increases and a
small expansion in staff. Total FTEs at September 30, 1995 were 370, of which
three were at the holding company, 280 were at VFB, and 87 were at FS. This
represents an increase of ten from September 30, 1994.
On October 1, 1994, the Company adopted a new accounting standard, SFAS
No. 112, "Employers' Accounting for Post Employment Benefits," that requires
accrual for post employment benefits during either the employees' service
periods or at the time the Company incurs a liability. Post employment benefits
include salary continuation, supplemental employment benefits, severance
benefits, disability- related benefits, health care benefits, life insurance,
and the like. The adoption of SFAS No. 112 did not have a material impact on the
Company's results of operations and financial condition.
Marketing expense increased $359,000 during fiscal 1995 to $1.5 million
or .18 percent of average assets. The Banks primarily market their deposit
products, concentrating heavily on a direct mail marketing program, to acquire
checking accounts. The program has been very successful in attracting low-cost
checking accounts and increasing customer service fees. Also contributing to the
increase in marketing expense was the consolidation of the Banks' product lines
in advance of the FS-VFB Merger.
Other real estate operations expense increased $328,000 during fiscal
1995, to $3.1 million from $2.7 million in fiscal 1994. The 1995 amount
represented .37 percent of average assets compared to .34 percent in fiscal
1994. Of the fiscal 1995 total, $1.3 million came from provisions for loss on
foreclosed real estate, $1.5 million came from operating and selling costs of
foreclosed real estate, and $502,000 came from the writedown of a specific asset
in recognition of the Company's desire to target this property for early
liquidation. Partially offsetting these charges was a $288,000 net gain on sale
of OREO.
34
<PAGE>
Costs associated with office occupancy during fiscal 1995 was $5.1
million or .62 percent of average assets, compared to $4.9 million or .61
percent of average assets in fiscal 1994. Contributing to the $265,000 increase
was the addition of a new computer maintenance contract, an increase in rented
space, and an increase in general office building expense.
FDIC's insurance premium expense was $1.4 million during fiscal 1995, a
decrease of $26,000 from fiscal 1994. The decrease was due to a lower deposit
base at the time of assessment.
The amortization of excess cost over assets acquired (goodwill) during
fiscal 1995 was $382,000, a decrease of $313,000 from fiscal 1994's $695,000.
Fiscal 1994's expense included a provision to write-down the carrying value of
the PMSR due to the high prepayment speed of the PMSR mortgages during fiscal
1994.
Professional fees decreased $184,000 during fiscal 1995 to $1.1 million
or .14 percent of average assets, compared to .17 percent of average assets in
fiscal 1994. Fiscal 1994 included additional consulting fees for problem credit
resolutions, technology updates, and FDICIA implementation.
Supplies expense for fiscal 1995 was $874,000, or .11 percent of
average assets, compared to $687,000, or .09 percent of average assets, in
fiscal 1994. Postage expense for fiscal 1995 was $829,000, or .10 percent of
average assets, compared to $712,000, or .09 percent of average assets, in
fiscal 1994.
Federal and State Taxes
During fiscal 1995, the Company recognized income tax expense of $2.3
million on its income before income taxes of $6.5 million, resulting in an
effective tax rate of 35.9 percent compared to income tax expense of $2.3
million on income before taxes of $6.0 million in fiscal 1994, an effective tax
rate of 38.7 percent. Included in fiscal 1995 tax expense was a $293,000 tax
credit that resulted from an IRS audit.
At September 30, 1995, the Company had a net deferred income tax asset
of approximately $776,000. For the year ending September 30, 1995, the Company
generated approximately $5.4 million in taxable income. Factors beyond
management's control, such as the general state of the economy and real estate
values, can affect future levels of taxable income and that no assurance can be
given that sufficient taxable income will be generated to fully absorb gross
deductible temporary differences. For further information on income taxes, see
notes 1 and 10 of the notes to consolidated financial statements.
Financial Condition
Liquidity and Capital Resources
The OTS requires the Bank to maintain an average daily balance of
liquid assets (cash and certain short term investments) equal to 5 percent of
deposits and short term borrowings. During fiscal 1996 the Bank was in
compliance with this requirement. The Bank uses deposit inflows, loan and
mortgage backed security repayments, and loan sales to provide funds for lending
activities, its primary use of funds. When these sources of funds are not
sufficient to maintain the Bank's loan commitments, or are not cost effective,
the Bank will borrow funds from either the FHLB or from reverse repurchase
agreements using mortgage backed securities and other qualified investments as
collateral. The FHLB requires that borrowing banks have outstanding debt no
greater than 30 percent of their total assets. As of September 30, 1996, VFB had
$153.9 million of outstanding debt, or 17.72 percent of its assets.
35
<PAGE>
As a holding company, the Company's primary sources of liquidity are
dividends from the Bank, and maturities and repayments of investment securities.
The Company uses its liquidity to pay cash dividends to stockholders, fund
operating expenses, pay taxes and fund the development needs of its
subsidiaries. During fiscal 1996, the Company received $2.7 million in cash
dividends from the Bank. The Company anticipates that the Bank will continue
paying dividends to the Company during fiscal 1997.
Effective August 1, 1990, the OTS adopted a regulation that establishes
uniform treatment for all capital distributions by savings associations
(including dividends, stock repurchases, and cash-out mergers). This regulation
classifies a savings association as a tier 1, a tier 2, or a tier 3 institution,
depending on its level of regulatory capital both before and after giving effect
to a proposed capital distribution. A tier 1 institution (one that both before
and after a proposed capital distribution has net capital equal to or in excess
of its fully phased-in regulatory capital requirement) would be allowed, subject
to any otherwise applicable statutory or regulatory requirements or agreements
entered into with regulating authorities, to make capital distributions in any
calendar year in an amount equal to 100 percent of its net income to date during
the calendar year plus up to 50 percent of its surplus capital ratio (the excess
of its ratio of net capital to total assets over the ratio of its fully
phased-in capital requirement to total assets) as of the beginning of the
calendar year, adjusted to reflect current earnings. No regulatory approval of
the capital distribution is required. For purposes of this regulation, at
September 30, 1996, the Bank was classified as a tier 1 institution.
During fiscal 1996, the Company utilized its treasury stock to supply
shares to the Company's Stock Option Plan. The Company generated $907,000 of
additional capital by using its treasury shares for such plan during of fiscal
1996. The Company anticipates that dividends from the Bank should provide
adequate liquidity to Eastern. See note 18 of the notes to consolidated
financial statements for Eastern only financial information.
Investment and Mortgage Backed Securities
Total investment and mortgage backed securities at September 30, 1996,
were $315.0 million, a decrease of $22.0 million from the portfolio of $337.0
million at September 30, 1995. Included in the investment and mortgage backed
securities portfolio are $13.2 million of CMOs. The underlying collateral of
these CMOs consists of residential mortgages guaranteed by the FNMA. The Company
considers these bonds relatively low risk derivative securities because it
expects these bonds to react to changes in interest rates in a way that is not
materially different from other fixed rate mortgage backed securities in the
portfolio. During fiscal 1996, the Bank purchased $107.5 million in mortgage
backed and investment securities compared to $31.3 million in fiscal 1995.
During the first quarter of fiscal 1996, the Company took advantage of a
provision in the FASB's special report on SFAS No. 115 which allowed entities to
make a one-time reclassification of security classifications. The Bank
reclassified $43.7 million from the held-to-maturity portfolio to the
available-for-sale portfolio. Subsequently, the Bank sold a majority of these
reclassified securities and utilized the proceeds, along with proceeds from loan
and investment securities repayments and maturities, to invest in higher
yielding loans and securities. The sources of funds for fiscal 1995 purchases
were primarily loan and mortgage backed security repayments and maturities.
Repayments increased during fiscal 1996 due to higher prepayment rates on both
newly purchased mortgage backed securities and on previously held securities.
Proceeds from repayments and maturities of investments and mortgage backed
securities were $79.0 million during fiscal 1996 compared to $37.2 million
during fiscal 1995.
Interest rates began to rise in the second half of fiscal 1996
increasing the net unrealized loss in the investment and mortgage backed
securities held-to-maturity portfolios to $8.8 million at September 30,
36
<PAGE>
1996 compared to $5.4 million at September 30, 1995. An unrealized loss results
from an interest rate environment that is higher than the rates being earned on
the investment and mortgage backed securities portfolios. Substantially all of
the Company's securities are guaranteed by the U.S. Government or a related
agency. In order to satisfy the requirements of SFAS No. 115, management has the
positive intent to hold these securities to maturity and believes the Bank has
the ability to do so.
Loans
The Company's net loans increased $34.8 million to $488.8 million at
September 30, 1996, from $454.0 million at September 30, 1995 due primarily to
increased originations and purchases. See Table 8 for further information
regarding loans.
Loan originations during fiscal 1996 were $215.1 million compared to
$162.7 million during fiscal 1995. Falling interest rates in early fiscal 1996
increased the demand for new residential mortgage loan originations.
The Bank originates fixed and ARM loans for sale. At September 30,
1996, the Bank had $10.5 million in mortgage loans held for sale that required
no valuation reserve to adjust their carrying value to the lower of cost or
market. At September 30, 1996, the Bank had $17.4 million in commitments to sell
mortgage loans. During the year ended September 30, 1996, the Bank sold $126.8
million and securitized and sold $12.6 million in mortgage loans; all originated
for sale.
During fiscal 1996, the Bank's commercial lending was conducted on a
limited basis. The returns realized historically had been impacted periodically
by adverse economic conditions and did not justify the amount of regulatory
capital required under the risk-based capital guidelines to support emphasis on
such assets. The Bank's business plan concentrates on retail banking,
emphasizing mortgage lending and the acquisition of demand deposits.
Table 8
LOAN ACTIVITY
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Originations:
Residential mortgage $163,255 $ 95,195 $177,088
Consumer 38,219 32,560 52,702
Commercial real estate and non-real estate 13,585 34,931 16,524
------ ------ ------
Total originations $215,059 $162,686 $246,314
======== ======== ========
Loans purchased $ 53,072 $ 11,926 $ 1,619
Loans sold 126,764 60,019 129,880
Loans securitized and sold 12,575 1,002 18,887
Loans transferred to in-substance
and foreclosed real estate 2,723 1,575 3,120
Loan repayments 91,117 78,189 93,210
====== ====== ======
</TABLE>
37
<PAGE>
At September 30, 1996, the Bank had loan commitments of $93.5 million.
This included $16.0 million in residential mortgage loans, $17.7 million in
commercial loans (primarily unadvanced funds on lines of credit) and $59.8
million in consumer loans (primarily unadvanced funds on equity lines of
credit). While management believes it has been prudent in its lending decisions,
uncertainties regarding future events, such as changes in interest rates, the
real estate market, and the overall economy, could adversely affect the loan
portfolios and future results of operations.
Pursuant to the Merger Agreement, the Company may not make any loans or
extensions of credit other than those which are on customary terms, conditions
and standards and are within normal business practices until the effective date
of the Merger.
Other Real Estate Owned
Other real estate owned totaled $3.6 million at September 30,
1996, compared to $5.4 million at September 30, 1995. All of the fiscal 1996 and
fiscal 1995 balances consisted of assets classified as nonperforming. During
fiscal 1996, the Bank added $2.7 million into OREO, sold $4.1 million, and
reduced the carrying value of certain properties by $389,000. During fiscal
1995, the Bank transferred $5.0 million into OREO, sold $4.8 million, and
reduced the carrying value of specific properties by $1.3 million. The balance
of OREO at September 30, 1995 was restated to reflect the Company's adoption of
SFAS No. 114 that changed the criteria for classification of a loan as
in-substance foreclosure. This required a reclassification of $2.7 million from
OREO to the loan portfolio. Management continues to focus efforts on the
reduction and resolution of OREO.
