As filed with the Securities and Exchange Commission on January 16, 1997
Registration No. 333-18611
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
SOVEREIGN BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 6720 23-2453088
- ------------------------- ----------------- ----------------
(State or other jurisdic- (Primary Standard (I.R.S. Employer
tion of incorporation or Industrial Class- Identification
organization) ification Code No.)
Number)
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
(610) 320-8400
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(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Jay S. Sidhu
President and Chief Executive Officer
Sovereign Bancorp, Inc.
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
(610) 320-8400
---------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------------------------
Copies to:
David W. Swartz, Esquire John J. Gorman, Esquire
Stevens & Lee Luse Lehman Gorman Pomerenk
111 North Sixth Street & Schick
P.O. Box 679 5335 Wisconsin Avenue, N.W.,
Reading, Pennsylvania 19603 Suite 400
Washington, D.C. 20015
----------------------------------------
<PAGE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
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: [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
<PAGE>
[ LOGO ] FIRST STATE
FINANCIAL SERVICES, INC.
1120 BLOOMFIELD AVENUE, CN 2449, WEST CALDWELL, NEW JERSEY 07007-2449
(201) 575-5800 EXTENSION 203
January 17, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
First State Financial Services, Inc. ('First State') to be held on Tuesday,
February 18, 1997, at 10:00 a.m., local time, at Mayfair Farms, 481 Eagle Rock
Avenue, West Orange, New Jersey.
The purpose of the Special Meeting is to consider and vote upon the
Agreement and Plan of Merger dated June 24, 1996, as amended by an Amendment to
Agreement and Plan of Merger dated November 26, 1996 (collectively, the 'Merger
Agreement'), between First State and Sovereign Bancorp, Inc. ('Sovereign'),
providing for the merger of First State with and into Sovereign (the 'Merger')
and the conversion of each outstanding share of common stock of First State into
shares of common stock of Sovereign and related stock purchase rights based on
an exchange ratio to be determined in accordance with the Merger Agreement, all
as more fully described in the accompanying Proxy Statement/Prospectus.
Completion of the Merger is subject to certain conditions, including the
approval of the Merger Agreement by the stockholders of First State at this
Special Meeting.
The attached Proxy Statement/Prospectus contains important information
concerning the Merger. We urge you to give it your careful attention.
The Board of Directors of First State has carefully considered and approved
the Merger Agreement and believes that the Merger is in the best interests of
First State and its stockholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
YOUR VOTE IS IMPORTANT. You are urged to sign, date and mail the enclosed
proxy card promptly in the postage-prepaid envelope provided. If you attend the
Special Meeting, you may vote in person even if you have already mailed your
proxy card.
On behalf of the Board of Directors and our employees, I wish to thank you
for your continued support. We appreciate your interest.
Sincerely yours,
/s/ Michael J. Quigley, III
-----------------------------
Michael J. Quigley, III
Chairman, President and Chief
Executive Officer
FIRST DeWITT BANK
CEDAR GROVE SERVICE CORPORATION * FIRST STATE INVESTMENT SERVICES, INC.
<PAGE>
FIRST STATE FINANCIAL SERVICES, INC.
1120 BLOOMFIELD AVENUE
WEST CALDWELL, NEW JERSEY 07007-2449
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 18, 1997
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of First
State Financial Services, Inc. ('First State'), a Delaware corporation, will be
held on Tuesday, February 18, 1997, at 10:00 a.m., local time, at Mayfair
Farms, 481 Eagle Rock Avenue, West Orange, New Jersey (the 'Special Meeting'),
to consider the following matters:
1. The approval and adoption of the Agreement and Plan of Merger dated
June 24, 1996, as amended by an Amendment to Agreement and Plan of Merger
dated as of November 26, 1996 (collectively, the 'Merger Agreement'),
between First State and Sovereign Bancorp, Inc. ('Sovereign'), which is
attached as Annex A to the accompanying Proxy Statement/Prospectus,
providing for the merger of First State with and into Sovereign (the
'Merger'). Pursuant to the Merger Agreement, each share of the common
stock, $.01 par value per share, of First State (the 'First State Common
Stock') outstanding at the closing of the Merger will be converted into
such number of shares of common stock, no par value, of Sovereign
('Sovereign Common Stock'), and related stock purchase rights, as shall
equal $14.75 divided by the average market value of a share of Sovereign
Common Stock (as determined in accordance with the Merger Agreement);
provided, however, that (i) if such average market value of Sovereign
Common Stock is less than $8.00 per share, each share of First State Common
Stock will be converted into 1.840 shares of Sovereign Common Stock, and
related stock purchase rights, or (ii) if the average market value of a
share of Sovereign Common Stock is greater than $12.04 per share, each
share of First State Common Stock will be converted into 1.225 shares of
Sovereign Common Stock, and related stock purchase rights. Sovereign will
pay cash to First State stockholders in lieu of issuing fractional shares
of Sovereign Common Stock.
2. To vote on adjournment of the Special Meeting, if necessary, to
permit further solicitation of proxies in the event there are not
sufficient votes at the time of the Special Meeting to constitute a quorum
or to approve the Merger Agreement.
3. Such other matters as may properly be brought before the Special
Meeting or any adjournments thereof.
The Board of Directors of First State has fixed the close of business on
January 6, 1997 as the record date for determining stockholders entitled to
notice of, and to vote at, the Special Meeting and any adjournments thereof.
A Proxy Statement/Prospectus is set forth on the following pages and a form
of proxy is enclosed herewith. To ensure that your vote is counted, please
complete, sign, date and return the proxy in the enclosed 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.
A list of stockholders entitled to vote at the Special Meeting will be
available at 1120 Bloomfield Avenue, West Caldwell, New Jersey for a period of
ten days prior to the Special Meeting and will also be available for inspection
at the Special Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Marie G. Martino, Secretary
West Caldwell, New Jersey
January 17, 1997
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN PROMPTLY THE
ENCLOSED PROXY CARD, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
IF YOU HAVE ANY QUESTIONS, PLEASE CALL
FIRST STATE AT (201) 575-5800.
Attention: Marie G. Martino
<PAGE>
FIRST STATE FINANCIAL SERVICES, INC.
PROXY STATEMENT
------------------
SOVEREIGN BANCORP, INC.
PROSPECTUS
This Proxy Statement/Prospectus ('Proxy Statement/Prospectus') is being
furnished to stockholders of First State Financial Services, Inc. ('First
State') in connection with the solicitation of proxies by the Board of Directors
of First State for use at a Special Meeting of Stockholders (including any
adjournments or postponements thereof) to be held on February 18, 1997 (the
'Special Meeting').
This Proxy Statement/Prospectus relates to up to 7,912,102 shares of common
stock, no par value ('Sovereign Common Stock'), of Sovereign Bancorp, Inc., a
Pennsylvania corporation ('Sovereign'), which may be issued upon the merger (the
'Merger') of First State with and into Sovereign, pursuant to an Agreement and
Plan of Merger dated June 24, 1996, as amended by an Amendment to Agreement and
Plan of Merger dated as of November 26, 1996 (collectively, the 'Merger
Agreement'). In the Merger, each outstanding share of common stock, par value
$0.01 per share, of First State ('First State Common Stock'), will be converted
into such number of shares of Sovereign Common Stock, and related stock purchase
rights, as shall equal $14.75 divided by the average of the mean between the
high bid and low asked prices of a share of Sovereign Common Stock (as reported
on the Nasdaq National Market) for the ten consecutive trading days immediately
preceding the effective date of the Merger (the 'Sovereign Market Value'). This
exchange ratio is subject to possible adjustment in the event that the Sovereign
Market Value as of the effective date of the Merger is less than $8.00 or
greater than $12.04 per share (such exchange ratio, as adjusted, is hereinafter
referred to as the 'Exchange Ratio'). If the Sovereign Market Value as of the
effective date of the Merger is less than $8.00 per share, then the Exchange
Ratio will be 1.840 shares of Sovereign Common Stock, and related stock purchase
rights, for each outstanding share of First State Common Stock. If the Sovereign
Market Value as of the effective date of the Merger is greater than $12.04 per
share, then the Exchange Ratio will be 1.225 shares of Sovereign Common Stock,
and related stock purchase rights, for each outstanding share of First State
Common Stock.
This Proxy Statement/Prospectus constitutes both the proxy statement of
First State relating to the solicitation of proxies by the First State Board of
Directors for use at the Special Meeting to be held for the purpose of
considering and voting upon a proposal to approve the Merger Agreement, and the
prospectus of Sovereign with respect to the Sovereign Common Stock to be issued
in the Merger. Completion of the Merger is subject to various conditions
including the approval of First State stockholders.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of First State on or about January 17, 1997.
THE SHARES OF SOVEREIGN 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 PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF SOVEREIGN COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
------------------
The date of this Proxy Statement/Prospectus is January 17, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
AVAILABLE INFORMATION............................................................ 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................. 1
SUMMARY.......................................................................... 3
The Companies.................................................................. 3
The Meeting.................................................................... 3
The Merger..................................................................... 4
Certain Related Transactions................................................... 7
Recent Developments............................................................ 8
Comparative Per Common Share Data.............................................. 8
INTRODUCTION..................................................................... 11
SOVEREIGN SELECTED FINANCIAL DATA................................................ 12
FIRST STATE SELECTED FINANCIAL DATA.............................................. 13
PRO FORMA COMBINED FINANCIAL INFORMATION......................................... 14
Pro Forma Unaudited Combined Condensed Balance Sheet as of September 30, 1996.. 14
Pro Forma Unaudited Combined Condensed Statements of Income for the
Nine Months Ended September 30, 1996 and 1995 and the Years Ended
December 31, 1995, 1994 and 1993............................................ 16
THE MEETING...................................................................... 22
Matters to be Considered at the Meeting........................................ 22
Vote Required.................................................................. 22
Voting of Proxies.............................................................. 22
Revocability of Proxies........................................................ 23
Record Date; Stock Entitled to Vote; Quorum.................................... 23
Solicitation of Proxies........................................................ 23
THE MERGER....................................................................... 24
Background of and Reasons for the Merger; Recommendation of the
First State Board of Directors.............................................. 24
Terms of the Merger............................................................ 27
Opinion of Financial Advisor................................................... 28
Effective Date of the Merger................................................... 34
Exchange of First State Stock Certificates..................................... 35
Conditions to the Merger....................................................... 35
Subsidiary Bank Merger......................................................... 36
Regulatory Approvals........................................................... 37
Representations and Warranties................................................. 37
Business Pending the Merger.................................................... 38
Dividends...................................................................... 39
No Solicitation of Transactions................................................ 39
Amendment; Waivers............................................................. 40
Termination; Effect of Termination............................................. 40
Management and Operations after the Merger..................................... 40
Employee Benefits.............................................................. 41
Accounting Treatment........................................................... 41
Certain Federal Income Tax Consequences........................................ 42
Expenses....................................................................... 43
Resale of Sovereign Common Stock............................................... 43
No Dissenters' Rights of Appraisal............................................. 43
Dividend Reinvestment Plan..................................................... 43
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
PAGE
----
INTERESTS OF CERTAIN PERSONS IN THE MERGER....................................... 44
Stock Options.................................................................. 44
Indemnification................................................................ 44
CERTAIN RELATED TRANSACTIONS..................................................... 45
Stock Option Agreement......................................................... 45
INFORMATION WITH RESPECT TO SOVEREIGN............................................ 46
General........................................................................ 46
Market Price of and Dividends on Sovereign Common Stock and
Related Shareholder Matters................................................. 46
INFORMATION WITH RESPECT TO FIRST STATE.......................................... 47
General........................................................................ 47
Market Price of and Dividends on First State Common Stock and
Related Stockholder Matters................................................. 47
DESCRIPTION OF SOVEREIGN CAPITAL SECURITIES...................................... 48
Common Stock................................................................... 48
Preferred Stock................................................................ 49
Shareholder Rights Plan........................................................ 52
Special Charter and Pennsylvania Corporate Law Provisions...................... 52
COMPARISON OF SHAREHOLDER RIGHTS................................................. 54
Directors...................................................................... 54
Shareholders' Meetings......................................................... 55
Shareholder Rights Plan........................................................ 55
Required Shareholder Votes..................................................... 55
Amendment of Bylaws............................................................ 57
Mandatory Tender Offer Provision............................................... 57
Special Pennsylvania Corporate Law Provisions.................................. 57
ADJOURNMENT OF SPECIAL MEETING................................................... 57
EXPERTS.......................................................................... 58
LEGAL MATTERS.................................................................... 58
OTHER MATTERS.................................................................... 58
SHAREHOLDER PROPOSALS............................................................ 58
ANNEXES
A. Agreement and Plan of Merger between Sovereign Bancorp, Inc. and First State
Financial Services, Inc. dated June 24, 1996, and Amendment to Agreement and
Plan of Merger between Sovereign Bancorp, Inc. and First State Financial
Services, Inc. dated as of November 26, 1996.................................. A-1
B. Stock Option Agreement........................................................ B-1
C. Opinion of McConnell, Budd & Downes, Inc...................................... C-1
</TABLE>
(ii)
<PAGE>
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY SOVEREIGN OR FIRST STATE. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF SOVEREIGN OR FIRST STATE SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
All information concerning Sovereign and its subsidiaries contained herein,
incorporated herein by reference or supplied herewith has been furnished by
Sovereign, and all information concerning First State and its subsidiaries
contained herein, incorporated herein by reference or supplied herewith has been
furnished by First State.
AVAILABLE INFORMATION
Sovereign and First State are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the 'Exchange Act'), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the 'Commission'). The reports, proxy
statements and other information filed by Sovereign and First State with the
Commission can be inspected and copied at the offices of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Seven World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Avenue, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material also can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates, and from the web site that the
Commission maintains at http://www.sec.gov.
Sovereign has filed with the Commission a Registration Statement on Form
S-4 (together with any amendments thereto, the 'Registration Statement') under
the Securities Act of 1933, as amended (the 'Securities Act'), with respect to
the Sovereign Common Stock to be issued pursuant to the Merger Agreement. This
Proxy Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto. Such additional information may
be obtained from the Commission's principal office in Washington, D.C.
Statements contained in this Proxy Statement/Prospectus or in any document
incorporated in this Proxy Statement/Prospectus by reference or supplied
herewith as to the contents of any contract or other document referred to herein
or therein are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Sovereign (File No.
0-16533) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
1. Sovereign's Annual Report on Form 10-K for the year ended December
31, 1995 (including certain information contained in Sovereign's Proxy
Statement dated March 15, 1996, used in connection with Sovereign's 1996
Annual Meeting of Shareholders and incorporated by reference in the Form
10-K).
2. Sovereign's Quarterly Reports on Form 10-Q for each of the quarters
ended March 31, 1996, June 30, 1996 and September 30, 1996.
1
<PAGE>
3. Sovereign's Current Reports on Form 8-K dated February 15, 1996,
June 3, 1996, October 31, 1996 and November 26, 1996.
4. Sovereign's Registration Statement on Form 8-A, filed August 14,
1989, pursuant to which Sovereign registered certain stock purchase rights
under the Exchange Act and any amendments or reports filed for the purpose
of updating such Registration Statement.
The following documents relating to First State are incorporated by
reference in this Proxy Statement/Prospectus:
1. First State's Annual Report on Form 10-K for the year ended
September 30, 1996 as filed with the Commission by First State (File No.
0-16329) pursuant to the Exchange Act.
2. The following portions of First State's Annual Report to
Stockholders for the year ended September 30, 1996, which accompanies this
Proxy Statement/Prospectus: audited financial statements and notes thereto
(pages 16 through 44); selected consolidated financial and other data (page
4); management's discussion and analysis of financial condition and results
of operations (pages 5 through 17); and selected quarterly financial data
(page 37).
In addition, all documents filed by Sovereign and First State pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
of this Proxy Statement/Prospectus and prior to the date of the Special Meeting
shall be deemed to be incorporated by reference in this Proxy
Statement/Prospectus and to be a part hereof from the dates of filing of such
documents or reports. Any statement contained herein or in a document all or a
portion of which is incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
Accompanying this Proxy Statement/Prospectus is First State's Annual Report
to Stockholders for the year ended September 30, 1996.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON
WRITTEN OR ORAL REQUEST. DOCUMENTS RELATING TO SOVEREIGN MAY BE REQUESTED FROM
SOVEREIGN BANCORP, INC., 1130 BERKSHIRE BOULEVARD, WYOMISSING, PENNSYLVANIA
19610 (TELEPHONE NUMBER (610) 320-8400), ATTENTION: LAWRENCE M. THOMPSON, JR.,
SECRETARY. DOCUMENTS RELATING TO FIRST STATE MAY BE REQUESTED FROM FIRST STATE
FINANCIAL SERVICES, INC., 1120 BLOOMFIELD AVENUE, WEST CALDWELL, NEW JERSEY
07007-2449 (TELEPHONE NUMBER (201) 575-5800), ATTENTION: MARIE G. MARTINO,
SECRETARY. IN ORDER TO ENSURE DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL
MEETING OF STOCKHOLDERS, REQUESTS SHOULD BE RECEIVED BY FEBRUARY 5, 1997.
2
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained or
incorporated by reference in this Proxy Statement/Prospectus and the Annexes
hereto. A copy of the Merger Agreement, as amended (excluding schedules
thereto), is set forth in Annex A to this Proxy Statement/Prospectus and
reference is made thereto for a complete description of the terms of the Merger.
Stockholders are urged to read carefully this entire Proxy Statement/Prospectus,
including the Annexes hereto.
THE COMPANIES
Sovereign
Sovereign Bancorp, Inc. ('Sovereign'), a Pennsylvania business corporation,
is the holding company for Sovereign Bank, a Federal Savings Bank ('Sovereign
Bank') and Sovereign Community Bank, a federal savings bank ('Sovereign
Community'). At September 30, 1996, Sovereign and its subsidiaries had total
consolidated assets, deposits and shareholders' equity of approximately $9.4
billion, $5.0 billion and $460 million, respectively. The primary operating
entity of Sovereign is Sovereign Bank. Sovereign Bank's primary business
consists of attracting deposits from its network of 122 community banking
offices, and originating residential mortgage loans and home equity lines of
credit in the communities served by those offices. Those offices are located
largely in the Pennsylvania counties of Berks, Lancaster, Bucks, Montgomery,
Philadelphia, Lehigh and Northampton and in the New Jersey counties of Mercer,
Ocean, Monmouth and Union.
The principal executive offices of Sovereign are located at 1130 Berkshire
Boulevard, Wyomissing, Pennsylvania 19610, and its telephone number is (610)
320-8400. For further information concerning Sovereign and its subsidiaries, see
'AVAILABLE INFORMATION,' 'INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,'
'SOVEREIGN SELECTED FINANCIAL DATA,' 'INFORMATION WITH RESPECT TO SOVEREIGN,'
and 'DESCRIPTION OF SOVEREIGN CAPITAL SECURITIES.'
First State
First State Financial Services, Inc. ('First State'), a Delaware
corporation, is the holding company for First DeWitt Bank, a federal savings
bank ('First DeWitt'). At September 30, 1996, First State had total consolidated
assets, deposits and stockholders' equity of approximately $610 million, $554
million and $35 million, respectively. The primary operating entity of First
State is First DeWitt, a federally-chartered savings bank having 14 branches
located in Essex, Ocean, Morris, Monmouth and Sussex Counties, New Jersey. First
DeWitt is principally engaged in the business of attracting deposits, primarily
from the general public, through a variety of deposit products and investing
those deposits, together with funds from ongoing operations, in the origination
and purchase of one-to-four family residential mortgage loans and securities
backed by these mortgage loans and, to a lesser extent, consumer and other
mortgage loans. First DeWitt considers its primary market area to be Essex,
Ocean and Monmouth Counties, New Jersey.
The principal executive offices of First State are located at 1120
Bloomfield Avenue, West Caldwell, New Jersey 07007-2449, and its telephone
number is (201) 575-5800. For additional information concerning First State and
its subsidiaries, see 'AVAILABLE INFORMATION,' 'INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE,' 'FIRST STATE SELECTED FINANCIAL DATA,' and 'INFORMATION
WITH RESPECT TO FIRST STATE.'
THE MEETING
General
A Special Meeting of the stockholders of First State will be held at
Mayfair Farms, 481 Eagle Rock Avenue, West Orange, New Jersey, on Tuesday,
February 8, 1997 at 10:00 a.m., local time (the 'Special Meeting').
3
<PAGE>
Record Date
The record date for the Special Meeting is January 6, 1997 (the 'Record
Date'). Only stockholders of record at the close of business on the Record Date
will be entitled to receive notice of, and to vote at, the Special Meeting.
Matters to be Considered at the Meeting
At the Special Meeting, holders of First State's common stock, par value
$0.01 per share (the 'First State Common Stock'), will consider and vote upon a
proposal to approve and adopt the Agreement and Plan of Merger, dated June 24,
1996, as amended by an Amendment to Agreement and Plan of Merger dated as of
November 26, 1996 (collectively, the 'Merger Agreement'), between Sovereign and
First State, which is attached as Annex A to this Proxy Statement/Prospectus,
providing for the merger of First State with and into Sovereign (the 'Merger').
In addition to the Merger Agreement, stockholders of First State are being asked
to approve a proposal to adjourn the Special Meeting, if necessary, to permit
further solicitation of proxies in the event there are not sufficient votes at
the Special Meeting to approve the Merger Agreement. Stockholders will also
consider and vote upon any other matter that may properly come before the
Special Meeting. See 'THE MEETING -- Matters to be Considered at the Meeting.'
Vote Required
The Merger will require the approval of the Merger Agreement by the
affirmative vote of a majority of the outstanding shares of First State Common
Stock entitled to be voted thereon. The directors and executive officers of
First State have agreed to vote all shares of First State Common Stock that they
own on the Record Date in favor of the approval and adoption of the Merger
Agreement. At December 1, 1996, directors and executive officers of First
State owned approximately 460,206 shares of First State Common Stock or
approximately 11.7% of the then outstanding shares of First State Common Stock
that are entitled to be voted at the Special Meeting. See 'THE MEETING -- Votes
Required.'
THE MERGER
Terms of the Merger
At the effective date of the Merger (the 'Effective Date'), each
outstanding share of First State Common Stock will be automatically converted
into, and become a right to receive, such number of shares of Sovereign Common
Stock, and related stock purchase rights, as shall equal $14.75 divided by the
average of the mean between the high bid and low asked prices of a share of
Sovereign Common Stock (as reported on the Nasdaq National Market) for the ten
consecutive trading days immediately preceding the Effective Date (the
'Sovereign Market Value'). This exchange ratio is subject to possible adjustment
in the event that the Sovereign Market Value as of the Effective Date is less
than $8.00 per share or greater than $12.04 per share (such exchange ratio, as
adjusted, is hereinafter referred to as the 'Exchange Ratio').
If, on the Effective Date, the Sovereign Market Value is less than $8.00
per share, each outstanding share of First State Common Stock will be converted
into and become a right to receive 1.840 shares of Sovereign Common Stock and
related stock purchase rights.
If, on the Effective Date, the Sovereign Market Value is greater than
$12.04 per share, each outstanding share of First State Common Stock will be
converted into and become a right to receive 1.225 shares of Sovereign Common
Stock and related stock purchase rights.
Sovereign will in all events pay cash to First State stockholders in lieu
of issuing fractional shares of Sovereign Common Stock.
First State may terminate the Merger Agreement if, among other things, the
Sovereign Market Value on the Effective Date is less than $8.00 per share,
subject to the right of Sovereign to increase
4
<PAGE>
the Exchange Ratio to an amount which when multiplied by the Sovereign Market
Value as of the Closing Date equals $14.75. Sovereign or First State may
terminate the Merger Agreement if the Merger has not been completed prior to
March 31, 1997.
In connection with the Merger, all outstanding options to purchase shares
of First State Common Stock under First State's preexisting employee and
director stock option plans will be converted on the Effective Date into an
option to acquire that number of shares of Sovereign Common Stock equal to the
number of shares of First State Common Stock covered by the option multiplied by
the applicable Exchange Ratio, and the exercise price for a whole share of
Sovereign Common Stock shall be the stated exercise price for such option
divided by the applicable Exchange Ratio, such shares to be issuable upon
exercise in accordance with the terms of the respective plans and grant
agreements under which they were issued. See 'THE MERGER -- Terms of the
Merger.'
The Effective Date will be designated by Sovereign and will occur within
the 30-day period following the first day on which all conditions precedent are
fulfilled or waived. See 'THE MERGER -- Effective Date of the Merger.'
The Merger Agreement permits First State to pay its regular quarterly cash
dividend in an amount not to exceed $.055 per share in each quarter in which the
Effective Date is not on or before the record date for the payment by Sovereign
of its regular cash dividend. See 'THE MERGER -- Dividends.'
Merger Agreement Amendment
The Merger Agreement as originally executed by the parties provided that
First State stockholders would receive in the Merger such number of shares of
Sovereign Common Stock as equalled $14.75 divided by the Sovereign Market Value
(which is determined by reference to the average price of Sovereign Common Stock
for the ten trading days preceding the Effective Date) if the Sovereign Market
Value was between $9.00 and $11.45 per share; provided that, if the Sovereign
Market Value was greater than $11.45 per share, First State stockholders would
receive 1.29 shares of Sovereign Common Stock in the Merger and, if the
Sovereign Market Value was less than $9.00 per share, First State stockholders
would receive 1.64 shares of Sovereign Common Stock in the Merger. The Merger
Agreement as originally executed by the parties also included certain
termination provisions that allowed Sovereign to terminate the Merger Agreement
at any time prior to the Effective Date if certain asset quality measures were
triggered, including if the aggregate deficiencies in the current appraised
values of commercial real estate assets securing commercial real estate loans
necessary to maintain an 80% loan to value ratio for each loan exceeded
$1,000,000 (the 'Commercial Real Estate Termination Right'). In late November
1996, Sovereign and First State amended the Merger Agreement as a result of
Sovereign's notification to First State that the Commercial Loan Termination
Right had been triggered.
Under the Amendment to Agreement and Plan of Merger, dated as of November
26, 1996 (the 'Merger Agreement Amendment'), the parties agreed to revise the
exchange ratio in exchange for Sovereign's agreement to eliminate the
termination rights included in the Merger Agreement relating to the asset
quality of First State. Under the Merger Agreement Amendment, if the Sovereign
Market Value is between $8.00 and $12.04, First State stockholders will receive
such number of shares of Sovereign Common Stock as will equal $14.75 divided by
the Sovereign Market Value. If the Sovereign Market Value is greater than
$12.04, First State stockholders will receive 1.225 shares of Sovereign Common
Stock in the Merger and, if the Sovereign Market Value is less than $8.00, First
State stockholders will receive 1.84 shares of Sovereign Common Stock in the
Merger. In the Merger Agreement Amendment, First State retained the right to
terminate the transaction if the Sovereign Market Value as of the Effective Date
is less than $8.00 per share unless Sovereign agrees to increase the exchange
ratio to an amount which, when multiplied by the Sovereign Market Value as of
the Effective Date, equals $14.75. References in this Proxy Statement/Prospectus
to the 'Merger Agreement' are references to such Merger Agreement as amended by
the Merger Agreement Amendment. See 'THE MERGER -- Background of and Reasons for
the Merger; Recommendation of the First State Board of Directors' and '-- Terms
of the Merger.'
5
<PAGE>
No Dissenters' Rights of Appraisal
Record holders of First State Common Stock will not be entitled to
appraisal rights enabling such holders to obtain a cash payment for the 'fair
value' of their shares in connection with the matters to be acted on at the
Special Meeting. See 'THE MERGER -- No Dissenters' Rights of Appraisal.'
Accounting Treatment and Certain Federal Income Tax Consequences
The Merger is intended to qualify as a pooling of interests for financial
accounting purposes and is expected to constitute a tax-free reorganization for
federal income tax purposes. See 'THE MERGER -- Certain Federal Income Tax
Consequences' and '-- Accounting Treatment.'
Recommendations of First State's Board of Directors and Reasons for the Merger
The Board of Directors of First State unanimously recommends that its
shareholders approve and adopt the Merger Agreement. See 'THE MERGER --
Background of and Reasons for the Merger; Recommendation of the First State
Board of Directors.'
Opinion of Financial Advisor
McConnell, Budd & Downes, Inc. ('MB&D') has delivered its written opinion
to the Board of Directors of First State that, as of January 15, 1997, the
Exchange Ratio is fair, from a financial point of view, to the stockholders of
First State. For information on the assumptions made, matters considered, and
limitations on the review undertaken by MB&D, see 'THE MERGER -- Opinion of
Financial Advisor.' Stockholders are urged to read in its entirety the opinion
of MB&D, attached as Annex C to this Proxy Statement/Prospectus.
Conditions to the Merger; Regulatory Approvals
The obligations of Sovereign and First State to complete the Merger are
subject to various conditions usual and customary in transactions similar to the
Merger, including obtaining requisite regulatory approvals and stockholder
approval of First State's stockholders. Application has been made to obtain
required regulatory approvals. No assurance can be given that all required
approvals will be received or as to the timing or conditions of such approvals.
See 'THE MERGER -- Regulatory Approvals.' The obligation of Sovereign to
complete the Merger is also subject to certain other conditions, including,
among other things, receipt of an opinion from Sovereign's independent auditors
to the effect that the Merger will be treated as a 'pooling of interests' for
financial accounting purposes. No assurances can be given that all such
conditions will be met. See 'THE MERGER -- Conditions to the Merger.'
Termination; Effect of Termination
The Merger Agreement may be terminated at any time prior to the Effective
Date by mutual consent of Sovereign and First State or by either party if (i)
the other party breaches any representation, warranty, covenant or other
obligation contained in the Merger Agreement which results in a Material Adverse
Effect, and such breach has not or cannot be cured within thirty days from the
date written notice of such breach was given to such party committing the
breach, (ii) the Merger is not completed by March 31, 1997, or (iii) either
party is notified that a necessary regulatory approval is unlikely to be
granted. In addition, First State may terminate the Merger Agreement if, on the
Effective Date, the Sovereign Market Value is less than $8.00, subject to the
right of Sovereign to increase the Exchange Ratio to an amount which when
multiplied by the Sovereign Market Value as of the Effective Date equals $14.75.
See 'THE MERGER -- Termination; Effect of Termination.'
6
<PAGE>
Differences in Shareholder Rights
Sovereign is a Pennsylvania corporation subject to the provisions of the
Pennsylvania Business Corporation Law of 1988, as amended (the 'Pennsylvania
BCL'). First State is a Delaware corporation subject to the provisions of the
Delaware General Corporation Law ('GCL'). Upon completion of the Merger,
stockholders of First State will become shareholders of Sovereign and their
rights as such will be governed by Sovereign's Articles of Incorporation and
Bylaws and by the Pennsylvania BCL. The rights of shareholders of Sovereign are
different in certain respects from the rights of stockholders of First State.
See 'COMPARISON OF SHAREHOLDER RIGHTS.'
Management and Operations after the Merger
The Board of Directors and executive officers of Sovereign in office
immediately prior to completion of the Merger will remain as Sovereign's Board
of Directors and executive officers upon completion of the Merger. The Board of
Directors and executive officers of Sovereign Bank in office immediately prior
to completion of the merger of First DeWitt with and into Sovereign Bank (the
'Bank Merger') will remain as Sovereign Bank's Board of Directors and executive
officers, except that upon completion of the Bank Merger Michael J. Quigley,
III, Chairman of the Board of Directors, President and Chief Executive Officer
of First DeWitt, will become a director of Sovereign Bank until the 1998 annual
reorganization meeting of the Board of Directors of Sovereign Bank. See 'THE
MERGER -- Subsidiary Bank Merger,' '-- Management and Operations after the
Merger' and '-- Employee Benefits.'
Exchange of Certificates
After the Effective Date, Sovereign will send to First State stockholders
transmittal materials for use in effecting the exchange of their certificates
representing shares of First State Common Stock for certificates representing
shares of Sovereign Common Stock. See 'THE MERGER -- Exchange of First State
Stock Certificates.'
CERTAIN RELATED TRANSACTIONS
Stock Option Agreement
As a condition to entering into the Merger Agreement, First State granted
Sovereign an option to purchase under certain circumstances up to 783,500
shares, or 19.9%, of the issued and outstanding First State Common Stock
pursuant to a Stock Option Agreement, dated as of June 24, 1996 (the 'Stock
Option Agreement'). The option may be exercised by Sovereign only upon the
occurrence of specified events that have the potential for a third party to
effect an acquisition of control of First State prior to the termination of the
Merger Agreement. The exercise price per share to purchase First State Common
Stock under the option is equal to the lower of $10.00 or the lowest price per
share that a person or group, other than Sovereign or an affiliate of Sovereign,
paid or offers to pay for First State Common Stock upon the occurrence of one of
the specified events that triggers the ability of Sovereign to exercise the
option. None of such triggering events has occurred as of the date hereof.
Acquisitions of shares of First State Common Stock pursuant to an exercise of
the option would be subject to prior regulatory approval under certain
circumstances. See 'CERTAIN RELATED TRANSACTIONS -- Stock Option Agreement.'
Other
First State has agreed in the Merger Agreement that during the term of the
Merger Agreement, it will not solicit or engage in any discussions with any
person other than Sovereign concerning any acquisition of First State or any of
its subsidiaries, except that First State may respond to unsolicited inquiries
from analysts, regulatory authorities, and stockholders in the ordinary course
of business. See 'THE MERGER -- No Solicitation of Transactions.' In addition,
the directors and executive officers
7
<PAGE>
of First State have agreed to vote their shares of First State Common Stock in
favor of the Merger Agreement. See 'THE MERGER -- Matters to be Considered at
the Meeting.'
The Stock Option Agreement and the agreements of First State's directors
and executive officers to vote in favor of the Merger may have the effect of
precluding or discouraging persons who might now or prior to the Effective Date
be interested in acquiring all of or a significant interest in First State from
considering or proposing such an acquisition, even if such persons were to pay a
higher price per share for First State Common Stock than the price per share
being paid by Sovereign under the Merger Agreement, or might result in a
potential acquiror proposing to pay a lower price per share to acquire First
State than it might otherwise have proposed to pay. See 'CERTAIN RELATED
TRANSACTIONS -- Stock Option Agreement.'
RECENT DEVELOPMENTS
On September 30, 1996, federal legislation was adopted to recapitalize the
Savings Association Insurance Fund (the 'SAIF') of the Federal Deposit Insurance
Corporation. The legislation, which, among other things, will result in an
immediate reduction in SAIF insurance premiums and the eventual elimination of
the disparity for deposit insurance premiums under the SAIF and the Bank
Insurance Fund (the 'BIF') of the Federal Deposit Insurance Corporation,
required a one-time assessment for the third quarter of 1996 of all institutions
with SAIF-insured deposits. Sovereign's one-time after-tax charge was $17.2
million for the quarter ended September 30, 1996. First State's one-time
after-tax charge was $2.0 million for the quarter ended September 30, 1996.
Certain information of Sovereign and First State for the period ended September
30, 1996 is presented in this Proxy Statement/Prospectus both including and
excluding the effects of this one-time assessment. See 'Comparative Per Common
Share Data' and 'SOVEREIGN SELECTED FINANCIAL DATA.'
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and executive officers of First State are the holders of
stock options to acquire First State Common Stock which will be converted into
options to acquire Sovereign Common Stock. Certain executive officers of First
State may be entitled to receive severance payments as a result of the Merger
under agreements with First State to which they are parties. Also, Sovereign has
agreed to indemnify, for a period of six years after the Effective Date, persons
who served as directors and officers of First State. See 'THE MERGER --
Management and Operations After the Merger' and 'INTERESTS OF CERTAIN PERSONS IN
THE MERGER.'
COMPARATIVE PER COMMON SHARE DATA
The following table sets forth certain unaudited comparative per share data
relating to book value per common share, cash dividends declared per common
share and income from continuing operations per common share (i) on an
historical basis for Sovereign and First State, (ii) on a pro forma basis per
share of Sovereign Common Stock to reflect completion of the Merger, and (iii)
on an equivalent pro forma basis per share of First State Common Stock to
reflect completion of the Merger. Certain information at and for the nine months
ended September 30, 1996 is presented both including and excluding the SAIF
special assessment applicable to SAIF-insured deposits. The pro forma
information has been prepared giving effect to the Merger using the pooling of
interests accounting method. For a description of the effect of pooling of
interests accounting, see 'THE MERGER -- Accounting Treatment.' The pro forma
information for the nine-month period ended September 30, 1996 and for the years
ended December 31, 1995, 1994 and 1993 utilizes First State historical financial
information for the nine-month period ended June 30, 1996 (unaudited), and the
years ended September 30, 1995, 1994 and 1993, respectively. The following
equivalent per share data assume an Exchange Ratio of 1.225 shares of Sovereign
Common Stock for each share of First State Common Stock (based on a closing sale
price of $13.50 per share for Sovereign Common Stock as of January 5, 1997); the
Exchange Ratio is subject to adjustment based on the Sovereign Market Value as
of the Effective Date. See 'THE MERGER -- Terms of the Merger.' This information
should be read in conjunction with the consolidated financial statements of
Sovereign and First State, including the notes
8
<PAGE>
thereto, incorporated by reference in this Proxy Statement/Prospectus, and the
other financial data appearing elsewhere in this Proxy Statement/Prospectus. See
'INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE' and 'AVAILABLE INFORMATION.'
The following information is not necessarily indicative of the results of
operations of future periods or future combined financial position.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996(1)
----------------------------------
EXCLUDING INCLUDING
BOOK VALUE PER COMMON SHARE: SAIF ASSESSMENT SAIF ASSESSMENT AT DECEMBER 31, 1995(1)
- -------------------------------------------------- ---------------- ---------------- -------------------------------------
<S> <C> <C> <C>
Historical:
Sovereign....................................... $ 8.05 $ 7.76 $ 7.40
First State..................................... 10.14 10.14 10.71
Pro Forma:
Pro forma per share of Sovereign Common Stock... 8.07 7.80 7.49
Equivalent pro forma per share of First State
Common Stock.................................. 9.88 9.55 9.18
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996(1) FOR THE YEAR ENDED
---------------------------------- DECEMBER 31,
EXCLUDING INCLUDING -------------------------------------
CASH DIVIDENDS PAID PER COMMON STOCK: SAIF ASSESSMENT SAIF ASSESSMENT 1995(1) 1994(1) 1993(1)
- -------------------------------------------------- ---------------- ---------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Historical:
Sovereign....................................... 0.063 0.063 0.084 0.106 0.099
First State..................................... 0.17 0.17 0.20 0.12 --
Pro Forma(2):
Pro forma per share of Sovereign Common Stock... 0.063 0.063 0.084 0.106 0.099
Equivalent pro forma per share of First State
Common Stock.................................. 0.077 0.077 0.103 0.130 0.121
INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE:
- ---------------------------------------------------
Historical:
Sovereign....................................... $ 0.84 $ 0.55 $ 1.00 $ 0.90 $ 0.70
First State..................................... (0.25) (0.25) 1.01 0.91 0.65
Pro Forma(3):
Pro forma per share of Sovereign
Common Stock.................................. 0.76 0.49 0.98 0.89 0.69
Equivalent pro forma per share of First State
Common Stock.................................. 0.93 0.60 1.21 1.08 .84
</TABLE>
- ------------------
(1) Data reflect First State historical financial data at and for the nine
months ended June 30, 1996, and at and for the years ended September 30,
1995, 1994 and 1993. First State historical financial data for the nine
months ended June 30, 1996 do not include the one-time after-tax charge of
$2.0 million relating to the SAIF recapitalization (see "Recent
Developments") or an after-tax charge of a total of $3.1 million relating
to loan loss provisions and writedowns of real estate owned taken by First
State during the quarter ended September 30, 1996.
(2) Sovereign pro forma dividends per share represent historical dividends paid
by Sovereign. First State pro forma equivalent dividends per share represent
such amounts multiplied by an Exchange Ratio of 1.225 shares of Sovereign
Common Stock for each share of First State Common Stock. The Exchange Ratio
is subject to adjustment based on the Sovereign Market Value as of the
Effective Date. See 'THE MERGER -- Terms of the Merger.'
(3) Sovereign pro forma income from continuing operations per common share
represents historical net income from continuing operations for Sovereign
and First State combined on the assumption that Sovereign and First State
had been combined for the periods presented on a pooling of interests basis,
divided by the number of shares of Sovereign Common Stock which will be
issued and outstanding following completion of the Merger. First State
equivalent pro forma income from continuing operations per common share
represents such amounts multiplied by an Exchange Ratio of 1.225 shares of
Sovereign Common Stock for each share of First State Common Stock. The
Exchange Ratio is subject to adjustment based on the Sovereign Market Value
as of the Effective Date. See 'THE MERGER -- Terms of the Merger.'
9
<PAGE>
Market Value of Securities
The following table sets forth the market value per share of Sovereign
Common Stock, the market value per share of First State Common Stock and the
equivalent market value per share of First State Common Stock on each of June
24, 1996, the last business day preceding public announcement of the Merger, and
November 25, 1996, the last business day preceding public announcement of the
Merger Agreement Amendment. The equivalent market value per share of First State
Common Stock indicated in the table as of June 24, 1996 is based upon an
Exchange Ratio of 1.45 shares of Sovereign Common Stock for each outstanding
share of First State Common Stock based on a market value of a share of
Sovereign Common Stock on June 24, 1996 of $10.1875. The equivalent market value
per share of First State Common Stock indicated in the table as of November 25,
1996 is based upon an Exchange Ratio of 1.225 shares of Sovereign Common Stock
for each share of First State Common Stock based on a market value of a share of
Sovereign Common Stock on November 25, 1996 of $13.625. The Exchange Ratio is
subject to adjustment based on the Sovereign Market Value as of the Effective
Date. See 'THE MERGER -- Terms of the Merger.'
The historical market values per share of Sovereign Common Stock and First
State Common Stock and the historical market value of Sovereign Common Stock
used to determine the equivalent market value per share of First State Common
Stock are the per share last sale prices on June 24, 1996 and November 25, 1996,
respectively, as reported on the Nasdaq National Market System.
FIRST STATE
--------------------------
EQUIVALENT
SOVEREIGN MARKET VALUE
HISTORICAL HISTORICAL PER SHARE
----------- ----------- -------------
June 24, 1996........................ $ 10.1875 $ 10.000 $ 14.750
November 25, 1996.................... $ 13.6250 $ 14.750 $ 16.690
Market Price and Dividend Information
On January 15, 1997, the last reported sale price of Sovereign Common
Stock, as reported on the Nasdaq/NMS, was $13.50 per share. For information
concerning cash dividends paid by Sovereign, see 'INFORMATION WITH RESPECT TO
SOVEREIGN -- Market Price of and Dividends on Sovereign Common Stock and Related
Shareholder Matters.'
10
<PAGE>
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to stockholders of First
State in connection with the solicitation of proxies by First State's Board of
Directors for use at the Special Meeting of Stockholders of First State (the
'Special Meeting') to be held at Mayfair Farms, 481 Eagle Rock Avenue, West
Orange, New Jersey, on February 18, 1997, at 10:00 a.m., local time, and at any
adjournments thereof.
At the Special Meeting, the stockholders of First State will be asked to
approve the Merger Agreement, dated June 24, 1996, as amended by an Amendment to
Agreement and Plan of Merger dated as of November 26, 1996 (collectively, the
'Merger Agreement'), between First State and Sovereign, which is attached as
Annex A and incorporated by reference and more fully described herein.
Stockholders of First State will also be asked to approve a proposal to adjourn
the Special Meeting, if necessary, to permit further solicitation of proxies in
the event there are not sufficient votes at the time of the Special Meeting to
constitute a quorum or to approve the Merger Agreement. The description of the
Merger Agreement set forth herein is qualified in its entirety by reference to
the Merger Agreement, which is attached hereto as Annex A.