Table 9
OTHER REAL ESTATE OWNED
<TABLE>
<CAPTION>
At September 30,
(Dollars in thousands) 1996 1995
---- ----
Amount Percent of Total Amount Percent of Total
<S> <C> <C> <C> <C>
By collateral:
Residential real estate $1,463 36.41% $1,531 24.61%
Land zoned residential 189 4.70 676 10.87
Commercial real estate 941 23.42 549 8.83
Industrial parks -- -- 1,273 20.46
Investment real estate -- -- 251 4.03
Shopping centers 1,425 35.47 1,729 27.79
Other -- -- 212 3.41
------ ------- ------ -------
Total before valuation allowance $4,018 100.00% $6,221 100.00%
Valuation allowance (407) (823)
----- -----
Total $3,611 $5,398
====== ======
By state:
Vermont $2,153 53.58% $3,501 56.28%
New Hampshire 1,865 46.42 2,720 43.72
----- ----- ----- -----
Total before valuation allowance $4,018 100.00% $6,221 100.00%
====== ======= ====== =======
</TABLE>
Table 10
OTHER REAL ESTATE OWNED ACTIVITY
38
<PAGE>
Years ended September 30,
(Dollars in thousands)
1996 1995
---- ----
Balance at beginning of year $5,398 $6,545
Additions 2,723 4,960
Sales (4,121) (4,778)
Provision for loss (389) (1,329)
Balance at end of year $3,611 $5,398
Deposits
Total deposits increased from $616.4 million at September 30, 1995, to
$641.3 million at September 30, 1996. Deposit growth in fiscal 1996 is due
primarily to the Bank offering attractive rates on time deposits, money market
accounts, and NOW accounts. Partially offsetting these increases was a decrease
in passbook accounts as the Bank experienced some disintermediation. The Bank
continued to increase demand deposit accounts for the purposes of attracting low
cost deposits and the related fee income. These types of accounts help establish
long-term core deposit relationships with customers to whom the Bank can sell
other retail bank products and services. At September 30, 1996, the Bank's NOW
and non-interest bearing demand deposits were $136.2 million compared to $126.5
million at September 30, 1995.
Pursuant to the Merger Agreement, the Company cannot offer an interest
rate with respect to any deposit that departs from past practices until the
effective date of the Merger.
Borrowings
Total borrowings of the Company decreased from $161.9 million at
September 30, 1995, to $153.9 million at September 30, 1996. Deposit growth and
maturities and repayments from the loan and investment portfolios were
sufficient to meet operating activities during fiscal 1996. Therefore, the
Company was able to reduce its outstanding borrowings.
Pursuant to the Merger Agreement, the Company may not incur any
additional debt obligation except in the ordinary course of business consistent
with past practices until the effective date of the Merger.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities increased $2.9 million to $9.8
million at September 30,1996 from $6.8 million at September 30, 1995. Fiscal
1996's balance included an accrual of $3.8 million for a non-recurring charge by
the FDIC to recapitalize the SAIF. Somewhat offsetting this increase was a
$307,000 accrual for severance related to the FS-VFB Merger in the fiscal 1995
balance. In addition, the fiscal 1996 accounts payable balance decreased
approximately $339,000 from the fiscal 1995 accounts payable balance as the Bank
lengthened its year end accounts payable cutoff procedures.
Stockholders' Equity
At September 30, 1996, stockholders' equity was $63.6 million, compared
to $61.0 million at September 30, 1995, an increase of $2.6 million. During
fiscal 1996, the Company recorded earnings of $3.3 million and paid aggregate
cash dividends to stockholders of $1.8 million. The Company used approximately
78,000 treasury shares for the exercise of employee and director stock options
and the directors deferred compensation plans.
39
<PAGE>
As a federally-insured savings bank, the Bank is required to maintain a
minimum level of regulatory capital in accordance with OTS regulations. Under
FIRREA, enacted August 7, 1989, the Director of the OTS must require savings
institutions to maintain (i) "core capital" in an amount of not less than 3.0
percent of total assets, (ii) "tangible capital" in an amount not less than 1.5
percent of total assets and (iii) a level of risk-based capital materially the
same as is required to be maintained by national banks. In determining
compliance with the capital standards established by FIRREA, a savings
institution must deduct from capital its entire investment in, and loans to, any
subsidiary engaged as principal in activities not permissible for a national
bank, other than subsidiaries (i) engaged in such non-permissible activities
solely as agent for their customers, (ii) engaged in mortgage banking
activities, or (iii) that are themselves savings institutions, or companies the
only investment of which is another savings institution, acquired prior to May
1, 1989.
The OTS has issued rules implementing the capital standards established
by FIRREA, requiring savings institutions to achieve and maintain the 3.0
percent core capital to total assets ratio, a 1.5 percent tangible capital to
total assets ratio, and a minimum ratio of total capital to total risk-weighted
assets of 8.0 percent. In addition, the OTS has promulgated regulations under
FDICIA requiring savings institutions classified as adequately capitalized to
have (i) a ratio of total capital to risk-weighted assets of 8.0 percent or
greater, (ii) a ratio of core capital to risk-weighted assets of 4.0 percent or
greater, and (iii) a ratio of core capital to adjusted total assets of either
(A) 4.0 percent or greater, or (B) 3.0 percent or greater if the savings
institution is rated composite 1 under the OTS Capital Adequacy, Asset Quality,
Management Administration, Earnings, and Liquidity-Asset/Liability Management
(CAMEL) rating system in the most recent examination of the savings institution.
The OTS may impose higher regulations for individual savings institutions.
At September 30, 1996, the Bank had risk-based capital of $58.9 million
or 12.3 percent of risk- weighted assets on a fully phased-in basis. At
September 30, 1996, the Bank exceeded its current regulatory capital
requirements. The Bank had a core capital leverage ratio (as defined in the
proposal) of 6.5 percent at September 30, 1996.
On May 23, 1996 Eastern's Board of Directors declared a three-for-two
stock split in the form of a 50 percent stock dividend. The distribution was
made on June 19, 1996 to holders of record of the Company's Common Stock as of
the close of business on June 5, 1996. All per share information herein has been
adjusted to reflect the three-for-two stock split.
40
<PAGE>
Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Eastern Bancorp, Inc. and Subsidiaries At September 30,
(Dollars in thousands, except share data) 1996 1995
<S> <C> <C>
Assets
Cash and due from banks (note 1) $27,766 $19,862
Short-term investments (note 1) 12,043 11,099
Investment and mortgage backed securities available-for-sale
(amortized cost of $1 at September 30, 1996,
and $4,443 at September 30, 1995, notes 2 and 8) 9 4,177
Investment securities held-to-maturity
(market value of $47,946 at September 30, 1996, and
$42,294 at September 30, 1995, notes 2 and 8) 48,793 42,259
Mortgage backed securities held-to-maturity
(market value of $236,869 at September 30, 1996, and
$264,666 at September 30, 1995, notes 2, 8, and 9) 244,856 270,133
FHLB stock (notes 2 and 8) 9,283 9,283
Loans (net of allowance for loan losses of $2,858 at September 30, 1996, and
$3,622 at September 30, 1995,
notes 3, 4, and 8) 478,306 445,780
Loans held for sale (note 3) 10,480 8,212
Accrued interest receivable:
Investment and mortgage backed securities 2,230 2,731
Loans 2,843 2,761
Other real estate owned, net (note 5) 3,611 5,398
Investment in real estate 437 447
Premises and equipment, net (note 6) 16,693 14,232
Excess of cost over net assets acquired 3,528 3,908
Deferred income tax asset, net (note 10) 1,346 776
Mortgage servicing rights (note 3) 3,061 1,675
Prepaid expense and other assets 3,393 3,352
Total assets $868,678 $846,085
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts (including non-interest-bearing deposits of $55,986 at
September 30, 1996, and $48,932 at September 30, 1995, note 7) $641,286 $616,350
Advances from FHLB (note 8) 153,636 136,632
Securities sold under agreement to repurchase (note 9) -- 24,855
Capital lease obligation (note 6) 273 395
Accrued federal income taxes 102 17
Accrued expenses and other liabilities 9,801 6,853
Total liabilities 805,098 785,102
Commitments and contingencies (notes 3, 6, 12, 13, 15, and 16) -- --
Stockholders' equity (notes 10, 11, and 16):
Preferred stock, $0.01 par value: 1,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $0.01 par value: 5,000,000 shares authorized;
4,095,549 shares issued at September 30, 1996, and
4,095,549 at September 30, 1995 41 41
Additional paid-in capital 36,384 36,182
Retained income (substantially restricted) 30,138 28,629
Unrealized gain (loss) on securities available-for-sale, net (note 2) 6 (175)
Treasury stock (at cost), 444,015 shares at September 30, 1996,
and 522,325 shares at September 30, 1995 (2,989) (3,694)
Total stockholders' equity 63,580 60,983
Total liabilities and stockholders' equity $868,678 $846,085
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Eastern Bancorp, Inc. and Subsidiaries
Years ended September 30,
(Dollars in thousands, except per share data) 1996 1995 1994
<S> <C> <C> <C>
Interest Income
Residential mortgage loans $19,226 $16,117 $13,550
Other loans 22,335 22,432 19,306
Investment and mortgage backed securities available-for-sale 576 234 1,200
Investment securities held-to-maturity 4,219 3,300 2,496
Mortgage backed securities held-to-maturity 14,917 18,015 14,994
Total interest income 61,273 60,098 51,546
Interest Expense
Deposit accounts (note 7) 24,116 21,667 17,752
Borrowings 8,224 10,551 7,861
Total interest expense 32,340 32,218 25,613
Net interest income 28,933 27,880 25,933
Provision for loan losses (note 4) 895 1,822 797
Net interest income after provision for loan losses 28,038 26,058 25,136
Non-interest Income
Gain on sale of investment and mortgage backed securities, net (note 2) 808 -- 443
Gain on sale of loans and mortgage servicing rights, net (note 3) 1,851 1,867 783
Service fees on loans sold 1,146 1,334 1,054
Customer service fees 6,027 5,578 5,081
Miscellaneous 1,441 1,238 661
Total non-interest income 11,273 10,017 8,022
Income before non-interest expense and federal and state taxes 39,311 36,075 33,158
Non-interest Expense
Compensation and benefits (note 12) 12,122 11,368 10,871
Office occupancy, net (note 6) 6,071 5,120 4,855
Marketing 1,718 1,526 1,167
Federal deposit insurance premium 5,207 1,446 1,472
Other real estate owned operations (note 5) 1,358 3,054 2,726
Professional fees 764 1,144 1,328
Amortization of intangibles 381 382 695
Restructuring and FS-VFB merger related (note 17) 401 1,029 --
Supplies 1,333 874 687
Telephone 869 582 560
Postage 939 829 712
Other 2,789 2,179 2,119
Total non-interest expense 33,952 29,533 27,192
Income before federal and state taxes 5,359 6,542 5,966
Federal and state tax expense (notes 1 and 10) 2,055 2,347 2,307
Net Income $3,304 $4,195 $3,659
Earnings per common and common equivalent shares
outstanding $ 0.87 $ 1.13 $ 1.00
Cash dividends paid per common share 0.49 0.24 0.10
Weighted average number of common and common equivalent
shares outstanding 3,807,724 3,721,573 3,658,510
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Eastern Bancorp, Inc. and Subsidiaries
Unrealized gain
(loss) on
Number Additional securities Total
of common Common paid-in Retained available- Treasury stockholders'
(Dollars in thousands) shares stock capital income for-sale, net stock equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 3,492 $ 41 $ 36,092 $ 21,991 $ 997 $ (4,438) $ 54,683
Net income -- -- -- 3,659 -- -- 3,659
Cash dividends paid ($0.10 per share) -- -- -- (353) -- -- (353)
Stock options exercised, net (note 16) 24 -- (137) -- -- 244 107
Sale of treasury stock 25 -- 91 -- -- 233 324
Increase in unrealized (loss) on
securities available-for-sale, net (note 2) -- -- -- -- (1,217) -- (1,217)
Balance at September 30, 1994 3,541 41 36,046 25,297 (220) (3,961) 57,203
Net income -- -- -- 4,195 -- -- 4,195
Cash dividends paid ($0.24 per share) -- -- -- (863) -- -- (863)
Stock options exercised, net (note 16) 3 -- -- -- -- 37 37
Sale of treasury stock 29 -- 136 -- -- 230 366
Decrease in unrealized (loss) on
securities available-for-sale, net (note 2) -- -- -- -- 45 -- 45
Balance at September 30, 1995 3,573 41 36,182 28,629 (175) (3,694) 60,983
Net income -- -- -- 3,304 -- -- 3,304