This Proxy Statement/Prospectus does not cover resales of Sovereign Common
Stock received in the Merger by any person who may be deemed to be an
'affiliate' of First State as such term is used in Rule 145 under the Securities
Act of 1933, as amended. Under Rule 145, affiliates of First State will be
subject to certain restrictions on their ability to transfer Sovereign Common
Stock received by them in the Merger. See 'THE MERGER -- Resale of Sovereign
Common Stock.'
The approximate date on which this Proxy Statement/Prospectus is first
being sent to stockholders of First State is on or about January 7, 1997.
11
<PAGE>
SOVEREIGN SELECTED FINANCIAL DATA
The following table sets forth certain historical consolidated summary
financial data for Sovereign. This data is derived from, and should be read in
conjunction with, among other things, the consolidated financial statements of
Sovereign, including the notes thereto, incorporated by reference in this Proxy
Statement/Prospectus. See 'INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE' and
'AVAILABLE INFORMATION.' Interim unaudited data for the nine months ended
September 30, 1996 and 1995 reflects, in the opinion of management of Sovereign,
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of such data. Results for the nine months ended September 30,
1996, are not necessarily indicative of results which may be expected for any
other interim period or for the year as a whole.
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30,(1)
-----------------------------------
EXCLUDING INCLUDING
SAIF SAIF AT DECEMBER 31,(1)
ASSESSMENT ASSESSMENT -----------------------------------------------------
1996 1996 1995 1995 1994 1993 1992(2) 1991
----------- ----------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets...................... $9,381,883 $9,364,636 $7,854,057 $8,078,287 $6,564,082 $4,877,166 $3,699,084 $2,274,702
Loans............................. 5,990,552 5,990,552 4,621,351 4,674,364 4,350,898 2,898,014 2,337,382 1,437,247
Allowance for possible loan
losses.......................... (34,018) (34,018) (34,480) (34,856) (36,289) (33,099) (26,562) (13,198)
Investment and mortgage-backed
securities available-for-sale... 526,700 526,700 118,218 889,509 87,128 -- -- --
Investment and mortgage-backed
securities held-to-maturity..... 2,478,239 2,478,239 2,726,861 2,077,212 1,816,840 1,689,304 1,001,356 644,061
Deposits.......................... 5,007,118 5,007,118 4,987,862 5,039,143 4,027,119 3,183,107 2,691,058 1,815,679
Borrowings........................ 3,814,828 3,814,828 2,383,400 2,530,656 2,162,587 1,367,100 427,591 285,059
Stockholders' equity.............. 477,328 460,081 415,006 427,025 303,900 259,121 220,419 137,259
SUMMARY STATEMENT OF OPERATIONS
Total interest income............. $ 451,794 $ 451,794 $ 356,456 $ 493,031 $ 354,141 $ 282,790 $ 199,431 $ 182,015
Total interest expense............ 290,785 290,785 228,668 318,805 198,741 153,318 118,585 125,326
---------- ---------- --------- --------- --------- --------- --------- ---------
Net interest income............... 161,009 161,009 127,788 174,226 155,400 129,472 80,846 56,689
Provision for possible loan
losses.......................... 1,516 1,516 750 1,000 4,100 8,650 10,080 6,796
---------- ---------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for possible loan
losses.......................... 159,493 159,493 127,038 173,226 151,300 120,822 70,766 49,893
---------- ---------- --------- --------- --------- --------- --------- ---------
Other income...................... 17,032 17,032 19,055 25,829 14,554 15,167 10,965 5,083
Other expenses.................... 96,292 124,110 84,168 113,108 90,989 77,377 47,036 33,460
---------- ---------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
cumulative effect of change in
accounting principle............ 80,223 52,415 61,925 85,947 74,865 58,612 34,695 21,516
Income tax provision.............. 30,489 19,911 21,214 29,539 28,467 22,998 15,057 9,534
---------- ---------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of
change in accounting
principle....................... 49,744 32,504 40,711 56,408 46,398 35,614 19,638 11,982
Cumulative effect of change in
accounting principle............ -- -- -- -- -- 4,800 -- --
---------- ---------- --------- --------- --------- --------- --------- ---------
Net income........................ $ 49,744 $ 32,504 $ 40,711 $ 56,408 $ 46,398 $ 40,414 $ 19,638 $ 11,982
---------- ---------- --------- --------- --------- --------- --------- ---------
---------- ---------- --------- --------- --------- --------- --------- ---------
Net income applicable to common
stock........................... $ 45,057 $ 27,817 $ 37,585 $ 51,719 $ 46,398 $ 40,414 $ 19,638 $ 11,982
---------- ---------- --------- --------- --------- --------- --------- ---------
---------- ---------- --------- --------- --------- --------- --------- ---------
SHARE DATA (3)
Common shares outstanding at end
of period (in thousands)........ 49,714 49,714 48,365 45,465 45,567 41,357 40,682 23,898
Preferred shares outstanding at
end of period (in thousands).... 2,000 2,000 2,000 2,000 -- -- -- --
Earnings per common and common
equivalent share:
Before cumulative effect of
change in accounting
principle..................... $ 0.84 $ 0.55 $ 0.73 $ 1.00 $ .90 $ .70 $ .51 $ .37
After cumulative effect of
change in accounting
principle..................... 0.84 0.55 0.73 1.00 .90 .80 .51 .37
Book value per common and common
equivalent share at end of
period(4)....................... 8.05 7.76 7.14 7.40 6.05 5.24 4.53 3.73
Common share price at end of
period.......................... 11 11 10-16/93 9-5/8 7 10-11/16 6-1/16 3-3/16
Dividends paid per common share... 0.063 0.063 0.063 0.84 .106 .099 .082 .058
Dividend payout ratio............. 7.50% 11.45% 8.63% 8.40% 11.78% 14.14% 16.08% 15.68%
</TABLE>
- ------------------
(1) The acquisitions of Valley Federal Savings and Charter Bancorp, Inc. were
accounted for as pooling-of-interests and accordingly, the consolidated
financial statements have been restated to include the accounts of Valley
Federal and Charter for all periods presented.
(2) The acquisition of Harmonia Bancorp, Inc. was accounted for as a purchase at
the close of business on December 31, 1992. Sovereign's consolidated balance
sheet at December 31, 1992 includes Harmonia. Sovereign's 1992 consolidated
results of operations do not include Harmonia's results.
(3) All per share data have been adjusted to reflect all stock dividends and
stock splits.
(4) Book Value is calculated using equity divided by common shares and assuming
conversion of all outstanding preferred shares.
12
<PAGE>
FIRST STATE SELECTED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial data for First State. These data are derived in part from, and should
be read in conjunction with, among other things, the consolidated financial
statements of First State, including the related notes thereto, incorporated by
reference in this Proxy Statement/Prospectus. See 'INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE' and 'AVAILABLE INFORMATION.'
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets.......................................... $ 610,417 $ 637,020 $ 553,483 $ 476,370 $ 470,520
Loans(1).............................................. 490,037 528,867 446,414 376,620 357,148
Investment securities and mortgage-backed
securities.......................................... 68,537 55,364 59,164 54,168 64,028
Deposits.............................................. 554,320 567,710 479,364 432,012 428,402
Borrowings............................................ 5,928 23,105 31,738 5,680 5,846
Stockholders' equity.................................. 35,236 41,592 37,973 34,179 31,490
OPERATING DATA
Interest income....................................... 49,239 44,349 34,935 34,624 36,479
Interest expense...................................... 24,054 21,765 13,448 15,401 20,474
--------- --------- --------- --------- ---------
Net interest income before provision for loan
losses.............................................. 25,185 22,584 21,487 19,223 16,005
Provision for loan losses............................. 8,900 1,650 1,892 2,440 2,667
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses... 16,285 20,934 19,595 16,783 13,328
Other income.......................................... 17,480 6,368 4,150 4,205 3,881
--------- --------- --------- --------- ---------
Operating expenses.................................... 41,022 22,172 18,881 18,448 16,997
--------- --------- --------- --------- ---------
Income (loss) before income tax expense (benefit)..... (7,257) 5,130 4,864 2,540 212
Income tax expense (benefit).......................... (1,608) 1,132 1,363 15 (504)
Extraordinary item.................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)..................................... $ (5,649) $ 3,998 $ 3,501 $ 2,525 $ 716
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share........................... $ (1.40) $ 1.01 $ 0.91 $ 0.65 $ 0.19
SELECTED OTHER DATA
Return on average assets.............................. (0.90)% 0.67% 0.70% 0.53% 0.15%
Return on average equity.............................. (13.51) 10.27 9.62 7.56 2.28
Average equity to average assets...................... 6.69 6.56 7.27 6.99 6.7
Interest rate spread(2)............................... 4.41 4.25 4.72 4.5 3.94
Net yield on average interest-earning assets(3)....... 4.38 4.18 4.73 4.46 3.82
Average interest-earning assets to average interest-
bearing liabilities................................. 0.99x 0.98x 1.01x 0.99x 0.98x
Book value per share of common stock outstanding...... $ 8.97 $ 10.71 $ 9.89 $ 8.86 $ 8.17
Dividends paid per share of common stock outstanding.. $ 0.22 $ 0.21 $ 0.12 $ -- $ --
Dividend payout ratio................................. NM 20.79% 13.19% 0.00% 0.00%
Number of full service offices........................ 14 12 12 12 11
</TABLE>
- ------------------
(1) Includes construction and land development loans of $17.6 million, $23.0
million, $19.7 million, $11.3 million, and $19.1 million, at September 30,
1996, 1995, 1994, 1993, and 1992, respectively. Also includes mortgage loans
held for resale of $9.1 million, $67.2 million, $3.1 million, $10.9 million,
and $10.2 million at September 30, 1996, 1995, 1994, 1993, and 1992,
respectively.
(2) Represents the average yield earned on interest-earning assets less the
average cost of interest-bearing liabilities.
(3) Represents net interest income as a percentage of average interest-earning
assets.
13
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following tables set forth selected unaudited pro forma financial data
reflecting the merger.
The pro forma information has been prepared assuming that First State's
stockholders will receive in the Merger 1.225 shares of Sovereign Common Stock
for each share of First State Common Stock they own (based on a closing sale
price of $13.50 per share of Sovereign Common Stock as of January 15,
1997). This exchange ratio is subject to adjustment based on the Sovereign
Market Value as of the Effective Date. See 'THE MERGER -- Terms of the Merger.'
The pro forma financial information included in this Proxy Statement/Prospectus
is presented for illustrative purposes only. Such pro forma financial
information does not necessarily reflect what the actual results of Sovereign
would be following completion of the Merger.
The following pro forma information does not give effect to any potential
cost savings or any merger-related expenses which may be realized or incurred as
a result of the Merger. See 'THE MERGER -- Management and Operations After the
Merger.'
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1996
The following unaudited pro forma combined condensed balance sheet
information reflects (i) the historical consolidated balance sheets of Sovereign
and First State as of September 30, 1996 and (ii) the pro forma combined
condensed balance sheet of Sovereign as of such date, after giving effect to the
Merger. The Merger has been reflected as a pooling-of-interests effective as of
September 30, 1996. The pro forma combined condensed balance sheet as of
September 30, 1996 utilizes First State historical information as of June 30,
1996. The unaudited information should be read in conjunction with the
historical consolidated financial statements of Sovereign and First State,
including the notes thereto, incorporated by reference in this Proxy
Statement/Prospectus. See 'INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.'
14
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1996(1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SOVEREIGN
AND
FIRST FIRST STATE
SOVEREIGN STATE COMBINED
------------- ----------- --------------
<S> <C> <C> <C>
Cash and amounts due from depository institutions.................... $ 122,973 $ 13,874 $ 136,847
Investment and mortgage-backed securities............................ 3,004,939 75,244 3,080,183
Loans................................................................ 5,990,552 545,976 6,536,528
Allowance for possible loan losses................................... (34,018) (9,125) (43,143)
Goodwill and other intangible assets................................. 114,524 2,199 116,723
Other assets......................................................... 165,666 37,769 203,435
------------- ----------- --------------
TOTAL ASSETS....................................................... $ 9,364,636 $ 665,937 $ 10,030,573
------------- ----------- --------------
------------- ----------- --------------
Deposits............................................................. 5,007,118 589,509 5,596,627
Borrowings........................................................... 3,814,828 32,629 3,847,457
Other Liabilities.................................................... 82,609 3,844 86,453
------------- ----------- --------------
TOTAL LIABILITIES.................................................. 8,904,555 625,982 9,530,537
Other Equity......................................................... 68,157 20,863 89,020
Common Stock......................................................... 276,498 39 276,537
Retained Earnings.................................................... 115,426 19,053 134,479
------------- ----------- --------------
TOTAL STOCKHOLDERS' EQUITY........................................... 460,081 39,955 500,036
------------- ----------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $ 9,364,636 $ 665,937 $ 10,030,573
------------- ----------- --------------
------------- ----------- --------------
</TABLE>
- ------------------
(1) Reflects First State historical financial information as of June 30, 1996.
For historical financial information for First State's fiscal year ended
September 30, 1996, reference should be made to First State's 1996 Annual
Report to Stockholders, which accompanies this Proxy Statement/Prospectus.
15
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF INCOME FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND THE YEARS
ENDED DECEMBER 31, 1995, 1994 AND 1993
The following unaudited pro forma combined condensed statements of income
reflect the historical consolidated statements of income of Sovereign and First
State, as indicated below, for each period presented and the pro forma combined
condensed statements of income of Sovereign, after giving effect to the Merger.
The Merger has been reflected as a pooling-of-interests. See 'THE MERGER --
Accounting Treatment.' The pro forma combined condensed statements of income for
the nine-month periods ended September 30, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993 were prepared on the assumption that the Merger
had been effected as of the beginning of the applicable nine-month or annual
period for Sovereign or First State, as the case may be. The pro forma combined
condensed statements of income for the years ended December 31, 1995, 1994 and
1993 and for the nine-month periods ended September 30, 1996 and 1995 utilize
First State historical financial information for the years ended September 30,
1995, 1994 and 1993 and the nine-month periods ended June 30, 1996 and 1995,
respectively. The unaudited information should be read in conjunction with the
historical consolidated financial statements of Sovereign and First State,
including the notes thereto, incorporated by reference in this Proxy
Statement/Prospectus. See 'INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.'
16
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SOVEREIGN
AND
FIRST FIRST STATE
SOVEREIGN STATE COMBINED
----------- --------- -----------
<S> <C> <C> <C>
Interest income............................................................. $ 451,794 $ 36,494 $ 488,288
Interest expense............................................................ 290,785 17,780 308,565
----------- --------- -----------
Net interest income......................................................... 161,009 18,714 179,723
Provision for possible loan losses.......................................... 1,516 5,600 7,116
----------- --------- -----------
Net interest income after provision for possible loan losses................ 159,493 13,114 172,607
----------- --------- -----------
Other non-interest income................................................... 17,032 12,466 29,498
Non-interest expense........................................................ 124,110 26,381 150,491
----------- --------- -----------
Income (loss) before taxes.................................................. 52,415 (801) 51,614
Income taxes................................................................ 19,911 195 20,106
----------- --------- -----------
Net income (loss)........................................................... $ 32,504 $ (996) $ 31,508
----------- --------- -----------
----------- --------- -----------
Earnings (loss) per share................................................... $0.55 $(0.25) $0.49
----------- --------- -----------
----------- --------- -----------
</TABLE>
- ------------------
(1) Reflects First State historical financial information for the nine months
ended June 30, 1996. First State historical financial data for the nine
months ended June 30, 1996 do not include the one-time after-tax charge of
$2.0 million relating to the SAIF recapitalization (see 'SUMMARY -- Recent
Developments') or an after-tax charge of a total of $3.1 million relating to
loan loss provisions and writedowns of real estate owned taken by First
State during the quarter ended September 30, 1996. For historical
information for First State's fiscal year ended September 30, 1996,
reference should be made to First State's 1996 Annual Report to
Stockholders, which accompanies this Proxy Statement/Prospectus.
17
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SOVEREIGN
AND
FIRST FIRST STATE
SOVEREIGN STATE COMBINED
----------- --------- -----------
<S> <C> <C> <C>
Interest income............................................................. $ 356,456 $ 32,507 $ 388,963
Interest expense............................................................ 228,668 15,545 244,213
----------- --------- -----------
Net interest income......................................................... 127,788 16,962 144,750
Provision for possible loan losses.......................................... 750 1,100 1,850
----------- --------- -----------
Net interest income after provision for possible loan losses................ 127,038 15,862 142,900
----------- --------- -----------
Other non-interest income................................................... 19,055 4,543 23,598
Non-interest expense........................................................ 84,168 16,109 100,277
----------- --------- -----------
Income before taxes......................................................... 61,925 4,296 66,221
Income taxes................................................................ 21,214 1,389 22,603
----------- --------- -----------
Net income.................................................................. $ 40,711 $ 2,907 $ 43,618
----------- --------- -----------
----------- --------- -----------
Earnings per share.......................................................... $0.73 $0.75 $0.72
----------- --------- -----------
----------- --------- -----------
</TABLE>
- ------------------
(1) Reflects First State historical financial information for the nine months
ended June 30, 1995.
18
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SOVEREIGN
AND
FIRST FIRST STATE
SOVEREIGN STATE COMBINED
----------- --------- -----------
<S> <C> <C> <C>
Interest income............................................................. $ 493,031 $ 44,349 $ 537,380
Interest expense............................................................ 318,805 21,765 340,570
----------- --------- -----------
Net interest income......................................................... 174,226 22,584 196,810
Provision for possible loan losses.......................................... 1,000 1,650 2,650
----------- --------- -----------
Net interest income after provision for possible loan losses................ 173,226 20,934 194,160
----------- --------- -----------
Other non-interest income................................................... 25,829 6,368 32,197
Non-interest expense........................................................ 113,108 22,172 135,280
----------- --------- -----------
Income before taxes......................................................... 85,947 5,130 91,077
Income taxes................................................................ 29,539 1,132 30,671
----------- --------- -----------
Net income.................................................................. $ 56,408 $ 3,998 $ 60,406
----------- --------- -----------
----------- --------- -----------
Earnings per share.......................................................... $1.00 $1.01 $0.98
----------- --------- -----------
----------- --------- -----------
</TABLE>
- ------------------
(1) Reflects First State historical financial information for the fiscal year
ended September 30, 1995.
19
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SOVEREIGN
AND
FIRST FIRST STATE
SOVEREIGN STATE COMBINED
----------- --------- -----------
<S> <C> <C> <C>
Interest income............................................................. $ 354,141 $ 34,935 $ 389,076
Interest expense............................................................ 198,741 13,448 212,189
----------- --------- -----------
Net interest income......................................................... 155,400 21,487 176,887
Provision for possible loan losses.......................................... 4,100 1,892 5,992
----------- --------- -----------
Net interest income after provision for possible loan losses................ 151,300 19,595 170,895
----------- --------- -----------
Other non-interest income................................................... 14,554 4,150 18,704
Non-interest expense........................................................ 90,989 18,881 109,870
----------- --------- -----------
Income before taxes......................................................... 74,865 4,864 79,729
Income taxes................................................................ 28,467 1,363 29,830
----------- --------- -----------
Net income.................................................................. $ 46,398 $ 3,501 $ 49,899
----------- --------- -----------
----------- --------- -----------
Earnings per share.......................................................... $0.90 $0.91 $0.89
----------- --------- -----------
----------- --------- -----------
</TABLE>
- ------------------
(1) Reflects First State historical financial information for the fiscal year
ended September 30, 1994.
20
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1993(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SOVEREIGN
AND
FIRST FIRST STATE
SOVEREIGN STATE COMBINED
----------- --------- -----------
<S> <C> <C> <C>
Interest income............................................................. $ 282,790 $ 34,624 $ 317,414
Interest expense............................................................ 153,318 15,401 168,719
----------- --------- -----------
Net interest income......................................................... 129,472 19,223 148,695
Provision for possible loan losses.......................................... 8,650 2,440 11,090
----------- --------- -----------
Net interest income after provision for possible loan losses................ 120,822 16,783 137,605
----------- --------- -----------
Other non-interest income................................................... 15,167 4,205 19,372
Non-interest expense........................................................ 77,377 18,448 95,825
----------- --------- -----------
Income before taxes......................................................... 58,612 2,540 61,152
Income taxes................................................................ 22,998 15 23,013
----------- --------- -----------
Net income.................................................................. $ 35,614 $ 2,525 $ 38,139
----------- --------- -----------
----------- --------- -----------
Earnings per share.......................................................... $0.70 $0.65 $0.69
----------- --------- -----------
----------- --------- -----------
</TABLE>
- ------------------
(1) Reflects First State historical financial information for the fiscal year
ended September 30, 1993.
21
<PAGE>
THE MEETING
MATTERS TO BE CONSIDERED AT THE MEETING
At the Special Meeting, the stockholders of First State will consider and
vote upon the approval and adoption of the Merger Agreement. In addition to the
Merger Agreement, stockholders of First State are being asked to approve a
proposal to adjourn the Special Meeting, if necessary, to permit further
solicitation of proxies in the event there are not sufficient votes at the time
of the Special Meeting to constitute a quorum or approve the Merger Agreement
(the 'Adjournment Proposal'). Stockholders will also consider and vote upon such
other matters, if any, as may be properly brought before the Special Meeting.
THE BOARD OF DIRECTORS OF FIRST STATE HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE ADJOURNMENT PROPOSAL, AND UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND FOR APPROVAL OF THE
ADJOURNMENT PROPOSAL.
VOTE REQUIRED
The presence in person or by proxy of the holders of a majority of the
outstanding First State Common Stock entitled to vote at the Special Meeting is
required to constitute a quorum at the Special Meeting. The affirmative vote of
a majority of the outstanding shares of First State Common Stock entitled to be
voted is required to approve the Merger Agreement. The affirmative vote of a
majority of the votes cast at the Special Meeting, assuming a quorum is present,
is required to approve the Adjournment Proposal. Except as provided in the
following paragraph, each share of First State Common Stock entitles its holder
to one vote with respect to all matters properly submitted for action at the
Special Meeting.
As provided in First State's Certificate of Incorporation, record holders
of First State Common Stock who beneficially own in excess of 10% of the
outstanding shares of First State Common Stock (the 'Limit') are not entitled to
any vote with respect to the shares held in excess of the Limit. A person or
entity is deemed to beneficially own shares owned by an affiliate of, as well as
persons acting in concert with, such person or entity. First State's Certificate
of Incorporation authorizes the Board of Directors (i) to make all
determinations necessary to implement and apply the Limit, including determining
whether persons or entities are acting in concert, and (ii) to demand that any
person who is reasonably believed to beneficially own stock in excess of the
Limit supply information to the Company to enable the Board to implement and
apply the Limit. The Board of Directors of First State is not aware of any
person who beneficially owns shares of First State Common Stock in excess of the
Limit with respect to the matters to be considered at the Special Meeting.
The directors and executive officers of First State have agreed to vote all
shares of First State Common Stock that they own on the Record Date in favor of
the Merger Agreement. At December 31, 1996, directors and executive officers of
First State owned approximately 460,206 shares of First State Common Stock, or
approximately 11.7% of the then outstanding shares of First State Common Stock
that are entitled to be voted at the Special Meeting.
Under applicable law and Sovereign's Articles of Incorporation, Sovereign's
shareholders are not required to approve the Merger Agreement or the issuance of
Sovereign Common Stock in connection with the Merger.
VOTING OF PROXIES
Shares represented by all properly executed proxies received prior to the
Special Meeting and not revoked prior to exercise will be voted in the manner
specified by the holders thereof. Executed proxies which do not contain voting
instructions will be voted in favor of approval and adoption of the Merger
Agreement and the Adjournment Proposal. Abstentions may be specified on the
proxy card. Abstentions and broker nonvotes will be considered present for
purposes of determining the presence of a quorum, but as unvoted on the matters
as to which abstention has been specified. For the vote on
22
<PAGE>
the Merger Agreement, abstentions and broker nonvotes will have the same effect
as a negative vote because the affirmative vote of not less than a majority of
the outstanding shares of First State Common Stock is required to approve the
Merger Agreement. For any vote on adjournment, abstentions will have the same
effect as a negative vote and broker nonvotes will have no effect.
It is not expected that any matter, other than those referred to herein,
will be brought before the Special Meeting. If, however, other matters are
properly presented, the persons named as proxies will vote in accordance with
their judgment with respect to such matters.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed form does not preclude a stockholder
from voting in person. A stockholder may revoke a proxy at any time prior to its
exercise by filing with the Secretary of First State a duly executed revocation
or a proxy bearing a later date, or by voting in person at the Special Meeting.
Attendance, without voting in person at the Special Meeting, will not of itself
constitute revocation of a proxy. If a stockholder's shares are not held in the
stockholder's name, such stockholder will need additional documentation from the
record holder in order to vote personally at the Special Meeting.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
The record date for the Special Meeting is January 6, 1997 (the 'Record
Date'). Only stockholders of record of First State at the close of business on
the Record Date will be entitled to receive notice of the Special Meeting or any
adjournment thereof, and only stockholders of record of First State Common Stock
at that time will be entitled to vote at the Special Meeting. On the Record
Date, First State had issued and outstanding 3,929,455 shares of First State
Common Stock, which were owned by approximately 1,100 stockholders of record.
SOLICITATION OF PROXIES
First State will bear the cost of the solicitation of proxies from its
stockholders, except that (i) Sovereign and First State will share equally the
cost of printing and mailing this Proxy Statement/Prospectus and (ii) if
Sovereign requests First State to retain a proxy solicitor in connection with
the solicitation of First State stockholder approval of the Merger Agreement,
Sovereign will bear the expense of such proxy solicitor. First State has engaged
Kissell-Blake, Inc. to assist in connection with the solicitation of First State
stockholder approval at a cost of $4,500, plus out-of-pocket expenses. In
addition to solicitations by mail, the directors, officers and employees of
First State and its subsidiaries may solicit proxies from First State
stockholders by telephone, telefacsimile, telegram or in person. Arrangements
will also be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the beneficial owners
of stock held of record by such persons, and First State will reimburse such
custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses
incurred in connection therewith.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS. AS
DESCRIBED BELOW UNDER THE CAPTION 'THE MERGER -- EXCHANGE OF FIRST STATE STOCK
CERTIFICATES,' EACH FIRST STATE STOCKHOLDER WILL BE PROVIDED WITH MATERIALS FOR
EXCHANGING SHARES OF FIRST STATE COMMON STOCK AS PROMPTLY AS PRACTICABLE AFTER
THE EFFECTIVE DATE.
23
<PAGE>
THE MERGER
BACKGROUND OF AND REASONS FOR THE MERGER; RECOMMENDATION OF THE FIRST STATE
BOARD OF DIRECTORS
Background of the Merger
From time to time, the Board of Directors of First State has reviewed its
strategic alternatives for enhancing profitability and maximizing stockholder
value. The changing competitive situation in banking and financial services on a
nation-wide basis and in particular with respect to New Jersey, has been
evidenced by considerable consolidation activity in recent years. During the
past few years, the increasing size of competitors and the benefits that an
increased scale of operation contribute to supporting product innovations and
technological improvements has led First State to recognize that a combination
or consolidation with a larger financial services entity could be beneficial to
both First State stockholders and First DeWitt customers.
In September 1995, Jay S. Sidhu, Sovereign's President and Chief Executive
Officer, contacted Michael J. Quigley, III, First State's Chairman, President
and Chief Executive Officer, regarding First State's interest in a possible
merger with and into Sovereign. As a result of this telephone call, a luncheon
meeting between Messrs. Sidhu and Quigley was arranged and held in late
September 1995. Following this meeting, Sovereign entered into a confidentiality
agreement with First State for the purpose of allowing Sovereign to commence a
due diligence investigation of First State. At approximately that time, First
State authorized MB&D to contact a limited number of institutions, to be
identified by MB&D and including one institution that had from time to time
expressed to Mr. Quigley an interest in acquiring First State, as to their
possible interest in a merger transaction with First State. A total of four
companies were contacted, and two companies, in addition to Sovereign, conducted
a due diligence review of First State. At a regular board meeting held in
October 1995, the Board of Directors of First State was apprised of developments
regarding possible merger transactions. MB&D was in attendance at this meeting,
as was counsel to First State. The directors were advised of their fiduciary
duties in general and in particular with respect to mergers, and a determination
was made to proceed with discussions regarding a possible merger transaction.
Continued discussions were held thereafter with the various parties, but by the
end of November, negotiations were continuing with only Sovereign, based on
pricing considerations. Special meetings of the Board of Directors of First
State were held on the 5th and 13th of December 1995 to review and discuss a
proposed merger agreement between Sovereign and First State. However, at a
regular Board of Directors meeting on December 22, a determination was made to
terminate discussions with Sovereign due to a disagreement over pricing terms.
In 1996, the Board actively reviewed with management, and in consultation
with MB&D, its options for maximizing stockholder value. As a result of this
review, at a meeting held on April 25, 1996, the Board of Directors adopted a
strategic restructuring plan, pursuant to which First State would offer for sale
seven branch offices that were located outside of its primary market areas of
Essex and Morris Counties, New Jersey, implement a comprehensive expense
reduction program, and liquidate substantially all nonperforming assets by March
31, 1997. First State publicly announced the Board's action in this regard, and
also disclosed that, as a result of the strategic restructuring plan, First
State would make significant additional provisions for loan losses for the
quarter ending June 30, 1996. Following the issuance of the press release,
Mr. Sidhu contacted Mr. Quigley, to again express Sovereign's interest in
acquiring First State in its entirety, and not just the branches outside of
Morris and Essex Counties, New Jersey. Other parties contacted First State at
this time regarding the branch sales. Sovereign requested to and again commenced
a due diligence investigation of First State. One other company that had
conducted a due diligence investigation in 1995 again requested and received due
diligence information regarding an acquisition of the entire company. However,
this company again declined to pursue an interest in a merger transaction.
At a regular meeting held on June 19, 1996, the Board of Directors of First
State was apprised of the expressions of renewed interest in acquiring First
State and the Board authorized management and
24
<PAGE>
First State's advisors to continue discussions with Sovereign. At a special
meeting held on June 24, 1996, the Board of Directors of First State reviewed
with First State's senior management officials, financial advisors and legal
counsel, the terms of the Merger, the Merger Agreement and the Stock Option
Agreement and the transactions contemplated thereby, as well as the background
of the transactions, the potential financial and strategic benefits of the
transactions, the results of due diligence reviews, financial and valuation
analyses of the transactions and the terms of the proposed agreements, including
the exchange ratio. The Board of Directors again discussed with counsel its
fiduciary duties in connection with merger transactions. At the meeting, MB&D
rendered its opinion that, as of June 24, 1996, the consideration to be paid by
Sovereign in the Merger was fair to First State stockholders from a financial
point of view. At such meeting, the First State Board of Directors unanimously
adopted and approved the Merger, the Merger Agreement, the Stock Option
Agreement and the transactions contemplated thereby.
The Merger Agreement initially provided for First State stockholders to
receive that number of shares of Sovereign Common Stock as equalled $14.75
divided by the Sovereign Market Value (which is determined by reference to the
average price of Sovereign Common Stock for the ten trading days preceding the
Effective Date), if the Sovereign Market Value was between $9.00 and $11.45. If
the Sovereign Market Value was greater than $11.45, First State stockholders
would receive 1.29 shares of Sovereign Common Stock and, if the Sovereign Market
Value was less than $9.00, First State stockholders would receive 1.64 shares of
Sovereign Common Stock. If the Sovereign Market Value was less than $8.00, then
First State had the right to terminate the Merger Agreement, unless Sovereign
agreed to increase the exchange ratio to an amount which, when multiplied by the
Sovereign Market Value, equaled $13.12. The Merger Agreement also included a
provision that allowed Sovereign to terminate the Merger Agreement if certain
asset quality measures were triggered, including if the aggregate deficiencies
in the current appraised values of commercial real estate assets securing
commercial real estate loans necessary to maintain an 80% loan to value ratio
for each loan exceeded $1,000,000 (the 'Commercial Real Estate Termination
Right').
In late November 1996, Sovereign informed First State of its view, based on
its continued review of First State's commercial real estate assets, that the
Commercial Real Estate Termination Right was applicable, and requested to revise
the Merger Agreement. Based on negotiations between First State and Sovereign,
an amendment to the Merger Agreement was proposed (the 'Merger Agreement
Amendment'), which revised the exchange ratio to provide that First State
stockholders are to receive that number of shares of Sovereign Common Stock as
will equal $14.75 divided by the Sovereign Market Value, if the Sovereign Market
Value is equal to or greater than $8.00 and less than or equal to $12.04. If the
Sovereign Market Value is greater than $12.04, First State stockholders will
receive 1.225 shares of Sovereign Common Stock and, if the Sovereign Market
Value is less than $8.00, First State stockholders will receive 1.84 shares of
Sovereign Common Stock. First State retained the right to terminate the Merger
Agreement if the Sovereign Market Value is less than $8.00, unless Sovereign
agrees to increase the exchange ratio to an amount which, when multiplied by the
Sovereign Market Value, equals $14.75. The Merger Agreement Amendment also
eliminates certain termination rights previously held by Sovereign under the
Merger Agreement, which termination rights were specific to the asset quality of
First State. A special meeting of the Board of Directors of First State was held
on November 25, and in consultation with its financial and legal advisors, the
Board agreed to the Amendment. A joint press release was issued on November 26
announcing the Merger Agreement Amendment.
Reasons for the Merger
Sovereign's Reasons for the Merger.
Sovereign's acquisition strategy consists of identifying financial
institutions with business philosophies that are similar to Sovereign, which
operate in strong markets that are geographically compatible with Sovereign, are
financially sound and can be acquired at reasonable cost. Acquisitions
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are also evaluated in terms of asset quality, interest rate risk, potential
operating efficiencies and management capabilities.
In determining the terms of its offer for First State and whether to enter
into the Merger Agreement, Sovereign's Board of Directors considered a number of
factors, including the following: (i) the financial condition, operating results
and future prospects of Sovereign and First State, (ii) historical pro forma
financial information on the Merger, including, among other things, pro forma
book value and earnings per share information, dilution analysis and capital
ratio impact information, (iii) a comparison of the price being paid in this
Merger to other comparable financial institution mergers, based, among other
things, on multiples of book value and earnings, and (iv) the historical trading
prices for First State Common Stock and Sovereign Common Stock.
In the view of Sovereign's Board of Directors, the Merger is a strategic
acquisition for Sovereign that provides a natural extension of its existing New
Jersey community bank franchise by establishing a strong presence in Essex
County, New Jersey. In addition, First State branches located outside of Essex
County will complement Sovereign's existing New Jersey franchise.
In approving the transaction, the Sovereign Board did not specifically
identify any one factor or group of factors as being more significant than any
other factor in the decision making process, although individual directors may
have given one or more factors more weight than other factors.
The emphasis of the Sovereign Board's discussion in considering the
transaction, however, was on the financial aspects of the transaction,
particularly (i) the strategic fit and enhanced franchise value discussed above,
including pro forma market share information relating to deposits, (ii)
perceived opportunities to reduce operating expenses relating to First State's
operations, (iii) provisions of the Merger Agreement relating to credit quality,
including provisions granting Sovereign the right to terminate the Merger
Agreement under certain circumstances relating to weakened credit quality (see
'THE MERGER -- Termination; Effect of Termination'), and (iv) pricing provisions
of the Merger Agreement, which provide for a fixed price of $14.75 in value of
Sovereign Common Stock for each share of First State Common Stock in the event
Sovereign Common Stock is trading between $8.00 and $12.04 per share and a fixed
exchange ratio in the event Sovereign Common Stock is trading outside such
range.
First State's Reasons for the Merger.
The First State Board has determined that the Merger and the Merger
Agreement, as amended, are fair to, and in the best interests of, First State
and its stockholders. In reaching this determination, the First State Board
consulted with its financial advisor, MB&D, with respect to the financial
aspects and fairness of the transaction. In arriving at its determination, the
First State Board also considered a number of factors which indicated that the
Merger should produce an institution that is well capitalized, and one which
will enjoy an enhanced operational and strategic value and that should foster
the potential for future earnings growth. The factors considered by the First
State Board included, but were not limited to, the following:
(i) Information concerning the businesses, earnings, operations,
financial condition, prospects, capital levels and asset quality of First
State and Sovereign, both individually and as combined.
(ii) The financial advice rendered by MB&D, as financial advisor to
First State, that the Exchange Ratio is fair, from a financial point of
view, to First State stockholders. See '-- Opinion of Financial Advisor.'
(iii) The terms of the Merger Agreement, as amended, the Stock Option
Agreement and the other documents executed in connection with the Merger.
(iv) The tax-free nature of the transaction to First State's
stockholders, for federal income tax purposes. See '-- Federal Income Tax
Consequences of the Merger.'
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(v) The historical trading prices for First State Common Stock and for
Sovereign Common Stock.
(vi) The anticipated cost savings and efficiencies available to the
combined company as a result of the Merger.
(vii) The current and prospective economic, competitive and regulatory
environment facing each institution and other financial institutions.
(viii) First State's alternatives to the Merger, including the
interest expressed by other institutions and the strategic restructuring
plan adopted by the Board after negotiations were terminated in December
1995.
(ix) The provisions of the Merger Agreement allowing First State to
terminate the Merger Agreement if the Sovereign Market Value is less than
$8.00, unless Sovereign provides First State stockholders with $14.75 of
Sovereign Market Value.
The Board of Directors also took into account that First State stockholders
would have the opportunity to participate in the future growth of Sovereign by
obtaining Sovereign Common Stock in the Merger. The Board noted that First
DeWitt, as part of an interstate savings institution holding company of greater
size and resources, should be able to provide its customers with a greater range
of services and should become a stronger competitor in its existing markets. The
Board of Directors of First State believes that the Merger will result in a
stronger and more effective competitor in First State's market, better able to
compete effectively in the rapidly changing marketplace for banking and
financial services and to take advantage of opportunities that might not be
available to First State on its own. The First State Board of Directors believes
that the Merger will provide First DeWitt's customers with a broader range of
products and services, as well as greater convenience. In reaching their
determinations to approve and recommend the Merger, the First State Board did
not assign any specific or relative weights to any of the foregoing factors, and
individual directors may have given differing weights to different factors.
Recommendation of the First State Board of Directors.
THE BOARD OF DIRECTORS OF FIRST STATE BELIEVES THAT THE TERMS OF THE MERGER
ARE FAIR AND IN THE BEST INTERESTS OF FIRST STATE'S STOCKHOLDERS AND HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT. THE BOARD OF DIRECTORS OF FIRST STATE
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF FIRST STATE APPROVE THE MERGER
AGREEMENT.
TERMS OF THE MERGER
Upon completion of the Merger, the separate legal existence of First State
will cease. All property, rights, powers, duties, obligations and liabilities of
First State will automatically be transferred to Sovereign, in accordance with
Pennsylvania and Delaware law. Sovereign, as the surviving corporation, will be
governed by the Articles of Incorporation and Bylaws of Sovereign in effect
immediately prior to completion of the Merger. The directors and executive
officers of Sovereign prior to the Merger will continue, in their respective
capacities, as the directors and executive officers of Sovereign after the
Merger.
Upon completion of the Merger, each outstanding share of Sovereign Common
Stock and related stock purchase rights will continue to be outstanding as an
identical share of Sovereign Common Stock and related stock purchase rights.
Under the Merger Agreement, each outstanding share of First State Common Stock
on the Effective Date will be converted into such number of shares of Sovereign
Common Stock, and related stock purchase rights, as shall equal $14.75 divided
by the average of the mean between the high bid and low asked prices of a share
of Sovereign Common Stock (as reported on the Nasdaq National Market) for the
ten consecutive trading days immediately preceding the Effective Date of the
Merger (the 'Sovereign Market Value'). This exchange ratio is subject to
possible adjustment in the event that the Sovereign Market Value as of the
Effective Date of the
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Merger is less than $8.00 or greater than $12.04 per share (such exchange ratio,
as adjusted, is hereinafter referred to as the 'Exchange Ratio').
If the Sovereign Market Value is less than $8.00, then the Exchange Ratio
will be 1.840 shares of Sovereign Common Stock, and related stock purchase
rights, for each outstanding share of First State Common Stock (the 'Maximum
Fixed Share Alternative').
If the Sovereign Market Value is greater than $12.04, then the Exchange
Ratio will be 1.225 shares of Sovereign Common Stock, and related stock purchase
rights, for each outstanding share of First State Common Stock (the 'Minimum
Fixed Share Alternative').
If, on the Effective Date, the Sovereign Market Value is less than $8.00,
the Merger Agreement may be terminated by First State, subject to the right of
Sovereign to increase the Exchange Ratio to an amount which when multiplied by
the Sovereign Market Value as of the Closing Date equals $14.75. See
'Termination; Effect of Termination' herein.
First State's stockholders will receive cash in lieu of fractional shares
of Sovereign Common Stock. See 'Exchange of First State Stock Certificates'
herein.
If Sovereign, at any time before completion of the Merger, pays or effects
a stock dividend, stock split, reverse stock split or reclassification of
Sovereign Common Stock and the Minimum Fixed Share Alternative or the Maximum
Fixed Share Alternative is applicable, then the Exchange Ratio will be adjusted
so that each First State stockholder would be entitled to receive such number of
shares of Sovereign Common Stock as such stockholder would have been entitled to
receive if the Effective Date occurred prior to the happening of such event.
As of the Record Date, directors and executive officers of First State
and/or First DeWitt have been granted options to purchase 370,600 shares of
First State Common Stock (the 'Management Options'). On the Effective Date, each
Management Option, whether or not such Management Option is exercisable on the
Effective Date, shall cease to be outstanding and shall be converted on the
Effective Date into and become an option to acquire that number of shares of
Sovereign Common Stock equal to the number of shares of First State Common Stock
covered by the Management Option multiplied by the Exchange Ratio, at an
exercise price equal to the present stated exercise price of such option divided
by the Exchange Ratio. Shares issuable upon the exercise of such options to
acquire Sovereign Common Stock shall be issuable in accordance with the terms of
the respective plans and grant agreements under which they were issued.
The Sovereign Common Stock and cash to be received by the holders of First
State Common Stock (including the holders of options to acquire First State
Common Stock) in exchange for each share of First State Common Stock (including
shares subject to options) may be referred to herein as the 'Merger
Consideration.'
OPINION OF FINANCIAL ADVISOR
McConnell, Budd & Downes, Inc. ('MB&D') has acted as financial advisor to
First State on a contractual basis since 1994. MB&D has advised First State on
numerous facets of its strategic planning process. MB&D advised First State in
connection with the proposed merger with Sovereign. Throughout this process
representatives of MB&D met with both management and the Board of Directors of
First State on a regular basis.
MB&D was retained based on its qualifications and experience in the
financial analysis of banking and thrift institutions, knowledge of the New
Jersey banking markets in particular and the banking markets in the North
Eastern part of the United States in general, and its experience with merger and
acquisition transactions involving banking institutions. MB&D is also a NASDAQ
broker-dealer specializing in the securities of banking and thrift entities and
produces equity research for institutional and high net-worth investors in the
securities of financial institutions. In the ordinary course of business, MB&D
may trade the equity securities of First State and Sovereign for its own account
and for the accounts of its customers and, accordingly, at any time may hold a
long or short
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position in such securities. In addition, various employees of MB&D may from
time to time hold positions in the securities of a wide variety of financial
institutions, including First State and Sovereign. MB&D has also served as a
market maker in First State Common Stock since 1994.
MB&D has delivered its written opinion as of the date of this Proxy
Statement/Prospectus, that, subject to the limitations set forth in the opinion,
the Exchange Ratio (including the maximum and minimum Exchange Ratios permitted)
provided for in the Merger Agreement Amendment is fair to the holders of First
State Common Stock from a financial point of view. MB&D delivered its initial
oral opinion on June 24, 1996. Due to the execution of the Merger Agreement
Amendment, MB&D delivered a supplementary oral opinion after consideration of
the effects of the Merger Agreement Amendment to First State's Board on November
25, 1996.