Cash dividends paid ($0.49 per share) -- -- -- (1,795) -- -- (1,795)
Stock options exercised, net (note 16) 77 -- 194 -- -- 695 889
Sale of treasury stock 1 - 8 -- -- 10 18
Decrease in unrealized (loss) on
securities available-for-sale, net (note 2) -- -- -- -- 181 -- 181
Balance at September 30, 1996 3,651 $ 41 $ 36,384 $ 30,138 $ 6 $ (2,989) $ 63,580
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Eastern Bancorp, Inc. and Subsidiaries Years ended September 30,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $3,304 $4,195 $3,659
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation, amortization, and accretion 4,101 3,622 5,215
Provision for loan losses 895 1,822 797
(Gain) on sale of investment and mortage backed securities (808) -- (443)
(Gain) on sale of loans and mortgage servicing rights (1,851) (1,867) (783)
(Gain) on sale of real estate owned (521) (288) (156)
Provision for loss on other real estate owned 389 1,329 1,282
Loans originated for sale (133,569) (64,073) (132,191)
Proceeds from sales of loans originated for sale 133,062 61,021 140,954
(Increase) decrease in accrued interest receivable 419 (613) (114)
Decrease in income taxes receivable -- -- 319
Capitalization of mortgage servicing rights (1,549) (629) --
(Increase) decrease in prepaid expenses and other assets 842 (480) 805
(Increase) decrease in deferred income tax asset (663) 372 (55)
Increase (decrease) in accrued expenses and other liabilities 2,948 1,704 (1,844)
Increase (decrease) in accrued federal income taxes 85 (490) 507
Total adjustments 3,780 1,430 14,293
Net cash provided (used) by operating activities 7,084 5,625 17,952
Cash flows from investing activities:
Net (increase) decrease in short-term investments (944) (4,390) 16,472
Net (increase) in FHLB stock -- (360) (1,409)
Portfolio loans:
Proceeds from sales 6,277 -- 7,813
Purchases (53,072) (11,926) (1,619)
Originations net of repayments 9,627 (20,423) (20,913)
Recoveries on loans previously charged off 231 136 313
Investment and mortgage backed securities available-for-sale:
Purchases (4,995) (231) (196)
Proceeds from sales 51,909 -- 146,120
Proceeds from maturities and returns of principal 1,980 -- 11,211
Investments held-to-maturity:
Purchases (61,207) (18,712) (27,216)
Proceeds from sales -- -- 165
Proceeds from maturities and returns of principal 42,751 8,900 11,855
Mortgage backed securities held-to-maturity:
Purchases (41,340) (12,350) (244,377)
Proceeds from sales -- -- --
Proceeds from maturities and returns of principal 34,260 28,339 39,171
Purchases of premises and equipment, net of sales proceeds (4,790) (2,902) (1,287)
Proceeds from sales of real estate, net 4,642 5,066 8,005
Purchase of mortgage servicing rights (594) (971) (521)
Proceeds from sale of servicing rights -- 2,023 --
(Increase) decrease in investment in real estate 10 702 (548)
Net cash (used) by investing activities $(15,255) $(27,099) $(56,961)
continued
44
<PAGE>
continued Years ended September 30,
(Dollars in thousands) 1996 1995 1994
Cash flows from financing activities:
Net increase in deposits $24,936 $31,961 $12,435
Advances from FHLB:
Proceeds 87,023 199,456 171,479
Repayments (70,019) (234,303) (131,260)
Securities sold under agreement to repurchase:
Proceeds 11,855 37,855 4,500
Repayments (36,710) (13,000) (15,500)
Reduction in capital lease obligation (122) (114) (105)
Net proceeds from exercise of stock options and/or
sale of treasury stock 907 403 431
Dividends paid (1,795) (863) (353)
Net cash provided by financing activities 16,075 21,395 41,627
Net increase (decrease) in cash 7,904 (79) 2,618
Cash and cash equivalents at beginning of year 19,862 19,941 17,323
Cash and cash equivalents at end of year $27,766 $19,862 $19,941
Cash paid for:
Interest $32,511 $31,984 $25,546
Federal and state taxes 2,200 2,249 1,910
Supplemental disclosure of non-cash activities:
Change in unrealized gain (loss) on investment and
mortgage backed securities available-for-sale, net 181 45 (1,217)
Investment and mortgage backed securities held-to-maturity
transferred to investment and mortgage backed securities
available-for-sale 43,664 -- --
Loans charged off 1,890 2,054 2,114
Loans securitized and sold 12,575 1,002 18,887
Loans foreclosed or transferred to in-substance foreclosure 2,723 1,575 3,120
See accompanying notes to consolidated financial statements.
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Eastern Bancorp, Inc. and Subsidiaries
September 30, 1996, 1995, and 1994
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to general practices within the
banking industry.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets, and income and expense for
the periods.
Actual results could differ materially from those estimates.
Among the material estimates that are particularly susceptible of
change are those that relate to the determination of the allowance for loan
losses and valuation of other real estate owned. In connection with the
determination of the allowance for loan losses and the carrying value of OREO,
management obtains independent appraisals for significant properties.
A substantial portion of the Company's loans are secured by real estate
in depressed markets in Vermont and New Hampshire. In addition, a majority of
OREO is located in those same markets. Accordingly, the ultimate collectibility
of a substantial portion of the Company's loan portfolio and the recovery of all
the OREO is susceptible of changing conditions in these markets.
Certain fiscal 1995 and fiscal 1994 information has been reclassified
to conform with the 1996 presentation. The following is a description of the
significant accounting policies.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Eastern Bancorp, Inc. and its wholly-owned subsidiary VFB. The Company also
owns VSC, a real estate development company it purchased from VFB in December
1991. VFB's wholly-owned subsidiaries are Eastern Real Estate Corporation,
Investment Alternative Financial Services Corporation, and Long Bay II
(liquidated as of September 30, 1996). All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Due from Banks
The Bank is required to maintain cash and reserve balances with the
Federal Reserve Bank. The reserve calculation is 3.0 percent of the first $52.0
million of checking deposits and 10.0 percent of total checking deposits over
$52.0 million. At September 30, 1996, the Bank was required to maintain a
reserve balance of $10.3 million.
Short-Term Investments
Short-term investments are carried at cost, which approximates market
value, and consist of federal funds and certificates of deposit with original
maturities of ninety days or less.
Investment and Mortgage Backed Securities
Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to- maturity and reported at amortized
cost; debt and equity securities that are bought and held principally for the
purpose of selling are classified as trading and reported at fair value, with
unrealized gains and losses included in earnings; and debt and equity securities
not classified as either held-to-maturity or trading are classified as
available-for-sale and
46
<PAGE>
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity, net of estimated
income taxes. Originated mortgage loans converted to mortgage backed securities
to be sold are classified as trading.
Premiums and discounts on investment and mortgage backed securities are
amortized or accreted into income by use of the level-yield method. If a decline
in fair value below the amortized cost basis of an investment or mortgage backed
security is judged to be other than temporary, the cost basis of the investment
is written down to fair value. The amount of the writedown is included as a
charge against gain on sale of investment and mortgage backed securities. Gains
and losses on the sale of investment and mortgage backed securities are
recognized at the time of sale on a specific identification basis.
Loans
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," that was amended in October 1994 by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosure." Under SFAS No. 114, a loan is impaired when it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. Large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment, such as residential mortgage and
installment loans, are exempt from the provisions of SFAS No. 114. The
statements, which were adopted by the Company on October 1, 1995, require
changes in both the disclosure and impairment measurement of certain loans. In
addition, criteria for classification of a loan as an in-substance foreclosure
were modified in such a way that such classification need be made only when the
lender is in possession of the collateral. At adoption, the Company reclassified
$2.6 million of in-substance foreclosure loans from OREO to loans. Adoption of
these statements had no material impact on the Company's financial position or
results of operations. Fiscal 1996 and 1995 amounts reflect the reclassification
of ISF loans to the loan portfolio. Fiscal 1994 amounts have not been
reclassified due to the lack of appropriate detail to make the required
reclassifications.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans," although the two categories overlap;
nonaccrual loans include impaired loans. The Company may choose to place a loan
on nonaccrual status, while not classifying the loan as impaired, if (i) it is
not probable that the Company will not collect all amounts due in accordance
with the contractual terms of the loan or (ii) the loan is not a commercial,
commercial real estate or an individually significant mortgage or consumer loan.
Factors considered by management in determining impairment include payment
status and collateral value. The amount of impairment is determined by the
difference between the present value of the expected cash flows related to the
loan, using the original contractual interest rate, and its recorded value. The
Company, as a practical expedient in the case of collateralized loans determines
the amount of impairment as the difference between the fair value of the
collateral and the recorded amount of the loan, which does not materially differ
from that which would be recognized by the use of the present value of the
expected cash flows related to the loan. When foreclosure is probable,
impairment is measured based on the fair value of the collateral. Mortgage and
consumer loans which are not individually significant are measured for
impairment collectively. Loans that experience insignificant payment delays and
insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Restructured, accruing loans entered into prior to the adoption of
these statements are not required to be reported as impaired unless such loans
are not performing according to the restructured terms at adoption of SFAS No.
114. Loan restructurings entered into after adoption of SFAS No. 114 are
reported as impaired loans, and impairment is measured as described above using
the loan's pre-modification rate of interest.
47
<PAGE>
Interest income on loans is recognized on the accrual method. Loans on
which the accrual of interest has been discontinued are designated nonaccrual
loans. Accrual of interest income on loans is discontinued when loan payments
are ninety days or more in arrears or when concern exists as to the
collectibility of principal or interest. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period income. Loans are removed from nonaccrual when they become less
than ninety days past due and when concern no longer exists as to the
collectibility of principal or interest. Interest received on nonaccruing loans
is either applied against principal or reported as income according to
management's judgment as to the collectibility of principal. Income received on
impaired loans is recognized in income similar to nonaccrual loans.
Discounts and premiums on loans are accreted over the remaining
estimated lives of the related loans using the level-yield method. Loan
origination and commitment fees and certain incremental loan origination costs
are deferred and are amortized over the contractual lives of the related loans,
using the level-yield method.
Loan Sales and Servicing
Additional funds for lending are provided by selling loans and
participating interests in loans. Mortgage loans designated as held for sale are
carried at the lower of cost or market value. Net unrealized losses, if any, are
provided for in a valuation allowance by charges to operations.
When loans are sold, gains and losses on sales of these loans are
determined using the specific identification method.
Gains and losses resulting from the sales of loans with servicing
retained are adjusted to recognize the present value of the differences between
the loan yield to the investor, reduced by normal servicing fees, and the
interest rate on the loan over the estimated lives of the related loans. The
resulting premium is amortized as a reduction of servicing fee income, using the
level yield method over the estimated remaining lives of the loans.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights , an Amendment of FASB Statement No. 65." The Company elected
to adopt this standard effective October 1, 1994. Accordingly, the Company's
financial statement reporting for fiscal 1994 was accounted for under the
original FASB Statement No. 65. As a result of adopting SFAS No. 122, gain on
sale of loans and mortgage servicing rights increased $566,000 for the year
ended September 30, 1995.
This statement requires the Company to recognize as separate assets
rights to service mortgage loans for others, however those servicing rights are
acquired. When the Company acquires mortgage servicing rights either through the
purchase or origination of mortgage loans (originated mortgage loan servicing
rights) and sells or securitizes those loans with servicing rights retained, it
allocates the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without the mortgage servicing rights) based on their relative
fair values. To determine the fair value of the servicing rights created, the
Company uses the market prices under comparable servicing sales contracts, when
available, or alternatively uses a valuation model that calculates the present
value of future cash flows to determine the fair value of the servicing rights.
In using this valuation method, the Company incorporates assumptions that market
participants would use in estimating future net servicing income, which includes
estimates of the cost of servicing loans, the discount rate, the float value, an
inflation rate, ancillary income, prepayment speeds and default rates. When the
Company purchases mortgage loan servicing rights separately, the initial
purchase cost is recognized as an asset. Originated and purchased mortgage loan
servicing rights are amortized as a reduction of service income in proportion
to, and over the period of, estimated net servicing income by use of the
level-yield method.
On a quarterly basis, the carrying values of originated and purchased
mortgage loan servicing rights are assessed for impairment based on the fair
value of such rights. The fair value is estimated using market prices when
available or, alternatively, using the valuation model referred to above with
current assumptions. Any impairment is recognized as a charge to earnings
through a valuation allowance. The risk characteristics of the underlying loans
used
48
<PAGE>
to measure impairment of originated and purchased mortgage loan servicing rights
include loan type, interest rate, loan origination date, term to maturity, and
geographic location.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon an evaluation of
inherent risk in the loan portfolio. Such evaluation includes a review of
overall portfolio size, quality, and composition, and an assessment of existing
economic conditions that may affect the borrower's ability to pay, specific
problem loans, and trends in delinquencies and charge offs.
While management uses available information in establishing the
allowance for loan losses, future adjustments to the allowance may be necessary
if economic conditions differ substantially from the assumptions used in making
the evaluations. Additions to the allowance are charged to operations; realized
losses, net of recoveries, are charged to the allowance. Loans are charged off
in whole or in part when, in management's opinion, collectibility is not
probable. Management believes that the allowance for loan losses is adequate. In
addition, various regulatory agencies, as part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
Other Real Estate Owned
OREO includes foreclosed properties of which the Bank has actually
received title. Real estate formally acquired in settlement of loans are
recorded at the lower of the carrying value of the loan or the fair value of the
property actually received, less selling costs. Losses arising from the
acquisition of real estate are charged against the allowance for loan losses.
Operating expenses and any subsequent provisions to reduce the carrying value to
fair value minus costs to sell are charged to current period earnings. Gains
upon disposition are reflected in earnings as realized; realized losses are
charged to the related allowance.
An allowance for losses is maintained for OREO which management
believes to be adequate to provide for potential losses. Additions to the
allowance are charged to operations.
49
<PAGE>
Investment in Real Estate
Real estate investments are carried at the lower of cost or net
realizable value. The acquisition, construction and holding costs incurred
during the development period are capitalized. After each project is completed
and the unit sales are consummated, revenue is recognized when a sufficient down
payment is received from the buyer.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is accumulated over the estimated
useful lives of the related assets using the straight-line method for buildings
and the declining balance or straight-line method for other assets. Amortization
of leasehold improvements is accumulated on a straight-line basis over the
lesser of the term of the respective lease or the asset's useful life.
It is general practice to charge the cost of maintenance and repairs to
operations when incurred; major expenditures for improvements are capitalized
and depreciated.
Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired is amortized to expense
using the straight-line method over periods of fifteen and twenty-five years. On
an ongoing basis, management reviews the valuation and amortization of its
intangible assets. During this review, management estimates the value of the
Company's intangible assets, taking into consideration any events and
circumstances which might have diminished fair value.
Federal Income Taxes
Income taxes are accounted for using the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and the respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Per Share Data
Earnings per share have been calculated based on the weighted average
number of common and common equivalent shares outstanding for each of the
periods presented. Employee Stock Ownership plan (ESOP) shares that are not
committed to be released are not considered outstanding for purposes of
calculating earnings per share.
Statements of Cash Flows
For purposes of reporting cash flows, cash and due from banks includes
cash on hand, cash items in the process of collection, and amounts due from
banks.
Recent Accounting Developments
SFAS No. 123, "Accounting for Stock-Based Compensation," is effective for years
beginning on October 1, 1996. This statement establishes a fair-value-based
method of accounting for stock-based compensation plans under which compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period. However, the statement allows a company to
continue to measure compensation cost for such plans under Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," under
50
<PAGE>
APB Opinion No. 25, no compensation cost is recorded if, at the grant date, the
exercise price of options granted is equal to the fair market value of the
Company's common stock. The Company has elected to continue to follow the
accounting method under APB No. 25. SFAS No. 123 requires companies that elect
to continue to follow the accounting in APB Opinion No. 25 to disclose in the
notes to their financial statements pro forma net income and earnings per share
as if the fair-value-based method of accounting had been applied.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Under the financial-components approach, after a
transfer of financial assets, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not meet
the criteria for a sale, the transfer is accounted for as a secured borrowing
with a pledge of collateral.
The statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and will be
applied prospectively. Earlier or retroactive application of this statement is
not permitted. The Company has determined that the adoption of this statement
will not have a material impact on its consolidated financial statements.
(2) Investment and Mortgage Backed Securities
A summary of investment and mortgage backed securities classified as
available-for-sale and held-to- maturity at September 30, 1996 and 1995 follows:
<TABLE>
<CAPTION>
Available-for-sale Quoted
(Dollars in thousands) Amortized Unrealized Unrealized market
At September 30, 1996 cost gains losses value
<S> <C> <C> <C> <C>
Investment securities:
Marketable equity securities $0 $3 $-- $3
Total investment securities $0 $3 $-- $3
Mortgage backed securities, by issuer:
Other $1 $5 $-- $6
Total mortgage backed securities $1 $5 $-- $6
Total available-for-sale $1 $8 $-- $9
Held-to-maturity Quoted
(Dollars in thousands) Amortized Unrealized Unrealized market
At September 30, 1996 cost gains losses value
Investment securities:
United States Government and related obligations $27,075 $3 $234 $26,844
Municipal bonds 247 2 1 248
Corporate debentures 1,002 1 1 1,002
FHLB debentures 20,469 -- 617 19,852
Total investment securities held-to-maturity $48,793 $6 $853 $47,946
<PAGE>
Mortgage backed securities, by issuer:
Fixed rate:
FHLMC $26,679 $ 148 $ 581 $26,246
FNMA 165,116 109 7,433 157,792
GNMA 99 1 1 99
Adjustable rate:
FHLMC 3,788 -- 168 3,620
FNMA 11,415 -- 299 11,116
GNMA 37,759 237 -- 37,996
Total mortgage backed securities held-to-maturity $244,856 $495 $8,482 $236,869
Available-for-sale Quoted
(Dollars in thousands) Amortized Unrealized Unrealized market
At September 30, 1995 cost gains losses value
Investment securities:
Mutual fund $4,440 $-- $301 $4,139
Marketable equity securities 2 29 -- 31
Total investment securities $4,442 $29 $301 $4,170
Mortgage backed securities, by issuer:
FNMA $ 1 $ 6 $-- $ 7
Total mortgage backed securities $ 1 $ 6 $-- $ 7
Total available-for-sale $4,443 $35 $301 $4,177
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Held-to-maturity Quoted
(Dollars in thousands) Amortized Unrealized Unrealized market
At September 30, 1995 cost gains losses value
<S> <C> <C> <C> <C>
Investment securities:
United States Government and related obligations $20,997 $17 $26 $20,988
Municipal bonds 1,251 1 5 1,247
Corporate debentures 1,011 2 5 1,008
FHLB debentures 19,000 66 15 19,051
Total investment securities held-to-maturity $42,259 $86 $51 $42,294
Mortgage backed securities, by issuer:
Fixed rate:
FHLMC $ 36,832 $ 294 $ 585 $ 36,541
FNMA 195,644 275 5,510 190,409
GNMA 128 3 -- 131
Adjustable rate:
FHLMC 19,039 304 174 19,169
FNMA 12,348 -- 371 11,977
GNMA 6,142 297 -- 6,439
Total mortgage backed securities held-to-maturity $270,133 $1,173 $6,640 $264,666
</TABLE>
The Company had $51,909,000, $0, and $146,120,000 in proceeds from
sales of investment and mortgage backed securities available-for sale in 1996,
1995 and 1994, respectively. Realized gains from sales of investment and
mortgage backed securities available-for-sale during 1996 were $121,000 and
$990,000, compared to realized gains of $0 and $0, respectively, in 1995, and
realized gains of $265,000 and $1,037,000, respectively, in 1994. Realized
losses from sales of investment and mortgage backed securities available-for-
sale during 1996 were $241,000 and $62,000, respectively compared to realized
losses of $0 and $0, respectively, in 1995, and $0 and $859,000, respectively,
in 1994.
The following table sets forth the contractual maturities of the
Company's investment and mortgage backed securities held-to-maturity. Maturities
of mortgage backed securities are presented based on the last contractual
payment date which is not representative of anticipated cash receipts. Actual
principal paydowns of mortgage backed securities will occur throughout the life
of the securities. Expected maturities of certain securities may differ from
contractual maturities because borrowers have the right to call or prepay.
<TABLE>
<CAPTION>
Held-to-maturity
(Dollars in thousands) At September 30, 1996
After 1 After 5
Within through through After
Amortized Cost 1 year 5 years 10 years 10 years Total
<S> <C> <C> <C> <C> <C>
United States Government and related obligations $5,075 $12,000 $10,0 $ -- $ 27,075
Mortgage backed securities -- 8,678 27,363 208,815 244,856
Municipal bonds 125 -- -- 122 247
Corporate debentures 502 500 -- -- 1,002
FHLB debentures 699 5,000 4,770 10,000 20,469
Total $6,401 $26,178 $42,133 $218,937 $293,649
Weighted average interest rate 5.35% 6.49% 6.66% 6.79% 6.71%
Market Value
United States Government and related obligations $5,077 $ 11,916 $ 9,851 $ -- $ 26,844
Mortgage backed securities -- 8,536 26,886 201,447 236,869
Municipal bonds 125 -- -- 123 248
Corporate debentures 501 501 -- -- 1,002
FHLB debentures 699 4,903 4,600 9,650 19,852
Total $6,402 $25,856 $41,337 $211,220 $284,815
</TABLE>
52
<PAGE>
At September 30, 1996, the Company had mortgage backed securities
available-for-sale maturing on November 1, 2008, with an amortized cost of $500
and a market value of $6,000.
At September 30, 1996, the Company owned $13.2 million of CMOs
classified as mortgage backed securities held-to-maturity. The underlying
collateral of these derivative securities consists of residential mortgages
guaranteed by the FNMA.
As a member of the FHLB, the Bank is required to invest in $100 par
value stock of the FHLB in the amount of 1.0 percent of its outstanding loans
secured by residential housing, or 1.0 percent of 30 percent of total assets, or
5.0 percent of their outstanding advances from the FHLB, whichever is highest.