THE FULL TEXT OF THE OPINION OF MB&D DATED JANUARY 15, 1997 THAT SETS FORTH
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN IS
ATTACHED HERETO AS ANNEX C. FIRST STATE'S STOCKHOLDERS ARE URGED TO READ BOTH
THIS SECTION AND THE OPINION IN THEIR ENTIRETY. MB&D'S OPINION IS DIRECTED TO
THE POSSIBLE RANGE OF EXCHANGE RATIOS THAT MAY BE OBTAINED IN THE MERGER AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF FIRST STATE COMMON STOCK
AS TO HOW SUCH HOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE
OPINION OF MB&D SET FORTH IN THIS PROXY STATEMENT PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION ITSELF. THE CONCLUSION OF
THE ORAL OPINION OF NOVEMBER 25, 1996 IS THE SAME AS THE CONCLUSION OF THE
OPINION THAT APPEARS IN ANNEX C.
In arriving at its opinion, MB&D (i) reviewed the executed Merger
Agreement, the executed Merger Agreement Amendment, the executed Stock Option
Agreement, and a final draft of this Prospectus/Proxy Statement in substantially
the form to be mailed to stockholders; (ii) reviewed publicly available business
and financial information concerning Sovereign and First State and certain
internal financial information and financial projections shared with MB&D by the
management of First State and Sovereign respectively; (iii) held discussions
with members of the senior management of First State concerning the past and
current results of operations, its current financial condition and management's
opinion of the bank's future prospects; (iv) held discussions with members of
the senior management of Sovereign concerning the past and current results of
operations, its current financial condition and management's opinion of the
banks' future prospects; (v) reviewed the specific acquisition analysis models
employed by MB&D to evaluate potential business combinations of banking
companies; (vi) considered certain financial and stock market data of Sovereign
(including historical reported price and trading volume) and compared that
information with similar information for other publicly held bank and thrift
holding companies; (vii) reviewed a number of other recently announced
transactions involving the acquisition of banking institution; and (viii)
performed such other studies and analyses as MB&D considered appropriate under
the circumstances associated with this particular transaction.
MB&D's opinion takes into account its assessment of general economic,
market and financial conditions, its experience in other transactions, as well
as its experience in securities valuation and its knowledge of the banking and
thrift industry generally. For purposes of reaching its opinion, MB&D has
assumed and relied upon the accuracy and completeness of the information
provided to it by First State and Sovereign, 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
First State or Sovereign. 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 on a basis reflecting the best
currently available estimates and judgments of the management of each of First
State and Sovereign as to the most likely future performance of their respective
companies. Finally, MB&D has not been furnished with any independent appraisals
of the assets or liabilities of Sovereign.
The following is a summary of the analyses employed by MB&D in connection
with rendering its written opinion as to the fairness of the Exchange Ratio to
the holders of First State Common Stock from a financial point of view. Given
that it is a summary, it is by definition not a complete and
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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 analysis must be considered as a whole and believes 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
First State or Sovereign.
Estimates that comprise a part of MB&D's analysis are not necessarily
indicative of actual value or predictive of future results or values. Estimates
of values referenced in any such analysis are not intended to be appraisals and
may not reflect the price at which the companies or their securities may
actually be sold.
The following is a summary of the analyses completed by MB&D in connection
with rendering and reaffirming its opinion.
ANALYSIS OF THE EXCHANGE RATIO AS AMENDED:
The consideration to be received per share of First State Common Stock
would be the number of shares of Sovereign Common Stock with a market value
(based on the average of the mean between the high bid and low asked prices of a
share of Sovereign Common Stock for the ten consecutive trading days immediately
preceding the Effective Date of the merger, 'Sovereign Market Value') of $14.75
constrained by a minimum exchange of 1.225 shares of Sovereign Common Stock and
a maximum exchange of 1.84 shares of Sovereign Common Stock ('Exchange Ratio
Collar'). The Merger Agreement Amendment executed on November 25, 1996 changed
the minimum and maximum number of Sovereign shares to be received per share of
First State Common Stock. Prior to being amended, the minimum number of
Sovereign shares to be exchanged per share of First State was 1.29 shares and
the maximum number of Sovereign shares to be exchanged per share of First State
was 1.66 shares.
MB&D considered the effect of the Exchange Ratio Collar as amended. The
effect of said collar is that stockholders of First State could receive
Sovereign Common Stock valued at greater than $14.75 per share of First State if
the Sovereign Market Value is greater than $12.04. The Exchange Ratio at this
price level is 1.225 shares of Sovereign for every share of First State. This is
the minimum number of Sovereign shares that will be exchanged for each share of
First State Common Stock. If the Sovereign Market Value is $12.04 or greater the
Exchange Ratio becomes fixed at 1.225 shares of Sovereign for each share of
First State. If the Sovereign Market Value is greater than $12.04, then the
value of the 1.225 shares of Sovereign Common Stock to be exchanged for each
First State share will be greater than $14.75.
The amended Exchange Ratio provides for a maximum Exchange Ratio of 1.84
shares of Sovereign Common Stock per share of First State Common Stock. Prior to
being amended, the Merger Agreement had constrained the maximum at 1.66 shares
of Sovereign Common Stock. If the Sovereign Market Value is $8.00 or greater,
each share of First State Common Stock will be exchanged for the number of
shares of Sovereign Common Stock equal in value to $14.75. If the Sovereign
Market Value is less than $8.00, the maximum number of Sovereign Common Stock
(1.84 shares) will be exchanged. If the Sovereign Market Value is less than
$8.00, then the value of the 1.84 shares of Sovereign to be exchanged for each
First State share will be less than $14.75. First State has the right to
terminate the transaction if the Sovereign Market Value is less than $8.00.
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The closing price of Sovereign Common Stock on January 15, 1997 ('Current
Market Price') was $13.50. Assuming $13.50 represented the Sovereign Market
Value, each share of First State Common Stock would currently have value equal
to $16.54 in Sovereign Common Stock.
First State shareholders are exposed to the risk of receiving less than
$14.75 in value only if the Sovereign Market Value calculates to be less than
$8.00 and First State does not elect to terminate the Merger Agreement. This
value is 40.74% lower than Sovereign's Current Market Price of $13.50.
TRANSACTION VALUE:
$14.75 of value in Sovereign Common Stock per share of First State Common
Stock assuming the Sovereign Market Value falls within the Exchange Ratio
collar. An aggregate transaction value of $63,479,058.75 would result from such
assumptions.
$16.54 of value in Sovereign Common Stock per share of First State Common
Stock assuming the Sovereign Market Value equaled the Current Market Price of
$13.50. An aggregate transaction value of $71,171,860 would result from such
assumptions.
TRANSACTION MULTIPLES:
o MULTIPLE OF EARNINGS:
Based upon an assumed value of $14.75 per share of First State
16.44 times reported earnings for the trailing 12 months ended March 31,
1996.
The earnings multiple as compared to earnings for the fiscal year ended
September 30, 1996 is not measurable. Due to the SAIF assessment and asset
quality concerns, First State reported a loss for the period.
11.47 times First State's projected earnings for the fiscal year ending
September 30, 1997.
Based upon an assumed value of $16.54 per share of First State
$18.44 times reported earnings for the trailing 12 months ended March 31,
1996.
The earnings multiple as compared to earnings for the fiscal year ended
September 30, 1996 is not measurable. Due to the SAIF assessment and asset
quality concerns, First State reported a loss for the period.
$12.86 times First State's projected earnings for the fiscal year ending
September 30, 1997.
o MULTIPLE OF BOOK VALUE:
Based upon the assumed value of $14.75 per share of First State
1.92 times tangible book value as of September 30, 1996.
Based upon the assumed value of $16.54 per share of First State
2.15 times tangible book value as of September 30, 1996.
o MULTIPLE OF MARKET VALUE:
The consideration of Sovereign Common Stock with a value of $14.75 per
share of First State Common Stock represented a 47.5% premium to the market
price reported by NASDAQ as of close of business on June 24, 1996 (the day prior
to the announcement of the execution of the Merger Agreement).
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o SPECIFIC ACQUISITION ANALYSIS:
MB&D employs a number of proprietary analysis models to examine
hypothetical transactions involving banking and/or thrift companies. The models
use forecast earnings data, selected current period balance sheet and income
statement data, current 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 combinative 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 and employing a specified transaction structure. The models also
permit an examination of the capital adequacy of the pro forma institution.
In connection with the agreement, MB&D evaluated the range of possible
exchange ratios in a pooling transaction where the consideration to be received
by First State shareholders is Sovereign Common Stock. On the basis of the
financial projections of the respective managements, MB&D projects the
transaction to be slightly accretive to earnings per share during the 1997
fiscal year. It is anticipated that this can be realized through efficiencies of
the combined institution and the ability of a larger institution to accelerate
resolution of First State's troubled assets.
OTHER HYPOTHETICAL MERGER PARTNERS:
As part of its financial advisory services, MB&D analyzed hypothetical
merger partners for First State. MB&D used only publicly available information
and did not contact any other banking institution for its analysis. From time to
time, First State's Board of Directors would ask MB&D to present its analysis to
the Board.
In the latter part of 1995, First State received an unsolicited expression
of interest from Sovereign. After consulting with the Board and MB&D, First
State's management extended due diligence materials to Sovereign. In response to
the expression of interest, First State instructed MB&D to solicit other
financial institutions to ascertain if there was additional interest in First
State. Two other institutions were also extended due diligence materials.
Discussions were terminated in December 1995 with all three parties.
Shortly after First State announced its strategic restructuring plan (to
divest its southern branches and aggressively address its troubled asset
portfolio) in May 1996, First State was contacted by Sovereign and one of the
other institutions that had conducted due diligence during 1995. Both Sovereign
and the other institution expressed interest in renewed negotiations. Each
institution was allowed to perform a complete due diligence review of First
State. Through this process and after consideration and consultation with MB&D,
the Board of First State determined that the shareholders were best served by
continuing to negotiate with Sovereign.
DISCOUNTED CASH FLOW ANALYSIS:
In late April 1996, the Board of First State resolved to dramatically alter
its strategic plan. First State planned to divest its six southern branches,
approximately $125 million in deposits would be auctioned to other financial
institutions. The two primary benefits that were projected to be the result of
such a plan were:
1. The resulting franchise would be much more concentrated both in
terms of branch size and geography. This greater concentration would allow
First State to reduce expenses and operate more efficiently. The plan
incorporated a reduction of 18% in non-interest expense.
2. The proceeds from the branch sale would be used to aggressively
reduce the troubled asset portfolio at First State. The goal of the plan
was to reduce problem assets to less than 1% of total assets. The proposed
changes to First State's strategic plan had been analyzed by both
management and MB&D.
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As part of its evaluation of Sovereign's offer, MB&D performed a discounted
cash flow analysis incorporating First State's revised strategic restructuring
plan. Discounted cash flow analyses permit the conceptual examination of the
present discounted values of potential future results employing selected
assumptions and discount rates.
The following assumptions and projections are a summary of the analyzed
business plan provided to MB&D by the management of First State and the
discounted cash flow model utilized.
1. On a per share basis, a control sale was deemed to be possible at a
P/E ratio (using estimated 1997 fiscal year earnings) of 11.47 times or
$14.75 in Sovereign Common Stock.
2. First State's assets would be substantially reduced initially due
to the branch sale and resolution of problem assets. Assets would then
steadily grow at an average of 6.88% per annum throughout the remaining 4
years of the planning period.
3. First State's average return on assets over the five year period
will be 0.90%. Average return on assets for the final fiscal year of the
planning period was projected to be 1.00%.
4. First State's dividend payout ratio is projected to average 29.57%
throughout the period.
5. A discount rate of 12.0% was applied to all cash flows.
The last variable needed to project a present value per share is a terminal
P/E multiple. MB&D employed hypothetical terminal control transaction P/E
multiples ranging from 10 times to 15 times. It is MB&D's opinion that the P/E
multiple for a transaction involving a thrift in the last year of the planning
period would likely fall within this range. The resulting present values fell
within a range of $9.62 (P/E multiple of 10) to $13.87 (P/E multiple of 15).
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 and terminal P/E multiples. The 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.
The assumptions employed were thoroughly discussed with both First State's
management and Board. Within this context both external and internal factors
were discussed. Consideration was given to the present health and future
prospects of the banking environment within the State of New Jersey. MB&D
advised the First State 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.
ANALYSIS OF OTHER COMPARABLE TRANSACTIONS:
MB&D is reluctant to place undue emphasis on 'comparables analysis' as a
valuation methodology due to what it considers to be inherent limitations of the
application of the results to specific cases. MB&D has observed that such
analysis often fails to adequately take into consideration such factors as:
material differences in the underlying capitalization of the 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; differences in
the asset quality of the compared institutions; failure to exclude non-recurring
profit or loss items from the last twelve month 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
factors as the relative population demographics of the acquired entities markets
as compared or contrasted to such factors for the markets in which comparable
entities are doing business. Comparable analysis also rarely seems to take into
consideration the degree of facilities overlap between the acquirers' market and
that of the target or the absence of such overlap and the resulting cost savings
differentials between two otherwise apparently comparable transactions. MB&D
consequently believes that comparable analysis is the least reliable form of
financial analysis available for the analysis of a prospective transaction.
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Nevertheless, in June 1996 MB&D reviewed 13 publicly announced transactions
involving a thrift as the acquisition target in the State of New Jersey and the
New York metropolitan area. These transactions were announced between June 1994
and May 1996. One of the transactions was terminated by mutual consent prior to
closing. Within this universe the average (mean) multiple of tangible book value
paid by the acquirer was 1.55 times and the maximum multiple paid was 2.50
times, while the minimum multiple was 1.22 times. These statistics can be
compared to a multiple of 1.56 (using fully diluted tangible book value as of
March 31, 1996) which was derived for the Merger. With respect to trailing 12
months earnings multiples for this same data sample, the average P/E multiple
paid was 16.09 times and the maximum multiple was 23.10 times, while the minimum
multiple was 7.70 times. These statistics can be compared to a multiple of 16.44
(using trailing 12 months earnings ended March 31, 1996) which was derived for
the Merger.
TANGIBLE EARNINGS
BOOK MULTIPLE MULTIPLE
--------------- -----------
The Merger....................................... 1.56 16.44
Sample Average................................... 1.55 16.09
Sample Maximum................................... 2.50 23.10
Sample Minimum................................... 1.22 7.70
COMPENSATION OF MB&D:
Pursuant to a letter dated December 5, 1995, First State paid MB&D a fee of
$200,000 upon execution of the definitive Merger Agreement, and First State is
required to pay MB&D a fee of $150,000 promptly after the mailing of this Proxy
Statement/Prospectus, which contains MB&D's written opinion. In addition, First
State has agreed to pay MB&D a cash fee equivalent to 1.00% of the fair market
value of the consideration received by First State stockholders (including
in-the-money options) upon closing of the Merger, less $350,000 of the fees
which will have been previously paid to MB&D as described above.
First State has agreed to reimburse MB&D for its reasonable out-of-pocket
expenses incurred. First State 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.
MB&D has filed a written consent with the Commission relating to the
inclusion of its fairness opinion and the references to such opinion and to MB&D
in the Registration Statement in which this Proxy Statement/Prospectus is
included. In giving such consent, MB&D did not admit that it comes within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations thereunder.
EFFECTIVE DATE OF THE MERGER
Under the Merger Agreement, the Effective Date is the date determined by
Sovereign, in its sole discretion, upon five days prior written notice to First
State, but in no event may the Effective Date be later than thirty days after
the last condition precedent to the completion of the Merger set forth in the
Merger Agreement has been fulfilled or waived. See 'Conditions to the Merger'
herein.
On or prior to the Effective Date (i) Articles of Merger between Sovereign
and First State will be filed with the Pennsylvania Department of State and (ii)
a Certificate of Merger will be filed in the Delaware Office of the Secretary of
State, and each such document will set forth the Effective Date. The Merger
Agreement may be terminated by either party if, among other reasons, the Merger
is not completed before March 31, 1997 and the terminating party is not in
breach of the Merger Agreement. See 'THE MERGER -- Termination; Effect of
Termination.'
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EXCHANGE OF FIRST STATE STOCK CERTIFICATES
The conversion of First State Common Stock into Sovereign Common Stock will
occur automatically at the Effective Date. As soon as practicable after the
Effective Date, Sovereign, or a bank or trust company designated by Sovereign,
in the capacity of exchange agent (the 'Exchange Agent'), will send a
transmittal form to each First State stockholder. The transmittal form will
contain instructions with respect to the surrender of certificates representing
First State Common Stock to be exchanged for Sovereign Common Stock.
FIRST STATE STOCKHOLDERS SHOULD NOT FORWARD FIRST STATE STOCK CERTIFICATES
TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. FIRST STATE
STOCKHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD.
Until the certificates representing First State Common Stock are
surrendered for exchange after completion of the Merger, holders of such
certificates will not receive, and will not be paid dividends on, the Sovereign
Common Stock into which such shares have been converted. When such certificates
are surrendered, any unpaid dividends will be paid without interest. For all
other purposes, however, each certificate which represents shares of First State
Common Stock outstanding at the Effective Date will be deemed to evidence
ownership of the shares of Sovereign Common Stock into which those shares have
been converted by virtue of the Merger.
All shares of Sovereign Common Stock issued upon conversion of shares of
First State Common Stock shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of First State Common
Stock, subject, however, to Sovereign's obligation to pay any dividends or make
any other distributions with a record date on or prior to the Effective Date,
which may have been declared or made by First State on such shares of First
State Common Stock in accordance with the Merger Agreement and which remain
unpaid at the Effective Date.
No fractional shares of Sovereign Common Stock will be issued to any First
State stockholder upon completion of the Merger. For each fractional share that
would otherwise be issued, Sovereign will pay by check an amount equal to the
product obtained by multiplying the fractional share interest to which such
holder would otherwise be entitled by the Sovereign Market Value.
Neither Sovereign nor First State will be liable to any holder of shares of
First State Common Stock which are converted into shares of Sovereign Common
Stock in the Merger for any such shares of Sovereign Common Stock (or dividends,
distributions or net sale proceeds with respect thereto) delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
CONDITIONS TO THE MERGER
The obligations of Sovereign and First State to effect the Merger are
subject to various conditions which include the following:
(a) the Merger Agreement shall have been duly approved by the holders
of First State Common Stock;
(b) all necessary governmental approvals for the Merger shall have
been obtained, and all waiting periods required by law or imposed by any
governmental authority with respect to the Merger shall have expired (see
'Regulatory Approvals' herein);
(c) there shall not be any order, decree, or injunction in effect
preventing the completion of the transactions contemplated by the Merger
Agreement;
(d) there shall have been delivered to each of Sovereign and First
State an opinion of counsel that, among other things, the Merger will be
treated for Federal income tax purposes as a 'reorganization' within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(see 'Certain Federal Income Tax Consequences' herein); and
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(e) there shall not have been any material adverse change in the
consolidated assets, business, financial condition or results of operations
of the other since March 31, 1996.
With respect to the condition relating to material adverse change,
Sovereign has agreed that neither (i) an increase in the provision for loan
losses by First State for the period ended June 30, 1996 in an amount not to
exceed $5,000,000, (ii) the existence of nonperforming assets of First State in
an amount up to $26,100,000, (iii) the incurrence by First State of aggregate
losses on the sale, exchange or other disposition of nonperforming assets up to
$1,000,000 (for purposes of this subsection, loss will be identified net of any
portion of the allowance for loan losses allocable to the nonperforming asset
which is sold, exchanged or otherwise disposed of by First State) or (iv)
provisions for loan losses taken or recognized by First State after the date of
the Merger Agreement in aggregate amounts up to $7,250,000 shall be considered a
material adverse change. For purposes of this provision, the term 'nonperforming
assets' means (i) loans that are 'troubled debt restructurings' as defined in
Statement of Financial Accounting Standards No. 15, 'Accounting by Debtors and
Creditors for Troubled Debt Restructurings,' excluding restructured loans the
terms and conditions of which were approved in writing in advance by Sovereign,
(ii) loans on nonaccrual, including loans placed on nonaccrual that may have
been previously restructured with Sovereign's approval, (iii) real estate owned,
and (iv) all loans 90 days or more past due, except that the term 'nonperforming
assets' shall not include loans originated to finance the purchase of any
one-to-four-family residential property. Sovereign has agreed that the
provisions for loan losses taken for the period ended September 30, 1996 would
not constitute a material adverse change for purposes of the Merger Agreement.
In addition, Sovereign's obligation to effect the Merger is subject to,
among others, the following additional conditions:
(a) Sovereign shall have received an opinion from its independent
certified public accountant to the effect that the Merger will be treated
as a 'pooling of interests' for financial accounting purposes (see
'Accounting Treatment' herein);
(b) the results of any 'phase I environmental audit' that Sovereign
shall have had performed at its expense at any office or branch of First
State or First DeWitt shall be reasonably satisfactory to Sovereign;
(c) neither the Merger nor the Bank Merger shall require Sovereign,
First State or any subsidiary to distribute to depositors the liquidation
account established by First DeWitt in connection with the conversion of
First DeWitt from mutual to stock form; and
(d) First DeWitt shall have received all amounts due to it from a
check processing company which is in liquidation (all of which have been
received as of the date of the Proxy Statement/Prospectus).
Except for the requirements of stockholder approval, regulatory approvals
and the absence of any order, decree, or injunction preventing the transactions
contemplated by the Merger Agreement, each of the conditions described above may
be waived in the manner and to the extent described in 'Amendment; Waivers'
herein.
SUBSIDIARY BANK MERGER
In connection with the Merger, Sovereign Bank and First DeWitt entered into
a Bank Plan of Merger (the 'Bank Plan of Merger') dated June 24, 1996. Pursuant
to the Bank Plan of Merger, concurrently with or as soon as practicable after
consummation of the Merger, First DeWitt will merge with and into Sovereign
Bank, with Sovereign Bank surviving (the 'Bank Merger'). Sovereign and First
State anticipate that the Bank Merger will be completed concurrently with the
completion of the Merger.
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REGULATORY APPROVALS
The Merger is subject to the prior approval of the Office of Thrift
Supervision ('OTS') under the Home Owners' Loan Act (the 'HOLA') and the
regulations adopted under the HOLA, and the Pennsylvania Department of Banking
(the 'Department') under the Pennsylvania Savings Association Code of 1967, as
amended (the 'Association Code'). An application for approval of the Merger was
filed with the OTS on September 25, 1996 and amended on November 23, 1996. The
OTS deemed the application complete by letter dated December 4, 1996. Under
applicable OTS regulations, the OTS will review the financial, managerial,
competitive, legal, disclosure, accounting and tax aspects of the transaction.
In addition, the OTS has the responsibility by statute and regulation to
review the performance of all involved institutions in meeting their
responsibilities under the Community Reinvestment Act ('CRA'). No protest of the
Merger has been filed with the OTS under the CRA as of the date of this Proxy
Statement/Prospectus.
An application was filed with the Department on September 25, 1996. In
connection with its review of the application, the Department may conduct such
investigation as it deems necessary. Such investigation must specifically
include consideration of the effects of the Merger on the reasonable
availability of banking services to all segments of the public and the economy
of the Commonwealth of Pennsylvania, with special emphasis on the financing of
enterprises and economic development with a view to increasing or retaining
employment opportunities. The Department will also review the credit practices
and policies of Sovereign Bank to determine the overall performance of such
institution in providing financial services to individuals and business
enterprises in light of its role as a thrift institution, its resources, its
capital and its income, the particular needs of the communities it serves,
competition and alternative sources of credit. The Department will also review
the extent to which Sovereign Bank provides basic transaction account services
to the public and, in particular, low or moderate income individuals. The
Department may approve the application if it determines that Sovereign Bank's
performance with respect to the reasonable availability of banking services is
not materially deficient. The Department may approve the transaction subject to
such conditions regarding banking services and basic transaction account
services as it deems appropriate.
There can be no assurance that the regulatory authorities described above
will approve the Merger or the Bank Merger, and if approved, there can be no
assurance as to the date of such approvals.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties
relating to, among other things, (a) the corporate organization of Sovereign,
Sovereign Bank, First State and First DeWitt; (b) the capital structures of
Sovereign and First State; (c) the due authorization, execution, delivery,
performance and enforceability of the Merger Agreement and the Bank Plan of
Merger; (d) consents or approvals of regulatory authorities or third parties
necessary to complete the Merger and the Bank Merger; (e) the consistency of
financial statements with generally accepted accounting principles and, where
appropriate, applicable regulatory accounting principles; (f) the absence of
material adverse changes, since March 31, 1996, in the consolidated assets,
business, financial condition or results of operations of Sovereign or First
State; (g) the filing of tax returns and payment of taxes; (h) the absence of
undisclosed material pending or threatened litigation; (i) compliance with
applicable laws and regulations; (j) retirement and other employee plans and
matters relating to the Employee Retirement Income Security Act of 1974; (k) the
quality of title to assets and properties; (l) the maintenance of adequate
insurance; (m) the absence of undisclosed brokers' or finders' fees; (n) the
accuracy of information supplied by Sovereign and First State in connection with
the Registration Statement on Form S-4 filed with the Commission in connection
with the issuance of Sovereign Common Stock in the Merger, this Proxy
Statement/Prospectus and all applications filed with regulatory authorities for
approval of the Merger and the Bank Merger; and (o) documents filed with the
Commission and the accuracy of information contained therein.
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The Merger Agreement also contains other representations and warranties by
First State relating to, among other things, (a) certain contracts relating to
employment, consulting and benefits matters; (b) the absence of material
environmental violations, actions or liabilities of or against First State and
its subsidiaries; (c) the consistency of First State's allowance for loan losses
with generally accepted accounting principles and all applicable regulatory
criteria; and (d) transactions with affiliates.
BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, Sovereign and First State have each
agreed to use their best efforts to preserve their business organizations
intact, to maintain good relationships with employees and to preserve the
goodwill of customers and others with whom business relationships exist. In
addition, First State has agreed to conduct its business and to engage in
transactions only in the ordinary course of business, consistent with past
practice, except as otherwise required by the Merger Agreement or with the
written consent of Sovereign.
In addition, First State has agreed in the Merger Agreement that neither it
nor First DeWitt Bank may, without the written consent of Sovereign, among other
things, (i) change its Certificate of Incorporation, Charter or Bylaws; (ii)
change the number of authorized or issued shares of its capital stock, except
for the possible issuance of up to 370,600 shares of First State Common Stock
upon the exercise of then outstanding stock options; (iii) grant options or
similar rights with respect to its capital stock or any securities convertible
into its capital stock; (iv) split, combine or reclassify any shares of its
capital stock; (v) declare, set aside or pay any dividend or other distribution
in respect of its capital stock, except as otherwise specifically set forth in
the Merger Agreement (see 'Dividends' herein); (vi) grant any severance pay,
except in accordance with First State's severance policy in effect on the date
of the Merger Agreement (see 'Employee Benefits' herein), or enter into or amend
any employment agreement; (vii) grant any pay increase except for routine
periodic increases in accordance with past practice; (viii) engage in any
merger, acquisition or similar transaction; (ix) dispose of any assets other
than in the ordinary course of business; (x) change any accounting practices;
(xi) implement any new employee benefit or welfare plan, or amend any such plan,
unless such amendment does not result in an increase in cost; (xii) purchase any
security for its investment portfolio not rated 'A' or higher by either Standard
& Poor's Corporation or Moody's Investor Services, Inc.; (xiii) make, enter
into, renew, extend, modify or compromise any transaction (including loans and
commitments to lend) with any affiliate of First State; (xiv) enter into any
swap or similar arrangement; (xv) take any action which would give rise to a
right of payment to any individual under any employment agreement; (xvi)
intentionally and knowingly take any action that would preclude the treatment of
the Merger as a pooling of interests for financial accounting purposes; (xvii)
make any loan or other credit facility commitment to any borrower in excess of
$600,000, or compromise, extend, renew or modify any such loan or commitment
outstanding in excess of $600,000; (xviii) waive, release, grant or transfer any
rights of value, or modify or change in any material respect any existing
agreement to which First State or any First State subsidiary is a party, other
than in the ordinary course of business, consistent with past practice; (xix)
take any action which would cause any of the representations and warranties of
First State set forth in the Merger Agreement to be untrue or the conditions set
forth in the Merger Agreement to be unsatisfied; or (xx) agree to do any of the
foregoing.
First State has also agreed in the Merger Agreement, among other things,
(i) to permit Sovereign, if Sovereign elects to do so at its own expense, to
cause a 'phase I environmental audit' to be performed at any physical site owned
or occupied by First State or First DeWitt; (ii) to permit a representative of
Sovereign to attend committee meetings of First State and First DeWitt's
management, and to reasonably consider Sovereign's requests that its
representatives be permitted to attend meetings of First State's Board of
Directors or Executive Committee; (iii) if Sovereign requests and agrees to bear
the expense, to retain a proxy solicitor in connection with the solicitation of
First State stockholder approval of the Merger Agreement; (iv) if Sovereign
requests, to cause its independent certified public accountants to perform a
review of its unaudited consolidated financial statements as of the end of any
calendar quarter, in accordance with Statement of Auditing Standards
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No. 36, and to issue their report on such financial statements; (v) if Sovereign
requests, to use its best efforts to obtain an extension of any contract with an
outside service bureau or other vendor of services to First State or any First
State subsidiary, on terms and conditions mutually acceptable to First State and
Sovereign; (vi) to submit the Merger Agreement to its stockholders for approval
at a meeting to be held as soon as practicable, and use its best efforts to
cause its Board of Directors to unanimously recommend approval of the Merger
Agreement to First State's stockholders; (vii) to provide to Sovereign copies of
the minutes of all meetings of the Board of Directors of First State and its
subsidiaries, and of any of their respective committees or of any senior
management committee; and (viii) to approve the Bank Merger as sole stockholder
of First DeWitt.
Sovereign and First State have jointly agreed, among other things, (i) to
prepare all applications for, and use their best efforts to obtain, all required
regulatory consents; (ii) to take all actions necessary to complete the
transactions contemplated by the Merger Agreement; (iii) to maintain adequate
insurance; (iv) to maintain accurate books and records; (v) to file all tax
returns and pay all taxes when due; (vi) to cooperate with each other and use
their best efforts to identify those persons who may be deemed to be affiliates
of First State; (vii) to agree upon the form and substance of any press release
or public disclosure related to the Merger Agreement, the Merger and the Bank
Merger; and (viii) to deliver to the other copies of all securities documents
when filed.
DIVIDENDS
The Merger Agreement permits First State to pay a regular quarterly cash
dividend, not to exceed $0.055 per share of First State Common Stock
outstanding, in any quarter in which the Effective Date is not on or before the
record date for the payment by Sovereign of its regular cash dividend. The Board
of Directors of First State agreed in the Merger Agreement to cause the regular
quarterly dividend record dates and payment dates with respect to First State
Common Stock to be the same as Sovereign's regular quarterly dividend record
dates and payment dates for Sovereign Common Stock. First DeWitt may pay cash
dividends sufficient to permit payment of the dividends permitted to be paid by
First State. No other dividends may be paid by First State or First DeWitt
without the prior written consent of Sovereign.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that during the term of the Merger Agreement,
First State shall not, nor shall it permit any First State subsidiary or any
other affiliate of First State or any officer, director or employee of any of
them, or any investment banker, attorney, accountant or other representative
retained by First State, any First State subsidiary or any other First State
affiliate to, directly or indirectly, solicit, encourage, initiate or engage in
discussions or negotiations with, or respond to requests for information,
inquiries, or other communications from, any person other than Sovereign
concerning the fact of, or the terms and conditions of, the Merger Agreement, or
concerning any acquisition of First State, any First State subsidiary, or any
assets or business thereof, except First State's officers may respond to
inquiries from analysts, regulatory authorities and holders of First State
Common Stock in the ordinary course of business. The Merger Agreement provides
that First State shall notify Sovereign immediately if any such discussions or
negotiations are sought to be initiated with First State by any person other
than Sovereign or if any such requests for information, inquiries, proposals or
communications are received from any person other than Sovereign.
The directors and executive officers of First State have executed a letter
agreement containing provisions similar to those described above relating to
First State, and such directors and executive officers have also agreed to vote
all shares of First State Common Stock owned by them in favor of the Merger
Agreement. A copy of the letter agreement executed by the directors and
executive officers of First State is included as Exhibit 1 to the Merger
Agreement attached hereto as Annex A.
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AMENDMENT; WAIVERS
Subject to applicable law, at any time prior to the consummation of the
transactions contemplated by the Merger Agreement, Sovereign and First State may
(a) amend the Merger Agreement, (b) extend the time for the performance of any
of the obligations or other acts of Sovereign and First State required in the
Merger Agreement, (c) waive any inaccuracies in the representations and
warranties contained in the Merger Agreement, or (d) waive compliance with any
of the agreements or conditions contained in the Merger Agreement.
TERMINATION; EFFECT OF TERMINATION
The Merger Agreement may be terminated on or at any time prior to the
Effective Date (a) by the mutual written consent of Sovereign and First State;
(b) by Sovereign or First State (i) if there shall have been any breach of any
representation, warranty, covenant or other obligation of Sovereign which
results in a material adverse effect with respect to Sovereign, on the one hand,
or of First State which results in a material adverse effect with respect to
First State, on the other hand, and such breach cannot be, or shall not have
been, remedied within 30 days after receipt by such other party of notice in
writing specifying the nature of such breach and requesting that it be remedied;
(ii) if the Effective Date shall not have occurred on or before March 31, 1997,
unless the failure of such occurrence shall be due to the failure of the party
seeking to terminate the Merger Agreement to perform or observe its agreements
set forth in the Merger Agreement required to be performed or observed by such
party on or before the Effective Date; or (iii) if either party has been
informed in writing by a regulatory authority whose approval or consent has been
requested that such approval or consent is unlikely to be granted, unless the
failure of such occurrence shall be due to the failure of the party seeking to
terminate the Merger Agreement to perform or observe its agreements set forth in
the Merger Agreement and required to be performed or observed by such party on
or before the Effective Date; or (c) by First State if, on the Effective Date,
the Sovereign Market Value is less than $8.00 (as adjusted for any stock splits
or stock dividends); provided, however, that if Sovereign delivers to First
State on the Effective Date a written notice increasing the Exchange Ratio to an
amount which, when multiplied by the Sovereign Market Value determined as of the
Closing Date, equals $14.75, then no termination of the Merger Agreement shall
occur and the Merger shall be completed pursuant of the Merger Agreement.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Directors and Executive Officers
The Board of Directors and executive officers of Sovereign in office
immediately prior to the completion of the Merger will constitute Sovereign's
Board of Directors and executive officers after completion of the Merger.
The Board of Directors and executive officers of Sovereign Bank in office
immediately prior to completion of the Bank Merger will constitute Sovereign
Bank's Board of Directors and executive officers after completion of the Bank
Merger, except that Michael J. Quigley, III, Chairman, President and Chief
Executive Officer of First State, will become a director of Sovereign Bank to
hold office until the 1998 annual reorganization meeting of the Board of
Directors of Sovereign Bank and until his successor is elected and qualified or
otherwise in accordance with the Charter and Bylaws of Sovereign Bank and the
policies of Sovereign and Sovereign Bank.
On the effective date of the Bank Merger, Sovereign will create an advisory
board of directors of Sovereign Bank for the market area served by First DeWitt
which shall consist of all directors of First DeWitt in office immediately prior
to the completion of the Bank Merger. Sovereign shall cause such persons to be
elected as advisory directors of Sovereign Bank effective as of the effective
date of the Bank Merger, and each shall hold office for at least one year from
such effective date. Such advisory board shall meet quarterly and each member
shall receive $250 per meeting attended.
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Consolidation of Operations
Sovereign expects to achieve certain cost savings and operating synergies
as a result of the Merger. These costs savings and operating synergies are
anticipated to aggregate approximately 40% of First State's recurring operating
expenses, substantially realized within the twelve months following the
Effective Date. Sovereign expects that such cost savings and operating synergies
will be realized primarily as the result of the elimination of duplicative
functions in the areas of human resources, loan servicing, and corporate
overhead in the combined New Jersey operations. Because of the uncertainties
inherent in merging two financial institutions, changes in the regulatory
environment, and changes in economic conditions, no assurances can be given that
any particular level of cost savings will be realized, that any such cost
savings will be realized over the time period currently anticipated, or that
such cost savings will not be offset to some degree by increases in other
expenses, including expenses relating to integrating the two companies.
Any such expected cost savings or synergies do not give effect to an
expected one-time after-tax charge of approximately $10 to $20 million, relating
to Merger expenses, which will be incurred upon completion of the Merger. Such
expenses will be incurred principally as a result of an addition to the
allowance for possible loan losses which Sovereign has determined will be
necessary in connection with a change in strategy related to problem assets and
to conform First State's charge-off policies to those of Sovereign, payments to
executive officers of First State under existing employment contracts containing
change in control related obligations, other severance payments and asset
writedowns, and transaction costs directly related to the Merger.
EMPLOYEE BENEFITS
Sovereign intends to maintain employee benefits for First State and First
DeWitt employees at levels which, in the aggregate, are at least as favorable as
such benefits which existed as of March 31, 1996. On and after the Effective
Date, so long as such benefits are so maintained, the employee pension and
welfare benefit plans of Sovereign and First State may, at Sovereign's election,
continue to be maintained separately or consolidated. In the event of a
consolidation of any or all of such plans, First State and First DeWitt
employees shall receive credit for service with First State or First DeWitt
under any Sovereign benefit plan or new Sovereign benefit plan in which such
employees would be eligible to enroll, for purposes of eligibility and vesting
determination.
ACCOUNTING TREATMENT
The Merger is expected to qualify as a 'pooling-of-interests' for
accounting and financial reporting purposes. Under this method of accounting,
the recorded assets and liabilities of Sovereign and First State will be carried
forward to the combined corporation at their recorded amounts; income of the
combined corporation will include income of both Sovereign and First State for
the entire fiscal year of Sovereign in which the Merger occurs; and the reported
income of the separate corporations for prior periods will be combined and
restated as income of the combined corporation. Expenses incurred in connection
with the Merger will constitute expenses for the accounting periods to which
such expenses relate. The receipt of a letter from Sovereign's independent
auditors confirming that the Merger will qualify for pooling of interests
accounting is a condition to Sovereign's obligation to complete the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Completion of the Merger is conditioned upon there being delivered to
Sovereign and to First State an opinion of Stevens & Lee, P.C., counsel to
Sovereign, that for Federal income tax purposes, under current law, assuming
that the Merger and related transactions will take place as described in the
Merger Agreement, among other things, the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the 'Code'), and Sovereign and First State will each be a
party to the reorganization within the meaning of Code Section 368(b).
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In that case, in the opinion of Stevens & Lee, the following would be the
material Federal income tax consequences of the Merger:
(i) no gain or loss will be recognized by Sovereign or First State in
the Merger;
(ii) no gain or loss will be recognized by holders of shares of First
State Common Stock upon their receipt of Sovereign Common Stock in exchange
for their First State Common Stock, except that stockholders who receive
cash proceeds for fractional interests in Sovereign Common Stock will
recognize gain or loss equal to the difference between such proceeds and
the tax basis allocated to their fractional share interests, and such gain
or loss will constitute capital gain or loss if their First State Common
Stock is held as a capital asset at the Effective Date;
(iii) the tax basis of the shares of Sovereign Common Stock (including
fractional share interests) received by the stockholders of First State
will be the same as the tax basis of their First State Common Stock
exchanged therefor; and
(iv) the holding period of the Sovereign Common Stock in the hands of
the First State stockholders will include the holding period of their First
State Common Stock exchanged therefor, provided such First State Common
Stock is held as a capital asset at the Effective Date.
Under the Merger Agreement, the condition that Stevens & Lee deliver the
opinion described above can be waived by Sovereign and First State. However, in
the event that the delivery of such opinion of counsel is waived, or such
opinion would otherwise set forth tax consequences materially different to a
stockholder than those described above, Sovereign and First State intend to
resolicit proxies as required in accordance with the rules and regulations of
the Securities and Exchange Commission.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND
IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND PROPOSED
TREASURY REGULATIONS THEREUNDER, AND CURRENT ADMINISTRATIVE RULINGS AND COURT
DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD
AFFECT THE CONTINUING VALIDITY OF THE DISCUSSION. THE DISCUSSION IS NOT A
COMPLETE DESCRIPTION OF ALL THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
AND, IN PARTICULAR, DOES NOT ADDRESS TAX CONSIDERATIONS THAT MAY AFFECT THE
TREATMENT OF STOCKHOLDERS WHO ACQUIRED THEIR FIRST STATE COMMON STOCK PURSUANT
TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION, OR
STOCKHOLDERS WHICH ARE EXEMPT ORGANIZATIONS OR WHO ARE NOT CITIZENS OR RESIDENTS
OF THE UNITED STATES. EACH STOCKHOLDER'S INDIVIDUAL CIRCUMSTANCES MAY AFFECT THE
TAX CONSEQUENCES OF THE MERGER TO SUCH STOCKHOLDER. IN ADDITION, NO INFORMATION
IS PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER UNDER
APPLICABLE STATE, LOCAL, OR FOREIGN LAWS. ACCORDINGLY, EACH FIRST STATE
STOCKHOLDER IS ADVISED TO CONSULT A TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER TO SUCH STOCKHOLDER.
EXPENSES
Sovereign and First State will each pay all costs and expenses incurred by
it in connection with the transactions contemplated by the Merger Agreement,
including fees and expenses of financial consultants, accountants and legal
counsel, except that (i) the cost of printing and mailing this Proxy
Statement/Prospectus will be shared equally by Sovereign and First State and
(ii) if Sovereign requests First State to retain a proxy solicitor in connection
with the solicitation of First State stockholder approval of the Merger
Agreement, Sovereign will bear the expense of such proxy solicitor.
42
<PAGE>
RESALE OF SOVEREIGN COMMON STOCK
The Sovereign Common Stock issued pursuant to the Merger will be freely
transferable under the Securities Act except for shares issued to any First
State shareholder who may be deemed to be an 'affiliate' of First State or
Sovereign for purposes of Rule 145 under the Securities Act of 1933 (the
'Securities Act'). Each director and executive officer of First State has
entered into an agreement with Sovereign providing that, as an affiliate, he or
she will not transfer any Sovereign Common Stock received in the Merger except
in compliance with the Securities Act and will make no dispositions of any
Sovereign Common Stock or First State Common Stock (or any interest therein)
during the period commencing 30 days prior to the Effective Date through the
date on which financial results covering at least 30 days of combined operations
of Sovereign and First State after the Merger have been made public. A copy of
such agreement is included as Exhibit 1 to the Merger Agreement attached hereto
as Annex A. This Proxy Statement/Prospectus does not cover resales of Sovereign
Common Stock received by any person who may be deemed an affiliate of First
State or Sovereign.
NO DISSENTERS' RIGHTS OF APPRAISAL
Holders of shares of First State Common Stock will not be entitled to
appraisal rights under the Delaware General Corporation law in connection with
the matters to be acted on at the Special Meeting.
DIVIDEND REINVESTMENT PLAN
Sovereign currently maintains a Dividend Reinvestment and Stock Purchase
Plan. This plan provides shareholders of Sovereign with a simple and convenient
method of investing cash dividends, as well as voluntary cash payments, in
additional shares of Sovereign Common Stock, without payment of any brokerage
commission or service charge. It is anticipated that, after the Effective Date,
Sovereign will continue to offer this plan and shareholders of First State who
become shareholders of Sovereign will be eligible to participate therein.