As and when such stock is redeemed, the Bank would receive from the FHLB an
amount equal to the par value of the stock. As of September 30, 1996, the Bank
was required to have an investment of at least $7,681,000.
During the first quarter of fiscal 1996, the Company took advantage of
a provision in the FASB's special report on SFAS no. 115 which allowed entities
to make a one-time reclassification of security classifications. The Bank
reclassified $43.7 million from the held-to-maturity portfolio to the
available-for- sale portfolio. Subsequently, the Bank sold a majority of these
reclassified securities.
(3) Loans
The Company's lending activities are conducted principally in Vermont
and southeastern and central New Hampshire. The Bank grants single family
residential loans, condominium loans, commercial real estate loans, commercial
loans, and a variety of consumer loans. In addition, the Bank grants loans for
the construction of residential homes, for the construction of commercial real
estate properties, and for land development. Substantially all loans granted by
the Bank are secured by real estate collateral. The ability and willingness of
residential mortgage and consumer loan borrowers to honor their repayment
commitments is impacted by the health of the real estate market in the
borrowers' geographic areas and the general economy. The Bank is prohibited by
statute and OTS regulations from lending to any one borrower aggregate amounts
in excess of 15.0 percent of the institution's unimpaired capital and unimpaired
surplus for loans and extensions of credit that are not fully secured and an
additional 10.0 percent of unimpaired capital and unimpaired surplus for loans
and extensions of credit that are fully secured by readily marketable
collateral. This lending limit may not apply to loans and extensions of credit
that are less than $500,000 in the aggregate. The Company had no such lending
relationships with borrowers at September 30, 1996.
Loans totaling $7,945,000, $11,076,000, and $5,454,000 were
nonaccruing at September 30, 1996, 1995 and 1994, respectively. However, fiscal
1994 does not include in-substance foreclosures. Total restructured loans were
$6,925,000, $5,786,000, and $4,999,000 at September 30, 1996, 1995, and 1994,
respectively. The Bank has no additional funding commitments to these borrowers.
The reduction in interest income for the years ended September 30 associated
with nonaccrual and restructured loans held at the end of each year is as
follows:
(Dollars in thousands) 1996 1995 1994
Interest income in accordance
with original terms $904 $1,225 $575
Interest income recognized 132 332 303
Interest income not recognized $772 $893 $272
53
<PAGE>
At September 30, 1996, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $5,348,572 (of which $3,529,559
was on a nonaccrual basis). Included in total impaired loans are $3,336,575 of
impaired loans with specific valuation allowances aggregating to $408,630. All
impaired loan relationships in excess of $100,000 were measured using the
difference between the fair value of collateral and the recorded amount of the
loan. Impaired loan relationships less than $100,000 totaled $211,448. The
average recorded investment in impaired loans during the twelve months ended
September 30, 1996 was approximately $6,437,640. For the twelve months ended
September 30, 1996, the Bank recognized interest income on impaired loans of
$451,469.
54
<PAGE>
In the ordinary course of business, the Bank makes loans to its
directors, officers, principal stockholders, and related interests of such
individuals or entities ("affiliates") on substantially the same terms as those
prevailing at the time of origination for comparable transactions with other
borrowers and subject to certain other limitations as provided in OTS
regulations. An analysis of loans to affiliates that exceed $60,000 in aggregate
outstanding amount to any related parties during the years ended September 30,
1996 and 1995 is as follows:
(Dollars in thousands) 1996 1995
Balance at beginning of year $2,317 $2,465
Additions 261 71
Repayments (454) (219)
Employment changes (1,245) --
Balance at end of year $ 879 $2,317
Loans are summarized as follows:
<TABLE>
<CAPTION>
At September 30,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Residential mortgage loans:
Conventional -- fixed rate $ 60,218 $ 29,859
Conventional -- variable rate 186,049 179,118
Construction 9,939 5,386
Partially guaranteed by VA or insured by FHA 986 1,467
Mortgage loans held for sale 10,480 8,212
Total residential mortgage loans 267,672 224,042
Consumer loans:
Home equity 76,917 79,878
Mobile home 40,109 44,690
Auto and personal 15,866 11,522
Secured by deposit accounts 2,018 2,062
Other 2,017 4,176
Total consumer loans 136,927 142,328
Commercial loans:
Commercial real estate 83,171 82,962
Other secured 7,315 10,174
Total commercial loans 90,486 93,136
Total loans receivable 495,085 459,506
Deductions:
Deferred loan (fees) costs (151) 245
Unamortized premiums, net (488) (252)
Undisbursed proceeds on loans in process 4,080 1,899
Allowance for loan losses (note 4) 2,858 3,622
Total 6,299 5,514
Net loans receivable $488,786 $453,992
</TABLE>
55
<PAGE>
Mortgage and commercial loans serviced for other investors were
approximately $647,653,000, $563,021,000, and $666,732,000 at September 30,
1996, 1995, and 1994, respectively. Loans serviced for others include
approximately $95.0 million and $59.0 million at September 30, 1996 and 1995,
respectively, the servicing rights to which were purchased by VFB during 1996
and 1995. During 1995, the rights to service $162.6 million of mortgage loans
were sold without recourse to an unrelated party for a price of $2.0 million.
This sale resulted in a gain of $777,000. The following table shows fiscal 1996
and fiscal 1995 activity for all loan servicing rights.
56
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands) Purchased Originated Excess Total
<S> <C> <C> <C> <C>
Balance at beginning of fiscal 1995 $ 1,524 $ -- $ 463 $1,987
Purchases and capitalization 971 566 63 1,600
Sales, net (1,246) -- -- (1,246)
Amortization (457) (62) (147) (666)
Balance at end of fiscal 1995 $ 792 $ 504 $ 379 $1,675
Purchases and capitalization 594 1,350 199 2,143
Sales, net -- -- -- --
Amortization (269) (309) (179) (757)
Balance at end of fiscal 1996 $1,117 $1,545 $399 $3,061
</TABLE>
(4) Allowance for Loan Losses
The following summarizes transactions in the allowance for loan losses:
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $3,622 $3,718 $4,722
Provision for loan losses 895 1,822 797
Recoveries on loans previously charged off 231 136 313
Loans charged off (1,890) (2,054) (2,114)
- ----------------------------------------------------------------------------------------------------------
Balance at end of year $2,858 $3,622 $3,718
Allocation of ending balance:
Commercial $1,352 $1,817 $2,460
Residential mortgage 428 519 648
Consumer 1,078 1,286 610
- ----------------------------------------------------------------------------------------------------------
Total $2,858 $3,622 $3,718
Allocation of charge offs:
Commercial $1,246 $1,014 $1,221
Residential mortgage 168 482 356
Consumer 476 558 537
Total $1,890 $2,054 $2,114
</TABLE>
(5) Other Real Estate Owned
The components of OREO are as follows:
<TABLE>
<CAPTION>
At September 30,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Residential real estate $1,463 $1,531
Land zoned residential 189 676
Commercial real estate 941 549
Industrial parks -- 1,273
Investment real estate -- 251
Shopping centers 1,425 1,729
57
<PAGE>
Other -- 212
Less valuation allowance (407) (823)
Total $3,611 $5,398
</TABLE>
Real estate foreclosed but subject to a redemption waiting period was
$337,946 and $145,000 on September 30, 1996 and1995, respectively.
58
<PAGE>
Changes in the allowance for other real estate owned are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 823 $ 226 $ 116
Provision charged to expense 389 1,329 1,282
Charge offs (805) (732) (1,172)
Balance at end of year $ 407 $ 823 $ 226
</TABLE>
The components of other real estate owned operations expense are as
follows:
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Net (gain) on sales of real estate owned $ (521) $ (288) $ (156)
Provision for loss 389 1,329 1,282
Investment in real estate expense 69 44 45
Provision for loss on investement in real estate -- 502 --
Other operating expense, net of income 1,421 1,467 1,555
Total $1,358 $3,054 $2,726
</TABLE>
(6) Premises and Equipment
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
At September 30,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Land $2,041 $2,025
Office buildings and improvements 8,251 7,299
Furniture, fixtures, and equipment 14,165 10,410
Computer equipment 2,760 3,127
Leasehold improvements 1,860 1,673
Total 29,077 24,534
Less accumulated depreciation and amortization 12,384 10,302
Total premises and equipment $16,693 $14,232
</TABLE>
The Bank occupies leased quarters at various locations. These leases
expire on various dates through 2003 with options to renew. In September 1991,
the Bank leased $807,000 of certain data processing equipment under a capital
lease. The commitments for minimum annual lease payments for operating and
capital leases are as follows:
<TABLE>
<CAPTION>
Years ending September 30,
Imputed Net Present
(Dollars in thousands) 1997 1998 1999 2000 2001 Thereafter Total Interest Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating $901 $868 $800 $734 $155 $331 $3,789
Capital 147 148 -- -- -- -- 295 $22 $273
- --------------------------------------------------------------------------------------------------------------------------------
Total $1,048 $1,016 $800 $734 $155 $331 $4,084
</TABLE>
Rental expense was approximately $936,000, $835,000, and $767,000 for
the years ended September 30, 1996, 1995, and 1994, respectively.
59
<PAGE>
(7) Deposit Accounts
<TABLE>
<CAPTION>
Deposit accounts are summarized as follows:
At September 30,
1996 1995 1994
Weighted Weighted Weighted
average average average
(Dollars in thousands) Amount interest rate Amount interest rate Amount interest rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing:
Commercial demand deposits $18,878 --% $17,569 -- % $15,908 -- %
Retail demand deposits 37,108 -- 31,363 -- 29,845 --
NOW accounts 80,209 1.15 77,518 1.43 74,980 1.51
Passbook accounts 115,466 2.66 119,383 2.65 140,668 2.62
Money market deposit accounts 67,148 3.53 59,862 4.54 56,745 3.86
Certificate accounts:
Less than $100,000 294,631 5.35 284,515 5.73 244,895 4.44
$100,000 or greater 27,846 5.50 26,139 5.84 21,347 4.72
641,286 3.69% 616,349 4.03% 584,388 3.23%
Unamortized premium -- 1 1
Total $641,286 $616,350 $584,389
Maturity of certificate accounts:
Within one year $248,353 $228,397 $180,716
From one to within two years 35,948 37,931 48,424
From two to within three years 20,349 15,914 10,003
Balance thereafter 17,827 28,412 27,099
Total $322,477 $310,654 $266,242
</TABLE>
During fiscal 1996 the Bank offered a range of rates from 1.02 percent
to 2.83 percent on now accounts, from 2.41 percent to 3.05 percent on passbook
acoounts, from 2.46 percent to 5.35 percent on money market accounts, and from
3.20 percent to 6.63 percent on certificate accounts
A summary of interest expense on deposits follows:
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Certificate accounts $17,525 $14,798 $11,097
NOW accounts 919 1,083 1,094
Money market deposit accounts 2,608 2,402 1,825
Passbook accounts 3,064 3,384 3,736
Total $24,116 $21,667 $17,752
</TABLE>
60
<PAGE>
(8) Advances from FHLB
Advances from FHLB consisted of the following:
<TABLE>
<CAPTION>
At September 30,
(Dollars in thousands) 1996 1995
Due in fiscal years Weighted average Weighted average
ended September 30, Amount interest rate Amount interest rate
<S> <C> <C> <C> <C>
1996 $ -- --% $ 96,277 6.04%
1997 120,800 5.71 21,000 6.20
1998 6,700 5.70 4,000 5.57
1999 18,500 5.48 9,500 5.26
2001 5,000 5.88 5,000 5.88
Thereafter 2,636 4.84 855 7.68
Total $153,636 5.67% $136,632 6.00%
</TABLE>
FHLB stock, mortgage loans on residential properties, and other
eligible investments not sold under agreement to repurchase are pledged as
collateral to secure such advances. The total unused line of credit with FHLB at
September 30, 1996, was $8,257,000. Three advances totaling $2,636,000 have
scheduled monthly repayments with maturity dates after September 2007.
(9) Securities Sold Under Agreement to Repurchase
The collateral for securities sold under agreement to repurchase
consisted of mortgage backed securities with a book value of approximately
$30,386,000 and a market value of approximately $29,984,000 at September 30,
1995. The Company had no outstanding repurchase agreements at September 30, 1996
or 1994.
<TABLE>
<CAPTION>
(Dollars in thousands) At September 30, 1995
Matured Interest
in Amount rate
Securities sold under agreement
to repurchase matured in
<S> <C> <C> <C>
10/95 $ 7,000 5.85%
11/95 7,000 5.85
12/95 6,000 5.84
5/96 4,855 6.08
Total $24,855 5.89%
</TABLE>
The mortgage backed securities underlying the agreements were delivered
to one primary dealer who arranged the transactions. The dealer may have sold,
loaned, or otherwise disposed of such securities to other parties in the normal
course of operations and have resold to the Company substantially identical
securities at the maturities of the agreements.
Securities sold under agreement to repurchase averaged $5,606,000,
$19,977,000, and $2,516,000 during 1996, 1995, and 1994, respectively. Maximum
amounts outstanding at any month
61
<PAGE>
end during 1996, 1995, and 1994 were $17,855,000, $32,855,000, and $10,500,000,
respectively. The average costs of repurchase agreements was 6.43 percent, 6.13
percent, and 3.50 percent during fiscal 1996, 1995, and 1994, respectively.
62
<PAGE>
(10) Federal and State Taxes
The components of income tax expense for the years ended September 30
were as follows:
(Dollars in thousands) 1996 1995 1994
Federal and state tax expense:
Current $2,718 $1,975 $2,362
Deferred (645) 368 (3)
Change in valuation reserve (18) 4 (52)
Total $2,055 $2,347 $2,307
The tax effects of temporary differences (the difference between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases) that give rise to significant portions of the
deferred tax asset and deferred tax liability are as follows:
At September 30,
(Dollars in thousands) 1996 1995
Deferred tax asset:
Allowance for loan losses $956 $1,436
Deposit insurance assessment 1,330 --
Deferred loan fees -- 136
Purchase accounting adjustments 85 107
Deferred compensation 254 192
Pension 183 180
Early retirement contribution 26 35
Purchased mortgage servicing rights 66 25
Unrealized loss on investment securities
available-for-sale -- 90
Other 239 225
Total 3,139 2,426
Valuation reserve -- (18)
Gross deferred tax asset $3,139 $2,408
Deferred tax liability:
Pension $167 $134
Depreciation 491 677
Originated mortgage servicing rights 544 164
Purchase accounting adjustments 168 233
Excess servicing rights 20 34
Deferred loan origination expense 401 330
Unrealized gain on investment securities
available-for-sale 2 --
Other -- 60
Gross deferred tax liability 1,793 1,632
Deferred income tax asset, net $1,346 $ 776
On August 20, 1996, President Clinton signed into law the Small
Business Job Protection Act of 1996 which included the repeal of the special
thrift bad debt provisions. Although the percentage of taxable
63
<PAGE>
income method bad debt deduction will no longer be available to the Bank, the
tax requirement to invest in certain qualifying types of investments and loans
has been eliminated, thus providing greater freedom to the Bank in structuring
its balance sheet to maximize return.
The Company has not provided deferred income taxes for the Bank's tax
return reserve for bad debts that arose in tax years beginning before September
30, 1988 because it is not expected that this difference will reverse in the
foreseeable future. The cumulative net amount of temporary differences related
to the reserve for bad debts for which deferred taxes have not been provided was
approximately $10.3 million at September 30, 1996. If the Company does not meet
the remaining income tax requirements of Internal Revenue Code section 593, as
amended by the Small Business Job Protection Act of 1996, the Bank could incur a
tax liability for the previously deducted tax return loan losses in the year in
which such requirements are not met. This potential liability for which no
deferred income taxes have been provided was approximately $3.6 million as of
September 30, 1996.
Realization of the net deferred tax asset is supported by the Company's
tax history. Management believes that the existing net deductible temporary
differences that give rise to the net deferred income tax asset will reverse
during periods in which the Company generates net taxable income. For the year
ending September 30, 1996 the Company generated taxable income of approximately
$6.5 million. In addition, gross deductible temporary differences are expected
to reverse in periods during which offsetting gross taxable temporary
differences are expected to reverse. It should be noted, however, that factors
beyond management's control, such as the general state of the economy and real
estate values, can affect future levels of taxable income and that no assurance
can be given that sufficient taxable income will be generated to fully absorb
gross deductible temporary differences.
The Company's effective tax rates differ from the statutory federal
income tax rate for the following principal reasons:
<TABLE>
<CAPTION>
Years ended
September 30,
1996 1995 1994
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Items affecting federal income tax rate:
State tax expense 4.2 4.2 3.7
Internal Revenue Service settlement -- (4.5) --
Amortization of excess of cost over net assets acquired 2.0 1.6 1.8
Low income housing tax credit (1.7) -- --
Change in valuation reserve (0.3) 0.1 (0.9)
Other, net 0.1 0.5 0.1
Effective federal income tax rate 38.3% 35.9% 38.7%
</TABLE>
(11) Stockholders' Equity
In connection with the Bank's conversion to a federal stock savings
bank and FS's conversion to a stock savings association, a liquidation account
was established for the benefit of eligible deposit account holders in the event
of a complete liquidation. At September 30, 1996, the amount of the combined
liquidation account was approximately $1.2 million (unaudited).
64
<PAGE>
On May 23, 1996, Eastern's Board of Directors declared a three-for-two
stock split in the form of a 50 percent stock dividend. The distribution was
made on June 19, 1996 to holders of record of the Company's Common Stock as of
the close of business on June 5, 1996. All earnings per share, dividends, and
share information has been adjusted to reflect this stock split.
The OTS prohibits the Bank from paying dividends if the effect thereof
would cause decline in regulatory capital to a level below required minimums,
reduction of net worth below the amount required for the liquidation account, or
violation of other regulatory requirements. The Bank was in compliance with all
regulatory capital requirements at September 30, 1996.
The Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly additional
discretionary) actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1996, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes would cause a change in the Bank's categorization.
The Bank's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As of September 30, 1996:
Total Capital
(to risk weighted assets) $59,952 12.5% $38,276 >= 8.0% $47,845 >= 10.0%
Tier I capital
(to risk weighted assets) 56,152 11.7 19,134 >= 4.0 28,707 >= 6.0
Tier I capital
(to average assets) 56,152 6.8 33,221 >= 4.0 23,922 >= 5.0
65
<PAGE>
(12) Employee Benefit Plans
The Company has a defined contribution plan and an employee stock
ownership plan, the Eastern Bancorp, Inc. 401(k) and ESOP Plan, for
substantially all of the Bank's employees. Company contributions to the plan are
discretionary and are based on annual profitability. Participants may make
voluntary contributions within limits prescribed by the plan's 401(k) and by
regulations under Section 401(k) of the Internal Revenue Code and the Company
will match half of the first six percent of compensation contributed. During
fiscal 1996, the Company made $231,000 and $147,000 in discretionary plan
contributions to the 401(k) and ESOP, respectively, compared to $311,000 and
$185,000 in fiscal 1995 and $279,000 and $166,000 in fiscal 1994. The Company
also made matching contributions to the participant's 401(k) accounts of
approximately $167,000, $107,000, and $108,000 during fiscal years 1996, 1995,
and 1994, respectively. Contributions to the ESOP are used to purchase Company
shares that are then allocated to eligible employees. Dividends on allocated
shares are used to purchase additional shares that are then allocated to
eligible participants. At September 30, 1996, the shares held by the ESOP
amounted to 89,286, all of which were allocated to ESOP participants.
In 1986, VFB established a supplemental deferred compensation plan for
directors and certain former officers of VFB. Under the plan, a participant or,
in the event of his or her death, his or her designated beneficiary, would
receive fixed annual payments for fifteen years following the participant's
retirement or death, as the case might be. The plan was established pursuant to
a recommendation by a life insurance company and insurance agents who
represented to VFB that the purchase of life insurance on the lives of
participants in the program would result in life insurance proceeds to VFB
sufficient to fund VFB's obligations under the plan at no cost to VFB. During
fiscal 1989, VFB discovered that the program presented by the insurance agents
was based on assumptions that were unjustified and unlikely to occur, as a
result of which the return on the policies was insufficient to fully fund VFB's
obligations under the plan. In December 1989, VFB instituted suit against the
insurance company and the insurance agents who made the above-referenced
representations to VFB. The Bank and the defendants have settled the lawsuit. In
December 1992, VFB reached a resolution with certain director participants in
this plan. Under the resolution, VFB returned to director participants their
original amounts deferred over a three-year period, beginning in January 1993.
In return, the director participants released VFB from any liability from the
plan. As of September 30, 1993, all but three director participants of the
original twelve accepted this resolution. Under the resolution, VFB retains the
option of keeping in force life insurance policies on the participants. The net
present value of these policies currently exceeds the cost of this resolution.
All director participants have since reached an agreement with VFB.
All eligible officers and employees of the Company, if they so choose,
are covered by a self-insured health and dental plan. The cost of this program
was $354,000 during fiscal 1996, $427,000 during fiscal 1995, and $489,000
during fiscal 1994.
Prior to the FS-VFB Merger, all eligible officers and employees of FS
were included in a non-contributory pension plan provided by FS as a
participating employer of the Financial Institutions Retirement Fund (FIRF). The
FIRF does not segregate the assets or liabilities by participating employer and,
accordingly, disclosure of accumulated vested and non-vested benefits and net
assets available for benefits required by SFAS No. 87 is not possible. Pension
expense amounted to approximately $121,000 and $216,000 for each of the years
ended September 30, 1995 and 1994, respectively. FS instituted an executive
supplemental insurance and retirement plan in 1988 under which an executive
officer receives a retirement benefit based upon compensation and length of
service. Life insurance policies were purchased of which the Bank is the owner.
66
<PAGE>
(13) Financial Instruments with Off-Balance-Sheet Risk
The Bank is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, standby letters of
credit, credit lines, loans sold with recourse and commitments to sell loans.
Such instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the statement of financial
condition. The contract or notional amounts of these instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit,
standby letters of credit, and loans sold with recourse is represented by the
contractual notional amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as they do for
on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk.
</TABLE>
<TABLE>
<CAPTION>
At September 30,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Financial instruments with off-balance-sheet risk: Commitments to
extend credit:
Residential mortgage - fixed rate $12,747 $12,499
Residential mortgage - variable rate 3,295 2,736
Consumer - fixed rate 855 517
Consumer - variable rate 1,044 1,814
Commercial - fixed rate 974 523
Commercial - variable rate 5,643 4,719
Standby letters of credit 1,257 2,328
Unused credit lines, including unused
portions of equity lines of credit 67,653 63,969
Loans sold with recourse -- --
Commitments to sell loans 17,437 10,112
Commitments to buy loans -- 1
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee by the customer. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates
customers' credit-worthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Bank upon extension of credit is based on
management's credit evaluation of the counter-party. Collateral held varies but
may include real estate; accounts receivable; inventory; property, plant, and
equipment; and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
instruments are primarily issued to support private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
67
<PAGE>
The Bank originates a variety of adjustable-rate loans with interest
rate caps and floors. Interest rate caps and floors on loans written by the Bank
enable customers to transfer, modify, or reduce their interest rate risk.