43
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
STOCK OPTIONS
As of the Record Date, the directors and executive officers of First State
beneficially own approximately 830,806 shares of First State Common Stock,
including options to purchase 370,600 shares of First State Common Stock. On the
Effective Date, each Management Option, whether or not such Management Option is
exercisable on the Effective Date, shall cease to be outstanding and shall be
converted on the Effective Date into and become an option to acquire that number
of shares of Sovereign Common Stock equal to the number of shares of First State
Common Stock covered by the Management Option multiplied by the Exchange Ratio,
at an exercise price equal to the present stated exercise price of such option
divided by the Exchange Ratio. Shares issuable upon the exercise of such options
to acquire Sovereign Common Stock shall be issuable, at the election of
Sovereign, either under Sovereign's stock option plans or First State's stock
option plans.
INDEMNIFICATION
Sovereign has agreed in the Merger Agreement that, on or after the
Effective Date, Sovereign shall indemnify, defend and hold harmless all prior
and then-existing directors and officers of First State and First DeWitt,
against (i) all losses, claims, damages, costs, expenses, liabilities or
judgments or amounts that are paid in settlement (with the approval of Sovereign
which approval shall not be unreasonably withheld) of or in connection with any
claim, action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director, officer or employee of First State or any First State subsidiary,
whether pertaining to any matter existing or occurring at or prior to the
Effective Date and whether asserted or claimed prior to, or at or after, the
Effective Date ('Indemnified Liabilities') and (ii) all Indemnified Liabilities
based in whole or in part on, or arising in whole or in part out of, or
pertaining to the Merger Agreement or the transactions contemplated by the
Merger Agreement, to the same extent as such officer, director or employee would
be indemnified by First State or First DeWitt as of June 24, 1996 including the
right to advancement of expenses, provided, however, that any such officer,
director or employee of First State or First DeWitt may not be indemnified by
Sovereign and/or Sovereign Bank if such indemnification is prohibited by
applicable law.
OTHER
Mr. Quigley and six other executive officers of First State are parties to
employment agreements with First State which, among other things, provide rights
to such officers upon the occurrence, after a change in control, of certain
circumstances. These circumstances include a demotion, reassignment to a new
location, and a reduction in salary (a 'Triggering Event'). Sovereign has agreed
to honor the terms of such contracts. One or more Triggering Events under such
agreements will in all likelihood occur as a result of the Merger. If a
Triggering Event occurs after the Effective Date and all of such officers
exercise their rights under such agreements, Sovereign would be required to pay
such officers the aggregate amount of approximately $6.4 million. First State is
also party to an agreement with Mr. Quigley that will indemnify him for any
'golden parachute' excise tax, and any income tax with respect to such
indemnification payments, for which he would become liable in connection with
any payments or benefits received under the employment agreements following a
Triggering Event.
44
<PAGE>
CERTAIN RELATED TRANSACTIONS
STOCK OPTION AGREEMENT
As a condition to entering into the Merger Agreement, First State executed
and delivered to Sovereign the Stock Option Agreement, dated as of June 24, 1996
(the 'Stock Option Agreement'). A copy of the Stock Option Agreement is attached
as Annex B hereto. Pursuant to the Stock Option Agreement, Sovereign was granted
an option to purchase up to 783,500 shares of First State Common Stock. The
exercise price per share to purchase First State Common Stock under the option
is equal to the lower of $10.00 or the lowest price per share that a person or
group, other than Sovereign or an affiliate of Sovereign, paid or offers to pay
for First State Common Stock upon the occurrence of one of the specified events
that trigger exercise of the option. The option may only be exercised, in whole
or in part, upon the occurrence of certain events (collectively, 'Triggering
Events'), including, among other things, the acquisition by a person or group of
a significant number of shares of First State Common Stock, First State entering
into an agreement to merge, consolidate or sell assets, or a public announcement
by a third party of an intent to acquire control of First State under certain
circumstances.
The Stock Option Agreement, together with (i) First State's agreement to
not solicit other transactions relating to the acquisition of First State by a
third party and (ii) the agreement of First State's directors and executive
officers to vote their shares in favor of the Merger Agreement (see 'THE MERGER
- -- No Solicitation of Transactions'), may have the effect of discouraging
persons who might now or prior to the Effective Date be interested in acquiring
all of or a significant interest in First State from considering or proposing
such an acquisition, even if such persons were prepared to pay a higher price
per share for First State Common Stock than the price per share implicit in the
Merger Consideration. Certain attempts to acquire First State or an interest in
First State would cause the option to become exercisable as described above.
Sovereign's exercise of such option would significantly increase a potential
acquiror's cost of acquiring First State compared to the cost that would be
incurred without the Stock Option Agreement. Such increased cost might
discourage a potential acquiror from considering or proposing an acquisition or
might result in a potential acquiror proposing to pay a lower per share price to
acquire First State than it might otherwise have proposed to pay. In addition,
the management of Sovereign and First State believe that the existence of the
Stock Option Agreement is likely to prohibit any acquiror of First State from
accounting for any acquisition of First State using the 'pooling of interests'
accounting method. In addition, exercise of the option would increase the
ability of Sovereign to obtain the approval of First State's stockholders
necessary to complete the Merger and adversely affect the ability of a third
party to obtain any necessary approval of such shareholders to complete an
alternative transaction.
45
<PAGE>
INFORMATION WITH RESPECT TO SOVEREIGN
GENERAL
Financial and other information relating to Sovereign, including
information relating to Sovereign's directors and executive officers, is
incorporated herein by reference. See 'INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE' and 'AVAILABLE INFORMATION.'
MARKET PRICE OF AND DIVIDENDS ON SOVEREIGN COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Sovereign Common Stock is listed on the Nasdaq National Market System
under the symbol SVRN. As of December 31, 1996, Sovereign had approximately
8,500 shareholders of record. The table below sets forth for the periods
indicated the amount of dividends paid per share and the quarterly ranges of
high and low sales prices for Sovereign Common Stock as reported by the Nasdaq
National Market System and does not necessarily reflect mark-ups, mark-downs or
commissions. All per share information has been adjusted to show the effect of
all stock dividends and stock splits paid through the date of this Proxy
Statement/Prospectus. The Sovereign Common Stock commenced trading in August
1986 upon the conversion of Sovereign Bank's predecessor from mutual to
stock form.
<TABLE>
<CAPTION>
QUARTERLY
-----------------------------------
QUARTER ENDED DIVIDEND HIGH LOW
------------- --------- ----------- -----------
<S> <C> <C> <C>
March 31, 1997(1)........................................................... $ -- $ 13.500 $ 13.125
December 31, 1996........................................................... 0.0210 13.625 10.875
September 30, 1996.......................................................... 0.0210 11.000 9.625
June 30, 1996............................................................... 0.0210 11.250 10.000
March 31, 1996.............................................................. 0.0210 11.125 9.250
December 31, 1995........................................................... 0.0210 10.250 9.250
September 30, 1995.......................................................... 0.0209 10.250 9.000
June 30, 1995............................................................... 0.0209 9.125 7.625
March 31, 1995.............................................................. 0.0209 8.625 7.125
December 31, 1994........................................................... 0.0259 9.000 7.000
September 30, 1994.......................................................... 0.0258 10.000 8.750
</TABLE>
- ------------------
(1) Through January 15, 1997
On June 24, 1996, the last business day preceding public announcement of
the Merger, the last sale price for Sovereign Common Stock was $10.1875 per
share. On January 15, 1997, the last sale price for the Sovereign Common Stock
was $13.50 per share. The average weekly trading volume for the Sovereign
Common Stock during the quarter ended December 31, 1996 was approximately 1.2
million shares.
For certain limitations on the ability of Sovereign Bank to pay dividends
to Sovereign, see Sovereign's Annual Report on Form 10-K for the year ended
December 31, 1995 which is incorporated herein by reference. See 'INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE.'
46
<PAGE>
INFORMATION WITH RESPECT TO FIRST STATE
GENERAL
Financial and other information concerning First State, including
information relating to First State's directors and executive officers, is
incorporated herein by reference. See 'INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.' A copy of First State's 1996 Annual Report to Stockholders is being
sent to First State's stockholders together with this Proxy
Statement/Prospectus.
MARKET PRICE OF AND DIVIDENDS ON FIRST STATE COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The First State Common Stock is listed on the Nasdaq National Market System
under the symbol FSFI. As of December 31, 1996, there were approximately 1,100
shareholders of record. The table below sets forth for the periods indicated the
amount of dividends declared per share and the quarterly ranges of high and low
closing sales prices as reported by Nasdaq for the periods indicated. Such
prices do not necessarily reflect mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
QUARTERLY
----------------------------------
QUARTER ENDED DIVIDEND HIGH LOW
------------- ----------- ---------- ---------
<S> <C> <C> <C>
March 31, 1997(1).............................................................. $ -- $ 16 $ 15 1/2
December 31, 1996.............................................................. .055 15 3/16 15 1/8
September 30, 1996............................................................. .055 13 3/8 12 1/2
June 30, 1996.................................................................. .055 13 5/8 10
March 31, 1996................................................................. .055 13 3/8 11 3/4
December 31, 1995.............................................................. .055 14 3/8 12 7/8
September 30, 1995............................................................. .055 13 1/4 12 1/8
June 30, 1995.................................................................. .055 12 1/4 9 1/4
March 31, 1995................................................................. .050 9 1/2 6 3/4
December 31, 1994.............................................................. .050 8 3/4 6 5/8
September 30, 1994............................................................. .050 8 3/4 7 3/4
</TABLE>
- ------------------
(1) Through January 15, 1997
On June 24, 1996, the last business day preceding public announcement of
the Merger, the last sale price for First State Common Stock was $10 per share.
On January 15, 1997, the last sale price for First State Common Stock was $16.00
per share.
The Merger Agreement permits First State to pay a regular quarterly cash
dividend, not to exceed $0.055 per share of First State Common Stock outstanding
in any quarter in which the Effective Date is not on or before the record date
for the payment by Sovereign of its regular cash dividend. The Board of
Directors of First State agreed in the Merger Agreement to cause the regular
quarterly dividend record dates and payment dates with respect to First State
Common Stock to be the same as Sovereign's regular quarterly dividend record
dates and payment dates for Sovereign Common Stock. First DeWitt may pay cash
dividends sufficient to permit payment of the dividends permitted to be paid by
First State. No other dividends may be paid by First State or First DeWitt
without the prior written consent of Sovereign. See 'THE MERGER -- Dividends.'
First State's ability to continue to pay dividends may be dependent upon its
receipt of dividends from First DeWitt. See 'REGULATION AND SUPERVISION,' set
forth in First State's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996, which is incorporated herein by reference. See also Note 16
to First State's audited consolidated financial statements set forth in First
State's 1996 Annual Report to Stockholders, which is incorporated herein by
reference. See 'INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.'
47
<PAGE>
DESCRIPTION OF SOVEREIGN CAPITAL SECURITIES
The authorized capital stock of Sovereign consists of 100,000,000 shares of
common stock, no par value ('Sovereign Common Stock'), and 7,500,000 shares of
authorized preferred stock ('Sovereign Preferred Stock'). As of September 30,
1996, there were 49,333,762 shares of Sovereign Common Stock issued and
outstanding and no shares held by Sovereign as treasury stock, and 2,000,000
shares of 6 1/4% Cumulative Convertible Preferred Stock, Series B ($50
liquidation preference) issued and outstanding. There are no other shares of
capital stock of Sovereign authorized, issued or outstanding. Sovereign has no
options, warrants, or other rights authorized, issued or outstanding, other than
as described herein under 'Shareholder Rights Plan' and options granted under
stock option plans.
COMMON STOCK
The holders of Sovereign Common Stock are entitled to share ratably in
dividends when and if declared by the Sovereign Board of Directors from funds
legally available therefor. Declaration and payment of cash dividends by
Sovereign depends upon dividend payments by Sovereign Bank, which are
Sovereign's primary source of revenue and cash flow. Sovereign is a legal entity
separate and distinct from its subsidiaries. Accordingly, the right of
Sovereign, and consequently the right of creditors and shareholders of
Sovereign, to participate in any distribution of the assets or earnings of any
subsidiary is necessarily subject to the prior claims of creditors of the
subsidiary, except to the extent that claims of Sovereign in its capacity as a
creditor may be recognized.
Sovereign Bank will not be permitted to pay dividends on its capital stock
or repurchase shares of its stock if its shareholders' equity would be reduced
below the amount required for the liquidation accounts established in the
respective conversions from mutual to stock form of the predecessors of
Sovereign Bank or applicable regulatory capital requirements. Current OTS
regulations require a holding company's insured institutions to give the OTS 30
days advance notice of any proposed declaration of dividends to the holding
company, and the OTS has the authority under its supervisory powers to prohibit
the payment of dividends to the holding company.
The OTS capital distribution rule, which became effective on August 1,
1990, provides for three tiers of savings associations: (i) Tier 1 associations,
associations that have capital ('total capital' as calculated under the OTS
capital regulations) equal to or greater than their fully phased-in capital
requirements (the requirements applicable at December 31, 1994) prior to, and on
a pro forma basis after giving effect to, a proposed capital distribution; (ii)
Tier 2 associations, associations that have capital equal to or greater than
their minimum capital requirements, but less than their fully phased-in capital
requirements prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution; and (iii) Tier 3 associations, associations that
do not meet their minimum capital requirements, either before or after giving
effect to a proposed capital distribution. At September 30, 1996, Sovereign Bank
is a 'Tier 1 association' both historically and on a pro forma basis after
giving effect to the Merger. Under the OTS capital distribution rule, a Tier 1
association may make capital distributions of up to the greater of (a) 100% of
its net income during a calendar year plus the amount that would reduce by
one-half its surplus capital ratio (the percentage by which the association's
capital-to-assets ratio exceeds the ratio of its fully phased-in capital
requirements to its assets) at the beginning of the calendar year, or (b) 75% of
its net income over the most recent four-quarter period. A Tier 1 association
may make capital distributions in excess of the foregoing limits if the OTS does
not object after receiving notice thereof. A Tier 2 association is authorized to
make distributions of up to 75% of net income over the most recent four-quarter
period if it satisfies its fully phased-in risk-based capital requirement, or up
to 50% of such net income if it satisfies its interim (90% of fully phased-in
amount) risk-based capital requirement. A Tier 2 association may, through a
written approval process, obtain OTS approval to make distributions in excess of
these amounts. Tier 3 associations are not authorized to make any capital
distributions without prior written OTS approval unless, in the case of an
association operating in compliance with an approved capital plan, the capital
distribution is consistent with the association's capital plan. The OTS has
supervisory authority to prohibit the payment of capital distributions for Tier
1 and Tier 2 associations.
48
<PAGE>
For certain limitations on the ability of Sovereign Bank to pay dividends
to Sovereign, see Sovereign's Annual Report on Form 10-K for the year ended
December 31, 1995 which is incorporated herein by reference. See 'INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE.'
Prior to the issuance of any Sovereign Preferred Stock which possesses
voting rights (see 'Preferred Stock' below), the holders of shares of Sovereign
Common Stock will possess exclusive voting rights in Sovereign. Each holder of
shares of Sovereign Common Stock will be entitled to one vote for each share
held on matters upon which shareholders have the right to vote. Sovereign
shareholders are not entitled to cumulate votes in the election of directors.
The Sovereign Board of Directors is divided into three classes, each
serving three-year terms, so that approximately one-third of the directors of
Sovereign are elected at each annual meeting of shareholders of Sovereign.
Classification of the Sovereign Board of Directors has the effect of decreasing
the number of directors that could be elected in a single year by any person who
seeks to elect its designees to a majority of the seats on the Sovereign Board
of Directors and thereby could impede a change in control of Sovereign.
The holders of Sovereign Common Stock have no preemptive rights to acquire
any additional shares of Sovereign. In addition, the Sovereign Common Stock is
not subject to redemption.
Sovereign's Articles of Incorporation authorize the Sovereign Board of
Directors to issue authorized shares of Sovereign Common Stock without
shareholder approval. Sovereign Common Stock is included for quotation on the
Nasdaq National Market System. As a result, in order to maintain such inclusion,
approval of Sovereign's shareholders is required for the issuance of additional
shares of Sovereign Common Stock or securities convertible into Sovereign Common
Stock if the issuance of such securities (1) is in connection with the
acquisition of a company, is not in connection with a public offering for cash,
and the securities issued have or will have voting power equal to or in excess
of 20% of the voting power outstanding before such issuance; (2) is in
connection with the acquisition of a company in which a director, officer or
substantial shareholder of Sovereign has a 5% or greater interest and the
issuance of the securities could result in an increase in outstanding common
stock or voting power of 5% or more; (3) is in connection with a transaction,
other than a public offering, at a price less than the greater of book or market
value in which the shares issued will equal 20% or more of the shares of
Sovereign Common Stock or 20% or more of the voting power outstanding before
issuance; or (4) would result in a change in control of Sovereign. Under Nasdaq
National Market System rules, shareholder approval is also required for the
establishment of a stock option or purchase plan in which stock may be acquired
by officers and directors other than a broadly-based plan in which other
security holders of Sovereign or employees of Sovereign participate. The
approval of Sovereign shareholders is not required for the issuance of the
shares of Sovereign Common Stock issuable to First State stockholders in the
Merger.
In the event of liquidation, dissolution or winding-up of Sovereign,
whether voluntary or involuntary, holders of Sovereign Common Stock will be
entitled to share ratably in any of its assets or funds that are available for
distribution to its shareholders after the satisfaction of its liabilities (or
after adequate provision is made therefor) and after payment of any liquidation
preferences of any outstanding Sovereign Preferred Stock.
PREFERRED STOCK
General
Sovereign's Board of Directors is authorized to approve the issuance of
Sovereign Preferred Stock, without any required approval of shareholders. The
rights, qualifications, limitations and restrictions on each series of Sovereign
Preferred Stock issued will be determined by the Board of Directors at the time
of issuance and may include, among other things, rights to participating
dividends, voting and convertibility into shares of Common Stock. Shares of
Sovereign Preferred Stock may be issued with dividend, redemption, voting, and
liquidation rights taking priority over
49
<PAGE>
Common Stock, and may be convertible into common stock, as determined by the
Board of Directors at the time of issuance.
On May 17, 1995, Sovereign issued 2,000,000 shares of 6-1/4% Cumulative,
Convertible Preferred Stock, Series B (the 'Series B Preferred Stock').
Description of Series B Preferred Stock
Ranking. The Series B Preferred Stock will rank prior to Sovereign Common
Stock and Series A Junior Participating Preferred Stock, and on a parity with
all other preferred stock of Sovereign (unless such other preferred stock is
expressly made junior to the Series B Preferred Stock), with respect to the
payment of dividends and amounts payable upon any voluntary or involuntary
liquidation, dissolution or winding up of Sovereign.
Dividends. Holders of shares of Series B Preferred Stock are entitled to
receive, when and as declared by the Board of Directors, cash dividends payable
quarterly at the rate of 6-1/4% per annum. Dividends on the Series B Preferred
Stock, calculated as a percentage of the liquidation preference, are payable
quarterly on February 15, May 15, August 15 and November 15 of each year.
Dividends will be cumulative from the date of issue of the Series B Preferred
Stock. So long as any Series B Preferred Stock is outstanding, Sovereign may not
declare any dividends on the Sovereign Common Stock or any other stock ranking
as to dividends or distribution of assets junior to the Series B Preferred Stock
(the Common stock and any such other stock being herein referred to as 'Junior
Stock'), or make any payment on account of, or set apart money for, a sinking or
other analogous fund for the purchase, redemption or other retirement of any
shares of Junior Stock, or make any distribution in respect thereof, whether in
cash or property or in obligations or stock of Sovereign, other than Junior
Stock, unless (i) full cumulative dividends shall have been paid or declared and
set apart for payment upon all outstanding shares of Sovereign Preferred Stock
other than Junior Stock, and (ii) Sovereign is not in default or in arrears with
respect to any sinking or other analogous fund or any call for tenders,
obligation or other agreement for the purchase, redemption or other retirement
of any shares of Sovereign Preferred Stock other than Junior Stock. If dividends
on shares of the Series B Preferred Stock are in arrears, and there shall be
outstanding shares of any other series of Sovereign Preferred Stock ranking on a
parity as to dividends with the shares of the Series B Preferred Stock,
Sovereign in making any dividend payment on account of such arrears, is required
to make payments ratably upon all outstanding shares of the Series B Preferred
Stock and shares of such other series of Sovereign Preferred Stock in proportion
to the respective amounts of dividends in arrears on such shares of Series B
Preferred Stock and shares of other series of Sovereign Preferred Stock.
Conversion Rights. Holders of shares of Series B Preferred Stock have the
right, at their option, to convert shares of Series B Preferred Stock into
shares of Sovereign Common Stock at any time at an initial conversion rate of
4.989 (adjusted to reflect stock dividends) shares of Common Stock for each
share of Series B Preferred Stock provided that if any of the Preferred Stock is
called for redemption, the conversion rights pertaining thereto will terminate
at the close of business on the date fixed for redemption. The conversion rate
is subject to adjustment in certain events, including: (i) the issuance of
capital stock as a dividend or distribution on the Sovereign Common Stock; (ii)
subdivisions and combinations of the Sovereign Common Stock; (iii) the issuance
to all holders of Sovereign Common Stock of certain rights or warrants entitling
them to subscribe for or purchase Sovereign Common Stock (or securities
convertible into Sovereign Common Stock) within 45 days after the date fixed for
the determination of the shareholders entitled to receive such rights or
warrants, at less than the current market price; and (iv) the distribution to
all holders of Sovereign Common Stock of evidences of indebtedness or assets of
Sovereign (excluding those referred to above).
In the case of (i) any reclassification or change of the Common Stock, or
(ii) a consolidation or merger involving Sovereign, or (iii) a sale or
conveyance to another corporation of the property and assets of Sovereign as an
entirety or substantially as an entirety, in each case as a result of which
holders of Sovereign Common Stock will be entitled to receive stock, securities,
other property or assets (including cash) with respect to or in exchange for
such Sovereign Common Stock, the holders
50
<PAGE>
of the Series B Preferred Stock then outstanding will be entitled thereafter to
convert such Series B Preferred Stock into the kind and amount of shares of
stock and other securities or property which they would have received upon such
reclassification, change, consolidation, merger, combination, sale or conveyance
had such Series B Preferred Stock been converted into Sovereign Common Stock
immediately prior to such reclassification, change, consolidation, merger,
combination, sale or conveyance.
Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of Sovereign, the holders of shares of
Series B Preferred Stock are entitled to receive out of assets of Sovereign
available for distribution to shareholders, before any distribution of assets is
made to holders of Sovereign Common Stock or of any other stock of Sovereign
ranking as to such distribution junior to the Series B Preferred Stock,
liquidating distributions in the amount of $50 per share plus accrued and unpaid
dividends. If upon any voluntary or involuntary liquidation, dissolution or
winding up of Sovereign, the amounts payable with respect to the Series B
Preferred Stock and any other shares of stock of Sovereign ranking as to any
such distribution on a parity with the Series B Preferred Stock are not paid in
full, the holders of the Series B Preferred Stock and of each other share will
share ratably in any such distribution of assets of Sovereign in proportion to
the full respective preferential amounts to which they are entitled. After
payment of the full amount of the liquidating distribution to which they are
entitled, the holders of shares of Series B Preferred Stock will not be entitled
to any further participation in any distribution of assets by Sovereign. A
consolidation or merger of Sovereign with or into any other corporation or
corporations or a sale of all or substantially all of the assets of Sovereign
will not be deemed to be a liquidation, dissolution or winding up of Sovereign.
Redemption. The shares of Series B Preferred Stock are not redeemable
prior to May 15, 1998. On or after May 15, 1998, at any time or from time to
time, each share of Series B Preferred Stock will be redeemable in whole or in
part at the option of Sovereign, upon not less than 30 nor more than 60 days'
notice, at a redemption price as set forth below plus, in each case, accrued and
unpaid dividends to the redemption date.
IF REDEEMED DURING THE
TWELVE MONTHS BEGINNING MAY 15, REDEMPTION PRICE
------------------------------- ----------------
1998........................................................ $ 52.188
1999........................................................ 51.875
2000........................................................ 51.563
2001........................................................ 51.250
2002........................................................ 50.938
2003........................................................ 50.625
2004........................................................ 50.313
and at $50 per share thereafter
The Series B Preferred Stock may not be redeemed and Sovereign may not
otherwise purchase or acquire any shares of the Series B Preferred Stock unless
full cumulative dividends on the Series B Preferred Stock or on any series of
Sovereign Preferred Stock ranking on a parity with or senior to the Series B
Preferred Stock have been paid or declared and set apart for payment and unless
all matured obligations of Sovereign with respect to all sinking funds or
purchase funds applicable to any other series of Sovereign Preferred Stock then
outstanding have been met.
Voting Rights. Except as indicated below, or except as expressly required
by applicable law, the holders of the Series B Preferred Stock are not entitled
to vote.
If the equivalent of six quarterly dividends payable on any series of
Sovereign Preferred Stock of Sovereign are in default (whether or not declared
consecutively), the holders of all outstanding series of Sovereign Preferred
Stock, voting as a single class without regard to series, will be entitled to
elect two directors until all dividends in default have been paid or declared
and set apart for payment. The affirmative vote or consent of the holders of at
least two-thirds of the outstanding shares of Series B
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<PAGE>
Preferred Stock and any other series of Sovereign Preferred Stock, voting as a
single class without regard to series, will be required (i) for any amendment to
Sovereign's Articles of Incorporation (or any certificate supplemental thereto
providing for the capital stock of Sovereign) or Bylaws which will materially
and adversely change the preferences, privileges, rights or powers of the
Sovereign Preferred Stock, but, in any case in which one or more, but not all,
series of preferred stock would be affected as to their preferences, privileges,
rights or powers, only the consent of holders of at least two-thirds of the
shares of all such series that would be so affected, voting separately as a
class, will be required; or (ii) to issue any class of stock which shall have
preference as to dividends or distribution of assets over any outstanding series
of Sovereign Preferred stock.
SHAREHOLDER RIGHTS PLAN
Sovereign maintains a Shareholder Rights Plan (the 'Rights Plan') designed
to protect shareholders from attempts to acquire control of Sovereign at an
inadequate price. Under the Rights Plan, each outstanding share of Sovereign
Common Stock has attached to it one right to purchase one one-hundredth of a
share of a series of junior participating preferred stock at an initial exercise
price of $40. The rights are not currently exercisable or transferable, and no
separate certificates evidencing such rights will be distributed, unless certain
events occur.
The rights become exercisable to purchase shares of the junior
participating preferred stock if a person, group or other entity acquires or
commences a tender offer or an exchange offer for 19.9% or more of total voting
power. They can also be exercised if a person or group who has become a
beneficial owner of at least 4.9% of Sovereign Common Stock or total voting
power is declared by Sovereign's Board of Directors to be an 'adverse person,'
as defined in the Rights Plan.
After the rights become exercisable, under certain circumstances, the
rights (other than rights held by a 19.9% beneficial owner or an 'adverse
person') will entitle the holders to purchase either Sovereign Common Stock or
the common stock of the potential acquiror, in lieu of the junior participating
preferred stock, at a substantially reduced price.
Sovereign is generally entitled to redeem the rights at $.001 per right at
any time until the tenth business day following public announcement that a 19.9%
position has been acquired. At any time prior to the date the rights have become
nonredeemable, the Sovereign Board of Directors can extend the redemption
period. Rights are not redeemable following an 'adverse person' determination.
SPECIAL CHARTER AND PENNSYLVANIA CORPORATE LAW PROVISIONS
Sovereign's Articles of Incorporation and Bylaws contain certain provisions
which may have the effect of deterring or discouraging, among other things, a
nonnegotiated tender or exchange offer for Sovereign stock, a proxy contest for
control of Sovereign, the assumption of control of Sovereign by a holder of a
large block of Sovereign's stock and the removal of Sovereign's management.
These provisions: (1) empower the Sovereign Board of Directors, without
shareholder approval, to issue Sovereign Preferred Stock the terms of which,
including voting power, are set by the Sovereign Board of Directors; (2) divide
the Sovereign Board of Directors into three classes serving staggered three-year
terms; (3) restrict the ability of shareholders to remove directors; (4) require
that shares with at least 80% of total voting power approve mergers and other
similar transactions with a person or entity holding stock with more than 5% of
Sovereign's voting power, if the transaction is not approved, in advance, by the
Sovereign Board of Directors; (5) prohibit shareholders' actions without a
meeting; (6) require that shares with at least 80%, or in certain instances a
majority, of total voting power approve the repeal or amendment of Sovereign's
articles of incorporation; (7) require any person who acquires stock of
Sovereign with voting power of 25% or more to offer to purchase for cash all
remaining shares of Sovereign's voting stock at the highest price paid by such
person for shares of Sovereign's voting stock during the preceding year; (8)
eliminate cumulative voting in elections of directors; (9) require an
affirmative vote of at least two-thirds of Sovereign's total voting power in
order for shareholders to repeal or amend Sovereign's bylaws; (10) require
advance notice of nominations for the election of directors and the presentation
of shareholder proposals at meetings of
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<PAGE>
shareholders; and (11) provide that officers, directors, employees, agents and
persons who own 5% or more of the voting securities of any other corporation or
other entity that owns 66-2/3% or more of Sovereign's outstanding voting stock
cannot constitute a majority of the members of Sovereign's Board of Directors.
The Pennsylvania BCL also contains certain provisions applicable to
Sovereign which may have the effect of impeding a change in control of
Sovereign. These provisions, among other things: (1) require that, following any
acquisition by any person or group of 20% of a public corporation's voting
power, the remaining shareholders have the right to receive payment for their
shares, in cash, from such person or group in an amount equal to the 'fair
value' of the shares, including an increment representing a proportion of any
value payable for control of the corporation; and (2) prohibit for five years,
subject to certain exceptions, a 'business combination' (which includes a merger
or consolidation of the corporation or a sale, lease or exchange of assets) with
a shareholder or group of shareholders beneficially owning 20% or more of a
public corporation's voting power.
In 1990, Pennsylvania adopted legislation further amending the Pennsylvania
BCL. To the extent applicable to Sovereign at the present time, this legislation
generally (1) expands the factors and groups (including shareholders) which the
Sovereign Board of Directors can consider in determining whether a certain
action is in the best interests of the corporation; (2) provides that the
Sovereign Board of Directors need not consider the interests of any particular
group as dominant or controlling; (3) provides that Sovereign's directors, in
order to satisfy the presumption that they have acted in the best interests of
the corporation, need not satisfy any greater obligation or higher burden of
proof with respect to actions relating to an acquisition or potential
acquisition of control; (4) provides that actions relating to acquisitions of
control that are approved by a majority of 'disinterested directors' are
presumed to satisfy the directors' standard, unless it is proven by clear and
convincing evidence that the directors did not assent to such action in good
faith after reasonable investigation; and (5) provides that the fiduciary duty
of Sovereign's directors is solely to the corporation and may be enforced by the
corporation or by a shareholder in a derivative action, but not by a shareholder
directly.
The 1990 amendments to the Pennsylvania BCL explicitly provide that the
fiduciary duty of directors shall not be deemed to require directors (1) to
redeem any rights under, or to modify or render inapplicable, any shareholder
rights plan; (2) to render inapplicable, or make determinations under,
provisions of the PaBCL relating to control transactions, business combinations,
control-share acquisitions or disgorgement by certain controlling shareholders
following attempts to acquire control; or (3) to act as the board of directors,
a committee of the board or an individual director solely because of the effect
such action might have on an acquisition or potential or proposed acquisition of
control of the corporation or the consideration that might be offered or paid to
shareholders in such an acquisition. One of the effects of the 1990 fiduciary
duty statutory provisions may be to make it more difficult for a shareholder to
successfully challenge the actions of the Sovereign Board of Directors in a
potential change in control context. Pennsylvania case law appears to provide
that the fiduciary duty standard under the 1990 amendments to the PaBCL grants
directors the statutory authority to reject or refuse to consider any potential
or proposed acquisition of the corporation.
Sovereign opted out of coverage by the 'disgorgement' and 'control-share
acquisition' statutes included in the 1990 legislation, pursuant to a Bylaw
amendment as permitted by the legislation; Sovereign can reverse this action
under certain circumstances.
53
<PAGE>
COMPARISON OF SHAREHOLDER RIGHTS
At the Effective Date, shareholders of First State automatically will
become shareholders of Sovereign, and their rights as shareholders will be
determined by the Pennsylvania BCL and by Sovereign's Articles of Incorporation
and Bylaws. The following is a summary of material differences between the
rights of holders of Sovereign Common Stock and the rights of holders of First
State Common Stock. These differences arise from various provisions of the
Pennsylvania BCL and the Delaware GCL, the Articles of Incorporation, Bylaws and
Rights Plan of Sovereign and the Certificate of Incorporation and Bylaws of
First State.
DIRECTORS
Removal
Pursuant to Sovereign's Articles of Incorporation, Sovereign directors may
be removed from office without cause by the affirmative vote of a majority of
outstanding voting shares. First State directors, pursuant to First State's
Certificate of Incorporation, may only be removed for cause and only by the
affirmative vote of the holders of at least 80% of the outstanding voting
capital stock.
Nomination
Shareholders of both First State and Sovereign are required to submit to
their respective companies, in writing and in advance, any nomination of a
candidate for election as a director. Sovereign's bylaws provide that such
nominations generally must be submitted not more than 120 days, and not less
than 90 days, prior to a scheduled meeting for the election of directors (unless
less than 21 days' notice of the meeting is given to shareholders in which case
such nominations must be submitted within 7 days following the mailing of the
notice to shareholders). First State's Bylaws provide that its shareholders must
submit written nominations not less than 90 days prior to the date of the
meeting for the election of directors (unless less than 100 days' notice of the
meeting is given to stockholders in which case such nominations must be
submitted not less than 10 days following the day on which notice of the meeting
was mailed or public disclosure was made).
Limited Liability
A director of Sovereign is not personally liable to Sovereign, its
shareholders or others for any action taken or any failure to take any action
unless the director breached or failed to perform the duties of his or her
office as set forth under Pennsylvania law and such breach or failure
constitutes self-dealing, willful misconduct or recklessness; provided, however,
that there is no such elimination of liability arising under any criminal
statute or with respect to the payment of taxes pursuant to local, state or
federal law.
A director of First State is not personally liable to First State or its
shareholders for monetary damages for breach of fiduciary duty as a director
except for liability (i) for any breach of the director's duty of loyalty, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) for certain illegal dividends, or (iv) for
any transaction from which the director derived an improper personal benefit.
Indemnification
The Certificate of Incorporation of First State and the Bylaws of Sovereign
each provide for indemnification of directors, officers and agents for certain
litigation-related liabilities and expenses. Generally, directors, officers and
employees of First State are entitled to indemnification (i) in third party
actions, if the person acted in good faith and in a manner he reasonably
believed to be in the best interests of First State and, as to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful and (ii) in derivative actions, if the person acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of First State, provided the person has not been adjudged to be liable to First
State. Indemnification in both third party actions and
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<PAGE>
derivative actions can be made only in a specific case upon a finding by (i) a
majority vote of disinterested directors, even though less than a quorum, (ii)
independent legal counsel in a written opinion, or (iii) by shareholders, that
the appropriate standard for indemnification has been met.
In comparison, directors, officers, employees and agents of Sovereign are
entitled to indemnification in both third party actions and derivative actions
unless there is a court finding that the act or failure to act giving rise to
the claim for indemnification constitutes willful misconduct or recklessness.
There is no requirement of a case-by-case determination that the applicable
standard of conduct has been met for a person to be entitled to indemnification.
SHAREHOLDERS' MEETINGS
Special meetings of Sovereign shareholders may be called at any time by any
of the following: (1) the Board of Directors at a duly called and held meeting
of the Board of Directors or upon the unanimous written consent of the members
of the Board of Directors; or (2) the Chairman of the Board or the Chief
Executive Officer, but only upon receiving written direction of at least a
majority of directors then in office. Holders of First State Common Stock are
not entitled to call a special meeting of First State stockholders. Special
meetings of First State stockholders may be called only by a majority of the
total number of directors of First State.
Shareholders of Sovereign are required to submit to Sovereign, in writing
and in advance, any matter desired to be placed on the agenda of an annual
meeting of shareholders. Such proposal generally must be submitted not more than
150 days and not less than 90 days prior to the meeting (or 7 days if less than
21 days' notice of the annual meeting is given to shareholders). First State's
Bylaws require that its shareholders submit to First State written notice of any
matter desired to be placed on the agenda of an annual meeting of shareholders
not less than 90 days prior to the date of the meeting (or 10 days if less than
100 days' notice or prior public disclosure of the date of the meeting is given
or made to shareholders).
SHAREHOLDER RIGHTS PLAN
Sovereign has adopted a shareholder rights plan pursuant to which holders
of Sovereign Common Stock are entitled, under certain circumstances generally
involving an accumulation of Sovereign Common Stock, to purchase Sovereign
Common Stock or common stock of the potential acquiror at a substantially
reduced price. See 'DESCRIPTION OF SOVEREIGN CAPITAL SECURITIES -- Shareholder
Rights Plan.'
First State does not have a shareholder rights plan.
REQUIRED SHAREHOLDER VOTES
General
Subject to the voting rights of any series of Sovereign Preferred Stock
then outstanding, the holders of Sovereign Common Stock possess exclusive voting
rights of Sovereign. Each holder of Sovereign Common Stock is entitled to one
vote for each share owned of record. There are no cumulative voting rights in
the election of directors. For general corporate action of the shareholders of
Sovereign, the affirmative vote of a majority of the votes represented, in
person or by proxy, at a stockholders' meeting is required for approval.
The holders of First State Common Stock possess exclusive voting rights of
First State. Except as provided in the following paragraph, each holder of First
State Common Stock is entitled to one vote for each share owned of record. There
are no cumulative voting rights in the election of directors. For general
corporate action of the stockholders of First State, the affirmative vote of a
majority of the votes cast at a stockholders' meeting is required for approval.
As provided in First State's Certificate of Incorporation, record holders
of First State Common Stock who beneficially own in excess of 10% of the
outstanding shares of First State Common Stock
55
<PAGE>
(the 'Limit') are not entitled to any vote with respect to the shares held in
excess of the Limit. A person or entity is deemed to beneficially own shares
owned by an affiliate of, as well as persons acting in concert with, such person
or entity. First State's Certificate of Incorporation authorizes the Board of
Directors (i) to make all determinations necessary to implement and apply the
Limit, including determining whether persons or entities are acting in concert,
and (ii) to demand that any person who is reasonably believed to beneficially
own stock in excess of the Limit supply information to the Company to enable the
Board to implement and apply to Limit. The Board of Directors of First State is
not aware of any person who beneficially owns shares of First State Common Stock
in excess of the Limit with respect to the matters to be considered at the
Special Meeting.
Fundamental Changes
Sovereign's Articles of Incorporation require that a plan of merger,
consolidation, share exchange, division, conversion or asset transfer (in
respect of a sale, lease, exchange or other disposition of all, or substantially
all, the assets of Sovereign other than in the usual and regular course of
business) must be approved by the affirmative vote of shareholders entitled to
cast at least a majority of the votes which all shareholders are entitled to
cast, except that shareholder approval of any such transaction which is approved
in advance by at least 66 2/3% of the members of Sovereign's Board of Directors
requires only the affirmative vote of a majority of the votes cast. In the
absence of prior approval by Sovereign's Board of Directors, Sovereign's
Articles of Incorporation require a vote of shareholders with at least 80% of
Sovereign's total voting power to approve any merger, consolidation, share
exchange, asset transfer (in respect of a sale, lease, exchange or other
disposition of all, or substantially all, the assets of Sovereign) or similar
transactions involving a shareholder holding 5% or more of Sovereign's voting
power.
Under the Delaware GCL, a plan of merger, consolidation, or asset transfer
(in respect of a sale, lease, exchange or other disposition of all, or
substantially all, the assets of First State) must be approved by the
affirmative vote of a majority of the outstanding stock of First State entitled
to vote thereon; provided, however, that no vote of stockholders of a
constituent corporation surviving a merger shall be necessary to authorize a
merger if (1) the agreement of merger does not amend in any respect the
certificate of incorporation of such constituent corporation, (2) each share of
stock of such constituent corporation outstanding immediately prior to the
effective date of the merger is to be an identical outstanding or treasury share
of the surviving corporation after the effective date of the merger, and (3)
either no shares of common stock of the surviving corporation and no shares,
securities or obligations convertible into such stock are to be issued or
delivered under the plan of merger, or the authorized unissued shares or the
treasury shares of common stock of the surviving corporation to be issued or
delivered under the plan of merger plus those initially issuable upon conversion
of any other shares, securities or obligations to be issued or delivered under
such plan do not exceed 20% of the shares of common stock of such constituent
corporation outstanding immediately prior to the effective date of the merger.
In addition, First State's Certificate of Incorporation requires a vote of
stockholders with at least 80% of First State's total voting power to approve
any merger, consolidation, share exchange, asset transfer (in respect of a sale,
lease, exchange or other disposition of all, or substantially all, the assets of
First State) or similar transactions involving a stockholders holding 10% or
more of First State's voting power.
Amendment of Articles or Certificate of Incorporation
Sovereign's Articles of Incorporation contain various provisions that
require a supermajority vote of shareholders to amend or repeal particular
sections of such Articles. Amendment or repeal of the provisions of Sovereign's
Articles of Incorporation relating to noncumulative voting, the classification
of directors, the requirement of holding meetings for shareholder action, the
amendment of Bylaws generally, and the consideration of non-economic factors by
Sovereign's Board of Directors if evaluating a tender offer, all require (i) the
affirmative vote of 80% of the shares entitled to vote or (ii) the affirmative
vote of 80% of the members of Sovereign's Board of Directors and the affirmative
56
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vote of shareholders entitled to cast at least a majority of votes which all
shareholders are entitled to cast.
A supermajority vote of 80% of First State's stockholders, is required to
amend or repeal the provisions of First State's Certificate of Incorporation
relating to the requirements of holding meetings for stockholder action, the
right to call special meetings of stockholders being vested solely in the Board
of Directors, the classification and filling of vacancies on, and removal of
members of, the First State Board of Directors, the amendment of Bylaws
generally, indemnification of First State's officers, directors, employees, and
agents, and the supermajority vote requirement on a merger or similar
transaction with a 10% or greater First State stockholder.
AMENDMENT OF BYLAWS
The authority to amend or repeal Sovereign's Bylaws is vested in
Sovereign's Board of Directors, subject always to the power of the shareholders
of Sovereign to change such action by the affirmative vote of shareholders
holding at least two-thirds of the voting power (except that any amendment to
the indemnification provisions set forth in the Bylaws shall require the
affirmative vote of two-thirds of the Board of Directors or shareholders holding
80% of the votes that all shareholders are entitled to cast). Similarly, the
authority to amend or repeal First State's Bylaws is vested in First State's
Board of Directors. By contrast, however, although First State's stockholders
may amend or repeal the Bylaws, a stockholder amendment to or repeal of any
Bylaw provision requires the affirmative vote of First State stockholders
holding at least 80% of the voting power.
MANDATORY TENDER OFFER PROVISION
Sovereign's Articles of Incorporation provide that any person or entity
acquiring Sovereign capital stock with 25% or more of Sovereign's total voting
power is required to offer to purchase, for cash, all shares of Sovereign's
voting stock, at a price per share equal to the highest price paid by such
person for each respective class of Sovereign's voting stock within the
preceding twelve months. The Pennsylvania BCL also provides that following any
acquisition by a person or group of more than 20% of a publicly-held
corporation's voting stock, the remaining shareholders have the right to receive
payment, in cash, for their shares from such person or group of an amount equal
to the 'fair value' of their shares, including a proportionate amount for any
control premium.
Neither First State's Certificate of Incorporation, Bylaws nor the Delaware
GCL provide First State shareholders with similar rights.