Forward commitments to sell mortgage loans are contracts the Company
enters into for the purpose of reducing the interest rate risk associated with
originating loans held for sale. Risks may arise from the possible inability of
the Company to originate loans to fulfill the contracts.
Most of the Bank's business activity is with customers located within
Vermont and New Hampshire. A significant amount of the Bank's assets are secured
by real estate with no industry concentrations.
(14) Fair Values of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments."
The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments:
The respective carrying values of certain financial instruments
approximated their fair value as they were short-term in nature or they were
payable on demand. These include, "Cash and due from banks," "short-term
investments," and non-certificate deposit accounts.
Investment and mortgage backed securities: Fair values for investment
and mortgage backed securities were based on quoted market prices, where
available. If quoted market prices were not available, fair values were based on
quoted market prices of comparable instruments.
FHLB stock: The carrying amount reported in the statement of condition
approximates fair value. If the stock is redeemed, the Company will receive an
amount equal to the par value of the stock.
Loans: The fair value of loans including loans sold with recourse was
determined using discounted cash flow analysis, using interest rates currently
being offered by the Company to discount future cash flows to present value. The
fair value of non-accrual loans was estimated using a discount rate
substantially higher than the rates used for performing loans to reflect the
increased credit risk.
Off-balance-sheet instruments: The fair value of mortgage servicing
rights was estimated using discounted cash flow analysis. The fair value of
commitments to extend credit or sell loans was based on quoted market prices for
comparable instruments.
The fair values of the unused portion of lines of credit and letters of
credit are based on fees currently charged to enter into similar agreements and
were estimated to be the fee charged. Commitments to originate non-mortgage
loans were short-term and were at current market rates and estimated to have no
fair value.
Financial Liabilities: The fair value of certificates of deposit, FHLB
term advances, and repurchase agreements were estimated using discounted cash
flow analysis using rates currently being offered by the Company and the FHLB
for comparable instruments.
68
<PAGE>
Limitations: The estimates of fair value of financial instruments were
based on information available at September 30, 1996 and 1995, and are not
indicative of the fair market value of those instruments at the date this report
is published. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a portion of the
Company's financial instruments, fair value estimates were based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial instruments include real estate acquired by foreclosure,
the deferred income tax asset, office properties and equipment, and core deposit
and other intangibles. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered.
The estimation methodologies used, book values and estimated fair
values for the Bank's financial instruments follows.
</TABLE>
<TABLE>
<CAPTION>
At September 30,
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(Dollars in thousands) amount fair value amount fair value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $27,766 $27,766 $19,862 $19,862
Short-term investments 12,043 12,043 11,099 11,099
Investment and mortgage backed securities 293,658 284,824 316,569 311,137
FHLB stock 9,283 9,283 9,283 9,283
Loans, net 488,786 483,161 453,992 454,890
Accrued interest receivable 5,073 5,073 5,492 5,492
Mortgage servicing rights 3,061 5,249 1,675 4,923
Financial liabilities:
Deposits $641,286 $642,779 $616,350 $616,514
Advances from FHLB 153,636 153,303 136,632 136,042
Securities sold under areement to repurchase -- -- 24,855 24,750
Capital lease obligation 273 270 395 388
- ------------------------------------------------------------------------------------------------------------------------------------
Off-balance-sheet instruments:
Commitments to extend credit $-- $15 $-- $(19)
Commitments to sell loans -- 14 -- 3
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(15) Litigation
At September 30, 1996, the Company was involved in various claims and
legal actions arising in the normal course of its business. The outcomes of
these claims and actions are not presently determinable; however, in the opinion
of the Company's management, after consulting with the Company's legal counsel,
the ultimate disposition of these matters is not expected to have a material
adverse effect on the Company's financial condition or results of operations.
(16) Stock Option Plans
69
<PAGE>
The Board of Directors of the Company adopted the 1984 Stock Option
Plan effective simultaneously with the Bank's conversion to a stock charter in
November 1983. Upon formation of the Company, all outstanding options of the
Bank were automatically converted to options of the Company. A total of 189,015
shares of authorized but unissued common stock has been reserved under the 1984
Stock Option Plan. This plan is no longer available for grant.
In April 1987, the Board of Directors of the Company adopted a second
stock option plan, in addition to and separate from the 1984 Stock Option Plan,
which was approved by stockholders at the 1988 annual meeting of stockholders. A
total of 532,500 authorized but unissued shares of Company common stock is
reserved for issuance under the 1987 Stock Option Plan all of which remain
eligible for future grant under such plan.
Under the terms of the plans, options are granted at not less than the
fair market value of the shares at the date of grant and may not have a term of
more than ten years. Options may generally be exercised at such time during the
term as is deemed appropriate by the Compensation and Option Committee of the
Board of Directors.
Options exercisable at September 30, 1996 totaled 394,425 with a
weighted average option price per share of $10.34.
Information with regard to the stock option plans follows:
<TABLE>
<CAPTION>
Number of Weighted average option
option shares price per share
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at September 30, 1993 441,939 $ 9.04
Granted 38,250 12.04
Exercised (26,514) 5.69
Cancelled (21,000) 9.67
- --------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1994 432,675 9.50
Granted 10,500 14.09
Exercised (4,050) 9.17
- --------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1995 439,125 9.61
Granted 34,125 16.13
Exercised (77,100) 8.76
Cancelled (1,725) 10.54
- --------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1996 394,425 $ 10.34
- --------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of the options by maturity follows:
Expiring during the Number of Weighted average option
year ended September 30, option shares price per share
1997 30,600 $16.05
1998 7,500 9.50
1999 32,400 9.17
2000 31,500 5.83
2001 -- --
70
<PAGE>
2002 18,000 3.72
2003 191,925 9.46
2004 38,250 12.04
2005 32,250 15.26
2006 12,000 16.67
394,425 $10.34
(17) Restructuring and FS-VFB Merger-Related Charges
In May 1995, the Company announced plans to merge its subsidiary banks,
Vermont Federal Bank, FSB, and First Savings of New Hampshire. The two banks
operated as separate legal entities during fiscal 1995, and began operating as
one bank on October 1, 1995. The Company's restructuring plan included
consolidation of operational support functions that were completed during fiscal
1996.
71
<PAGE>
During fiscal 1995, the Company provided for $839,000 in restructuring
charges associated with the FS-VFB Merger. A summary of the charges is as
follows:
(Dollars in thousands)
Separation and benefits $351
Obsolete supplies and equipment 334
Consulting 71
Legal 28
Contract termination penalties 23
Accounting 19
OTS filing fee 8
Miscellaneous 5
- ------------------------------------------------------
Total $839
At September 30, 1995, the remaining restructuring liability was
$330,000. This balance consisted of $307,000 of accrued separation and benefits
expense and $23,000 of accrued contract termination penalties.
At September 30, 1996, the restructuring liability no longer existed.
During fiscal 1995, the Company also incurred other FS-VFB
Merger-related expenses of $190,000 such as startup expenses, technology
updates, and miscellaneous expenses.
During fiscal 1996's first quarter, the Company incurred other FS-VFB
Merger-related expenses of $401,000 due to contractual obligations from the
change in control of FS.
(18) Eastern Bancorp, Inc. (Parent Company Only)
Financial Information
<TABLE>
<CAPTION>
Statements of Financial Condition At September 30,
(Dollars in thousands, except per share data) 1996 1995
<S> <C> <C>
Assets
Cash $ 52 $ 60
Short-term investments 665 584
Investment in subsidiaries 60,279 58,657
Investment securities 2,777 1,525
Accrued interest receivable 414 227
Other assets 563 634
Total assets $64,750 $61,687
Liabilities and Stockholders' Equity
Liabilities:
Accrued federal income taxes $ 102 $ 17
Other liabilities 701 506
Accounts payable to subsidiaries 367 181
Total liabilities 1,170 704
Stockholders' equity:
Preferred stock, $0.01 par value: 1,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $0.0067 par value: 5,000,000 shares authorized;
72
<PAGE>
4,095,549 shares issued at September 30, 1996 and
4,095,549 shares issued at September 30, 1995 27 27
Additional paid-in capital 36,398 36,196
Retained income (substantially restricted) 30,138 28,629
Unrealized gain (loss) on securities available-for-sale, net 6 (175)
Treasury stock (at cost), 444,015 shares at September 30, 1996,
and 522,325 shares at September 30, 1995 (2,989) (3,694)
Total stockholders' equity 63,580 60,983
Total liabilities and stockholders' equity $64,750 $61,687
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Statements of Operations
Interest on investment and mortgage backed securities $ 334 $ 282 $ 170
Total interest income 334 282 170
Net operating expenses 1,623 1,476 1,290
Loss before federal and state taxes, dividends, and equity in
undistributed earnings of subsidiaries (1,289) (1,194) (1,120)
Federal and state tax benefit 571 671 508
Loss before dividends and equity in undistributed
earnings of subsidiaries (718) (523) (612)
Dividends from subsidiaries 2,729 1,501 1,160
Equity in undistributed net income of subsidiaries 1,293 3,217 3,111
Net income $3,304 $4,195 $3,659
</TABLE>
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Statements of Cash Flows
Cash flows from operating activities:
Net income $3,304 $4,195 $3,659
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed (earnings) of subsidiaries:
VSC 296 777 228
VFB (1,589) (3,606) (2,765)
Rockingham -- (388) (574)
Amortization of fees, discounts, and premiums (10) (83) (23)
(Increase) decrease in other assets 71 (215) 283
(Increase) in accrued interest receivable (187) (164) (56)
(Increase) decrease in net accounts receivable to subsidiaries 186 245 (170)
Increase in other liabilities 195 96 6
(Decrease) in deferred federal income taxes (11) (183) --
Increase (decrease) in accrued federal income taxes 85 (490) 507
Total adjustments (964) (4,011) (2,564)
Net cash provided by operating activities 2,340 184 1,095
Cash flows from investing activities:
Investment in subsidiary -- (200) --
Loans to subsidiary, net of repayments (145) 80 (763)
(Increase) decrease in short-term investments (81) (38) 557
Investment and mortgage backed securities purchases (4,484) (4,418) (3,265)
Proceeds from maturities and returns of principal 3,250 4,706 1,949
Net cash provided (used) by investing activities (1,460) 130 (1,522)
Cash flows from financing activities:
Net proceeds from exercise of stock options and sale of
treasury stock 907 403 431
Dividends paid (1,795) (863) (353)
Net cash provided (used) by financing activities (888) (460) 78
Net (decrease) in cash (8) (146) (349)
Cash at beginning of year 60 206 555
Cash at end of year $52 $60 $206
Cash paid:
Federal and state taxes $2,200 $2,023 $1,100
</TABLE>
The parent only statements of stockholders' equity are identical to the
consolidated statements of stockholders' equity and, therefore, are not
reprinted here.
74
<PAGE>
(19) Unaudited Quarterly Information
<TABLE>
<CAPTION>
Year ended September 30, 1996
(Dollars in thousands, except per share data) First quarter Second quarter Third quarter Fourth quarter
<S> <C> <C> <C> <C>
Total interest income $15,476 $15,177 $15,007 $15,613
Net interest income 6,902 7,175 7,244 7,612
Provision for loan losses 435 300 100 60
Non-interest income 3,069 2,534 2,475 3,195
Non-interest expense(a) 7,193 7,032 7,483 12,170
Net income 1,487 1,506 1,309 (998)
Earnings per share 0.39 0.40 0.34 ( 0.27)
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30, 1995
(Dollars in thousands, except per share data) First quarter Second quarter Third quarter Fourth quarter
<S> <C> <C> <C> <C>
Total interest income $14,322 $14,795 $15,272 $15,709
Net interest income 7,008 6,981 6,907 6,984
Provision for loan losses 260 699 566 297
Non-interest income 2,256 2,463 2,366 2,932
Non-interest expense(b) 7,015 7,387 8,243 6,888
Net income 1,200 1,083 207 1,705
Earnings per share 0.33 0.29 0.06 0.45
</TABLE>
(a) Fourth quarter results include a $3.8 million non-recurring charge to
recapitalize SAIF.