SPECIAL PENNSYLVANIA CORPORATE LAW PROVISIONS
For certain provisions of Pennsylvania corporate law relating to the
fiduciary duty of directors that differ from Delaware law, see 'DESCRIPTION OF
SOVEREIGN CAPITAL SECURITIES -- Special Charter and Corporate Law Provisions.'
ADJOURNMENT OF SPECIAL MEETING
In the event that there are not sufficient votes to constitute a quorum or
approve the adoption of the Merger Agreement at the time of the Special Meeting,
such proposal could not be approved unless the Special Meeting were adjourned in
order to permit further solicitation of proxies. In order to allow proxies which
have been received by First State at the time of the Special Meeting to be voted
for such adjournment, if necessary, First State has submitted the question of
adjournment under such circumstances to its stockholders as a separate matter
for their consideration (the 'Adjournment Proposal'). A majority of the shares
represented and voting at the Special Meeting is required in order to approve
the Adjournment Proposal.
The Board of Directors of First State recommends that stockholders vote
their proxies in favor of the Adjournment Proposal so that their proxies may be
used for such purposes in the event it becomes necessary. Properly executed
proxies will be voted in favor of the Adjournment Proposal unless otherwise
indicated thereon. If it is necessary to adjourn the Special Meeting, no notice
of the time and
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place of the adjourned meeting is required to be given to stockholders other
than an announcement of such time and place at the Special Meeting provided such
adjournment is for a period not exceeding thirty days.
EXPERTS
The consolidated financial statements of Sovereign, at December 31, 1995
and for each of the three years in the period ended December 31, 1995, appearing
in Sovereign's Annual Report on Form 10-K for the year ended December 31, 1995,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon included therein and incorporated herein by reference
which, as to the year 1993, is based in part on the report of BDO Seidman LLP,
independent auditors. The financial statements referred to above are included in
reliance upon such reports given upon the authority of such firms as experts in
accounting and auditing.
The consolidated financial statements of First State Financial Services,
Inc. and subsidiary as of September 30, 1996 and 1995 and for each of the years
in the three-year period ended September 30, 1996, included in First State's
Annual Report on Form 10-K, incorporated by reference herein and in the
Registration Statement, 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.
LEGAL MATTERS
The validity of the Sovereign Common Stock to be issued in the Merger,
certain federal income tax consequences of the Merger, and certain other legal
matters relating to the Merger are being passed upon for Sovereign by the law
firm of Stevens & Lee, counsel to Sovereign. Joseph E. Lewis, a director of
Sovereign Bank, is a principal of the firm of Stevens & Lee. Stevens & Lee and
its attorneys own an aggregate of approximately 215,000 shares of Sovereign
Common Stock, including shares issuable upon the exercise of options owned by
Mr. Lewis. Certain legal matters will be passed upon for First State by Luse
Lehman Gorman Pomerenk & Schick, P.C., counsel to First State.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the Board of Directors
of First State knows of no matters which will be presented for consideration at
the Special Meeting other than as set forth in the Notice of Special Meeting
accompanying this Proxy Statement/Prospectus. However, if any other matters
shall come before the meeting or any adjournments thereof and be voted upon, the
enclosed Proxy shall be deemed to confer discretionary authority to the
individuals named as proxies therein to vote the shares represented by such
Proxy as to any such matters.
SHAREHOLDER PROPOSALS
Any Sovereign shareholder who desired to submit a proposal for presentation
to the 1997 Annual Meeting of Shareholders was required to submit the proposal
to Sovereign Bancorp, not later than November 14, 1996, for inclusion, if
appropriate, in Sovereign's proxy statement and the form of proxy relating to
the 1997 Annual Meeting.
Any First State stockholder who wishes to submit a proposal for
presentation to the 1997 Annual Meeting of Stockholders, if the Merger has not
been completed prior to the date the meeting is to be held, must submit the
proposal to First State, 1120 Bloomfield Avenue, CN 2449, West Caldwell, New
Jersey 07007-2449, Attention: Office of the Secretary, not later than forty-five
days prior to First State's solicitation of proxies for such annual meeting, for
inclusion, if appropriate, in First State's proxy statement and the form of
proxy relating to the 1997 Annual Meeting.
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ANNEX A
AGREEMENT AND PLAN OF MERGER BETWEEN SOVEREIGN BANCORP, INC.
AND FIRST STATE FINANCIAL SERVICES, INC.,
AS AMENDED
<PAGE>
AGREEMENT AND PLAN
OF MERGER
BETWEEN
SOVEREIGN BANCORP, INC.
AND
FIRST STATE FINANCIAL SERVICES, INC.
JUNE 24, 1996
<PAGE>
AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
BACKGROUND................................................................................................ A-1
AGREEMENT................................................................................................. A-1
</TABLE>
ARTICLE I
THE MERGERS
<TABLE>
<S> <C>
Section 1.01 Definitions................................................................................. A-1
Section 1.02 The Merger.................................................................................. A-4
Section 1.03 The Bank Merger............................................................................. A-7
</TABLE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FSFS
<TABLE>
<CAPTION>
<S> <C>
Section 2.01 Organization................................................................................ A-8
Section 2.02 Capitalization.............................................................................. A-8
Section 2.03 Authority; No Violation..................................................................... A-9
Section 2.04 Consents.................................................................................... A-10
Section 2.05 Financial Statements........................................................................ A-10
Section 2.06 Taxes....................................................................................... A-11
Section 2.07 No Material Adverse Effect.................................................................. A-11
Section 2.08 Contracts................................................................................... A-11
Section 2.09 Ownership of Property; Insurance Coverage................................................... A-12
Section 2.10 Legal Proceedings........................................................................... A-12
Section 2.11 Compliance With Applicable Law.............................................................. A-13
Section 2.12 ERISA....................................................................................... A-13
Section 2.13 Brokers, Finders and Financial Advisors..................................................... A-14
Section 2.14 Environmental Matters....................................................................... A-14
Section 2.15 Loan Portfolio.............................................................................. A-14
Section 2.16 Information to be Supplied.................................................................. A-14
Section 2.17 Securities Documents........................................................................ A-15
Section 2.18 Related Party Transactions.................................................................. A-15
Section 2.19 Schedule of Termination Benefits............................................................ A-15
Section 2.20 Loans....................................................................................... A-15
Section 2.21 Quality of Representations.................................................................. A-15
</TABLE>
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SOVEREIGN
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Section 3.01 Organization................................................................................ A-16
Section 3.02 Capital Structure........................................................................... A-16
Section 3.03 Authority; No Violation..................................................................... A-17
Section 3.04 Consents.................................................................................... A-17
Section 3.05 Financial Statements........................................................................ A-18
Section 3.06 Taxes....................................................................................... A-18
Section 3.07 No Material Adverse Effect.................................................................. A-18
Section 3.08 Legal Proceedings........................................................................... A-18
Section 3.09 Ownership of Property; Insurance Coverage................................................... A-18
Section 3.10 Compliance With Applicable Law.............................................................. A-19
Section 3.11 Information to be Supplied.................................................................. A-19
Section 3.12 ERISA....................................................................................... A-19
Section 3.13 Securities Documents........................................................................ A-20
Section 3.14 Environmental Matters....................................................................... A-20
Section 3.15 Loan Portfolio.............................................................................. A-20
Section 3.16 Brokers and Finders......................................................................... A-20
Section 3.17 Quality of Representations.................................................................. A-20
</TABLE>
ARTICLE IV
COVENANTS OF THE PARTIES
<TABLE>
<CAPTION>
<S> <C>
Section 4.01 Conduct of FSFS's Business.................................................................. A-21
Section 4.02 Access; Confidentiality..................................................................... A-23
Section 4.03 Regulatory Matters and Consents............................................................. A-23
Section 4.04 Taking of Necessary Action.................................................................. A-24
Section 4.05 Certain Agreements.......................................................................... A-25
Section 4.06 No Other Bids and Related Matters........................................................... A-25
Section 4.07 Duty to Advise; Duty to Update FSFS's Disclosure Schedule................................... A-25
Section 4.08 Conduct of Sovereign's Business............................................................. A-25
Section 4.09 Board and Committee Minutes................................................................. A-25
Section 4.10 Undertakings by Sovereign and FSFS.......................................................... A-25
Section 4.11 Employee Benefits and Termination Benefits.................................................. A-27
Section 4.12 Duty to Advise; Duty to Update Sovereign's Disclosure Schedule.............................. A-28
Section 4.13 Affiliate Letter............................................................................ A-28
</TABLE>
<PAGE>
ARTICLE V
CONDITIONS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Section 5.01 Conditions to FSFS's Obligations under this Agreement....................................... A-29
Section 5.02 Conditions to Sovereign's Obligations under this Agreement.................................. A-30
</TABLE>
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
<TABLE>
<CAPTION>
<S> <C>
Section 6.01 Termination................................................................................. A-31
Section 6.02 Effect of Termination....................................................................... A-32
</TABLE>
ARTICLE VII
MISCELLANEOUS
<TABLE>
<CAPTION>
<S> <C>
Section 7.01 Expenses.................................................................................... A-32
Section 7.02 Non-Survival of Representations and Warranties.............................................. A-32
Section 7.03 Amendment, Extension and Waiver............................................................. A-32
Section 7.04 Entire Agreement............................................................................ A-33
Section 7.05 No Assignment............................................................................... A-33
Section 7.06 Notices..................................................................................... A-33
Section 7.07 Captions.................................................................................... A-33
Section 7.08 Counterparts................................................................................ A-34
Section 7.09 Severability................................................................................ A-34
Section 7.10 Consent to Service of Process............................................................... A-34
Section 7.11 Governing Law............................................................................... A-34
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Exhibit 1 FSFS Affiliate Agreement................................................................. A-35
Exhibit 2 Stock Option Agreement................................................................... A-38
Exhibit 3 Bank Plan of Merger...................................................................... A-44
Exhibit 4 Form of Agreement Re: Benefits........................................................... A-49
Exhibit 5 Form of Opinion of Sovereign's Counsel................................................... A-50
Exhibit 6 Form of Tax Opinion of Sovereign's Counsel............................................... A-52
Exhibit 7 Form of Opinion of FSFS's Counsel........................................................ A-54
</TABLE>
<PAGE>
AGREEMENT
THIS AGREEMENT AND PLAN OF MERGER, dated as of June 24, 1996, is made by
and between SOVEREIGN BANCORP, INC. ('Sovereign'), a Pennsylvania corporation,
having its principal place of business at 1130 Berkshire Boulevard, Wyomissing,
Pennsylvania 19610, and FIRST STATE FINANCIAL SERVICES, INC. ('FSFS'), a
Delaware corporation, having its principal place of business at 1120 Bloomfield
Avenue, CN 2449, West Caldwell, New Jersey 07007-2449.
BACKGROUND
1. Sovereign and FSFS desire for FSFS to merge with and into Sovereign,
with Sovereign surviving such merger, in accordance with the applicable laws of
the Commonwealth of Pennsylvania and the State of Delaware, and in accordance
with the plan of merger set forth herein.
2. At or prior to the execution and delivery of this Agreement, and as a
condition and inducement to Sovereign's execution of this Agreement (a) certain
directors and officers of FSFS and affiliates of FSFS, each have executed in
favor of Sovereign, a Letter Agreement dated June 24, 1996, in the form attached
hereto as Exhibit 1, and (b) FSFS granted to Sovereign an option to acquire,
under certain circumstances, FSFS's common stock (the 'Sovereign Option')
pursuant to a Stock Option Agreement between Sovereign and FSFS dated June 24,
1996, attached hereto as Exhibit 2.
3. Sovereign desires to merge First DeWitt Bank, a federal savings bank and
a wholly-owned subsidiary of FSFS ('First DeWitt') into and with Sovereign Bank,
FSB, a federal savings bank and a wholly-owned subsidiary of Sovereign
('Sovereign Bank'), with Sovereign Bank surviving such merger in accordance with
the Bank Plan of Merger in the form attached hereto as Exhibit 3.
4. Sovereign and FSFS desire to provide the terms and conditions governing
the transactions contemplated herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, agreements, representations and warranties herein contained, the
parties hereto, intending to be legally bound, do hereby agree as follows:
ARTICLE I
THE MERGERS
Section 1.01 Definitions. As used in this Agreement, the following terms
shall have the indicated meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
Affiliate means, with respect to any Person, any Person who directly,
or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Person and, without
limiting the generality of the foregoing, includes any executive officer or
director of such Person and any Affiliate of such executive officer or
director.
Agreement means this agreement, and any amendment or supplement
hereto, which constitutes a 'plan of merger' between Sovereign and FSFS.
Applicable Exchange Ratio shall have the meaning given to such term in
Section 1.02(e)(ii)(A).
Applications means the applications for regulatory approval which are
required by the transactions contemplated hereby.
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Articles of Merger means the articles of merger to be executed by
Sovereign and FSFS and to be filed in the PDS, in accordance with the
applicable laws of the Commonwealth of Pennsylvania.
Bank Merger means the merger of First DeWitt with and into Sovereign
Bank, with Sovereign Bank surviving such merger, contemplated by Section
1.03 of this Agreement.
Bank Plan of Merger has the meaning given to that term in Section 1.03
of this Agreement.
BCL means the Pennsylvania Business Corporation Law of 1988, as
amended.
Certificate of Merger means the certificate of merger to be executed
by Sovereign and FSFS and to be filed in the DOSS, in accordance with the
applicable laws of the State of Delaware.
Closing Date means the date determined by Sovereign, in its sole
discretion, upon five (5) days prior written notice to FSFS, but in no
event later than thirty (30) days after the last condition precedent
pursuant to this Agreement has been fulfilled or waived (including the
expiration of any applicable waiting period), or such other date as
Sovereign and FSFS shall agree.
DGCL means the Delaware General Corporation Law, as amended.
DOSS means the Delaware Office of the Secretary of State.
Effective Date means the date upon which the Articles of Merger shall
be filed in the PDS and the Certificate of Merger shall be filed in the
DOSS, and shall be the same as the Closing Date.
Environmental Law means any federal, state, local or foreign law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with
any Regulatory Authority relating to (i) the protection, preservation or
restoration of the environment (including, without limitation, air, water
vapor, surface water, groundwater, drinking water supply, surface soil,
subsurface soil, plant and animal life or any other natural resource),
and/or (ii) the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or
disposal of any substance presently listed, defined, designated or
classified as hazardous, toxic, radioactive or dangerous, or otherwise
regulated, whether by type or by quantity, including any material
containing any such substance as a component.
ERISA means the Employee Retirement Income Security Act of 1974, as
amended.
Exchange Act means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated from time to time thereunder.
FDIC means the Federal Deposit Insurance Corporation.
FFIEC means the Federal Financial Institutions Examination Council.
FSFS Common Stock means the common stock of FSFS described in Section
2.02(a).
FSFS Disclosure Schedule means a disclosure schedule delivered by FSFS
to Sovereign pursuant to Article II of this Agreement.
FSFS Financials means (i) the audited consolidated financial
statements of FSFS as of September 30, 1995 and for the three years ended
September 30, 1995, including the notes thereto, and (ii) the unaudited
interim consolidated financial statements of FSFS as of each calendar
quarter thereafter included in Securities Documents filed by FSFS.
FSFS Regulatory Reports means the Annual Reports of FSFS on Form
H(b)-11, any Current Report of FSFS on Form H(b)-11 filed with the OTS from
September 30, 1994 through the Closing Date and the Thrift Financial
Reports of First DeWitt and accompanying schedules for each calendar
quarter, beginning with the quarter ended September 30, 1994, through the
Closing Date.
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FSFS Subsidiaries means any corporation, 50% or more of the capital
stock of which is owned, either directly or indirectly, by FSFS, except any
corporation the stock of which is held in the ordinary course of the
lending activities of First DeWitt.
GAAP means generally accepted accounting principles as in effect.
HOLA means the Home Owners' Loan Act, as amended.
IRC means the Internal Revenue Code of 1986, as amended.
IRS means the Internal Revenue Service.
Material Adverse Effect shall mean, with respect to Sovereign or FSFS,
any adverse effect on its assets, financial condition or results of
operations which is material to its assets, financial condition or results
of operations on a consolidated basis, except for any material adverse
effect caused by any change occurring after the date hereof in any federal
or state law, rule or regulation or in GAAP, which change affects banking
institutions generally, including any changes affecting the Bank Insurance
Fund or the Savings Association Insurance Fund.
Merger means the merger of FSFS with and into Sovereign, with
Sovereign surviving such merger, contemplated by this Agreement.
OTS means the Office of Thrift Supervision.
PDB means the Department of Banking of the Commonwealth of
Pennsylvania.
PDS means the Department of State of the Commonwealth of Pennsylvania.
Person means any individual, corporation, partnership, joint venture,
association, trust or 'group' (as that term is defined under the Exchange
Act).
Prospectus/Proxy Statement means the prospectus/proxy statement,
together with any supplements thereto, to be transmitted to holders of FSFS
Common Stock in connection with the transactions contemplated by this
Agreement.
Registration Statement means the registration statement on Form S-4,
including any pre-effective or post-effective amendments or supplements
thereto, as filed with the SEC under the Securities Act with respect to the
Sovereign Common Stock and Sovereign Stock Purchase Rights to be issued in
connection with the transactions contemplated by this Agreement.
Regulatory Agreement has the meaning given to that term in Section
2.11 of this Agreement.
Regulatory Authority means any banking agency or department of any
federal or state government, including without limitation the OTS, the
FDIC, the PDB or the respective staffs thereof.
Rights means warrants, options, rights, convertible securities and
other capital stock equivalents which obligate an entity to issue its
securities.
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933, as amended, and the
rules and regulations promulgated from time to time thereunder.
Securities Documents means all registration statements, schedules,
statements, forms, reports, proxy material, and other documents required to
be filed under the Securities Laws.
Securities Laws means the Securities Act and the Exchange Act and the
rules and regulations promulgated from time to time thereunder.
Sovereign Common Stock has the meaning given to that term in Section
3.02(a) of this Agreement.
Sovereign Disclosure Schedule means a disclosure schedule delivered by
Sovereign to FSFS pursuant to Article III of this Agreement.
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<PAGE>
Sovereign Financials means (i) the audited consolidated financial
statements of Sovereign as of December 31, 1995 and for the three years
ended December 31, 1995, including the notes thereto, and (ii) the
unaudited interim consolidated financial statements of Sovereign as of each
calendar quarter thereafter included in Securities Documents filed by
Sovereign.
Sovereign Market Value means, as of any date, the average of the mean
between the closing high bid and low asked prices of a share of Sovereign
Common Stock, as reported on the National Association of Securities Dealers
Automated Quotation System (Nasdaq) National Market System, for the ten
consecutive trading days commencing eleven (11) trading days prior to the
date of determination.
Sovereign Option means the option granted to Sovereign to acquire
shares of FSFS Common Stock referenced in the recitals to this Agreement.
Sovereign Regulatory Reports means the Annual Reports of Sovereign on
Form H(b)-11, any Current Report of Sovereign on Form H(b)-11 filed with
the OTS from September 30, 1994 through the Closing Date and the Thrift
Financial Reports of Sovereign and accompanying schedules for each calendar
quarter, beginning with the quarter ended September 30, 1994, through the
Closing Date.
Sovereign Rights Agreement means the Rights Agreement dated as of
September 19, 1989, as amended September 27, 1995, between Sovereign and
Chemical Bank, as rights agent, relating to Sovereign's Series A Junior
Participating Preferred Stock.
Sovereign Stock Purchase Rights means Rights to purchase a unit of
Sovereign's Series A Junior Participating Preferred Stock in accordance
with the terms of the Sovereign Rights Agreement.
Sovereign Subsidiaries means any corporation, 50% or more of the
capital stock of which is owned, either directly or indirectly, by
Sovereign, except any corporation the stock of which is held in the
ordinary course of the lending activities of a bank.
Subsidiary means any corporation, 50% or more of the capital stock of
which is owned, either directly or indirectly, by another entity, except
any corporation the stock of which is held in the ordinary course of the
lending activities of a bank.
Section 1.02 The Merger.
(a) Closing. The closing will take place at 10:00 a.m. on the Closing Date
at the offices of Stevens & Lee, 111 North Sixth Street, Reading, Pennsylvania,
unless another time and place are agreed to by the parties hereto; provided, in
any case, that all conditions to closing set forth in Article V have been
satisfied or waived at or prior to the Closing Date. On the Closing Date, FSFS
and Sovereign shall cause the Articles of Merger to be duly executed and to be
filed in the PDS and the Certificate of Merger to be duly executed and filed in
the DOSS.
(b) The Merger. Subject to the terms and conditions of this Agreement, on
the Effective Date: FSFS shall merge with and into Sovereign; the separate
existence of FSFS shall cease; Sovereign shall be the surviving corporation in
the Merger; and all of the property (real, personal and mixed), rights, powers
and duties and obligations of FSFS shall be taken and deemed to be transferred
to and vested in Sovereign, as the surviving corporation in the Merger, without
further act or deed; all debts, liabilities and duties of each of FSFS and
Sovereign shall thereafter be the responsibility of Sovereign as the surviving
corporation; all in accordance with the applicable laws of the Commonwealth of
Pennsylvania and the State of Delaware.
(c) Sovereign's Articles of Incorporation and Bylaws. On and after the
Effective Date, the articles of incorporation and the bylaws of Sovereign, as in
effect immediately prior to the Effective Date, shall automatically be and
remain the articles of incorporation and bylaws of Sovereign, as the surviving
corporation in the Merger, until thereafter altered, amended or repealed.
A-4
<PAGE>
(d) Board of Directors and Officers of Sovereign and Sovereign Bank.
(i) On the Effective Date, the Board of Directors of Sovereign, as the
surviving corporation in the Merger, shall consist of those persons holding
such office immediately prior to the Effective Date.
(ii) On the Effective Date, the officers of Sovereign duly elected and
holding office immediately prior to the Effective Date shall be the
officers of Sovereign, as the surviving corporation in the Merger, existing
on such Effective Date.
(iii) On the effective date of the Bank Merger, the directors of
Sovereign Bank as the surviving institution in the Bank Merger shall
consist of (i) those persons holding such office immediately prior to the
Effective Date, and (ii) Michael J. Quigley, III. Sovereign shall cause Mr.
Quigley to be appointed as a director of Sovereign Bank effective as of the
effective date of the Bank Merger. Mr. Quigley shall be appointed to hold
office until the 1997 annual reorganization meeting of the Board of
Directors of Sovereign Bank and until his successor is elected and
qualified or otherwise in accordance with Sovereign Bank's charter and
bylaws.
(iv) On the effective date of the Bank Merger, the officers of
Sovereign Bank duly elected and holding office immediately prior to such
effective date shall be the officers of Sovereign Bank, as the surviving
corporation in the Bank Merger.
(v) On the effective date of the Bank Merger, Sovereign will create an
advisory board of directors of Sovereign Bank for the market area served by
First DeWitt which shall consist of all existing directors of First DeWitt.
Sovereign shall cause such persons to be elected as advisory directors of
Sovereign Bank effective as of the effective date of the Bank Merger, and
each shall hold office for at least one year from such effective date. Such
advisory board shall meet quarterly and each member shall receive $250 per
meeting attended.
(e) Conversion of Shares.
(i) Sovereign Common Stock.
(A) Each share of Sovereign Common Stock issued and outstanding
immediately prior to the Effective Date shall, on and after the
Effective Date, continue to be issued and outstanding as an identical
share of Sovereign Common Stock. Shares of Sovereign Common Stock owned
by FSFS (other than shares held in trust, managed, custodial or nominee
accounts and the like or held by mutual funds for which a subsidiary of
FSFS acts as investment advisor, that in any such case are beneficially
owned by third parties (any such shares, 'trust account shares') and
shares acquired in respect of debts previously contracted (any such
shares, 'DPC shares')) shall become treasury stock of Sovereign.
(B) Each share of Sovereign Common Stock issued and held in the
treasury of Sovereign as of the Effective Date, if any, shall, on and
after the Effective Date, continue to be issued and held in the treasury
of Sovereign.
(ii) FSFS Common Stock.
(A) Subject to the provisions of subparagraphs (B), (C) and (D) of
this Section 1.02(e)(ii), each share of FSFS Common Stock issued and
outstanding immediately prior to the Effective Date (other than shares
of FSFS Common Stock, if any, then owned by Sovereign or FSFS or any
FSFS Subsidiary) shall, on the Effective Date, by reason of the Merger
and without any action on the part of the holder thereof, be converted
into and become a right to receive:
(i) if the Sovereign Market Value determined as of the
Effective Date is greater than or equal to $9.00 (88% of the
Sovereign Market Value determined as of the date of this Agreement)
and less than or equal to $11.45 (112% of the Sovereign Market Value
determined as of the date of this Agreement), then that number of
shares of fully paid and nonassessable shares of Sovereign Common
Stock, and the corresponding percentage of Sovereign Stock Purchase
A-5
<PAGE>
Rights pursuant to the Sovereign Rights Agreement, equal to $14.75
divided by the Sovereign Market Value determined as of the Effective
Date;
(ii) if the Sovereign Market Value determined as of the
Effective Date is less than $9.00, then 1.64 shares of fully paid
and nonassessable shares of Sovereign Common Stock, and the
corresponding percentage of Sovereign Stock Purchase Rights pursuant
to the Sovereign Rights Agreement; or
(iii) if the Sovereign Market Value determined as of the
Effective Date is greater than $11.45, then 1.29 shares of fully
paid and nonassessable shares of Sovereign Common Stock, and the
corresponding percentage of Sovereign Stock Purchase Rights pursuant
to the Sovereign Rights Agreement (as determined pursuant to either
Sections 1.02(e)(ii)(A)(i), 1.02(e)(ii)(A)(ii) or
1.02(a)(ii)(A)(iii), the 'Applicable Exchange Ratio').
(B) Each share of FSFS Common Stock (other than trust account
shares or DPC shares) owned by Sovereign or a Sovereign Subsidiary on
the Effective Date, if any, shall be cancelled.
(C) Each share of FSFS Common Stock issued and held in the treasury
of FSFS or owned by FSFS or any FSFS Subsidiary (other than trust
account shares or DPC shares) as of the Effective Date, if any, shall be
cancelled, and no cash, stock or other property shall be delivered in
exchange therefor.
(D) No fraction of a whole share of Sovereign Common Stock and no
scrip or certificates therefor shall be issued in connection with the
Merger. Any former holder of FSFS Common Stock who would otherwise be
entitled to receive a fraction of a share of Sovereign Common Stock
shall receive, in lieu thereof, cash in an amount equal to such fraction
of a share multiplied by the market value of Sovereign Common Stock
(determined in accordance with the provisions of Section 1.02(e)(iii)
hereof).
(f) Stock Options. Each option to acquire FSFS Common Stock shall be
converted into and become an option to acquire that number of shares of
Sovereign Common Stock equal to the number of shares of FSFS Common Stock
covered by the option multiplied by the Applicable Exchange Ratio and the
exercise price for a whole share of Sovereign Common Stock shall be the present
stated exercise price of such option divided by the Applicable Exchange Ratio,
such shares to be issuable upon exercise of such options in accordance with the
terms of the respective plans and grant agreements under which they were issued.
(g) Surrender and Exchange of FSFS Stock Certificates.
(i) Exchange of Certificates. Each holder of shares of FSFS Common
Stock who surrenders to Sovereign the certificate or certificates
representing such shares will be entitled to receive, as soon as
practicable after the Effective Date, in exchange therefor a certificate or
certificates for the number of whole shares of Sovereign Common Stock into
which such holder's shares of FSFS Common Stock have been converted
pursuant to the Merger, together with a check for cash in lieu of any
fractional share in accordance with Section 1.02(e)(ii)(D) hereof.
(ii) Rights Evidenced by Certificates. Each certificate for shares of
Sovereign Common Stock issued in exchange for certificates for FSFS Common
Stock pursuant to Section 1.02(g)(i) hereof will be dated the Effective
Date and be entitled to dividends and all other rights and privileges
pertaining to such shares of stock from the Effective Date. Until
surrendered, each certificate theretofore evidencing shares of FSFS Common
Stock will, from and after the Effective Date, evidence solely the right to
receive certificates for shares of Sovereign Common Stock pursuant to
Section 1.02(g)(i) hereof and a check for cash in lieu of any fractional
share in accordance with Section 1.02(e)(ii)(D) hereof. If certificates for
shares of FSFS Common Stock are exchanged for Sovereign Common Stock at a
date following one or more record dates for the payment of dividends or of
any other distribution on the shares of Sovereign Common Stock, Sovereign
will pay cash in an amount equal to dividends theretofore payable on such
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Sovereign Common Stock and pay or deliver any other distribution to which
holders of shares of Sovereign Common Stock have theretofore become
entitled. No interest will accrue or be payable in respect of dividends or
cash otherwise payable under this Section 1.02(g) upon surrender of
certificates for shares of FSFS Common Stock. Notwithstanding the
foregoing, no party hereto will be liable to any holder of FSFS Common
Stock for any amount paid in good faith to a public official or agency
pursuant to any applicable abandoned property, escheat or similar law.
Until such time as certificates for shares of FSFS Common Stock are
surrendered by a FSFS shareholder to Sovereign for exchange, Sovereign
shall have the right to withhold dividends or any other distributions on
the shares of Sovereign Common Stock issuable to such shareholder.
(iii) Exchange Procedures. Each certificate for shares of FSFS Common
Stock delivered for exchange under this Section 1.02(g) must be endorsed in
blank by the registered holder thereof or be accompanied by a power of
attorney to transfer such shares endorsed in blank by such holder. If more
than one certificate is surrendered at one time and in one transmittal
package for the same shareholder account, the number of whole shares of
Sovereign Common Stock for which certificates will be issued pursuant to
this Section 1.02(g) will be computed on the basis of the aggregate number
of shares represented by the certificates so surrendered. If shares of
Sovereign Common Stock or payments of cash are to be issued or made to a
person other than the one in whose name the surrendered certificate is
registered, the certificate so surrendered must be properly endorsed in
blank, with signature(s) guaranteed, or otherwise in proper form for
transfer, and the person to whom certificates for shares of Sovereign
Common Stock is to be issued or to whom cash is to be paid shall pay any
transfer or other taxes required by reason of such issuance or payment to a
person other than the registered holder of the certificate for shares of
FSFS Common Stock which are surrendered. As promptly as practicable after
the Effective Date, Sovereign shall send or cause to be sent to each
shareholder of record of FSFS Common Stock transmittal materials for use in
exchanging certificates representing FSFS Common Stock for certificates
representing Sovereign Common Stock into which the former have been
converted in the Merger.
(iv) Closing of Stock Transfer Books; Cancellation of FSFS
Certificates. Upon the Effective Date, the stock transfer books for FSFS
Common Stock will be closed and no further transfers of shares of FSFS
Common Stock will thereafter be made or recognized. All certificates for
shares of FSFS Common Stock surrendered pursuant to this Section 1.02(g)
will be cancelled by Sovereign.
(h) Payment Procedures. As soon as practicable after the Effective Date,
Sovereign shall make payment of the cash consideration provided for in Section
1.02(e)(ii)(D) to each person entitled thereto.
(i) Anti-Dilution Provisions. If, on the Effective Date, the Applicable
Exchange Ratio is determined pursuant to either Section 1.02(e)(ii)(A)(ii) or
1.02(e)(ii)(A)(iii) and Sovereign has, at any time after the date hereof and
before the Effective Date, (A) issued a dividend in shares of Sovereign Common
Stock, (B) combined the outstanding shares of Sovereign Common Stock into a
smaller number of shares, (C) subdivided the outstanding shares of Sovereign
Common Stock, or (D) reclassified the shares of Sovereign Common Stock, then, in
any such event, the number of shares of Sovereign Common Stock to be delivered
pursuant to Sections 1.02(e)(ii)(A)(ii) or 1.02(e)(ii)(A)(iii) to FSFS
shareholders who are entitled to receive shares of Sovereign Common Stock in
exchange for shares of FSFS Common Stock shall be adjusted so that each FSFS
shareholder shall be entitled to receive such number of shares of Sovereign
Common Stock as such shareholder would have been entitled to receive if the
Effective Date had occurred prior to the happening of such event. (By way of
illustration, if Sovereign shall declare a stock dividend of 7% payable with
respect to a record date on or prior to the Effective Date, the Applicable
Exchange Ratio determined pursuant to Sections 1.02(e)(ii)(A)(ii) and
1.02(e)(ii)(A)(iii) shall be adjusted upward by 7%).
Section 1.03 The Bank Merger. Sovereign and FSFS shall use their best
efforts to cause First DeWitt to merge with and into Sovereign Bank, with
Sovereign Bank surviving such merger, as soon as practicable after the Effective
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Date. Concurrently with, or as soon as practicable after, the execution and
delivery of this Agreement, Sovereign shall cause Sovereign Bank, and FSFS shall
cause First DeWitt, to execute and deliver the Bank Plan of Merger attached
hereto as Exhibit 3.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FSFS
FSFS hereby represents and warrants to Sovereign that, except as
specifically set forth in the FSFS Disclosure Schedule delivered to Sovereign by
FSFS on the date hereof:
Section 2.01 Organization.
(a) FSFS is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and is duly qualified and
licensed to do business under the laws of the State of New Jersey. FSFS is a
savings and loan holding company duly registered under the HOLA. FSFS has the
corporate power and authority to carry on its business and operations as now
being conducted and to own and operate the properties and assets now owned and
being operated by it. Except for the State of New Jersey, FSFS is not qualified
or licensed to do business as a foreign corporation in any other jurisdiction
and is not required to be so qualified or licensed as the result of the
ownership or leasing of property or the conduct of its business except where the
failure to be so qualified or licensed would not have a Material Adverse Effect.
(b) First DeWitt is a federal savings bank duly organized and validly
existing under the laws of the United States of America. First DeWitt has the
corporate power and authority to carry on its business and operations as now
being conducted and to own and operate the properties and assets now owned and
being operated by it. Except for the State of New Jersey, neither First DeWitt
nor any FSFS subsidiary is qualified or licensed to do business as a foreign
corporation in any other jurisdiction and are not required to be so qualified or
licensed as the result of the ownership or leasing of property or the conduct of
its business except where the failure to be so qualified or licensed would not
have a Material Adverse Effect.
(c) There are no FSFS Subsidiaries other than First DeWitt and those
identified in the FSFS Disclosure Schedule. There are no First DeWitt
Subsidiaries other than those identified in the FSFS Disclosure Schedule.
(d) The deposits of First DeWitt are insured by the FDIC to the extent
provided in the Federal Deposit Insurance Act.
(e) The respective minute books of FSFS and First DeWitt and each other
FSFS Subsidiary accurately record, in all material respects, all material
corporate actions of their respective shareholders and boards of directors
(including committees) through the date of this Agreement.
(f) Prior to the date of this Agreement, FSFS has delivered to Sovereign
true and correct copies of the certificate of incorporation and bylaws of FSFS
and the charter and bylaws of First DeWitt as in effect on the date hereof.
Section 2.02 Capitalization.
(a) The authorized capital stock of FSFS consists of (a) 8,000,000 shares
of common stock, $0.01 par value ('FSFS Common Stock'), of which 3,938,815
shares are outstanding, validly issued, fully paid and nonassessable and free of
preemptive rights, and (b) 2,000,000 shares of preferred stock, $0.01 par value,
none of which are issued or outstanding. Neither FSFS nor First DeWitt nor any
other FSFS Subsidiary has or is bound by any subscription, option, warrant,
call, commitment, agreement, plan or other Right of any character relating to
the purchase, sale or issuance or voting of, or right to receive dividends or
other distributions on any shares of FSFS Common Stock, FSFS preferred stock or
any other security of FSFS or any securities representing the right to vote,
purchase or otherwise receive any shares of FSFS Common Stock, FSFS preferred
stock or any other security of FSFS, other than for (i) shares issuable under
the Sovereign Option and (ii) 385,600 shares which FSFS is obligated to issue,
under FSFS's 1987 Stock Option Plan, FSFS's 1993 Long-term Incentive Stock
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Benefit Plan and FSFS's 1993 Stock Option Plan for Outside Directors (the 'FSFS
Stock Option Plans'), at a weighted average exercise price of $7.66, to its
directors, officers and employees and officers and employees of FSFS
Subsidiaries, including First DeWitt. As of March 31, 1996, FSFS had
approximately 1,150 shareholders of record.
(b) The authorized capital stock of First DeWitt consists of (i) 750,000
shares of common stock, par value $1.00 per share ('First DeWitt Common Stock'),
of which 1,000 shares are outstanding, validly issued, fully paid,
nonassessable, free of preemptive rights and owned by FSFS and (ii) 250,000
shares of preferred stock, par value $1.00 per share, none of which are issued
or outstanding. Neither FSFS nor any other FSFS Subsidiary has or is bound by
any subscription, option, warrant, call, commitment, agreement or other Right of
any character relating to the purchase, sale or issuance or voting of, or right
to receive dividends or other distributions on any shares of the capital stock
of any FSFS Subsidiary or any other security of any FSFS Subsidiary or any
securities representing the right to vote, purchase or otherwise receive any
shares of the capital stock or any other security of any FSFS Subsidiary. Either
FSFS or First DeWitt owns all of the outstanding shares of capital stock of each
FSFS Subsidiary free and clear of all liens, security interests, pledges,
charges, encumbrances, agreements and restrictions of any kind or nature.
(c) Except as set forth in the FSFS Disclosure Schedule, neither (i) FSFS,
(ii) First DeWitt or (iii) any other FSFS Subsidiary, owns any equity interest,
directly or indirectly, in any other company or controls any other company,
except for equity interests held in the investment portfolios of FSFS
Subsidiaries, equity interests held by FSFS Subsidiaries in a fiduciary
capacity, and equity interests held in connection with the commercial loan
activities of FSFS Subsidiaries. There are no subscriptions, options, warrants,
calls, commitments, agreements or other Rights outstanding and held by FSFS or
First DeWitt with respect to any other company's capital stock or the equity of
any other person.
(d) No person or 'group' (as that term is used in Section 13(d)(3) of the
Exchange Act), to the best of FSFS's knowledge, is the beneficial owner (as
defined in Section 13(d) of the Exchange Act) of 5% or more of the outstanding
shares of FSFS Common Stock, except as disclosed in FSFS's proxy statement for
use in connection with its January 17, 1996 annual meeting of shareholders,
previously delivered to Sovereign or in the FSFS Disclosure Schedule.
(e) Neither Austin Bernet, Inc. ('ABI'), Basswood Partners, L.P.
('Basswood'), nor FMR Corp. ('FMR') is an Affiliate or is or will be deemed to
be an affiliate of FSFS within the meaning of SEC Staff Accounting Bulletin No.
65, SEC Accounting Series Release No. 130 or SEC Accounting Series Release No.
135.
Section 2.03 Authority; No Violation.
(a) FSFS has full corporate power and authority to execute and deliver this
Agreement and to complete the transactions contemplated hereby. First DeWitt has
full corporate power and authority to execute and deliver the Bank Plan of
Merger and to consummate the Bank Merger. The execution and delivery of this
Agreement by FSFS and the completion by FSFS of the transactions contemplated
hereby have been duly and validly approved by the Board of Directors of FSFS
and, except for approval by the shareholders of FSFS as required under the DGCL,
FSFS's certificate of incorporation and bylaws and Nasdaq requirements
applicable to it, no other corporate proceedings on the part of FSFS are
necessary to complete the transactions contemplated hereby. This Agreement has
been duly and validly executed and delivered by FSFS, subject to approval of the
shareholders of FSFS as required under the DGCL, FSFS's certificate of
incorporation and bylaws and Nasdaq requirements applicable to it, and
constitutes the valid and binding obligation of FSFS, enforceable against FSFS
in accordance with its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and subject, as to
enforceability, to general principles of equity. The Bank Plan of Merger, upon
its execution and delivery by First DeWitt, will constitute the valid and
binding obligation of First DeWitt, enforceable against First DeWitt in
accordance with its terms, subject to applicable conservatorship, receivership,
insolvency and similar laws affecting creditors' rights generally and
institutions the deposits of which are insured by the FDIC, and subject, as to
enforceability, to general principles of equity.
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(b) (A) The execution and delivery of this Agreement by FSFS, (B) the
execution and delivery of the Bank Plan of Merger by First DeWitt, (C) subject
to receipt of approvals from the Regulatory Authorities referred to in Section
3.04 hereof and FSFS's and Sovereign's compliance with any conditions contained
therein, the completion of the transactions contemplated hereby, and (D)
compliance by FSFS or First DeWitt with any of the terms or provisions hereof or
of the Bank Plan of Merger, will not (i) conflict with or result in a breach of
any provision of the certificate of incorporation or bylaws of FSFS or any FSFS
Subsidiary or the charter and bylaws of First DeWitt; (ii) violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to FSFS or any FSFS Subsidiary or any of their respective properties
or assets; or (iii) except as set forth in the FSFS 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 properties or assets of FSFS or any FSFS Subsidiary under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement, commitment or other instrument or obligation
to which FSFS or any FSFS Subsidiary is a party, or by which they or any of
their respective properties or assets may be bound or affected, except for such
violations, conflicts, breaches or defaults under clause (ii) or (iii) hereof
which, either individually or in the aggregate, will not have a material adverse
effect on the assets, business, financial condition, results of operations or
business prospects of FSFS and the FSFS Subsidiaries taken as a whole or the
ability of FSFS to perform any of its obligations under this Agreement.
Section 2.04 Consents. Except for the consents, approvals, filings and
registrations from or with the Regulatory Authorities referred to in Section
3.04 hereof and compliance with any conditions contained therein, and the
approval of this Agreement by the shareholders of FSFS under the DGCL, and of
the Bank Plan of Merger by FSFS as sole shareholder of First DeWitt under the
HOLA, and by the First DeWitt Board of Directors, no consents or approvals of,
or filings or registrations with, any public body or authority are necessary,
and no consents or approvals of any third parties are necessary, or will be, in
connection with (a) the execution and delivery of this Agreement by FSFS or the
Bank Plan of Merger by First DeWitt, and (b) the completion by FSFS of the
transactions contemplated hereby or by First DeWitt of the Bank Merger. FSFS has
no reason to believe that (i) any required consents or approvals will not be
received or will be received with conditions, limitations or restrictions
unacceptable to it or which would adversely impact FSFS's ability to consummate
the transactions contemplated by this Agreement or that (ii) any public body or
authority, the consent or approval of which is not required or any filing with
which is not required, will object to the consummation of the transactions
contemplated by this Agreement.
Section 2.05 Financial Statements.
(a) FSFS has previously delivered, or will deliver, to Sovereign the FSFS
Regulatory Reports. The FSFS Regulatory Reports have been, or will be, prepared
in all material respects in accordance with applicable regulatory accounting
principles and practices applied on a consistent basis throughout the periods
covered by such statements, and fairly present, or will fairly present in all
material respects, the financial position, results of operations and changes in
shareholders' equity of FSFS as of and for the periods ended on the dates
thereof, in accordance with applicable regulatory accounting principles applied
on a consistent basis.
(b) FSFS has previously delivered to Sovereign the FSFS Financials. The
FSFS Financials have been, or will be, prepared in accordance with generally
accepted accounting principles and practices applied on a consistent basis
throughout the periods covered by such statements, and fairly present, or will
fairly present, the consolidated financial position, results of operations and
cash flows of FSFS as of and for the periods ending on the dates thereof, in
accordance with generally accepted accounting principles applied on a consistent
basis.
(c) At the date of each balance sheet included in the FSFS Financials or
the FSFS Regulatory Reports, neither FSFS nor First DeWitt (as the case may be)
had, or will have any liabilities, obligations or loss contingencies of any
nature (whether absolute, accrued, contingent or otherwise) of a type required
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to be reflected in such FSFS Financials or FSFS Regulatory Reports or in the
footnotes thereto which are not fully reflected or reserved against therein or
fully disclosed in a footnote thereto, except for liabilities, obligations and
loss contingencies which are not material in the aggregate and which are
incurred in the ordinary course of business, consistent with past practice and
except for liabilities, obligations and loss contingencies which are within the
subject matter of a specific representation and warranty herein and subject, in
the case of any unaudited statements, to normal, recurring audit adjustments and
the absence of footnotes.
Section 2.06 Taxes.
(a) FSFS and the FSFS Subsidiaries are members of the same affiliated group
within the meaning of IRC Section 1504(a). FSFS has duly filed, and will file,
all federal, state and local tax returns required to be filed by or with respect
to FSFS and all FSFS Subsidiaries on or prior to the Closing Date (all such
returns being accurate and correct in all material respects) and has duly paid
or will pay, or made or will make, provisions for the payment of all federal,
state and local taxes which have been incurred by or are due or claimed to be
due from FSFS and any FSFS Subsidiary by any taxing authority or pursuant to any
tax sharing agreement or arrangement (written or oral) on or prior to the
Closing Date other than taxes which (i) are not delinquent or (ii) are being
contested in good faith.
(b) No consent pursuant to IRC Section 341(f) has been filed (or will be
filed prior to the Closing Date) by or with respect to FSFS or any FSFS
Subsidiary.
Section 2.07 No Material Adverse Effect. FSFS has not suffered any
Material Adverse Effect since March 31, 1996.
Section 2.08 Contracts.
(a) Except as described in FSFS's proxy statement for its January 17, 1996
annual meeting of shareholders and Annual Reports on Form 10-K for the fiscal
years ended September 30, 1993, 1994 and 1995, previously delivered to
Sovereign, in the footnotes to the audited consolidated financial statements of
FSFS as of September 30, 1995 and for the three years ended September 30, 1995
or in the FSFS Disclosure Schedule, neither FSFS nor any FSFS Subsidiary is a
party to or subject to: (i) any employment, consulting or severance contract or
arrangement with any past or present officer, director or employee of FSFS or
any FSFS Subsidiary, except for 'at will' arrangements; (ii) any plan,
arrangement or contract providing for bonuses, pensions, options, deferred
compensation, retirement payments, profit sharing or similar arrangements for or
with any past or present officers, directors or employees of FSFS or any FSFS
Subsidiary; (iii) any collective bargaining agreement with any labor union
relating to employees of FSFS or any FSFS Subsidiary; (iv) any agreement which
by its terms limits the payment of dividends by any FSFS Subsidiary; (v) any
instrument evidencing or related to indebtedness for borrowed money whether
directly or indirectly, by way of purchase money obligation, conditional sale,
lease purchase, guaranty or otherwise, in respect of which FSFS or any FSFS
Subsidiary is an obligor to any person, which instrument evidences or relates to
indebtedness other than deposits, repurchase agreements, bankers acceptances and
'treasury tax and loan' accounts established in the ordinary course of business
and transactions in 'federal funds' or which contains financial covenants or
other restrictions (other than those relating to the payment of principal and
interest when due) which would be applicable on or after the Closing Date to
Sovereign or any Sovereign Subsidiary; or (vi) any contract (other than this
Agreement) limiting the freedom of any FSFS Subsidiary to engage in any type of
banking or bank-related business permissible under law.
(b) True and correct copies of agreements, plans, arrangements and
instruments referred to in Section 2.08(a) or described in the FSFS proxy
statement for its January 17, 1996 annual meeting of shareholders or in a
footnote to such audited consolidated financial statements, have been provided
to Sovereign on or before the date hereof, are listed on the FSFS Disclosure
Schedule and are in full force and effect on the date hereof and neither FSFS
nor any FSFS Subsidiary (nor, to the knowledge of FSFS, any other party to any
such contract, plan, arrangement or instrument) has breached any provision of,
or is in default in any respect under any term of, any such contract, plan,
arrangement or instrument which breach has resulted in or will result in a
Material Adverse Effect with respect to FSFS. Except as set forth in the FSFS
Disclosure Schedule, no party to any material contract, plan, arrangement or
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instrument will have the right to terminate any or all of the provisions of any
such contract, plan, arrangement or instrument as a result of the transactions
contemplated by this Agreement. None of the employees (including officers) of
FSFS or any FSFS Subsidiary, except for Michael J. Quigley, III, possess the
right to terminate their employment as a result of the execution of this
Agreement. Except as set forth in the FSFS Disclosure Schedule, no plan,
employment agreement, termination agreement, or similar agreement or arrangement
to which FSFS or any FSFS Subsidiary is a party or under which FSFS or any FSFS
Subsidiary may be liable contains provisions which permit an employee or
independent contractor to terminate it without cause and continue to accrue
future benefits thereunder. Except as set forth in the FSFS Disclosure Schedule,
no such agreement, plan or arrangement (x) provides for acceleration in the
vesting of benefits or payments due thereunder upon the occurrence of a change
in ownership or control of FSFS or any FSFS Subsidiary absent the occurrence of
a subsequent event; (y) provides for benefits which may cause the disallowance
of a federal income tax deduction under IRC Section 280G; or (z) requires FSFS
or any FSFS Subsidiary to provide a benefit in the form of FSFS Common Stock or
determined by reference to the value of FSFS Common Stock.
Section 2.09 Ownership of Property; Insurance Coverage.
(a) Except as disclosed in the FSFS Disclosure Schedule, FSFS and the FSFS
Subsidiaries have, or will have as to property acquired after the date hereof,
good and, as to real property, marketable title to all assets and properties
owned by FSFS or any FSFS Subsidiary in the conduct of their businesses, whether
such assets and properties are real or personal, tangible or intangible,
including assets and property reflected in the balance sheets contained in the
FSFS Regulatory Reports and in the FSFS Financials or acquired subsequent
thereto (except to the extent that such assets and properties have been disposed
of for fair value, in the ordinary course of business, since the date of such
balance sheets), subject to no encumbrances, liens, mortgages, security
interests or pledges, except (i) those items which secure liabilities for
borrowed money from a Federal Home Loan Bank, (ii) statutory liens for amounts
not yet delinquent or which are being contested in good faith and (iii) items
permitted under Article IV. FSFS and the FSFS Subsidiaries, as lessee, have the
right under valid and subsisting leases of real and personal properties used by
FSFS and its Subsidiaries in the conduct of their businesses to occupy or use
all such properties as presently occupied and used by each of them. Except as
disclosed in the FSFS Disclosure Schedule, such existing leases and commitments
to lease constitute or will constitute operating leases for both tax and
financial accounting purposes and the lease expense and minimum rental
commitments with respect to such leases and lease commitments are as disclosed
in the Notes to the FSFS Financials.
(b) With respect to all agreements pursuant to which FSFS or any FSFS
Subsidiary has purchased securities subject to an agreement to resell, if any,
FSFS or such FSFS Subsidiary, as the case may be, has a valid, perfected first
lien or security interest in the securities or other collateral securing the
repurchase agreement, and the value of such collateral equals or exceeds the
amount of the debt secured thereby.
(c) FSFS and the FSFS Subsidiaries currently maintain insurance considered
by FSFS to be reasonable for their respective operations and similar in scope
and coverage to that maintained by other businesses similarly engaged. Neither
FSFS nor any FSFS Subsidiary has received notice from any insurance carrier that
(i) such insurance will be cancelled or that coverage thereunder will be reduced
or eliminated, or (ii) premium costs with respect to such policies of insurance
will be substantially increased. There are presently no material claims pending
under such policies of insurance and no notices have been given by FSFS or First
DeWitt under such policies. All such insurance is valid and enforceable and in
full force and effect, and within the last three years FSFS has received each
type of insurance coverage for which it has applied and during such periods has
not been denied indemnification for any material claims submitted under any of
its insurance policies.
Section 2.10 Legal Proceedings. Except as disclosed in the FSFS Disclosure
Schedule, neither FSFS nor any FSFS Subsidiary is a party to any, and there are
no pending or, to the best of FSFS's knowledge, threatened legal,
administrative, arbitration or other proceedings, claims (whether asserted or
unasserted), actions or governmental investigations or inquiries of any nature
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(i) against FSFS or any FSFS Subsidiary, (ii) to which FSFS or any FSFS
Subsidiary's assets are or may be subject, (iii) challenging the validity or
propriety of any of the transactions contemplated by this Agreement, or (iv)
which could adversely affect the ability of FSFS to perform under this
Agreement, except for any proceedings, claims, actions, investigations or
inquiries referred to in clauses (i) or (ii) which, if adversely determined,
individually or in the aggregate, could not be reasonably expected to have a
Material Adverse Effect.
Section 2.11 Compliance With Applicable Law.
(a) FSFS and FSFS Subsidiaries hold all licenses, franchises, permits and
authorizations necessary for the lawful conduct of their businesses under, and
have complied in all material respects with, applicable laws, statutes, orders,
rules or regulations of any federal, state or local governmental authority
relating to them, other than where such failure to hold or such noncompliance
will neither result in a limitation in any material respect on the conduct of
their businesses nor otherwise have a Material Adverse Effect on the assets,
business, financial condition, the results of operations or business prospects
of FSFS and its Subsidiaries taken as a whole.
(b) Except as disclosed in the FSFS Disclosure Schedule, neither FSFS nor
any FSFS Subsidiary has received any notification or communication from any
Regulatory Authority (i) asserting that FSFS or any FSFS Subsidiary is not in
compliance with any of the statutes, regulations or ordinances which such
Regulatory Authority enforces; (ii) threatening to revoke any license,
franchise, permit or governmental authorization which is material to FSFS or any
FSFS Subsidiary; (iii) requiring or threatening to require FSFS or any FSFS
Subsidiary, or indicating that FSFS or any FSFS Subsidiary may be required, to
enter into a cease and desist order, agreement or memorandum of understanding or
any other agreement restricting or limiting, or purporting to restrict or limit,
in any manner the operations of FSFS or any FSFS Subsidiary, including without
limitation any restriction on the payment of dividends; or (iv) directing,
restricting or limiting, or purporting to direct, restrict or limit, in any
manner the operations of FSFS or any FSFS Subsidiary, including without
limitation any restriction on the payment of dividends (any such notice,
communication, memorandum, agreement or order described in this sentence is
hereinafter referred to as a 'Regulatory Agreement'). Neither FSFS nor any FSFS
Subsidiary has consented to or entered into any Regulatory Agreement, except as
heretofore disclosed to Sovereign.
Section 2.12 ERISA. FSFS has previously delivered to Sovereign true and
complete copies of all employee pension benefit plans within the meaning of
ERISA Section 3(2), profit sharing plans, stock purchase plans, deferred
compensation and supplemental income plans, supplemental executive retirement
plans, employment agreements, annual or long term incentive plans, settlement
plans, policies and agreements, group insurance plans, and all other employee
welfare benefit plans within the meaning of ERISA Section 3(1) (including
vacation pay, sick leave, short-term disability, long-term disability, and
medical plans) and all other employee benefit plans, policies, agreements and
arrangements, all of which are set forth in the FSFS Disclosure Schedule,
maintained or contributed to for the benefit of the employees or former
employees (including retired employees) and any beneficiaries thereof or
directors or former directors of FSFS or any FSFS Subsidiary, together with (i)
the most recent actuarial (if any) and financial reports relating to those plans
which constitute 'qualified plans' under IRC Section 401(a), (ii) the most
recent annual reports relating to such plans filed by them, respectively, with
any government agency, and (iii) all rulings and determination letters which
pertain to any such plans. The pension plan has not incurred, directly or
indirectly, within the past six (6) years any liability under Title IV of ERISA
(including to the Pension Benefit Guaranty Corporation) or to the IRS except
liabilities to the Pension Benefit Guaranty Corporation pursuant to ERISA
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Section 4007, all of which have been fully paid, nor has any reportable event
under ERISA Section 4043(b) occurred with respect to any such pension plan.
Neither FSFS, any FSFS Subsidiary nor any other pension plan maintained by FSFS
or any FSFS Subsidiary, has incurred, directly or indirectly, within the past
six (6) years any liability under Title IV of ERISA (including to the Pension
Benefit Guaranty Corporation) or to the IRS with respect to any pension plan
qualified under IRC Section 401(a) which liability has resulted in or will
result in a Material Adverse Effect with respect to FSFS, except liabilities to
the Pension Benefit Guaranty Corporation pursuant to ERISA Section 4007, all of
which have been fully paid, nor has any reportable event under ERISA Section
4043(b) occurred with respect to any such pension plan. With respect to each of
such plans that is subject to Title IV of ERISA, the present value of the
accrued benefits under such plan, based upon the actuarial assumptions used for
funding purposes in the plan's most recent actuarial report, did not, as of its
latest valuation date, exceed the then current value of the assets of such plan
allocable to such accrued benefits by more than $200,000, and FSFS estimates
that by the Closing Date such liabilities will not exceed such assets. Neither
FSFS nor any FSFS Subsidiary has incurred or is subject to any liability under
ERISA Section 4201 for a complete or partial withdrawal from a multi-employer
plan. All 'employee benefit plans,' as defined in ERISA Section 3(3), comply and
within the past six (6) years have complied in all material respects with (i)
relevant provisions of ERISA and (ii) in the case of plans intended to qualify
for favorable income tax treatment, provisions of the IRC relevant to such
treatment. Neither FSFS nor any FSFS Subsidiary has a material liability under
any such plan which pursuant to GAAP is required to be reflected on or disclosed
in (pursuant to a footnote or otherwise) the FSFS Financials and which is not so
reflected or disclosed thereon. No prohibited transaction, breach of fiduciary
duty or other transaction has occurred within the past six (6) years with
respect to (i) any pension plan, employment agreement, supplemental executive
retirement plan or special termination agreement maintained by FSFS or any FSFS
Subsidiary which would result in the imposition, directly or indirectly, of an
excise tax or other penalty under ERISA or the IRC or (ii) any other employee
benefit plan maintained by FSFS or any FSFS Subsidiary which would result in the
imposition, directly or indirectly, of an excise tax or other penalty under
ERISA or the IRC, which, individually or in the aggregate, has resulted in or
will result in a Material Adverse Effect with respect to FSFS. FSFS and the FSFS
Subsidiaries provide continuation coverage under group health plans for
separating employees and 'qualified beneficiaries' in accordance with the
provisions of IRC Section 4980B(f). Such group health plans are in compliance
with Section 1862(b)(1) of the Social Security Act.
Section 2.13 Brokers, Finders and Financial Advisors. Except for FSFS's
engagement of McConnell, Budd & Downes, Inc. in connection with transactions
contemplated by this Agreement, neither FSFS nor any FSFS Subsidiary, nor any of
their respective officers, directors, employees or agents, has employed any
broker, finder or financial advisor in connection with the transactions
contemplated by this Agreement or in connection with any transaction other than
the Merger, or, except for a commitment to pay McConnell, Budd & Downes, Inc. in
connection with the transactions contemplated by this Agreement, incurred any
liability or commitment for any fees or commissions to any such person in
connection with the transactions contemplated by this Agreement or in connection
with any transaction other than the Merger, which has not been reflected in the
FSFS Financials. The FSFS Disclosure Schedule shall contain as an exhibit the
engagement letter between FSFS and McConnell, Budd & Downes, Inc.
Section 2.14 Environmental Matters. To the knowledge of FSFS, neither FSFS
nor any FSFS Subsidiary, nor any properties owned or operated by FSFS or any
FSFS Subsidiary has been or is in violation of or liable under any Environmental
Law which violation or liability, individually or in the aggregate, resulted in,
or will result, in a Material Adverse Effect with respect to FSFS. There are no
actions, suits or proceedings, or demands, claims, notices or investigations
(including without limitation notices, demand letters or requests for
information from any environmental agency) instituted or pending, or to the
knowledge of FSFS, threatened, relating to the liability of any property owned
or operated by FSFS or any FSFS Subsidiary under any Environmental Law.
Section 2.15 Loan Portfolio. The allowance for loan losses reflected, and
to be reflected, in the FSFS Regulatory Reports, and shown, and to be shown, on
the balance sheets contained in the FSFS Financials have been, and will be,
established in accordance with the requirements of generally accepted accounting
principles and all applicable regulatory criteria.
Section 2.16 Information to be Supplied. The information to be supplied by
FSFS and First DeWitt for inclusion in the Registration Statement will not, at
the time the Registration Statement is declared effective pursuant to the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein not
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misleading. The information supplied, or to be supplied, by FSFS for inclusion
in the Applications will, at the time such documents are filed with any
Regulatory Authority, be accurate in all material aspects.
Section 2.17 Securities Documents. FSFS has delivered to Sovereign copies
of its (i) annual reports on SEC Form 10-K for the years ended September 30,
1995, 1994 and 1993, (ii) quarterly reports on SEC Form 10-Q for the quarters
ended December 31, 1995, and March 31, 1996, and (iii) proxy materials used or
for use in connection with its meetings of shareholders held in 1996, 1995 and
1994. Such reports and such proxy materials complied, at the time filed with the
SEC, in all material respects, with the Exchange Act and all applicable rules
and regulations of the SEC.
Section 2.18 Related Party Transactions. Except as disclosed (i) in the
FSFS Disclosure Schedule, (ii) in the proxy statement for use in connection with
FSFS's 1996 annual meeting of shareholders or (iii) in the footnotes to the FSFS
Financials, FSFS is not a party to any transaction (including any loan or other
credit accommodation) with any Affiliate of FSFS (except a FSFS Subsidiary).
Except as disclosed in the FSFS Disclosure Schedule or in the proxy statement
for use in connection with FSFS's 1995 annual meeting of shareholders, all such
transactions (a) were made in the ordinary course of business, (b) were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other Persons, and (c)
did not involve more than the normal risk of collectability or present other
unfavorable features. Except as set forth on the FSFS Disclosure Schedule, no
loan or credit accommodation to any Affiliate of FSFS is presently in default
or, during the three year period prior to the date of this Agreement, has been
in default or has been restructured, modified or extended. Neither FSFS nor
First DeWitt has been notified that principal and interest with respect to any
such loan or other credit accommodation will not be paid when due or that the
loan grade classification accorded such loan or credit accommodation by First
DeWitt is inappropriate.
Section 2.19 Schedule of Termination Benefits. The FSFS Disclosure
Schedule includes a schedule of termination benefits and related payments
payable to the individuals identified thereon, excluding any options to acquire
FSFS Common Stock granted to such individuals, under any and all employment
agreements, special termination agreements, supplemental executive retirement
plans, deferred bonus plans, deferred compensation plans, salary continuation
plans, or any other pension benefit or welfare benefit plan maintained by FSFS
solely for the benefit of officers of FSFS or FSFS Subsidiaries (the 'Benefits
Schedule'), in the event their employment had been terminated as of March 31,
1996. No other individuals are entitled to benefits under any such plans. The
present value of the termination benefits and related payments specified,
including required gross-up payments under Section 280G of the IRC, on the
Benefit Schedule with respect to each named individual (based on a 6% per annum
discount factor) is true and correct in all material respects and the aggregate
amount of the present value of such termination benefits and related payments
(based on a 6% per annum discount factor) does not exceed the amount set forth
on the Benefits Schedule included in the FSFS Disclosure Schedule, excluding any
amounts accrued through March 31, 1996, assuming all individuals entitled to
receive termination benefits under any and all agreements providing for such
termination benefits terminated their employment on March 31, 1996.
Section 2.20 Loans. Each loan reflected as an asset in the FSFS Financial
Statements (i) is evidenced by notes, agreements or other evidences of
indebtedness which are true, genuine and correct (ii) to the extent secured, has
been secured by valid liens and security interests which have been perfected,
and (ii) is the legal, valid and binding obligation of the obligator named
therein, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles, in
each case other than loans as to which the failure to satisfy the foregoing
standards would not have a Material Adverse Effect on FSFS.
Section 2.21 Quality of Representations. The representations made by FSFS
in this Agreement are true, correct and complete in all material respects.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SOVEREIGN
Sovereign hereby represents and warrants to FSFS that, except as set forth
in the Sovereign Disclosure Schedule delivered by Sovereign to FSFS on or prior
to the date hereof:
Section 3.01 Organization.
(a) Sovereign is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania. Each Sovereign
Subsidiary is duly organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation and each possesses full corporate
power and authority to carry on its respective business and to own, lease and
operate its properties as presently conducted. Neither Sovereign nor any
Sovereign Subsidiary is required by the conduct of its business or the ownership
or leasing of its assets to qualify to do business as a foreign corporation in
any jurisdiction other than the Commonwealth of Pennsylvania and the states of
Delaware and New Jersey, except where the failure to be so qualified would not
have a Material Adverse Effect. Sovereign is a savings and loan holding company
duly registered under the HOLA.
(b) Sovereign Bank is a federal savings bank, duly organized and validly
existing under the laws of the United States of America. Sovereign Bank has the
corporate power and authority to carry on its business and operations as now
being conducted and to own and operate the properties and assets now owned and
being operated by it.
(c) The deposits of Sovereign Bank are insured by the FDIC to the extent
provided in the Federal Deposit Insurance Act.
(d) The respective minute books of Sovereign and Sovereign Bank accurately
record in all material respects all material corporate action of their
respective shareholders and boards of directors (including committees) through
the date of this Agreement.
(e) Prior to the execution of this Agreement, Sovereign has delivered to
FSFS true and correct copies of the articles of incorporation and the bylaws of
Sovereign and Sovereign Bank, respectively, as in effect on the date hereof.
Section 3.02 Capital Structure.
(a) Sovereign is authorized, by its articles of incorporation, to issue (a)
100,000,000 shares of common stock, no par value ('Sovereign Common Stock'), of
which, at the date of this Agreement, no shares were issued and held by
Sovereign as treasury stock and 52,769,815 shares are issued and outstanding,
and (b) 7,500,000 shares of preferred stock, no par value, of which, at the date
of this Agreement, 2,000,000 shares of 6-1/4% Cumulative, Convertible Preferred
Stock, Series B, are issued and outstanding. All shares of Sovereign Common
Stock issued and outstanding are fully paid and nonassessable and none were
issued in violation of any preemptive rights. Sovereign has no Rights
authorized, issued or outstanding, other than (i) the Sovereign Stock Purchase
Rights, and (ii) options to acquire 1,578,902 shares of Sovereign Common Stock
as authorized under Sovereign's employee benefit plans, stock option plans,
non-employee directors compensation plan, employee stock ownership plan,
employee stock purchase plan, and dividend reinvestment and stock purchase plan.
As of March 31, 1996, Sovereign had approximately 8,500 shareholders of record.
(b) To the best of Sovereign's knowledge, except as disclosed in
Sovereign's proxy statement dated March 15, 1996, no person or 'group' (as that
term is used in Section 13(d)(3) of the Exchange Act) is the beneficial owner of
5% or more of the outstanding shares of Sovereign Common Stock.
(c) Sovereign owns all of the capital stock of Sovereign Bank, free and
clear of any lien or encumbrance. Except for the Sovereign Subsidiaries,
Sovereign does not possess, directly or indirectly, any material equity interest
in any corporation, except for equity interests held in the investment
portfolios of Sovereign Subsidiaries, equity interests held by Sovereign
Subsidiaries in a fiduciary capacity, and equity interests held in connection
with the commercial loan activities of Sovereign Subsidiaries.
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Section 3.03 Authority; No Violation.
(a) Sovereign has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. Sovereign
Bank has full corporate power and authority to execute and deliver the Bank Plan
of Merger and to consummate the Bank Merger. The execution and delivery of this
Agreement by Sovereign and the consummation by Sovereign of the transactions
contemplated hereby have been duly and validly approved by the Board of
Directors of Sovereign and no other corporate proceedings on the part of
Sovereign are necessary to consummate the transactions contemplated hereby. The
execution and delivery of the Bank Plan of Merger by Sovereign Bank and the
consummation by Sovereign Bank of the Bank Merger have been duly and validly
approved by the Board of Directors of Sovereign Bank and by Sovereign as sole
shareholder of Sovereign Bank, and no other corporate proceedings on the part of
Sovereign Bank are necessary to consummate the transactions contemplated by the
Bank Plan of Merger. This Agreement has been duly and validly executed and
delivered by Sovereign and, subject to receipt of the required approvals of
Regulatory Authorities described in Section 3.04 hereof, constitutes the valid
and binding obligation of Sovereign, enforceable against Sovereign in accordance
with its terms, subject to applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally and subject, as to enforceability, to
general principles of equity. The Bank Plan of Merger, upon its execution and
delivery by Sovereign Bank concurrently with the execution and delivery of this
Agreement, will constitute the valid and binding obligation of Sovereign Bank,
enforceable against Sovereign Bank in accordance with its terms, subject to
applicable conservatorship and receivership provisions of the Federal Deposit
Insurance Act, or insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to general principles of equity.
(b) (A) The execution and delivery of this Agreement by Sovereign, (B) the
execution and delivery of the Bank Plan of Merger by Sovereign Bank, (C) subject
to receipt of approvals from the Regulatory Authorities referred to in Section
3.04 hereof and FSFS's and Sovereign's compliance with any conditions contained
therein, the consummation of the transactions contemplated hereby, and (D)
compliance by Sovereign or Sovereign Bank with any of the terms or provisions
hereof or of the Bank Plan of Merger will not (i) conflict with or result in a
breach of any provision of the articles of incorporation or bylaws of Sovereign
or the charter and bylaws of Sovereign Bank; (ii) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Sovereign or Sovereign Bank or any of their respective properties
or assets; or (iii) 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 properties or assets of Sovereign or Sovereign Bank
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other investment or
obligation to which Sovereign or Sovereign Bank is a party, or by which they or
any of their respective properties or assets may be bound or affected, except
for such violations, conflicts, breaches or defaults under clause (ii) or (iii)
hereof which, either individually or in the aggregate, will not have a Material
Adverse Effect on Sovereign.
Section 3.04 Consents. Except for consents and approvals of or filings
with the OTS, the PDB, the SEC, and state 'blue sky' authorities, no consents or
approvals of, or filings or registrations with, any public body or authority are
necessary in connection with the execution and delivery of this Agreement by
Sovereign or the Bank Plan of Merger by Sovereign Bank, or the consummation by
Sovereign of the transactions contemplated hereby or by Sovereign Bank of the
Bank Merger. Sovereign has no reason to believe that (i) any required consents
or approvals will not be received or will be received with conditions,
limitations or restrictions unacceptable to it or which would adversely impact
Sovereign's ability to consummate the transactions contemplated by this
Agreement or that (ii) any public body or authority, the consent or approval of
which is not required or any filing with which is not required, will object to
the consummation of the transactions contemplated by this Agreement.
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Section 3.05 Financial Statements.
(a) Sovereign has previously delivered, or will deliver, to FSFS the
Sovereign Financials. The Sovereign Financials have been, or will be, prepared
in accordance with generally accepted accounting principles, and fairly present,
or will fairly present, the consolidated financial position, results of
operations and cash flows of Sovereign as of and for the periods ending on the
dates thereof, in accordance with generally accepted accounting principles.
Sovereign will make the Sovereign Regulatory Reports available to FSFS for
inspection.
(b) At the date of any balance sheet included in the Sovereign Financials,
Sovereign did not have any liabilities or obligations of any nature (whether
absolute, accrued, contingent or otherwise) of a type required to be reflected
in such Sovereign Financials or in the footnotes thereto which are not fully
reflected or reserved against therein or disclosed in a footnote thereto, except
for liabilities and obligations which are not material in the aggregate and
which are incurred in the ordinary course of business, consistent with past
practice, and except for liabilities and obligations which are within the
subject matter of a specific representation and warranty herein.
Section 3.06 Taxes. Sovereign and the Sovereign Subsidiaries are members
of the same affiliated group within the meaning of IRC Section 1504(a).
Sovereign has duly filed in correct form all federal, state and local tax
returns required to be filed by or with respect to Sovereign and all Sovereign
Subsidiaries on or prior to the date hereof (all such returns being accurate and
correct in all material respects) and has duly paid or made provisions for the
payment of all federal, state and local taxes which have been incurred by or are
due or claimed to be due from Sovereign and any Sovereign Subsidiary by any
taxing authority or pursuant to any tax sharing agreement or arrangement
(written or oral) on or prior to the date hereof other than taxes which (i) are
not delinquent or (ii) are being contested in good faith.
Section 3.07 No Material Adverse Effect. Sovereign has not suffered any
Material Adverse Effect since March 31, 1996.
Section 3.08 Legal Proceedings. Neither Sovereign nor any Sovereign
Subsidiary is a party to any, and there are no pending or, to the best of
Sovereign's knowledge, threatened legal, administrative, arbitration or other
proceedings, claims, actions or governmental investigations or inquiries of any
nature (i) against Sovereign or any Sovereign Subsidiary, (ii) to which
Sovereign's or any Sovereign Subsidiary's assets are subject, (iii) challenging
the validity or propriety of any of the transactions contemplated by this
Agreement, or (iv) which could adversely affect the ability of Sovereign to
perform under this Agreement, except for any proceedings, claims, actions,
investigations or inquiries referred to in clauses (i) or (ii) which,
individually or in the aggregate, could not be reasonably expected to materially
and adversely affect the assets, business, financial condition or results of
operations of Sovereign and its Subsidiaries taken as a whole.
Section 3.09 Ownership of Property; Insurance Coverage.
(a) Sovereign and the Sovereign Subsidiaries have good and, as to real
property, marketable title to all assets and properties owned by Sovereign or
any of its Subsidiaries, whether real or personal, tangible or intangible,
including assets and property reflected in the balance sheets contained in the
Sovereign Financials or acquired subsequent thereto (except to the extent that
such assets and properties have been disposed of for fair value, in the ordinary
course of business, since the date of such balance sheets), subject to no
encumbrances, liens, mortgages, security interests or pledges, except (i) those
items that secure liabilities for borrowed money and that are described in the
Sovereign Disclosure Schedule or permitted under Article IV hereof, and (ii)
statutory liens for amounts not yet delinquent or which are being contested in
good faith. Sovereign and the Sovereign Subsidiaries, as lessee, have the right
under valid and subsisting leases of properties used by Sovereign and its
Subsidiaries in the conduct of their businesses to occupy and use all such
properties as presently occupied and used by each of them.
(b) Sovereign and the Sovereign Subsidiaries currently maintain insurance
in amounts considered by Sovereign to be reasonable for their respective
operations, and such insurance is similar in scope
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and coverage to that maintained by other businesses similarly engaged. Neither
Sovereign nor any Sovereign Subsidiary has received notice from any insurance
carrier that (i) such insurance will be cancelled or that coverage thereunder
will be reduced or eliminated or (ii) premium costs with respect to such
insurance will be substantially increased.
Section 3.10 Compliance With Applicable Law.
(a) Sovereign and the Sovereign Subsidiaries hold all licenses, franchises,
permits and authorizations necessary for the lawful conduct of their businesses
under, and have complied in all material respects with, applicable laws,
statutes, orders, rules or regulations of any federal, state or local
governmental authority relating to them, other than where such failure to hold
or such noncompliance will neither result in a limitation in any material
respect on the conduct of their businesses nor otherwise have a Material Adverse
Effect on the assets, business, financial condition, business prospects or
results of operations of Sovereign and its Subsidiaries taken as a whole.
(b) Neither Sovereign nor any Sovereign Subsidiary has received any
notification or communication from any Regulatory Authority (i) asserting that
Sovereign or any Sovereign Subsidiary is not in compliance with any of the
statutes, regulations or ordinances which such Regulatory Authority enforces;
(ii) threatening to revoke any license, franchise, permit or governmental
authorization which is material to Sovereign or any Sovereign Subsidiary; (iii)
requiring or threatening to require Sovereign or any Sovereign Subsidiary, or
indicating that Sovereign or any Sovereign Subsidiary may be required, to enter
into a cease and desist order, agreement or memorandum of understanding or any
other agreement restricting or limiting, or purporting to restrict or limit, in
any manner the operations of Sovereign or any Sovereign Subsidiary, including
without limitation any restriction on the payment of dividends; or (iv)
directing, restricting or limiting, or purporting to direct, restrict or limit,
in any manner the operations of Sovereign or any Sovereign Subsidiary, including
without limitation any restriction on the payment of dividends (any such notice,
communication, memorandum, agreement or order described in this sentence is
hereinafter referred to as a 'Regulatory Agreement'). Neither Sovereign nor any
Sovereign Subsidiary has consented to or entered into any Regulatory Agreement,
except as heretofore disclosed to FSFS.
Section 3.11 Information to be Supplied. The information to be supplied by
Sovereign for inclusion in the Registration Statement will not, at the time the
Registration Statement is declared effective pursuant to the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein not misleading. The
information supplied, or to be supplied, by Sovereign for inclusion in the
Applications will, at the time such documents are filed with any Regulatory
Authority, be accurate in all material aspects.
Section 3.12 ERISA. Sovereign has previously made available to FSFS true
and complete copies of the employee pension benefit plans within the meaning of
ERISA Section 3(2), profit sharing plans, stock purchase plans, deferred
compensation and supplemental income plans, supplemental executive retirement
plans, annual incentive plans, group insurance plans, and all other employee
welfare benefit plans within the meaning of ERISA Section 3(1) (including
vacation pay, sick leave, short-term disability, long-term disability, and
medical plans), and all other employee benefit plans, policies, agreements and
arrangements, all of which are set forth on the Sovereign Disclosure Schedule,
maintained or contributed to for the benefit of the employees or former
employees (including retired employees) and any beneficiaries thereof or
directors or former directors of Sovereign or any Sovereign Subsidiary, together
with (i) the most recent actuarial (if any) and financial reports relating to
those plans which constitute 'qualified plans' under IRC Section 401(a), (ii)
the most recent annual reports relating to such plans filed by them,
respectively, with any government agency, and (iii) all rulings and
determination letters which pertain to any such plans. Neither Sovereign nor any
Sovereign Subsidiary, and no pension plan maintained by Sovereign or any
Sovereign Subsidiary, has incurred, directly or indirectly, within the past six
(6) years any liability under Title IV of ERISA (including to the Pension
Benefit Guaranty Corporation) or to the IRS with respect to any pension plan
qualified under IRC Section 401(a) which liability has resulted in or will
result in a Material Adverse Effect with respect to Sovereign, except
liabilities to the Pension Benefit
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Guaranty Corporation pursuant to ERISA Section 4007, all of which have been
fully paid, nor has any reportable event under ERISA Section 4043(b) occurred
with respect to any such pension plan. With respect to each of such plans that
is subject to Title IV of ERISA, the present value of the accrued benefits under
such plan, based upon the actuarial assumptions used for funding purposes in the
plan's most recent actuarial report did not, as of its latest valuation date,
exceed the then current value of the assets of such plan allocable to such
accrued benefits. Neither Sovereign nor any Sovereign Subsidiary has incurred
any liability under ERISA Section 4201 for a complete or partial withdrawal from
a multi-employer plan. All 'employee benefit plans,' as defined in ERISA Section
3(3), comply and in the past six (6) years have complied in all material
respects with (i) relevant provisions of ERISA, and (ii) in the case of plans
intended to qualify for favorable income tax treatment, provisions of the IRC
relevant to such treatment. Except as disclosed in the Sovereign Disclosure
Schedule, neither Sovereign nor any Sovereign Subsidiary has a material
liability under any such plan which is not reflected on the Sovereign
Financials. No prohibited transaction (which shall mean any transaction
prohibited by ERISA Section 406 and not exempt under ERISA Section 408 or any
transaction prohibited under IRC Section 4975) has occurred within the past six
(6) years with respect to any employee benefit plan maintained by Sovereign or
any Sovereign Subsidiary that would result in the imposition, directly or
indirectly, of an excise tax under IRC Section 4975 or other penalty under ERISA
or the IRC, which individually or in the aggregate, has resulted in or will
result in a Material Adverse Effect with respect to Sovereign. Sovereign and the
Sovereign Subsidiaries provide continuation coverage under group health plans
for separating employees in accordance with the provisions of IRC Section
4980B(f). Such group health plans are in compliance with Section 1862(b)(1) of
the Social Security Act.
Section 3.13 Securities Documents. Sovereign has delivered, or will
deliver, to FSFS copies of its (i) annual reports on SEC Form 10-K for the years
ended December 31, 1995, 1994, and 1993, (ii) quarterly reports on SEC Form 10-Q
for the quarter ended March 31, 1996, and (iii) proxy statement dated March 15,
1996 used in connection with its annual meeting of shareholders held in April
1996. Such reports and such proxy materials complied, at the time filed with the
SEC, in all material respects, with the Exchange Act and the applicable rules
and regulations of the SEC.
Section 3.14 Environmental Matters. To the knowledge of Sovereign, neither
Sovereign nor any Sovereign Subsidiary, nor any properties owned or operated by
Sovereign or any Sovereign Subsidiary has been or is in violation of or liable
under any Environmental Law which violation or liability, individually or in the
aggregate, resulted in or will result in a Material Adverse Effect with respect
to Sovereign. There are no actions, suits or proceedings, or demands, claims,
notices or investigations (including without limitation notices, demand letters
or requests for information from any environmental agency) instituted or
pending, or to the knowledge of Sovereign, threatened, relating to the liability
of any property owned or operated by Sovereign or any Sovereign Subsidiary under
any Environmental Law.
Section 3.15 Loan Portfolio. The allowance for loan losses reflected, and
to be reflected, in the Sovereign Regulatory Reports, and shown, and to be
shown, on the balance sheets contained in the Sovereign Financials have been,
and will be, established in accordance with the requirements of generally
accepted accounting principles and all applicable regulatory criteria.
Section 3.16 Brokers and Finders. Neither Sovereign nor any Sovereign
Subsidiary, nor any of their respective officers, directors, employees or
agents, has employed any broker, finder or financial advisor, or incurred any
liability for any fees or commissions to any such person, in connection with the
transactions contemplated by this Agreement.
Section 3.17 Quality of Representations. The representations made by
Sovereign in this Agreement are true, correct and complete in all material
respects.
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ARTICLE IV
COVENANTS OF THE PARTIES
Section 4.01 Conduct of FSFS's Business.
(a) From the date of this Agreement to the Closing Date, FSFS and each FSFS
Subsidiary will conduct its business and engage in transactions, including
extensions of credit, only in the ordinary course and consistent with past
practice and policies, except as otherwise required by this Agreement or with
the written consent of Sovereign. FSFS will use its best efforts, and will cause
First DeWitt to use its best efforts, to (i) preserve its business organizations
intact, (ii) maintain good relationships with employees, and (iii) preserve for
itself the good will of customers of FSFS and FSFS Subsidiaries and others with
whom business relationships exist. From the date hereof to the Closing Date,
except as otherwise consented to or approved by Sovereign in writing or as
permitted or required by this Agreement, FSFS will not, and FSFS will not permit
any FSFS Subsidiary to:
(i) amend or change any provision of its certificate or articles of
incorporation, charter, or bylaws;
(ii) change the number of authorized or issued shares of its capital
stock or issue or grant any option, warrant, call, commitment,
subscription, Right or agreement of any character relating to its
authorized or issued capital stock or any securities convertible into
shares of such stock, or split, combine or reclassify any shares of capital
stock, or declare, set aside or pay any dividend or other distribution in
respect of capital stock, or redeem or otherwise acquire any shares of
capital stock, except that (A) FSFS may issue shares of FSFS Common Stock
upon the valid exercise, subject to the terms of the letter agreement
attached hereto as Exhibit 1, of presently outstanding options to acquire
FSFS Common Stock under the FSFS Stock Option Plans and (B) FSFS may pay a
regular quarterly cash dividend, not to exceed $0.055 per share of FSFS
Common Stock outstanding. As promptly as practicable following the date of
this Agreement, the Board of Directors of FSFS shall cause its regular
quarterly dividend record dates and payment dates to be the same as
Sovereign's regular quarterly dividend record dates and payment dates for
Sovereign Common Stock, and FSFS shall not change its regular dividend
payment dates and record dates without prior written consent of Sovereign.
Nothing contained in this Section 4.01(ii) or in any other Section of this
Agreement shall be construed to permit FSFS shareholders to receive two
dividends in any quarter. Subject to applicable regulatory restrictions, if
any, First DeWitt may pay a cash dividend, in the aggregate, sufficient to
fund any dividend by FSFS permitted hereunder;
(iii) grant any severance or termination pay (other than pursuant to
written policies or written agreements of FSFS or FSFS Subsidiaries in
effect on the date hereof and provided to Sovereign prior to the date
hereof) to, or enter into any new or amend any existing employment
agreement with, or increase the compensation of, any employee, officer or
director of FSFS or any FSFS Subsidiary, except for routine periodic
increases, individually and in the aggregate, in accordance with past
practice;
(iv) merge or consolidate FSFS or any FSFS Subsidiary with any other
corporation; sell or lease all or any substantial portion of the assets or
business of FSFS or any FSFS Subsidiary; make any acquisition of all or any
substantial portion of the business or assets of any other person, firm,
association, corporation or business organization other than in connection
with the collection of any loan or credit arrangement between any FSFS
Subsidiary and any other person; enter into a purchase and assumption
transaction with respect to deposits and liabilities; permit the revocation
or surrender by any FSFS Subsidiary of its certificate of authority to
maintain, or file an application for the relocation of, any existing branch
office, or file an application for a certificate of authority to establish
a new branch office;
(v) sell or otherwise dispose of the capital stock of First DeWitt or
sell or otherwise dispose of any asset of FSFS or of any FSFS Subsidiary
other than in the ordinary course of business consistent with past
practice; subject any asset of FSFS or of any FSFS Subsidiary to a lien,
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pledge, security interest or other encumbrance (other than in connection
with deposits, repurchase agreements, bankers acceptances, 'treasury tax
and loan' accounts established in the ordinary course of business and
transactions in 'federal funds' and the satisfaction of legal requirements
in the exercise of trust powers) other than in the ordinary course of
business consistent with past practice; incur any indebtedness for borrowed
money (or guarantee any indebtedness for borrowed money), except in the
ordinary course of business consistent with past practice;
(vi) take any action which would result in any of the representations
and warranties of FSFS set forth in this Agreement becoming untrue as of
any date after the date hereof or in any of the conditions set forth in
Article V hereof not being satisfied;
(vii) change any method, practice or principle of accounting, except
as may be required from time to time by GAAP (without regard to any
optional early adoption date) or any Regulatory Authority responsible for
regulating FSFS or First DeWitt;
(viii) waive, release, grant or transfer any rights of value or modify
or change in any material respect any existing material agreement to which
FSFS or any FSFS Subsidiary is a party, other than in the ordinary course
of business, consistent with past practice;
(ix) implement any pension, retirement, profit sharing, bonus, welfare
benefit or similar plan or arrangement that was not in effect on the date
of this Agreement, or materially amend any existing plan or arrangement
except to the extent such amendments do not result in an increase in cost;
provided, however, that FSFS may contribute to the FSFS pension plan an
amount not to exceed the minimum amount required under ERISA or the IRC
only if (A) such amount is usual and ordinary, consistent with past
practice and (B) FSFS obtains an opinion of legal counsel that the full
amount of such contribution will be deductible by FSFS for federal tax
purposes, and further provided that in no event will FSFS contribute to the
FSFS pension plan an amount in excess of $200,000 without Sovereign's prior
written consent;
(x) purchase any security for its investment portfolio not rated 'A'
or higher by either Standard & Poor's Corporation or Moody's Investor
Services, Inc.;
(xi) make any loan or other credit facility commitment (including
without limitation, lines of credit and letters of credit) to any borrower
or group of affiliated borrowers in excess of $600,000 in the aggregate, or
compromise, extend, renew or modify any such loan or commitment outstanding
in excess of $600,000, except for any commitment disclosed on the FSFS
Disclosure Schedule; provided that Sovereign will not unreasonably withhold
its consent with respect to any request by FSFS for permission to
compromise, extend, renew or modify any loan in excess of $600,000;
(xii) except as set forth on the FSFS Disclosure Schedule, enter into,
renew, extend or modify any other transaction with any Affiliate;
(xiii) enter into any interest rate swap or similar commitment,
agreement or arrangement;
(xiv) except for the execution of this Agreement, take any action that
would give rise to a right of payment to any individual under any
employment agreement;
(xv) intentionally and knowingly take any action that would preclude
satisfaction of the condition to closing contained in Section 5.02(k)
relating to financial accounting treatment of the Merger; or
(xvi) agree to do any of the foregoing.