(b) Third quarter non-interest expense increased due primarily to $839,000 in
restructuring charges and $190,000 in other merger-related expenses. See note 17
of the notes to consolidated financial statements for further information
regarding restructuring charges.
(20) Subsequent Event
On November 13, 1996, the Company entered into an Agreement and Plan of
Reorganization (the Merger Agreement) by and among the Company, the Bank, and
Vermont Financial Services Corp., a Delaware corporation (VFSC). Pursuant to the
Merger Agreement, the Company will merge with and into VFSC and the Bank will
become a wholly-owned subsidiary of VFSC (the Merger). Subject to certain price
adjustment provisions, under the terms of the Merger Agreement, the Company's
shareholders will receive stock and/or cash equal to the sum of $7.25 plus the
product of 0.49 times the average closing bid price of VFSC common stock for a
twenty-day period ending shortly before the effective time of the Merger. Based
on a twenty-day average closing bid price of VFSC common stock at the November
13, 1996 of $34.66, the Company's shareholders would be entitled to receive
stock and /or cash equal to approximately $24.23 for each share of the of the
Company's common stock. The Merger is expected to be completed in mid 1997.
Consummation of the Merger is conditioned, among other things, upon stockholder
approval and regulatory approval.
75
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Eastern Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Eastern Bancorp, Inc. and subsidiaries as of September 30, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eastern Bancorp,
Inc. and subsidiaries as of September 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1996, in conformity with generally accepted
accounting principles.
As discussed in note 1 of the notes to the consolidated financial statements,
during 1995 the Company adopted Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights, an Amendment of FASB Statement
No. 65."
KPMG Peat Marwick LLP
Boston, Massachusetts
November 8, 1996, except as to note 20,
which is as of
November 13, 1996
76
<PAGE>
Directors and Executive Officers of the Registrant
Set forth below is certain information regarding the Board of Directors
of Eastern Bancorp.
<TABLE>
<CAPTION>
Director For Term Position(s) held
Continuing Directors: Age (a) Since (b) Expiring with the Company
- --------------------- ------- --------- -------- ----------------
<S> <C> <C> <C> <C>
John A. Cobb 52 1988 1999 Director, President and
Chief Executive Officer
of Eastern Bancorp
Vice Chair and Chief
Executive Officer of
Vermont Federal Bank
E. David Humphrey 54 1992 1997 Director and Executive
Vice President of
Eastern Bancorp
President and Chief
Operating Officer of
Vermont Federal Bank
W. Stevens Sheppard 66 1989 1998 Chair of the Board
John K. Dwight 52 1989 1998 Director
Michael D. Flynn 57 1991 1997 Director
John S. Kimbell 50 1993 1997 Director
Garry T. Melia 54 1987 1997 Director
Mary Alice McKenzie 39 1991 1999 Director
Ernest A. Pomerleau 49 1990 1999 Director
James M. Sutton 55 1995 1998 Director
- -------------------------------------
(a) At December 31, 1996.
(b) The dates shown include service as directors of the Company's
subsidiary, Vermont Federal Bank, FSB, in the case of Ms. McKenzie and
Messrs. Cobb, Humphrey and Pomerleau.
</TABLE>
The business background of each member of the Board of Directors for
the past five years follows.
Michael D. Flynn, C.P.A. is Managing Partner of the Burlington, Vermont
Certified Public Accounting firm of Gallagher, Flynn & Company and has been
associated with the largest independent CPA firm in Vermont since 1972. He is
treasurer and a director of the Vermont Business Roundtable and chair of the
Board of Advisors for the School of Business Administration of the University of
Vermont. Mr. Flynn has served as Chair of the Vermont Chamber of Commerce,
President of the Lake Champlain Chamber of
77
<PAGE>
Commerce, and is a member of the Board of Trustees of Champlain College. Mr.
Flynn holds a B.A. from Colby College and an M.B.A. from Harvard Business
School.
E. David Humphrey joined the Bank on November 30, 1991 and began
serving as its president during fiscal 1992 and serves on its board of
directors. Before joining the Bank, he served as president, chief executive
officer, and a director of Eureka Savings Bank in Overland Park, Kansas from
1988 through 1991. He holds a B.S. in Business Administration from West Virginia
University.
78
<PAGE>
John S. Kimbell is the President and Chief Executive Officer of Vermont
Gas Systems, Inc. Prior to joining Vermont Gas in 1989, he served as Assistant
Vice President and subsequently as Vice President of Elizabethtown Gas Company
in New Jersey. He is currently Chair and Director of the Vermont Business
Roundtable, and Vice Chair of the New England Gas Association. Mr. Kimbell holds
a B.A. in Human Relations from Salem College in Salem, West Virginia and an
M.B.A. from Fairleigh Dickinson University in New Jersey.
Garry T. Melia is the managing partner of Melia & Osol, a law firm in
Worcester, Massachusetts. Mr. Melia is a member of both the Massachusetts and
Florida Bar Associations. He is also President and Director of several
Massachusetts business corporations. From December 1987 through September 1995,
Mr. Melia served on the Board of Directors of each of First Savings and
Rockingham. Mr. Melia holds a Bachelors degree from Salem State College in
Salem, Massachusetts and a J.D. from the University of Miami in Miami, Florida.
John A. Cobb was elected president, chief operating officer, and a
director of the Company in August 1988, and in February 1989 Mr. Cobb became the
Company's chief executive officer. He also currently serves as chief executive
officer and as a director of the Bank. He has a Bachelors degree from West
Virginia University and is a Certified Public Accountant.
Mary Alice McKenzie is the President of McKenzie's L.L.C., a meat
company located in Burlington, Vermont. She is a Director of the Bank and the
Central Vermont Public Service Company. Ms. McKenzie is also Director of, and on
the Executive Committee of, the Associated Industries of Vermont. She is
currently the Chair of the Board of the American Meat Institute. She is a member
of the Governor's Council of Economic Advisors and the Vermont Technology
Council. Ms. McKenzie holds a Bachelors of Business Administration from St.
Mary's College in Notre Dame, Indiana and a J.D. from Valparaiso University in
Valparaiso, Indiana.
Ernest A. Pomerleau is President of Pomerleau Real Estate in
Burlington, Vermont. He currently serves as Chair of the Board of Vermont
Federal, is a member of the Executive Committee of Eastern Bancorp, and Chair of
its Compensation Committee. Mr. Pomerleau currently serves as a director for
Greater Burlington Industrial Corporation. Mr. Pomerleau graduated from St.
Michael's College in Colchester, Vermont.
John K. Dwight is currently President, Chief Executive Officer, and a
director of Dwight Asset Management Company, Inc. located in Burlington,
Vermont, a subsidiary of United Asset Management Company, in Boston,
Massachusetts. Upon graduation from the University of North Carolina in Chapel
Hill in 1967 with a B.A. in English, Mr. Dwight joined Fidelity Mutual Life
Insurance Company in Cincinnati, Ohio, as a sales and pension consultant. Upon
moving to Vermont in 1975, Mr. Dwight became a partner in Brown Bridgman &
Company, offering preferred investment vehicles for pension plans, and later
owned and operated John K. Dwight, Inc. and John K. Dwight Asset Management
Company from 1985 through 1994 when such companies were acquired by United Asset
Management Company.
W. Stevens Sheppard was elected to the Board in 1989 and currently
serves as Chairman. He is an Administrator of Pequot Investment Advisors, Inc.,
and an Advisory Director of Berkshire Capital Corporation. Mr. Sheppard was a
Managing Director of Berkshire Capital Corporation from March 1988 to June 1995
and, prior to that, a Managing Director of Financial Institutions Group in
Corporate Finance, specializing in the thrift and mortgage banking industries
with Paine Webber. Prior thereto, he served as President and Director of Paine
Webber Real Estate Securities Inc., as well as a board member of a number
79
<PAGE>
of Paine Webber subsidiaries. Mr. Sheppard is a graduate of the University of
Virginia with a B.A. in Economics, and is a retired Naval Officer.
James M. Sutton was elected to the Board of Directors effective
November 1, 1995. Mr. Sutton is the general partner of James M. Sutton Investors
Limited of Englewood, Colorado, President and Chief Executive Officer of Maxwell
Corporation, an investment company headquartered in Welch, West Virginia, and
President of Monogram Homes, Inc. of Englewood, Colorado, a residential
construction firm. He currently serves as President of Ameribank in Northfork,
West Virginia, and Chair of American Bankshares, Inc., a bank holding company in
Welch, West Virginia. Mr. Sutton is a graduate of West Virginia University with
a B.S./B.A. in Accounting. He has completed the Graduate School of Banking at
the University of Wisconsin in Madison, Wisconsin and the Small Company
Management Program conducted by the Harvard Business School.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company at September 30, 1996. All officers serve at
the discretion of the Board of Directors, and there are no arrangements or
understandings regarding any such person's term of office as an officer, except
that Mr. Cobb has an employment contract with the Company pursuant to which he
serves as an officer of the Company and Mr. Humphrey has an employment contract
with the Company and the Bank pursuant to which he serves as an officer of those
companies.
<TABLE>
<CAPTION>
Age at
September 30,
Name 1996 Position(s) Held With the Company
<S> <C> <C>
John A. Cobb 52 President and Chief Executive
Officer; Chief Executive Officer
of the Bank
E. David Humphrey 54 Executive Vice President; President
and Chief Operating Officer
of the Bank
Janine K. Pinel 30 Chief Financial Officer and Vice President
Robert K. Hamme 54 Treasurer and Corporate Secretary;
Senior Vice President of the Bank
</TABLE>
Information concerning the principal occupations of the executive
officers of the Company during at least the last five years is set forth below.
John A. Cobb was elected president, chief operating officer, and a
director of the Company in August 1988, and in February 1989 Mr. Cobb became the
Company's chief executive officer. He also currently serves as chief executive
officer and as a director of the Bank. He has a Bachelors degree from West
Virginia University and is a Certified Public Accountant.
80
<PAGE>
E. David Humphrey joined the Bank on November 30, 1991 and during
fiscal 1992 began serving as ts president and chief operating officer. He also
serves on the Bank's and the Company's boards of directors. Before joining the
Bank, he served as president, chief executive officer, and a director of Eureka
Savings Bank in Overland Park, Kansas from 1988 through 1991. He holds a
Bachelor of Science degree in Business Administration from West Virginia
University.
Janine K. Pinel joined the Company in June 1994 as vice president of
accounting. In February 1995, Mrs. Pinel became the chief financial officer of
the Company. Prior to joining the Company, Mrs. Pinel had been employed by
Schering Plough Corporation in New Jersey from April 1992 through February 1993
and by Ernst & Young LLP from August 1988 through April 1992. She holds a
Bachelor of Science degree from Clemson University and is a Certified Public
Accountant. Mrs. Pinel is a member of the Vermont Society of CPAs, the American
Institute of CPAs, the Financial Executives Institute, and the National
Association for Female Executives.
Robert K. Hamme is a senior vice president, chief financial officer and
corporate secretary of the Bank. He also serves as treasurer and corporate
secretary of the Company. Before joining the Bank in March 1993, he served as
senior vice president, treasurer and corporate secretary of Bank of Vermont in
Burlington, Vermont. He is a Certified Public Accountant and a member of both
the Pennsylvania and Vermont Society of Certified Public Accountants. Mr. Hamme
is a graduate of Susquehanna University, with a Bachelor of Science degree in
Accounting.
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