For purposes of this Section 4.01, it shall not be considered in the
ordinary course of business for FSFS or any FSFS Subsidiary to do any of the
following: (i) make any capital expenditure of $50,000 or more not disclosed on
FSFS Disclosure Schedule 4.01, without the prior written consent of Sovereign;
(ii) make any sale, assignment, transfer, pledge, hypothecation or other
disposition of any assets having a book or market value, whichever is greater,
in the aggregate in excess of $1,000,000, other than pledges of assets to secure
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government deposits, to exercise trust powers, sales of assets received in
satisfaction of debts previously contracted in the normal course of business,
issuance of loans, or transactions in the investment securities portfolio by
FSFS or a FSFS Subsidiary or repurchase agreements made, in each case, in the
ordinary course of business; or (iii) undertake or enter any lease, contract or
other commitment for its account, other than in the normal course of providing
credit to customers as part of its banking business, involving a payment by FSFS
or any FSFS Subsidiary of more than $100,000 annually, or containing a material
financial commitment and extending beyond 24 months from the date hereof.
Notwithstanding anything in this Section 4.01 to the contrary, (i) FSFS shall be
permitted to sell, exchange or otherwise dispose of nonperforming assets (as
defined in Section 5.02(q)), except that sales, exchanges or other dispositions
of nonperforming assets with a principal balance exceeding $500,000 shall
require the prior written consent of Sovereign, which consent shall not be
unreasonably withheld, and (ii) FSFS shall be permitted to sell and transfer an
aggregate of $59,900,000 in credit card receivables, previously identified to
Sovereign, to Cross Country Bank (or its designee) at no less than the book
value (exclusive of any reserves) thereof.
Section 4.02 Access; Confidentiality.
(a) From the date of this Agreement through the Closing Date, FSFS or
Sovereign, as the case may be, shall afford to, and shall cause each FSFS
Subsidiary or Sovereign Subsidiary to afford to, the other party and its
authorized agents and representatives, complete access to their respective
properties, assets, books and records and personnel, at reasonable hours and
after reasonable notice; and the officers of FSFS and Sovereign will furnish any
person making such investigation on behalf of the other party with such
financial and operating data and other information with respect to the
businesses, properties, assets, books and records and personnel as the person
making such investigation shall from time to time reasonably request.
(b) FSFS and Sovereign each agree to conduct such investigation and
discussions hereunder in a manner so as not to interfere unreasonably with
normal operations and customer and employee relationships of the other party.
(c) In addition to the access permitted by subparagraph (a) above, from the
date of this Agreement through the Closing Date, FSFS shall permit employees of
Sovereign reasonable access to and participation in matters relating to problem
loans, loan restructurings and loan work-outs of FSFS and the FSFS Subsidiaries,
provided that nothing contained in this subparagraph shall be construed to grant
Sovereign or any Sovereign employee any final decision-making authority with
respect to such matters. Sovereign shall have the right, however, at Sovereign's
expense, to cause FSFS or any FSFS Subsidiary to obtain an appraisal by an
independent third party experienced in such matters, and mutually satisfactory
to Sovereign and FSFS, of the assets or property securing any loan made by FSFS
or any FSFS Subsidiary.
(d) If the transactions contemplated by this Agreement shall not be
consummated, FSFS and Sovereign will each destroy or return all documents and
records obtained from the other party or its representatives, during the course
of its investigation and will cause all information with respect to the other
party obtained pursuant to this Agreement or preliminarily thereto to be kept
confidential, except to the extent such information becomes public through no
fault of the party to whom the information was provided or any of its
representatives or agents and except to the extent disclosure of any such
information is legally required. FSFS and Sovereign shall each give prompt
notice to the other party of any contemplated disclosure where such disclosure
is so legally required.
Section 4.03 Regulatory Matters and Consents.
(a) Sovereign and FSFS will prepare all Applications and make all filings
for, and use their best efforts to obtain as promptly as practicable after the
date hereof, all necessary permits, consents, approvals, waivers and
authorizations of all Regulatory Authorities necessary or advisable to
consummate the transactions contemplated by this Agreement.
(b) FSFS will furnish Sovereign with all information concerning FSFS and
FSFS Subsidiaries as may be necessary or advisable in connection with any
Application or filing made by or on behalf of Sovereign to any Regulatory
Authority in connection with the transactions contemplated by this Agreement.
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(c) Sovereign will promptly furnish FSFS with copies of all material
written communications to, or received by Sovereign or any Sovereign Subsidiary
from, any Regulatory Authority in respect of the transactions contemplated
hereby, except information which is filed by Sovereign which is designated as
confidential or contains an earnings projection.
(d) Sovereign will furnish FSFS with (i) copies of all Applications prior
to filing with any Regulatory Authority and provide FSFS a reasonable
opportunity to suggest changes to such Applications, which suggested changes
Sovereign may, in its sole discretion accept or reject, (ii) copies of all
Applications filed by Sovereign and (iii) copies of all documents filed by
Sovereign under the Securities Exchange Act of 1934, as amended.
(e) FSFS will cooperate with Sovereign in the foregoing matters and will
furnish Sovereign with all information concerning FSFS and FSFS Subsidiaries as
may be necessary or advisable in connection with any Application or filing
(including the Registration Statement and any report filed with the SEC) made by
or on behalf of Sovereign to any Regulatory Authority in connection with the
transactions contemplated by this Agreement, and such information will be
accurate and complete in all material respects. In connection therewith, FSFS
will provide certificates and other documents reasonably requested by Sovereign.
Section 4.04 Taking of Necessary Action.
(a) Sovereign and FSFS shall each use its best efforts in good faith, and
each of them shall cause its Subsidiaries to use their best efforts in good
faith, to (i) furnish such information as may be required in connection with the
preparation of the documents referred to in Section 4.03 of this Agreement, and
(ii) take or cause to be taken all action necessary or desirable on its part
using its best efforts so as to permit completion of the Merger and the Bank
Merger including, without limitation, (A) obtaining the consent or approval of
each individual, partnership, corporation, association or other business or
professional entity whose consent or approval is required for consummation of
the transactions contemplated hereby, provided that neither FSFS nor any FSFS
Subsidiary shall agree to make any payments or modifications to agreements in
connection therewith without the prior written consent of Sovereign, and (B)
requesting the delivery of appropriate opinions, consents and letters from its
counsel and independent auditors. No party hereto shall take, or cause, or to
the best of its ability permit to be taken, any action that would substantially
impair the prospects of completing the Merger and the Bank Merger pursuant to
this Agreement and the Bank Plan of Merger; provided that nothing herein
contained shall preclude Sovereign or FSFS or from exercising its rights under
this Agreement or the Option Agreement.
(b) FSFS and Sovereign shall promptly prepare a Prospectus/Proxy Statement
to be mailed to shareholders of FSFS in connection with the meeting of FSFS
shareholders and transactions contemplated hereby, and to be filed by Sovereign
with the SEC in the Registration Statement, which Prospectus/Proxy statement
shall conform to all applicable legal requirements. Sovereign shall, as promptly
as practicable following the preparation thereof, file the Registration
Statement with the SEC and FSFS and Sovereign shall use all reasonable efforts
to have the Registration Statement declared effective under the Securities Act
as promptly as practicable after such filing. Sovereign will advise FSFS,
promptly after Sovereign receives notice thereof, of the time when the
Registration Statement has become effective or any supplement or amendment has
been filed, of the issuance of any stop order or the suspension of the
qualification of the shares of capital stock issuable pursuant to the
Registration Statement, or the initiation or threat of any proceeding for any
such purpose, or of any request by the SEC for the amendment or supplement of
the Registration Statement or for additional information. Sovereign shall use
its best efforts to obtain, prior to the effective date of the Registration
Statement, all necessary state securities laws or 'Blue Sky' permits and
approvals required to carry out the transactions contemplated by this Agreement.
Sovereign will provide FSFS with as many copies of such Registration Statement
and all amendments thereto promptly upon the filing thereof as FSFS may
reasonably request.
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Section 4.05 Certain Agreements.
(a) On or after the Effective Date, Sovereign shall indemnify, defend and
hold harmless all prior and then-existing directors and officers of FSFS and
First DeWitt, against (i) all losses, claims, damages, costs, expenses,
liabilities or judgments or amounts that are paid in settlement (with the
approval of Sovereign which approval shall not be unreasonably withheld) of or
in connection with any claim, action, suit, proceeding or investigation based in
whole or in part on or arising in whole or in part out of the fact that such
person is or was a director, officer or employee of FSFS or any FSFS Subsidiary,
whether pertaining to any matter existing or occurring at or prior to the
Effective Date and whether asserted or claimed prior to, or at or after, the
Effective Date ('Indemnified Liabilities') and (ii) all Indemnified Liabilities
based in whole or in part on, or arising in whole or in part out of, or
pertaining to this Agreement or the transactions contemplated hereby, to the
same extent as such officer, director or employee may be indemnified by FSFS or
First DeWitt as of the date hereof including the right to advancement of
expenses, provided, however, that any such officer, director or employee of FSFS
or First DeWitt may not be indemnified by Sovereign and/or Sovereign Bank if
such indemnification is prohibited by applicable law.
(b) Sovereign agrees to honor and Sovereign agrees to cause Sovereign Bank
to honor all terms and conditions of all existing employment contracts and
special termination agreements disclosed in the FSFS Disclosure Schedule.
Section 4.06 No Other Bids and Related Matters. So long as this Agreement
remains in Effect, FSFS shall not, nor shall it permit any FSFS Subsidiary or
any other Affiliate of FSFS or any officer, director or employee of any of them,
or any investment banker, attorney, accountant or other representative retained
by FSFS, any FSFS Subsidiary or any other FSFS Affiliate to, directly or
indirectly, solicit, encourage, initiate or engage in discussions or
negotiations with, or respond to requests for information, inquiries, or other
communications from, any person other than Sovereign concerning the fact of, or
the terms and conditions of, this Agreement, or concerning any acquisition of
FSFS, any FSFS Subsidiary, or any assets or business thereof (except that FSFS's
officers may respond to inquiries from analysts, Regulatory Authorities and
holders of FSFS Common Stock in the ordinary course of business). FSFS shall
notify Sovereign immediately if any such discussions or negotiations are sought
to be initiated with FSFS by any person other than Sovereign or if any such
requests for information, inquiries, proposals or communications are received
from any person other than Sovereign.
Section 4.07 Duty to Advise; Duty to Update FSFS's Disclosure
Schedule. FSFS shall promptly advise Sovereign of any change or event having a
Material Adverse Effect on it or on any FSFS Subsidiary or which it believes
would or would be reasonably likely to cause or constitute a material breach of
any of its representations, warranties or covenants set forth herein. FSFS shall
update FSFS's Disclosure Schedule as promptly as practicable after the
occurrence of an event or fact which, if such event or fact had occurred prior
to the date of this Agreement, would have been disclosed in the FSFS Disclosure
Schedule. The delivery of such updated Schedule shall not relieve FSFS from any
breach or violation of this Agreement and shall not have any effect for the
purposes of determining the satisfaction of the condition set forth in Sections
5.02(b) hereof.
Section 4.08 Conduct of Sovereign's Business. From the date of this
Agreement to the Closing Date, Sovereign will use its best efforts to (x)
preserve its business organizations intact, (y) maintain good relationships with
employees, and (z) preserve for itself the goodwill of customers of Sovereign
and Sovereign Subsidiaries and others with whom business relationships exist.
Section 4.09 Board and Committee Minutes. FSFS shall provide to Sovereign,
within 30 days after any meeting of the Board of Directors of FSFS or any FSFS
Subsidiary, or any committee thereof, or any senior management committee, a copy
of the minutes of such meeting, except that with respect to any meeting held
within 30 days of the Closing Date, such minutes shall be provided to Sovereign
prior to the Closing Date.
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Section 4.10 Undertakings by Sovereign and FSFS.
(a) From and after the date of this Agreement, FSFS shall:
(i) Voting by Directors. Use its best efforts to cause all members of
FSFS's Board of Directors to vote all shares of FSFS's Common Stock
beneficially owned by each such director in favor of this Agreement;
(ii) Phase I Environmental Audit. Permit Sovereign, if Sovereign
elects to do so, at its own expense, to cause a 'phase I environmental
audit' to be performed at any physical location owned or occupied by FSFS
or any FSFS Subsidiary on the date hereof;
(iii) Approval of Bank Plan of Merger. Approve the Bank Plan of
Merger as sole shareholder of First DeWitt and obtain the approval of, and
cause the execution and delivery of, the Bank Plan of Merger by First
DeWitt;
(iv) Proxy Solicitor. If Sovereign requests and agrees to bear the
expense thereof, retain a proxy solicitor in connection with the
solicitation of FSFS shareholder approval of this Agreement;
(v) Timely Review. If requested by Sovereign at Sovereign's sole
expense, cause its independent certified public accountants to perform a
review of its unaudited consolidated financial statements as of the end of
any calendar quarter, in accordance with Statement of Auditing Standards
No. 36, and to issue their report on such financial statements as soon as
is practicable thereafter;
(vi) Outside Service Bureau Contracts. If requested to do so by
Sovereign, use its best efforts to obtain an extension of any contract with
an outside service bureau or other vendor of services to FSFS or any FSFS
Subsidiary, on terms and conditions mutually acceptable to FSFS and
Sovereign;
(vii) Committee Meetings. Permit a representative of Sovereign, who
is reasonably acceptable to FSFS, to attend all committee meetings of FSFS
and First DeWitt management including, without limitation, any loan
committee or asset/liability committee. FSFS shall respond reasonably and
in good faith to any request of Sovereign to permit a representative of
Sovereign, who is reasonably acceptable to FSFS, to attend any meeting of
FSFS's Board of Directors or the Executive Committee thereof;
(viii) Shareholders' Meeting. Submit this Agreement to its
shareholders for approval at a meeting to be held as soon as practicable,
and use its best efforts to cause its Board of Director to unanimously
recommend approval of this Agreement to its shareholders; and
(ix) Certain Shareholders. Use its best efforts to cause ABI and
Basswood to execute the Letter Agreement dated June 24, 1996, in the form
attached hereto as Exhibit 1.
(x) List of Nonperforming Assets. Provide Sovereign, within ten (10)
days of the end of each calendar month, a written list of nonperforming
assets (as defined in Section 5.02(q)) as of the end of such month.
(xi) Reserves and Merger-Related Costs. On or before the Effective
Date, establish such additional accruals and reserves as may be necessary
to conform the accounting reserve practices and methods (including credit
loss practices and methods) of FSFS to those of Sovereign (as such
practices and methods are to be applied to FSFS from and after the Closing
Date) and Sovereign's plans with respect to the conduct of the business of
FSFS following the Merger and otherwise to reflect Merger-related expenses
and costs incurred by FSFS, provided, however, that FSFS shall not be
required to take such action (A) more than thirty days prior to the
Effective Date; and (B) unless Sovereign agrees in writing that all
conditions to closing set forth in Section 5.02 have been satisfied or
waived (except for the expiration of any applicable waiting periods); prior
to the delivery by Sovereign of the writing referred to in the preceding
clause, FSFS shall provide Sovereign a written statement, certified without
personal liability by the chief executive officer of FSFS and dated the
date of such writing, that the representation made in Section 2.15 hereof
is
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true as of such date or, alternatively, setting forth in detail the
circumstances that prevent such representation from being true as of such
date; and no accrual or reserve made by FSFS or any FSFS Subsidiary
pursuant to this subsection, or any litigation or regulatory proceeding
arising out of any such accrual or reserve, shall constitute or be deemed
to be a breach or violation of any representation, warranty, covenant,
condition or other provision of this Agreement or to constitute a
termination event within the meaning of Section 6.01(d) hereof.
(b) From and after the date of this Agreement, Sovereign and FSFS shall
each:
(i) Filings and Approvals. Cooperate with the other in the
preparation and filing, as soon as practicable, of (A) the Applications,
(B) the Registration Statement and related filings under state securities
laws covering the Sovereign Common Stock and related Sovereign Stock
Purchase Rights to be issued pursuant to the Merger, (C) all other
documents necessary to obtain any other approvals and consents required to
effect the completion of the Merger and the Bank Merger, and (D) all other
documents contemplated by this Agreement;
(ii) Identification of FSFS's Affiliates. Cooperate with the other
and use its best efforts to identify those persons who may be deemed to be
Affiliates of FSFS;
(iii) Public Announcements. Cooperate and cause its respective
officers, directors, employees and agents to cooperate in good faith,
consistent with their respective legal obligations, in the preparation and
distribution of, and agree upon the form and substance of, any press
release related to this Agreement and the transactions contemplated hereby,
and any other public disclosures related thereto, including without
limitation communications to FSFS shareholders, FSFS's internal
announcements and customer disclosures, but nothing contained herein shall
prohibit either party from making any disclosure which its counsel deems
necessary;
(iv) Maintenance of Insurance. Maintain, and cause their respective
Subsidiaries to maintain, insurance in such amounts as are reasonable to
cover such risks as are customary in relation to the character and location
of its properties and the nature of its business;
(v) Maintenance of Books and Records. Maintain, and cause their
respective Subsidiaries to maintain, books of account and records in
accordance with generally accepted accounting principles applied on a basis
consistent with those principles used in preparing the financial statements
heretofore delivered;
(vi) Delivery of Securities Documents. Deliver to the other, copies
of all Securities Documents simultaneously with the filing thereof;
(vii) Taxes. File all federal, state, and local tax returns required
to be filed by them or their respective Subsidiaries on or before the date
such returns are due (including any extensions) and pay all taxes shown to
be due on such returns on or before the date such payment is due; or
Section 4.11 Employee Benefits and Termination Benefits.
(a) Employee Benefits. On and after the Effective Date, the employee
pension and welfare benefit plans of Sovereign and FSFS may, at Sovereign's
election and subject to the requirements of the IRC, continue to be maintained
separately or consolidated, provided, however, that FSFS employees shall receive
benefits at least as favorable, in the aggregate, as the benefits to which they
were entitled on March 31, 1996. In the event of a consolidation of any or all
of such plans or in the event of termination of the FSFS benefit plans, FSFS and
First DeWitt employees shall receive credit for service with FSFS or First
DeWitt under any Sovereign benefit plan, or new Sovereign benefit plan in which
such employees would be eligible to enroll for purposes of eligibility and
vesting determination. In the event of any termination of or consolidation of
any FSFS or First DeWitt health plan with any Sovereign health plan, all
employees of FSFS or First DeWitt shall have immediate coverage under any
successor health plan without the necessity of satisfying a waiting period for
coverage of any pre-existing condition. In the event of a termination or
consolidation of any FSFS or First DeWitt health plan, terminated FSFS or First
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DeWitt employees will have the right to continue coverage under group health
plans of Sovereign and/or the Sovereign subsidiaries in accordance with
the IRC Section 4980B(f).
(b) Termination Benefits. FSFS shall cause to be delivered to Sovereign
concurrently with the execution of this Agreement with respect to Michael J.
Quigley, III and Emil J. Butchko and within 30 days after the date of this
Agreement with respect to each other individual named on the Benefits Schedule
included in the FSFS Disclosure Schedule, the written agreement of each such
individual in the form attached hereto as Exhibit 4 pursuant to which each such
individual agrees and acknowledges that the dollar amount set forth opposite
such individual's name on such Benefits Schedule is the entire amount due to
such individual under any employment agreement, special termination agreement,
supplemental executive retirement plan, deferred bonus plan, deferred
compensation plan, salary continuation plan, or any other benefit or welfare
plan maintained by FSFS solely for the benefit of officers of FSFS or FSFS
Subsidiaries in the event of termination of such individual's employment on
March 31, 1996.
Section 4.12 Duty to Advise; Duty to Update Sovereign's Disclosure
Schedule. Sovereign shall promptly advise FSFS of any change or event having a
Material Adverse Effect on it or on any Sovereign Subsidiary or which it
believes would or would be reasonably likely to cause or constitute a material
breach of any of its representations, warranties or covenants set forth herein.
Sovereign shall update Sovereign's Disclosure Schedule as promptly as
practicable after the occurrence of an event or fact which, if such event or
fact had occurred prior to the date of this Agreement, would have been disclosed
in the Sovereign Disclosure Schedule. The delivery of such updated Schedule
shall not relieve Sovereign from any breach or violation of this Agreement and
shall not have any effect for the purposes of determining the satisfaction of
the condition set forth in Sections 5.02(b) hereof.
Section 4.13 Affiliate Letter. No later than five days after the date of
this Agreement, FSFS shall cause to be delivered to Sovereign the Letter
Agreement attached hereto as Exhibit 1, executed by each director and officer
set forth thereon.
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ARTICLE V
CONDITIONS
Section 5.01 Conditions to FSFS's Obligations under this Agreement. The
obligations of FSFS hereunder shall be subject to satisfaction at or prior to
the Closing Date of each of the following conditions, unless waived by FSFS
pursuant to Section 7.03 hereof:
(a) Corporate Proceedings. All action required to be taken by, or on the
part of, Sovereign and Sovereign Bank to authorize the execution, delivery and
performance of this Agreement and the Bank Plan of Merger, respectively, and the
consummation of the transactions contemplated by this Agreement and the Bank
Plan of Merger, shall have been duly and validly taken by Sovereign and
Sovereign Bank; and FSFS shall have received certified copies of the resolutions
evidencing such authorizations;
(b) Covenants. The obligations and covenants of Sovereign required by this
Agreement to be performed by Sovereign at or prior to the Closing Date shall
have been duly performed and complied with in all respects, except where the
failure to perform or comply with any obligation or covenant would not, either
individually or in the aggregate, result in a Material Adverse Effect with
respect to FSFS;
(c) Representations and Warranties. The representations and warranties of
Sovereign set forth in this Agreement shall be true and correct, as of the date
of this Agreement, and as of the Closing Date as though made on and as of the
Closing Date, except as to any representation or warranty (i) which specifically
relates to an earlier date or (ii) where the breach of the representation or
warranty would not, either individually or in the aggregate, constitute a
Material Adverse Effect with respect to Sovereign;
(d) Approvals of Regulatory Authorities. Sovereign shall have received all
required approvals of Regulatory Authorities of the Merger, and delivered copies
thereof to FSFS; and all notice and waiting periods required thereunder shall
have expired or been terminated;
(e) No Injunction. There shall not be in effect any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits consummation of the transactions contemplated hereby;
(f) No Material Adverse Effect. Since March 31, 1996, there shall not have
occurred any Material Adverse Effect with respect to Sovereign;
(g) Officer's Certificate. Sovereign shall have delivered to FSFS a
certificate, dated the Closing Date and signed, without personal liability, by
its chairman or president, to the effect that the conditions set forth in
subsections (a) through (e) of this Section 5.01 have been satisfied, to the
best knowledge of the officer executing the same;
(h) Opinion of Sovereign's Counsel. FSFS shall have received an opinion of
Stevens & Lee, counsel to Sovereign, dated the Closing Date, in form and
substance reasonably satisfactory to FSFS and its counsel to the effect set
forth on Exhibit 5 attached hereto;
(i) Registration Statement. The Registration Statement shall be effective
under the Securities Act and no proceedings shall be pending or threatened by
the SEC to suspend the effectiveness of the Registration Statement; and all
required approvals by state securities or 'blue sky' authorities with respect to
the transactions contemplated by this Agreement, shall have been obtained;
(j) Tax Opinion. The Merger shall qualify as a reorganization within the
meaning of Section 368(a)(1)(A) of the IRC and FSFS shall have received an
opinion of Stevens & Lee, substantially to the effect set forth on Exhibit 6
attached hereto;
(k) Approval of FSFS's Shareholders. This Agreement shall have been
approved by the holders of at least a majority of the outstanding shares of FSFS
Common Stock entitled to vote thereon; and
(l) Investment Banking Opinion. FSFS shall have received an oral opinion
from McConnell, Budd & Downes, Inc., received on or before the date of this
Agreement and updated in writing as of a date within five (5) days of mailing
the Prospectus/Proxy Statement, to the effect that the consideration
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to be received by shareholders of FSFS pursuant to this Agreement is fair, from
a financial point of view, to such shareholders.
Section 5.02 Conditions to Sovereign's Obligations under this Agreement.
The obligations of Sovereign hereunder shall be subject to satisfaction at or
prior to the Closing Date of each of the following conditions, unless waived by
Sovereign pursuant to Section 7.03 hereof:
(a) Corporate Proceedings. All action required to be taken by, or on the
part of, FSFS and First DeWitt to authorize the execution, delivery and
performance of this Agreement and the Bank Plan of Merger, respectively, and the
consummation of the transactions contemplated by this Agreement and the Bank
Plan of Merger, shall have been duly and validly taken by FSFS and First DeWitt;
and Sovereign shall have received certified copies of the resolutions evidencing
such authorizations;
(b) Covenants. The obligations and covenants of FSFS, required by this
Agreement to be performed by it at or prior to the Closing Date shall have been
duly performed and complied with in all respects, except where the failure to
perform or comply with any obligation or covenant would not, either individually
or in the aggregate, result in a Material Adverse Effect with respect to FSFS;
(c) Representations and Warranties. The representations and warranties of
FSFS set forth in this Agreement shall be true and correct as of the date of
this Agreement, and as of the Closing Date as though made on and as of the
Closing Date, except as to any representation or warranty (i) which specifically
relates to an earlier date or (ii) where the breach of the representation or
warranty would not, either individually or in the aggregate, result in a
Material Adverse Effect with respect to FSFS;
(d) Approvals of Regulatory Authorities. Sovereign shall have received all
required approvals of Regulatory Authorities for the Merger, without the
imposition of any term or condition that would have a Material Adverse Effect on
Sovereign upon completion of the Merger; and all notice and waiting periods
required thereunder shall have expired or been terminated;
(e) No Injunction. There shall not be in effect any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits consummation of the transactions contemplated hereby;
(f) No Material Adverse Effect. Since March 31, 1996, there shall not have
occurred any Material Adverse Effect with respect to FSFS; provided, however,
that neither (i) an increase in the provision for loan losses for the period
ended June 30, 1996 in an amount not to exceed $5,000,000 nor (ii) the
incurrence by FSFS of aggregate losses on the sale, exchange or other
disposition of nonperforming assets up to the amount permitted by Section
6.01(d) of the Agreement shall be considered a Material Adverse Effect for
purposes of this subsection;
(g) Officer's Certificate. FSFS shall have delivered to Sovereign a
certificate, dated the Closing Date and signed, without personal liability, by
its chairman of the board or president, to the effect that the conditions set
forth in subsections (a) through (e) of this Section 5.02 have been satisfied,
to the best knowledge of the officer executing the same;
(h) Opinions of FSFS's Counsel. Sovereign shall have received an opinion
of Luse Lehman Gorman Pomerenk & Schick, counsel to FSFS, dated the Closing
Date, in form and substance reasonably satisfactory to Sovereign and its counsel
to the effect set forth on Exhibit 7 attached hereto;
(i) Registration Statement. The Registration Statement shall be effective
under the Securities Act and no proceedings shall be pending or threatened by
the SEC to suspend the effectiveness of the Registration Statement; and all
required approvals by state securities or 'blue sky' authorities with respect to
the transactions contemplated by this Agreement, shall have been obtained;
(j) Tax Opinion. Sovereign shall have received an opinion of Stevens &
Lee, its counsel, substantially to the effect set forth on Exhibit 6 attached
hereto;
(k) Pooling Letter. Sovereign shall have received an opinion from Ernst &
Young to the effect that the Merger will be treated as a 'pooling of interests'
for financial accounting purposes;
(l) Phase I Environmental Audit Results. The results of any 'phase I
environmental audit' conducted pursuant to Section 4.11(a)(ii) with respect to
owned or occupied bank premises shall be reasonably satisfactory to Sovereign;
provided, however, that (i) any such environmental audit must be
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initiated within 45 days of the date of this Agreement and (ii) Sovereign must
elect to terminate this Agreement or waive its right to terminate the Agreement
under this Section 5.02(k) within 15 days of receiving the results of such
environmental audit;
(m) Liquidation Account. Neither the Merger or consummation of the Bank
Plan of Merger shall require Sovereign, FSFS or any Subsidiary of either to
distribute to depositors the liquidation account established by First DeWitt in
connection with its conversion from mutual to stock form;
(n) Nationar Payment. First DeWitt shall have received all amounts due
from Nationar (approximately $3,000,000 at the date of this Agreement), or a
conservator or receiver of Nationar, with respect to checks cleared by that
correspondent institution;
(o) Pension Plans. With respect to each pension plan subject to Title IV
of ERISA, (i) the present value of the accrued benefits under such plan shall
not, as of the Closing Date, exceed the then current value of the assets of such
plan allocable to such accrued benefits and (ii) the amount contributed by FSFS
or any FSFS Subsidiary to any such pension plan in the one year period preceding
the Closing Date will not exceed $500,000;
(p) Approval of Sovereign's Shareholders. This Agreement shall have been
approved by the shareholders of Sovereign by such vote as is required under
Sovereign's articles of incorporation and bylaws if such shareholder approval is
required under the listing requirements of the National Association of
Securities Dealers; and
(q) Nonperforming Assets. The amount of nonperforming assets of FSFS and
the FSFS Subsidiaries, on a consolidated basis, on the Closing Date shall not
exceed $26,100,000. (The term 'nonperforming assets,' for purposes of this
subsection, means (i) loans that are 'troubled debt restructurings' as defined
in Statement of Financial Accounting Standards No. 15, 'Accounting by Debtors
and Creditors for Troubled Debt Restructurings,' excluding restructured loans
the terms and conditions of which were approved in writing in advance by
Sovereign, (ii) loans on nonaccrual, including loans placed on nonaccrual that
may have been previously restructured with Sovereign's approval, (iii) real
estate owned, and (iv) all loans 90 days or more past due), except that the term
'nonperforming assets' shall not include loans originated to finance the
purchase of any one-to-four-family residential property.) FSFS has previously
delivered to Sovereign a list of nonperforming assets as of March 31, 1996.
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
Section 6.01 Termination. This Agreement may be terminated on or at any
time prior to the Closing Date:
(a) By the mutual written consent of the parties hereto;
(b) By Sovereign or FSFS:
(i) if there shall have been any breach of any representation,
warranty, covenant or other obligation of Sovereign which results in a
Material Adverse Effect with respect to Sovereign, on the one hand, or of
FSFS which results in a Material Adverse Effect with respect to FSFS, on
the other hand, and such breach cannot be, or shall not have been, remedied
within 30 days after receipt by such other party of notice in writing
specifying the nature of such breach and requesting that it be remedied;
(ii) if the Closing Date shall not have occurred on or before March
31, 1997, 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 set forth in this Agreement required to be performed or observed
by such party on or before the Closing Date; or
(iii) if either party has been informed in writing by a Regulatory
Authority whose approval or consent has been requested that such approval
or consent is unlikely to be granted, unless the failure of such occurrence
shall be due to the failure of the party seeking to terminate this
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Agreement to perform or observe its agreements set forth herein required to
be performed or observed by such party on or before the Closing Date; or
(c) By FSFS if, on the Closing Date, the Sovereign Market Value is less
than $8.00 (as adjusted for any stock splits or stock dividends); provided,
however, that if Sovereign delivers to FSFS on the Closing Date a written notice
increasing the Applicable Exchange Ratio to an amount which, when multiplied by
the Sovereign Market Value determined as of the Closing Date, equals $13.12
($8.00 multiplied by the Applicable Exchange Ratio determined pursuant to
Section 1.02(e)(ii)(A)(ii)), then no termination of this Agreement shall occur
and the Merger shall be completed pursuant to the terms hereof.
(d) By Sovereign, at any time prior to the Closing Date, if (i) the
aggregate amount of nonperforming assets (as defined in Section 5.02(g)) exceeds
$26,100,000, (ii) the aggregate amount of loss on the sale, exchange or other
disposition of any nonperforming assets (as defined in Section 5.02(g)) after
the date of this Agreement exceeds $1,000,000 (for purposes of this subsection,
loss will be calculated net of any portion of the allowance for loan losses
allocable to the nonperforming asset which is sold, exchanged or otherwise
disposed of by FSFS) or (iii) the aggregate amount of the provisions for loan
losses taken or recognized by FSFS after the date of this Agreement exceeds
$5,750,000.
(e) By Sovereign, at any time prior to the Closing Date, if the aggregate
amount of deficiencies in the current appraised values of any assets or
properties securing or serving as collateral for commercial real estate loans
made by FSFS or any FSFS Subsidiary necessary to maintain an 80% loan to value
ratio for each loan exceeds $1,000,000; such appraised values being determined
after the date of this Agreement at the request of Sovereign from independent
third party appraisers experienced in such matters.
Section 6.02 Effect of Termination. If this Agreement is terminated
pursuant to Section 6.01 hereof, this Agreement shall forthwith become void
(other than Section 4.02(d), Section 4.10(b)(iii) and Section 7.01 hereof, which
shall remain in full force and effect), and there shall be no further liability
on the part of Sovereign or FSFS to the other, except for any liability arising
out of any uncured willful breach of any covenant or other agreement contained
in this Agreement or any fraudulent breach of a representation or warranty.
ARTICLE VII
MISCELLANEOUS
Section 7.01 Expenses. Except for the cost of printing and mailing the
Proxy Statement/Prospectus which shall be shared equally, each party hereto
shall bear and pay all costs and expenses incurred by it in connection with the
transactions contemplated hereby, including fees and expenses of its own
financial consultants, accountants and counsel.
Section 7.02 Non-Survival of Representations and Warranties. All
representations, warranties and, except to the extent specifically provided
otherwise herein, agreements and covenants, other than those covenants set forth
in Sections 1.02(d)(iii) and (v), 4.05(a) and (b), and 4.11(a) which will
survive the Merger, shall terminate on the Closing Date.
Section 7.03 Amendment, Extension and Waiver. Subject to applicable law,
at any time prior to the consummation of the transactions contemplated by this
Agreement, the parties may (a) amend this Agreement, (b) extend the time for the
performance of any of the obligations or other acts of either 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 IV and V hereof or otherwise.
This Agreement may not be amended except by an instrument in writing authorized
by the respective Boards of Directors and signed, by duly authorized officers,
on behalf 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 by a duly authorized officer 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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Section 7.04 Entire Agreement. This Agreement, including the documents and
other writings referred to herein or delivered pursuant hereto, contains the
entire agreement and understanding of the parties with respect to its subject
matter. This Agreement supersedes all prior arrangements and understandings
between the parties, both written or oral with respect to its subject matter.
This Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors; provided, however, that nothing in this
Agreement, expressed or implied, is intended to confer upon any party, other
than the parties hereto and their respective successors, any rights, remedies,
obligations or liabilities other than pursuant to Sections 1.02(d)(iii) and (v),
4.05(a) and (b), and 4.11(a) with respect to indemnification and certain other
matters.
Section 7.05 No Assignment. Neither party hereto may assign any of its
rights or obligations hereunder to any other person, without the prior written
consent of the other party hereto.
Section 7.06 Notices. All notices or other communications hereunder shall
be in writing and shall be deemed given if delivered personally, mailed by
prepaid registered or certified mail (return receipt requested), or sent by
telecopy, addressed as follows:
(a) If to Sovereign, to:
Sovereign Bancorp, Inc.
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
Attention: Jay S. Sidhu, President and Chief
Executive Officer
Telecopy No.: (610) 320-8448
with a copy to:
Stevens & Lee
111 North Sixth Street
Reading, Pennsylvania 19601
Attention: Joseph M. Harenza, Esquire and
David W. Swartz, Esquire
Telecopy No.: (610) 376-5610
(b) If to FSFS, to:
First State Financial Services, Inc.
1120 Bloomfield Avenue
West Caldwell, New Jersey 07007-2449
Attention: Michael J. Quigley, III,
Chairman, President and Chief
Executive Officer
Telecopy No.: (201) 244-9831
with copies to:
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
Attention: John J. Gorman, Esquire
Eric Luse, Esquire
Telecopy No.: (202) 362-2902
Section 7.07 Captions. The captions contained in this Agreement are for
reference purposes only and are not part of this Agreement.
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Section 7.08 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
Section 7.09 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
Section 7.10 Consent to Service of Process. In accordance with the
provisions of Section 252(d) of the DGCL, Sovereign hereby consents to service
of process in the State of Delaware in any proceeding for enforcement of any
obligation of Sovereign arising from the Merger, including any suit or
proceeding to enforce the right of any stockholder as determined in appraisal
proceedings pursuant to the provisions of Section 262 of the DGCL. Sovereign
irrevocably appoints the Secretary of State of Delaware as its agent to accept
service of process in any such suit or other proceedings. A copy of any process
served upon the Secretary of State shall be forwarded to the address of
Sovereign specified in Section 7.06.
Section 7.11 Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic internal law (including the law of
conflicts of law) of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the day and year first above written.
SOVEREIGN BANCORP, INC.
By: /s/ Jay S. Sidhu
----------------------------------
Jay S. Sidhu
President and Chief
Executive Officer
Attest: /s/ Dana J. Albera
------------------------------
Dana J. Albera
Assistant Secretary
FIRST STATE FINANCIAL SERVICES, INC.
By: /s/ Michael J. Quigley, III
----------------------------------
Michael J. Quigley, III,
Chairman, President and
Chief Executive Officer
Attest: /s/ Marie G. Martino
------------------------------
Marie G. Martino,
Secretary
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<PAGE>
EXHIBIT 1
June 24, 1996
Sovereign Bancorp, Inc.
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
Ladies and Gentlemen:
Sovereign Bancorp, Inc. ('Sovereign') and First State Financial Services,
Inc. ('FSFS') desire to enter into an agreement dated June 24, 1996
('Agreement'), pursuant to which, subject to the terms and conditions set forth
therein, (a) FSFS will merge with and into Sovereign with Sovereign surviving
the merger, and (b) shareholders of FSFS will receive common stock of Sovereign
in exchange for common stock of FSFS outstanding on the closing date (the
foregoing, collectively, referred to herein as the 'Merger').
Sovereign has required, as a condition to its execution and delivery to
FSFS of the Agreement, that the undersigned, being directors, executive officers
and major shareholders of FSFS, execute and deliver to Sovereign this Letter
Agreement.
Each of the undersigned, in order to induce Sovereign to execute and
deliver to FSFS the Agreement, hereby irrevocably:
(a) Agrees to be present (in person or by proxy) at all meetings of
shareholders of FSFS called to vote for approval of the Merger so that all
shares of common stock of FSFS then owned by the undersigned will be
counted for the purpose of determining the presence of a quorum at such
meetings and to vote all such shares (i) in favor of approval and adoption
of the Agreement and the transactions contemplated thereby (including any
amendments or modifications of the terms thereof approved by the Board of
Directors of FSFS), and (ii) against approval or adoption of any other
merger, business combination, recapitalization, partial liquidation or
similar transaction involving FSFS;
(b) Agrees not to vote or execute any written consent to rescind or
amend in any manner any prior vote or written consent, as a shareholder of
FSFS, to approve or adopt the Agreement;
(c) Agrees to use reasonable best efforts to cause the Merger to be
consummated;
(d) Agrees not to sell, transfer or otherwise dispose of any common
stock of FSFS on or prior to the record date for the meeting of FSFS
shareholders to vote on the Merger;
(e) Except as permitted by Section 4.06 of the Agreement, agrees not
to solicit, initiate or engage in any negotiations or discussions with any
party other than Sovereign with respect to any offer, sale, transfer or
other disposition of, any shares of common stock of FSFS now or hereafter
owned by the undersigned;
(f) Agrees not to offer, sell, transfer or otherwise dispose of any
shares of common stock of Sovereign received in the Merger, except (i) at
such time as a registration statement under the Securities Act of 1933, as
amended ('Securities Act') covering sales of such Sovereign common stock is
effective and a prospectus is made available under the Securities Act, (ii)
within the limits, and in accordance with the applicable provisions of,
Rule 145(d) under the Securities Act, or (iii) in a transaction which, in
the opinion of counsel satisfactory to Sovereign or as described in a
'no-action' or interpretive letter from the staff of the Securities and
Exchange Commission ('SEC'), is not required to be registered under the
Securities Act; and acknowledges and agrees that Sovereign is under no
obligation to register the sale, transfer or other disposition of Sovereign
common stock by the undersigned or on behalf of the undersigned, or to take
any other action necessary to make an exemption from registration
available;
(g) Notwithstanding the foregoing, agrees not to sell, or in any other
way reduce the risk of the undersigned relative to, any shares of common
stock of FSFS or of common stock of
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Sovereign, during the period commencing thirty days prior to the effective
date of the Merger and ending on the date on which financial results
covering at least thirty days of post-Merger combined operations of
Sovereign and FSFS have been published within the meaning of Section 201.01
of the SEC's Codification of Financial Reporting Policies;
(h) Agrees that Sovereign shall not be bound by any attempted sale of
any shares of Sovereign common stock, and Sovereign's transfer agent shall
be given an appropriate stop transfer order and shall not be required to
register any such attempted sale, unless the sale has been effected in
compliance with the terms of this Letter Agreement; and further agrees that
the certificate representing shares of Sovereign common stock owned by the
undersigned may be endorsed with a restrictive legend consistent with the
terms of this Letter Agreement;
(i) Acknowledges and agrees that the provisions of subparagraphs (f),
(g) and (h) hereof also apply to shares of Sovereign common stock received
in the Merger (or any shares of FSFS common stock or of Sovereign common
stock, whether or not received in the Merger, for the period referred to in
subparagraph (g) above) owned by (i) his or her spouse, (ii) any of his or
her relatives or relatives of his or her spouse occupying his or her home,
(iii) any trust or estate in which he or she, his or her spouse, or any
such relative owns at least a 10% beneficial interest or of which any of
them serves as trustee, executor or in any similar capacity, and (iv) any
corporation or other organization in which the undersigned, any affiliate
of the undersigned, his or her spouse, or any such relative owns at least
10% of any class of equity securities or of the equity interest;
(j) Represents that the undersigned has no plan or intention to sell,
exchange, or otherwise dispose of any shares of common stock of Sovereign
to be received in the Merger prior to expiration of the time period
referred to in subparagraph (g) hereof; and
(k) Represents that the undersigned has the capacity to enter into
this Letter Agreement and that it is a valid and binding obligation
enforceable against the undersigned in accordance with its terms, subject
to bankruptcy, insolvency and other laws affecting creditors' rights and
general equitable principles.
The obligations set forth herein shall terminate concurrently with any
termination of the Agreement.
------------------------
This Letter Agreement may be executed in two or more counterparts, each of
which shall be deemed to constitute an original, but all of which together shall
constitute one and the same Letter Agreement.
------------------------
This Letter Agreement shall terminate concurrently with any termination of
the Agreement in accordance with its terms.
------------------------
The undersigned intend to be legally bound hereby.
Sincerely,
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<PAGE>
EXHIBIT 2
[See Annex B for a copy of the STOCK OPTION AGREEMENT]
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<PAGE>
EXHIBIT 3
BANK PLAN OF MERGER
THIS BANK PLAN OF MERGER ('Plan of Merger') dated June 24, 1996, is by and
between SOVEREIGN BANK, a Federal Savings Bank ('Sovereign Bank'), and FIRST
DEWITT BANK ('First DeWitt').
BACKGROUND
1. Sovereign Bank is a federal savings bank and a wholly-owned subsidiary
of Sovereign Bancorp, Inc., a Pennsylvania corporation ('Sovereign'). The
authorized capital stock of Sovereign Bank consists of 1,000 shares of common
stock, par value $1.00 per share ('Sovereign Bank Common Stock'), of which at
the date hereof 1,000 shares are issued and outstanding.
2. First DeWitt is a federal savings bank and a wholly-owned subsidiary of
FSFS Financial Services, Inc., a Delaware corporation ('FSFS'). The authorized
capital stock of First DeWitt consists of 750,000 shares of common stock, par
value $1.00 per share ('First DeWitt Common Stock'), of which at the date hereof
1,000 shares are issued and outstanding and 250,000 shares of preferred stock,
par value $1.00 per share, none of which are issued or outstanding.
3. The respective Boards of Directors of Sovereign Bank and First DeWitt
deem the merger of First DeWitt with and into Sovereign Bank, pursuant to the
terms and conditions set forth or referred to herein, to be desirable and in the
best interests of the respective corporations and their respective shareholders.
4. The respective Boards of Directors of Sovereign Bank and First DeWitt
have adopted resolutions approving this Plan of Merger. The respective Boards of
Directors of Sovereign and FSFS have adopted resolutions approving an Agreement
dated June 24, 1996 (the 'Agreement') between Sovereign and FSFS, pursuant to
which this Plan of Merger is being executed by Sovereign Bank and First DeWitt.
AGREEMENT
In consideration of the premises and of the mutual covenants and agreements
herein contained, and in accordance with the applicable laws and regulations of
the United States of America and the Commonwealth of Pennsylvania, Sovereign
Bank and First DeWitt, intending to be legally bound hereby, agree:
ARTICLE I
MERGER
Subject to the terms and conditions of this Plan of Merger and in
accordance with the applicable laws and regulations of the United States of
America and the Commonwealth of Pennsylvania, on the Effective Date (as that
term is defined in Article V hereof): First DeWitt shall merge with and into
Sovereign Bank; the separate existence of First DeWitt shall cease; and
Sovereign Bank shall be the surviving corporation (such transaction referred to
herein as the 'Merger' and Sovereign Bank, as the surviving corporation in the
Merger, referred to herein as the 'Surviving Bank'). Sovereign Bank will have
its home office at 1130 Berkshire Boulevard, Wyomissing, Pennsylvania 19610 and
its branch offices at the locations listed on Exhibit 'A.'
ARTICLE II
CHARTER AND BYLAWS
On and after the Effective Date, the Charter and Bylaws of Sovereign Bank,
as in effect immediately prior to the Effective Date, shall automatically be and
remain the Charter and Bylaws of the Surviving Bank, until altered, amended or
repealed.
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<PAGE>
ARTICLE III
BOARD OF DIRECTORS AND OFFICERS
3.1 Board of Directors. On and after the Effective Date, the directors of
the Surviving Bank shall consist of the directors of Sovereign Bank duly elected
and holding office immediately prior to the Effective Date and Michael J.
Quigley, III. The names and residence addresses of the directors are:
NAME RESIDENCE ADDRESS
---- -----------------------
Brian Hard [INTENTIONALLY OMITTED]
Stewart B. Kean [INTENTIONALLY OMITTED]
Joseph E. Lewis [INTENTIONALLY OMITTED]
Howard D. Mackey [INTENTIONALLY OMITTED]
Richard E. Mohn [INTENTIONALLY OMITTED]
Rhoda S. Oberholtzer [INTENTIONALLY OMITTED]
Patrick J. Petrone [INTENTIONALLY OMITTED]
Michael J. Quigley, III [INTENTIONALLY OMITTED]
Daniel K. Rothermel [INTENTIONALLY OMITTED]
Elizabeth B. Rothermel [INTENTIONALLY OMITTED]
Robert A. Sadler [INTENTIONALLY OMITTED]
Jay S. Sidhu [INTENTIONALLY OMITTED]
Cameron C. Troilo [INTENTIONALLY OMITTED]
G. Arthur Weaver [INTENTIONALLY OMITTED]
Dr. Paul B. Wieand [INTENTIONALLY OMITTED]
Theodore Ziaylek, Jr. [INTENTIONALLY OMITTED]
3.2 Officers. On and after the Effective Date, the officers of the
Surviving Bank shall consist of the officers of Sovereign Bank duly elected and
holding office immediately prior to the Effective Date. The names and titles of
the officers are:
NAME TITLE
---- ------
Jay S. Sidhu President and Chief Executive Officer
Karl D. Gerhart Treasurer and Chief Financial Officer
Lawrence M. Thompson, Jr. Secretary and Chief Administrative Officer
Dana J. Albera Assistant Secretary
ARTICLE IV
CONVERSION OF SHARES
4.1 Stock of Sovereign Bank. Each share of Sovereign Bank Common Stock
issued and outstanding immediately prior to the Effective Date shall, on and
after the Effective Date, continue to be issued and outstanding as a share of
common stock of the Surviving Bank.
4.2 Stock of First DeWitt. Each share of First DeWitt Common Stock issued
and outstanding immediately prior to the Effective Date, and each share of First
DeWitt Common Stock issued and held in the treasury of FSFS as of the Effective
Date, if any, shall, on the Effective Date, be cancelled, and no cash, stock or
other property shall be delivered in exchange therefor.
ARTICLE V
EFFECTIVE DATE OF THE MERGER
The Merger shall be effective on the date on which all filings with
government agencies, as may be required under applicable laws and regulations
for the Merger to become effective, are made and accepted by the applicable
agencies (the 'Effective Date').
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<PAGE>
ARTICLE VI
EFFECT OF THE MERGER
6.1 Separate Existence. On the Effective Date: the separate existence of
First DeWitt shall cease; and all of the property (real, personal and mixed),
rights, powers, duties and obligations of First DeWitt shall be taken and deemed
to be transferred to and vested in the Surviving Bank, without further act or
deed, as provided by applicable laws and regulations.
6.2 Savings Accounts. After the Effective Date, Sovereign Bank will
continue to issue savings accounts on the same basis as immediately prior to the
Effective Date.
6.3 Liquidation Account. After the Effective Date, Sovereign Bank will
continue to maintain the Sovereign Bank liquidation account for the benefit of
eligible account holders on the same basis as immediately prior to the Effective
Date, and First DeWitt's liquidation account for the benefit of eligible account
holders shall automatically be deemed assumed by Sovereign Bank, as of the
Effective Date, on the same basis as it existed immediately prior to the
Effective Date.
ARTICLE VII
CONDITIONS PRECEDENT
The obligations of Sovereign Bank and First DeWitt to effect the Merger
shall be subject to satisfaction, unless duly waived by the party permitted to
do so, of the conditions precedent set forth in the Agreement.
ARTICLE VIII
TERMINATION
This Plan of Merger shall terminate upon any termination of the Agreement
in accordance with its terms; provided, however, that any such termination of
this Plan of Merger shall not relieve any party hereto from liability on account
of a breach by such party of any of the terms hereof or thereof.
ARTICLE IX
AMENDMENT
Subject to applicable law, this Plan of Merger may be amended, by action of
the respective Boards of Directors of the parties hereto, at any time prior to
consummation of the Merger, but only by an instrument in writing signed by duly
authorized officers on behalf of the parties hereto.
ARTICLE X
MISCELLANEOUS
10.1 Extensions; Waivers. Each party, by a written instrument signed by a
duly authorized officer, may extend the time for the performance of any of the
obligations or other acts of the other party hereto and may waive compliance
with any of the covenants, or performance of any of the obligations, of the
other party contained in this Plan of Merger.
10.2 Notices. Any notice or other communication required or permitted
under this Plan of Merger shall be given, and shall be effective, in accordance
with the provisions of Section 7.06 of the Agreement.
10.3 Captions. The headings of the several Articles and Sections herein
are inserted for convenience of reference only and are not intended to be part
of, or to affect the meaning or interpretation of, this Plan of Merger.
10.4 Counterparts. For the convenience of the parties hereto, this Plan of
Merger may be executed in several counterparts, each of which shall be deemed
the original, but all of which together shall constitute one and the same
instrument.
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10.5 Governing Law. This Plan of Merger shall be governed by and construed
in accordance with the laws of the United States of America and, in the absence
of controlling Federal law, in accordance with the laws of the Commonwealth of
Pennsylvania.
IN WITNESS WHEREOF, Sovereign Bank and First DeWitt have caused this Bank
Plan of Merger to be executed by their duly authorized officers and their
corporate seals to be hereunto affixed on the date first written above.
SOVEREIGN BANK, a Federal Savings Bank
By
----------------------------------
Jay S. Sidhu,
President
(CORPORATE SEAL) Attest:
------------------------------
Dana J. Albera,
Assistant Secretary
FIRST DEWITT BANK
By
----------------------------------
Michael J. Quigley, III,
Chairman of the Board,
President and Chief
Executive Officer
(CORPORATE SEAL)
Attest:
-----------------------------
Marie G. Martino,
Secretary
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<PAGE>
EXHIBIT 'A'
TO PLAN OF MERGER
SOVEREIGN BANK
BRANCH LOCATIONS
[INTENTIONALLY OMITTED]
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<PAGE>
EXHIBIT 4
[Intentionally omitted}
A-43
<PAGE>
EXHIBIT 5
FORM OF OPINION OF COUNSEL TO SOVEREIGN
FSFS shall have received from counsel to Sovereign, an opinion, dated as of
the Closing Date, substantially to the effect that, subject to normal exceptions
and qualifications:
(a) Sovereign and Sovereign Bank have full corporate power to carry out the
transactions contemplated in the Agreement and the Plan of Merger, respectively.
The execution and delivery of the Agreement and the Plan of Merger and the
consummation of the transactions contemplated thereunder have been duly and
validly authorized by all necessary corporate action on the part of Sovereign
and Sovereign Bank, and the Agreement and the Plan constitute valid and legally
binding obligations of Sovereign and Sovereign Bank, respectively, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium, receivership,
conservatorship, and other laws affecting creditors' rights generally and
institutions the deposits of which are insured by the FDIC, and as may be
limited by the exercise of judicial discretion in applying principles of equity.
Subject to satisfaction of the conditions set forth in the Agreement, neither
the transactions contemplated in the Agreement or the Plan, nor compliance by
Sovereign and Sovereign Bank with any of the respective provisions thereof, will
(i) conflict with or result in a breach or default under (A) the articles of
incorporation or bylaws of Sovereign or the charter or bylaws of Sovereign Bank,
or, (B) to the knowledge of such counsel, any note, bond, mortgage, indenture,
license, agreement or other material instrument or obligation to which Sovereign
or Sovereign Bank is a party; or (ii) based on certificates of officers and
without independent verification, to the knowledge of such counsel, result in
the creation or imposition of any material lien or encumbrance upon the property
of Sovereign or Sovereign Bank, except such material lien, instrument or
obligation that has been disclosed pursuant to the Agreement or the Plan; or
(iii) violate in any material respect any order, writ, injunction or decree
known to such counsel, or any federal or Pennsylvania statute, rule or
regulation applicable to Sovereign or Sovereign Bank.
(b) Sovereign Bank is a validly existing federally-chartered savings bank
organized and in good standing under the laws of the United States of America.
The deposits of Sovereign Bank are insured to the maximum extent provided by law
by the Federal Deposit Insurance Corporation.
(c) There is, to the knowledge of such counsel, no legal, administrative,
arbitration or governmental proceeding or investigation pending or threatened to
which Sovereign or Sovereign Bank is a party which would, if determined
adversely to Sovereign or Sovereign Bank, have a material adverse effect on the
financial condition or results of operation of Sovereign and Sovereign Bank
taken as a whole, or which presents a claim to restrain or prohibit the
transactions contemplated by the Agreement and the Plan, respectively.
(d) No consent, approval, authorization or order of any federal or state
court or federal or state governmental agency or body is required for the
consummation by Sovereign or Sovereign Bank of the transactions contemplated by
the Agreement and the Plan, except for such consents, approvals, authorizations
or orders as have been obtained.
(e) Upon the filing and effectiveness of the Articles of Merger with the
PDS, the Articles of Merger with the DOSS, and Articles of Combination with the
OTS in accordance with the Agreement and the Plan, the mergers of Sovereign and
FSFS and of Sovereign Bank and First DeWitt contemplated by the Agreement and
the Plan, respectively, will have been effected in compliance with all
applicable federal and Pennsylvania laws and regulations in all material
respects.
(f) The shares of Sovereign Common Stock to be issued in connection with
the merger of FSFS and Sovereign contemplated by the Agreement have been duly
authorized and will, when issued in accordance with the terms of the Agreement,
be validly issued, fully paid and nonassessable, free and clear of any mortgage,
pledge, lien, encumbrance or claim (legal or equitable).
(g) On the sole basis of such counsel's participation in conferences with
officers and employees of Sovereign in connection with the Proxy
Statement/Prospectus, and without other independent investigation or inquiry,
such counsel has no reason to believe that the Proxy Statement/Prospectus,
including any amendments or supplements thereto (except for the financial
information, financial
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schedules and other financial or statistical data contained therein and except
for any information supplied by FSFS or First DeWitt for inclusion therein, as
to which counsel need express no belief), as of the date of mailing thereof,
contained any untrue statement of a material fact with respect to Sovereign or
omitted to state any material fact with respect to Sovereign necessary to make
any statement therein with respect to Sovereign, in light of the circumstances
under which it was made, not misleading. Counsel may state in delivering such
opinion, that such counsel has not independently verified and does not assume
the responsibility for the accuracy, completeness or fairness of any information
or statements contained in the Proxy Statement/Prospectus, except with respect
to identified statements of law or regulations or legal conclusions relating to
Sovereign or the transactions contemplated in the Agreement and the Plan.
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<PAGE>
EXHIBIT 6
FORM OF TAX OPINION OF STEVENS & LEE
Sovereign and FSFS shall have received an opinion of Stevens & Lee
substantially to the effect that, under the provisions of the IRC:
1. Provided the Merger qualifies as a statutory merger under applicable
law, the transfer by FSFS of all of its assets to Sovereign in exchange for
Sovereign Common Stock (including fractional share interests) and the assumption
by Sovereign of all of FSFS's liabilities will constitute a reorganization
within the meaning of Section 368(a)(1)(A) of the IRC.
2. FSFS and Sovereign will each be 'a party to a reorganization' within
the meaning of Section 368(b) of the IRC.
3. Neither FSFS nor Sovereign will recognize any gain or loss upon the
transfer of FSFS's assets to Sovereign in exchange solely for Sovereign Common
Stock (including fractional share interests) and the assumption by Sovereign of
the liabilities of FSFS.
4. The basis of the FSFS assets in the hands of Sovereign will be the same
as the basis of such assets in the hands of FSFS immediately prior to the
Merger.
5. The holding period of the assets of FSFS to be received by Sovereign
will include the period during which the assets were held by FSFS.
6. No gain or loss will be recognized by the shareholders of FSFS on the
receipt of Sovereign Common Stock (including fractional share interests) solely
in exchange for their shares of FSFS Common Stock.
7. The basis of the Sovereign Common Stock (including fractional share
interests) to be received by the FSFS shareholders in the Merger will be the
same as the basis of the FSFS Common Stock surrendered in exchange therefor.
8. The holding period of the Sovereign Common Stock (including fractional
share interests) to be received by the FSFS shareholders in the Merger will
include the period during which the FSFS shareholders held their FSFS Common
Stock, provided the shares of FSFS Common Stock are held as a capital asset on
the Effective Date.
9. The payment of cash in lieu of fractional share interests of Sovereign
Common Stock will be treated as if the fractional share interests were
distributed as part of the Merger and then redeemed by Sovereign. Such cash
payments will be treated as having been received as distribution in full payment
in exchange for the fractional share interests redeemed, as provided in Section
302(a) of the IRC.
10. The Sovereign Stock Purchase Rights transferred with the shares of
Sovereign Common Stock will not constitute 'other property' within the meaning
of Section 356(a)(1)(B) of the IRC.
11. As provided in Section 381(c)(2) of the IRC and related Treasury
regulations, Sovereign will succeed to and take into account the earnings and
profits, or deficit in earnings and profits, of FSFS as of the Effective Date.
Any deficit in the earnings and profits of Sovereign or FSFS will be used only
to offset the earnings and profits accumulated after the Merger.
12. Pursuant to Section 381(a) of the IRC and related Treasury
regulations, Sovereign will succeed to and take into account the items of FSFS
described in Section 381(c) of the IRC. Such items will be taken into account by
Sovereign subject to the conditions and limitations of Sections 381, 382, 383,
and 384 of the IRC and the Treasury regulations thereunder.
13. Provided the Bank Merger constitutes a statutory merger under
applicable law, the Bank Merger will constitute a reorganization within the
meaning of Section 368(a)(1)(A) of the IRC.
14. First DeWitt and Sovereign Bank will each be 'a party to a
reorganization' within the meaning of Section 368(b) of the IRC.
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15. Neither First DeWitt nor Sovereign Bank will recognize any gain or
loss upon the transfer of First DeWitt's assets to Sovereign Bank in
constructive exchange solely for Sovereign Bank common stock and the assumption
by Sovereign Bank of the liabilities of First DeWitt.
16. The basis of the First DeWitt assets in the hands of Sovereign Bank
will be the same as the basis of such assets in the hands of First DeWitt
immediately prior to the Bank Merger.
17. The holding period of the First DeWitt assets in the hands of
Sovereign Bank will include the period during which such assets were held by
First DeWitt.
18. No gain or loss will be recognized by Sovereign, as the shareholder of
First DeWitt, upon the constructive receipt of shares of Sovereign Bank common
stock in exchange for the First DeWitt common stock surrendered in exchange
therefor in the Bank Merger.
19. The basis of the Sovereign Bank common stock to be held by Sovereign
after the Bank Merger will equal the basis of such stock immediately before the
Bank Merger, increased by the basis of the First DeWitt common stock surrendered
in the constructive exchange.
20. As provided in Section 381(c)(2) of the IRC and related Treasury
regulations, Sovereign Bank will succeed to and take into account the earnings
and profits, or deficit in earnings and profits, of First DeWitt as of the
effective date of the Bank Merger. Any deficit in the earnings and profits of
Sovereign Bank or First DeWitt will be used only to offset the earnings and
profits accumulated after the Bank Merger.
21. Pursuant to Section 381(a) of the IRC and related Treasury
regulations, Sovereign Bank will succeed to and take into account the items of
First DeWitt described in Section 381(c) of the IRC. Such items will be taken
into account by Sovereign Bank subject to the conditions and limitations of
Sections 381, 382, 383, and 384 of the IRC and the Treasury regulations
thereunder.
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<PAGE>
EXHIBIT 7
FORM OF OPINION OF COUNSEL TO FSFS
Sovereign shall have received from counsel to FSFS, an opinion, dated as of
the Closing Date, substantially to the effect that, subject to normal exceptions
and qualifications:
(a) FSFS and First DeWitt have full corporate power to carry out the
transactions contemplated in the Agreement and the Plan of Merger, respectively.
The execution and delivery of the Agreement and the Plan of Merger and the
consummation of the transactions contemplated thereunder have been duly and
validly authorized by all necessary corporate action on the part of FSFS and
First DeWitt, and the Agreement and the Plan constitute a valid and legally
binding obligation, in accordance with their respective terms, of FSFS and First
DeWitt, respectively, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium, receivership, conservatorship, and other laws
affecting creditors' rights generally and institutions the deposits of which are
insured by the FDIC, and as may be limited by the exercise of judicial
discretion in applying principles of equity. Subject to satisfaction of the
conditions set forth in the Agreement, neither the transactions contemplated in
the Agreement and the Plan, nor compliance by FSFS and First DeWitt with any of
the respective provisions thereof, will (i) conflict with or result in a breach
or default under (A) the certificate of incorporation or bylaws of FSFS or the
charter or bylaws of First DeWitt, or (B) based on certificates of officers and
without independent verification, to the knowledge of such counsel, any note,
bond, mortgage, indenture, license, agreement or other instrument or obligation
to which FSFS or First DeWitt is a party; or (ii) to the knowledge of such
counsel, result in the creation or imposition of any material lien, instrument
or encumbrance upon the property of FSFS or First DeWitt, except such material
lien, instrument or obligation that has been disclosed to Sovereign pursuant to
the Agreement and the Plan, or (iii) violate in any material respect any order,
writ, injunction, or decree known to such counsel, or any statute, rule or
regulation applicable to FSFS or First DeWitt.
(b) First DeWitt is a validly existing federally-chartered bank organized
and in good standing under the laws of the United States of America. The
deposits of First DeWitt are insured to the maximum extent provided by law by
the Federal Deposit Insurance Corporation.
(c) There is, to the knowledge of such counsel, no legal, administrative,
arbitration or governmental proceeding or investigation pending or threatened to
which FSFS or First DeWitt is a party which would, if determined adversely to
FSFS or First DeWitt, have a material adverse effect on the business,
properties, results of operations, or condition, financial or otherwise, of FSFS
or First DeWitt taken as a whole or which presents a claim to restrain or
prohibit the transactions contemplated by the Agreement and the Plan,
respectively.
(d) No consent, approval, authorization, or order of any federal or state
court or federal or state governmental agency or body, or of any third party, is
required for the consummation by FSFS or First DeWitt of the transactions
contemplated by the Agreement and the Plan, except for such consents, approvals,
authorizations or orders as have been obtained.
(e) On the sole basis of such counsel's participation in conferences with
officers and employees of FSFS in connection with the preparation of the
Prospectus/Proxy Statement and without other independent investigation or
inquiry, such counsel has no reason to believe that the Prospectus/Proxy
Statement, including any amendments or supplements thereto (except for the
financial information, financial statements, financial schedules and other
financial or statistical data contained therein and except for any information
supplied by Sovereign for inclusion therein, as to which counsel need express no
belief), as of the date of mailing thereof and as of the date of the meeting of
shareholders of FSFS to approve the merger, contained any untrue statement of a
material fact or omitted to state a material fact necessary to make any
statement therein, in light of the circumstances under which it was made, not
misleading. Counsel may state in delivering such opinion, that such counsel has
not independently verified and does not assume any responsibility for the
accuracy, completeness or fairness of any information or statements contained in
the Prospectus/Proxy Statement, except with respect to identified statements of
law or regulations or legal conclusions relating to FSFS or First DeWitt or the
transactions contemplated in the Agreement and the Plan.
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<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of November 26,
1996, is made by and between SOVEREIGN BANCORP, INC. ('Sovereign'), a
Pennsylvania corporation, having its principal place of business at 1130
Berkshire Boulevard, Wyomissing, Pennsylvania 19610, and FIRST STATE FINANCIAL
SERVICES, INC., a Delaware corporation, having its principal place of business
at 1120 Bloomfield Avenue, CN 2449, West Caldwell, New Jersey 07007-2449
('FSFS').
BACKGROUND
1. Sovereign and FSFS are parties to a certain Agreement and Plan of
Merger, dated as of June 24, 1996 (the 'Merger Agreement'), providing for, among
other things, the merger (the 'Merger') of FSFS with and into Sovereign, with
Sovereign surviving the merger.
2. As of the date of this Agreement, stockholders of FSFS have not yet
approved the Merger Agreement.
3. Sovereign and FSFS desire to amend the Merger Agreement as set forth
herein.
AGREEMENT
1. The date specified in the third sentence of Section 1.02(d)(iii) of the
Merger Agreement is hereby amended from '1997' to '1998.'
2. Section 1.02(e)(ii) of the Merger Agreement is hereby amended to read in
its entirety as follows:
'(ii) FSFS Common Stock.
(A) Subject to the provisions of subparagraphs (B), (C) and (D) of
this Section 1.02(e)(ii), each share of FSFS Common Stock issued and
outstanding immediately prior to the Effective Date (other than shares of
FSFS Common Stock, if any, then owned by Sovereign or FSFS or any FSFS
Subsidiary) shall, on the Effective Date, by reason of the Merger and
without any action on the part of the holder thereof, be converted into and
become a right to receive:
(i) if the Sovereign Market Value determined as of the Effective
Date is greater than or equal to $8.00 and less than or equal to $12.04,
then that number of shares of fully paid and nonassessable shares of
Sovereign Common Stock, and the corresponding percentage of Sovereign
Stock Purchase Rights pursuant to the Sovereign Rights Agreement, equal
to $14.75 divided by the Sovereign Market Value determined as of the
Effective Date;
(ii) if the Sovereign Market Value determined as of the Effective
Date is less than $8.00, then 1.84 shares of fully paid and
nonassessable shares of Sovereign Common Stock, and the corresponding
percentage of Sovereign Stock Purchase Rights pursuant to the Sovereign
Rights Agreement; or
(iii) if the Sovereign Market Value determined as of the Effective
Date is greater than $12.04, then 1.225 shares of fully paid and
nonassessable shares of Sovereign Common Stock, and the corresponding
percentage of Sovereign Stock Purchase Rights pursuant to the Sovereign
Rights Agreement (as determined pursuant to either Sections
1.02(e)(ii)(A)(i), 1.02(e)(ii)(A)(ii) or 1.02(e)(ii)(A)(iii), the
'Applicable Exchange Ratio').'
3. Section 5.02(f) of the Merger Agreement is hereby amended to read in its
entirety as follows:
(f) No Material Adverse Effect. Since March 31, 1996, there shall not
have occurred any Material Adverse Effect with respect to FSFS; provided,
however, that neither (i) an increase in the provision for loan losses by
FSFS for the period ended June 30, 1996 in an amount not to exceed
$5,000,000, (ii) the existence of nonperforming assets of FSFS in an amount
up to
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<PAGE>
$26,100,000, (iii) the incurrence by FSFS of aggregate losses on the sale,
exchange or other disposition of nonperforming assets up to $1,000,000 (for
purposes of this subsection, loss will be identified net of any portion of
the allowance for loan losses allocable to the nonperforming asset which is
sold, exchanged or otherwise disposed of by FSFS) or (iv) provisions for
loan losses taken or recognized by FSFS after the date of this Agreement in
aggregate amounts up to $7,250,000 shall be considered a Material Adverse
Effect for purposes of this subsection (the term 'nonperforming assets,'
for purposes of this subsection, means (i) loans that are 'troubled debt
restructurings' as defined in Statement of Financial Accounting Standards
No. 15, 'Accounting by Debtors and Creditors for Troubled Debt
Restructurings,' excluding restructured loans the terms and conditions of
which were approved in writing in advance by Sovereign, (ii) loans on
nonaccrual, including loans placed on nonaccrual that may have been
previously restructured with Sovereign's approval, (iii) real estate owned,
and (iv) all loans 90 days or more past due, except that the term
'nonperforming assets' shall not include loans originated to finance the
purchase of any one-to-four-family residential property);
4. Section 6.01(c) of the Merger agreement is hereby amended to read in its
entirety as follows:
'(c) By FSFS if, on the Closing Date, the Sovereign Market Value is
less than $8.00 (as adjusted for any stock splits or stock dividends);
provided, however, that if Sovereign delivers to FSFS on the Closing Date a
written notice increasing the Applicable Exchange Ratio to an amount which,
when multiplied by the Sovereign Market Value determined as of the Closing
Date, equals $14.75, then no termination of this Agreement shall occur and
the Merger shall be completed pursuant to the terms hereof.'
5. Sections 5.02(q), 6.01(d), and 6.01(e) of the Merger Agreement are
hereby deleted in their entirety.
6. Except as amended hereby, the Merger Agreement is ratified and confirmed
in all respects. All references in the Merger Agreement to the 'Merger
Agreement' shall be deemed to be references to the Merger Agreement as amended
hereby.
7. This Agreement and the Merger Agreement contain the entire agreement and
understanding of the parties with respect to the transactions contemplated
herein and therein and supersede all prior agreements or understandings with
respect hereto and thereto, whether written or oral.
8. Neither party hereto may assign any of its rights or obligations
hereunder to any other person, without the prior written consent of the other
party hereto.
9. This Agreement shall be governed and construed in accordance with the
domestic, internal law of the Commonwealth of Pennsylvania without regard to its
conflicts of laws principles.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the day and year first above written.
SOVEREIGN BANCORP, INC.
By /s/ JAY S. SIDHU
----------------------------------
(SEAL) Attest: /s/ LAWRENCE M. THOMPSON, JR.
-----------------------------
FIRST STATE FINANCIAL SERVICES, INC.
By /s/ MICHAEL J. QUIGLEY, III
---------------------------------
(SEAL) Attest: /s/ MARIE G. MARTINO
-----------------------------
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<PAGE>
ANNEX B
STOCK OPTION AGREEMENT
<PAGE>
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ('Stock Option Agreement') dated June 24, 1996,
is by and between SOVEREIGN BANCORP, INC., a Pennsylvania corporation
('Sovereign') and FIRST STATE FINANCIAL SERVICES, INC., a Delaware corporation
('FSFS').
BACKGROUND
1. Sovereign and FSFS desire to enter into a Agreement and Plan of Merger,
dated June 24, 1996 (the 'Agreement'), providing, among other things, for the
acquisition by Sovereign of FSFS through the merger of FSFS with and into
Sovereign, with Sovereign surviving the merger (the 'Merger').
2. As a condition to Sovereign to enter into the Plan, FSFS is granting to
Sovereign an option to purchase up to that number of shares of common stock of
FSFS as shall equal 19.9% of FSFS's shares of common stock issued and
outstanding immediately prior to such purchase, on the terms and conditions
hereinafter set forth.
AGREEMENT
In consideration of the foregoing and the mutual covenants and agreements
set forth herein, Sovereign and FSFS, intending to be legally bound hereby,
agree:
1. Grant of Option. FSFS hereby grants to Sovereign, on the terms and
conditions set forth herein, the option to purchase (the 'Option') up to 783,500
shares (as adjusted as set forth herein, the 'Option Shares') of common stock,
par value $.01 per share (the 'Common Stock'), of FSFS at a price per share (as
adjusted as set forth herein, the 'Option Price') equal to the lower of (i)
$10.00 or (ii) the lowest price per share that a person or a group, other than
Sovereign or an affiliate of Sovereign, paid or offers to pay after the date
hereof for Common Stock in a transaction constituting a Triggering Event under
Section 2 hereof.
2. Exercise of Option. Provided that (i) Sovereign shall not be in breach
of the agreements or covenants contained in this Agreement or the Plan, and (ii)
no preliminary or permanent injunction or other order against the delivery of
shares covered by the Option issued by any court of competent jurisdiction in
the United States shall be in effect, upon or after the occurrence of a
Triggering Event (as such term is hereinafter defined) and until termination of
this Stock Option Agreement in accordance with the provisions of Section 21,
Sovereign may exercise the Option, in whole or in part, at any time or one or
more times, from time to time. As used herein, the term 'Triggering Event' means
the occurrence of any of the following events:
(a) a person or group (as such terms are defined in the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and the rules and
regulations thereunder), other than Sovereign or an affiliate of Sovereign,
acquires beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act) of 10% or more of the then outstanding shares of Common Stock
(excluding any shares eligible to be reported on Schedule 13G of the
Securities and Exchange Commission);
(b) a person or group, other than Sovereign or an affiliate of
Sovereign, enters into an agreement or letter of intent with FSFS pursuant
to which such person or group or any affiliate of such person or group
would (i) merge or consolidate, or enter into any similar transaction, with
FSFS, (ii) acquire all or substantially all of the assets or liabilities of
FSFS or all or substantially all of the assets or liabilities of First
DeWitt Bank ('First DeWitt'), or (iii) acquire beneficial ownership of
securities representing, or the right to acquire beneficial ownership or to
vote securities representing, 10% or more of the then outstanding shares of
Common Stock (excluding any shares eligible to be reported on Schedule 13G
of the Securities and Exchange Commission) or the then outstanding shares
of common stock of First DeWitt; or
(c) a person or group, other than Sovereign or an affiliate of
Sovereign, publicly announces a bona fide proposal (including a written
communication that is or becomes the subject of public disclosure) for (i)
any merger, consolidation or acquisition of all or substantially all the
assets or
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liabilities of FSFS or all or substantially all the assets or liabilities
of First DeWitt, or any other business combination involving FSFS or First
DeWitt, or (ii) a transaction involving the transfer of beneficial
ownership of securities representing, or the right to acquire beneficial
ownership or to vote securities representing, 10% or more of the then
outstanding shares of Common Stock or the then outstanding shares of common
stock of First DeWitt (collectively, a 'Proposal'), and thereafter, if such
Proposal has not been Publicly Withdrawn (as such term is hereinafter
defined) at least 30 days prior to the meeting of shareholders of FSFS
called to vote on the Merger, FSFS's shareholders fail to approve the
Merger by the vote required by applicable law at the meeting of
shareholders called for such purpose or such meeting has been cancelled; or
(d) a person or group, other than Sovereign or an affiliate of
Sovereign, makes a bona fide Proposal and thereafter, but before such
Proposal has been Publicly Withdrawn, FSFS willfully takes any action in a
manner which would likely result in the failure of either party to satisfy
a material condition to the closing of the Merger or materially reduce the
value of the transaction to Sovereign; or
(e) FSFS breaches, in any material respect, any binding term of the
Agreement with respect to the Merger, or this Stock Option Agreement after
a Proposal is made and before it is Publicly Withdrawn or publicly
announces an intention to authorize, recommend or accept any such Proposal;
provided, however, that any purchase of shares upon exercise of the Option shall
be subject to compliance with applicable law.
If more than one of the transactions giving rise to a Triggering Event
under this Section is undertaken or effected, then all such transactions shall
give rise only to one Triggering Event, which Triggering Event shall be deemed
continuing for all purposes hereunder until all such transactions are abandoned.
'Publicly Withdrawn' for purposes of this Section 2 shall mean an
unconditional bona fide withdrawal of the Proposal coupled with a public
announcement of no further interest in pursuing such Proposal or in acquiring
any controlling influence over FSFS or in soliciting or inducing any other
person (other than Sovereign or an affiliate of Sovereign) to do so.
Notwithstanding the foregoing, the obligation of FSFS to issue Option
Shares upon exercise of the Option shall be deferred (but shall not terminate)
(i) until the receipt of all required governmental or regulatory approvals or
consents necessary for FSFS to issue the Option Shares, or Sovereign to exercise
the Option, or until the expiration or termination of any waiting period
required by law, or (ii) so long as any injunction or other order, decree or
ruling issued by any federal or state court of competent jurisdiction is in
effect which prohibits the sale or delivery of the Option Shares, and, in each
case, notwithstanding any provision to the contrary set forth herein, the Option
shall not expire or otherwise terminate.
FSFS shall notify Sovereign promptly in writing of the occurrence of any
Triggering Event known to it, it being understood that the giving of such notice
by FSFS shall not be a condition to the right of Sovereign to exercise the
Option. FSFS will not take any action which would have the effect of preventing
or disabling FSFS from delivering the Option Shares to Sovereign upon exercise
of the Option or otherwise performing its obligations under this Stock Option
Agreement. In the event Sovereign wishes to exercise the Option, Sovereign shall
send a written notice to FSFS (the date of which is hereinafter referred to as
the 'Notice Date') specifying the total number of Option Shares it wishes to
purchase and a place and date between two and ten business days inclusive from
the Notice Date for the closing of such a purchase (a 'Closing'); provided,
however, that a Closing shall not occur prior to two days after the later of
receipt of any necessary regulatory approvals or the expiration of any legally
required notice or waiting period, if any.
3. Payment and Delivery of Certificates. At any Closing hereunder, (a)
Sovereign will make payment to FSFS of the aggregate price for the Option Shares
so purchased by wire transfer of immediately available funds to an account
designated by FSFS, (b) FSFS will deliver to Sovereign a stock certificate or
certificates representing the number of Option Shares so purchased, registered
in
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the name of Sovereign or its designee, in such denominations as were specified
by Sovereign in its notice of exercise, and (c) Sovereign will pay any transfer
or other taxes required by reason of the issuance of the Option Shares so
purchased.
A legend will be placed on each stock certificate evidencing Option Shares
issued pursuant to this Stock Option Agreement, which legend will read
substantially as follows:
'The shares of stock evidenced by this certificate have not been the
subject of a registration statement filed under the Securities Act of 1933,
as amended (the 'Act'), and declared effective by the Securities and
Exchange Commission. These shares may not be sold, transferred or otherwise
disposed of prior to such time unless First State Financial Services, Inc.
receives an opinion of counsel stating that an exemption from the
registration provisions of the Act is available for such transfer.'
4. Registration Rights. Upon or after the occurrence of a Triggering Event
and upon receipt of a written request from Sovereign, FSFS shall prepare and
file as soon as practicable a registration statement under the Securities Act of
1933, as amended, with the Securities and Exchange Commission covering the
Option and such number of Option Shares as Sovereign shall specify in its
request, and FSFS shall use its best efforts to cause such registration
statement to be declared effective in order to permit the sale or other
disposition of the Option and the Option Shares, provided that Sovereign shall
in no event have the right to have more than one such registration statement
become effective, and provided further that FSFS shall not be required to
prepare and file any such registration statement in connection with any proposed
sale with respect to which FSFS's counsel delivers to FSFS and to Sovereign its
opinion to the effect that no such filing is required under applicable laws and
regulations with respect to such sale or disposition; provided, however, that
FSFS may delay any registration of Option Shares above for a period not
exceeding 90 days provided FSFS shall in good faith determine that any such
registration would adversely affect an offering or contemplated offering of
other securities by FSFS. Sovereign shall provide all information reasonably
requested by FSFS for inclusion in any registration statement to be filed
hereunder. In connection with such filing, FSFS shall use its best efforts to
cause to be delivered to Sovereign such certificates, opinions, accountant's
letters and other documents as Sovereign shall reasonably request and as are
customarily provided in connection with registration of securities under the
Securities Act of 1933, as amended. FSFS shall provide to Sovereign such number
of copies of the preliminary prospectus and final prospectus and any amendments
and supplements thereto as Sovereign may reasonably request. All reasonable
expenses incurred by FSFS in complying with the provisions of this Section 4,
including, without limitation, all registration and filing fees, reasonable
printing expenses, reasonable fees and disbursements of counsel for FSFS and
blue sky fees and expenses, shall be paid by FSFS. Underwriting discounts and
commissions to brokers and dealers relating to the Option Shares, fees and
disbursements of counsel to Sovereign and any other expenses incurred by
Sovereign in connection with such filing shall be borne by Sovereign. In
connection with such filing, FSFS shall indemnify and hold harmless Sovereign
against any losses, claims, damages or liabilities, joint or several, to which
Sovereign may become subject, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any preliminary or final registration statement or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and FSFS will reimburse Sovereign for any
legal or other expense reasonably incurred by Sovereign in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that FSFS will not be liable in any case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such preliminary or final registration statement or such amendment or
supplement thereto in reliance upon and in conformity with written information
furnished by or on behalf of Sovereign specifically for use in the preparation
thereof. Sovereign will indemnify and hold harmless FSFS to the same extent as
set forth in the immediately preceding sentence but only with reference to
written information furnished by or on behalf of Sovereign for use in the
preparation of such preliminary or final registration statement or such
amendment or supplement thereto; and Sovereign will reimburse FSFS for any legal
B-3
<PAGE>
or other expense reasonably incurred by FSFS in connection with investigating or
defending any such loss, claim, damage, liability or action.
5. Adjustment Upon Changes in Capitalization. In the event of any change
in the Common Stock by reason of stock dividends, split-ups, recapitalizations,
combinations, conversions, divisions, exchanges of shares or the like, then the
number and kind of Option Shares and the Option Price shall be appropriately
adjusted.
6. Filings and Consents. Each of Sovereign and FSFS will use its best
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 Stock Option Agreement. Within 10 days from the date
hereof, Sovereign shall file a report of beneficial ownership on Form 13D with
the Securities and Exchange Commission under the Exchange Act which discloses
the rights of Sovereign hereunder.
7. Representations and Warranties of FSFS. FSFS hereby represents and
warrants to Sovereign as follows:
(a) Due Authorization. FSFS has full corporate power and authority to
execute, deliver and perform this Stock Option Agreement and all corporate
action necessary for execution, delivery and performance of this Stock
Option Agreement has been duly taken by FSFS. This Stock Option Agreement
constitutes a legal, valid and binding obligation of FSFS, enforceable
against FSFS in accordance with its terms (except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting
creditors' rights or by general equity principles).
(b) Authorized Shares. FSFS has taken all necessary corporate action
to authorize and reserve for issuance all shares of Common Stock that may
be issued pursuant to any exercise of the Option.
8. Representations and Warranties of Sovereign. Sovereign hereby
represents and warrants to FSFS that Sovereign has full corporate power and
authority to execute, deliver and perform this Stock Option Agreement and all
corporate action necessary for execution, delivery and performance of this Stock
Option Agreement has been duly taken by Sovereign. This Stock Option Agreement
constitutes a legal, valid and binding obligation of Sovereign, enforceable
against Sovereign in accordance with its terms (except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting
creditors' rights or by general equity principles).
9. Specific Performance. The parties hereto acknowledge that damages would
be an inadequate remedy for a breach of this Stock Option Agreement and that the
obligations of the parties hereto shall be specifically enforceable.
10. Entire Agreement. This Stock Option Agreement and the Agreement
constitute the entire agreement between the parties with respect to the subject
matter hereof and supersede all other prior agreements and understandings, both
written and oral, among the parties or any of them with respect to the subject
matter hereof.
11. Assignment or Transfer. Sovereign may not sell, assign or otherwise
transfer its rights and obligations hereunder, in whole or in part, to any
person or group of persons other than to a subsidiary of Sovereign. Sovereign
represents that it is acquiring the Option for Sovereign's own account and not
with a view to, or for sale in connection with, any distribution of the Option
or the Option Shares. Sovereign is aware that neither the Option nor the Option
Shares is the subject of a registration statement filed with, and declared
effective by, the Securities and Exchange Commission pursuant to Section 5 of
the Securities Act of 1933, as amended, but instead each is being offered in
reliance upon the exemption from the registration requirement provided by
Section 4(2) thereof and the representations and warranties made by Sovereign in
connection therewith.
12. Amendment of Stock Option Agreement. By mutual consent of the parties
hereto, this Stock Option Agreement may be amended in writing at any time, for
the purpose of facilitating performance
B-4
<PAGE>
hereunder or to comply with any applicable regulation of any governmental
authority or any applicable order of any court or for any other purpose.
13. Validity. The invalidity or unenforceability of any provision of this
Stock Option Agreement shall not affect the validity or enforceability of any
other provisions of this Stock Option Agreement, which shall remain in full
force and effect.
14. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered personally, by telegram or telecopy, or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties as follows:
(i) If to Sovereign, to:
Sovereign Bancorp, Inc.
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
Attention: Jay S. Sidhu, President
and Chief Executive Officer
Telecopy No.: (610) 320-8448
with a copy to:
Stevens & Lee
111 North Sixth Street
P.O. Box 679
Reading, Pennsylvania 19603
Attention: Joseph M. Harenza, Esquire
David W. Swartz, Esquire
Telecopy No.: (610) 376-5610
(ii) If to FSFS, to:
First State Financial Services, Inc.
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
Attention: Michael J. Quigley, III
Chairman of the Board, President
and Chief Executive Officer
Telecopy No.: (201) 244-9831
with copies to:
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
Attention: John J. Gorman, Esquire
Eric Luse, Esquire
Telecopy No.: (202) 362-2902
or to such other address as the person to whom notice is to be given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
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<PAGE>
15. Governing Law. This Stock Option Agreement shall be governed by and
construed in accordance with the domestic internal law (but not the law of
conflicts of law) of the Commonwealth of Pennsylvania.
16. Captions. The captions in this Stock Option Agreement are inserted for
convenience and reference purposes, and shall not limit or otherwise affect any
of the terms or provisions hereof.
17. Waivers and Extensions. The parties hereto may, by mutual consent,
extend the time for performance of any of the obligations or acts of either
party hereto. Each party may waive (i) compliance with any of the covenants of
the other party contained in this Stock Option Agreement and/or (ii) the other
party's performance of any of its obligations set forth in this Stock Option
Agreement.
18. Parties in Interest. This Stock Option Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and, nothing in this Stock
Option Agreement, express or implied, is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of
this Stock Option Agreement.
19. Counterparts. This Stock Option 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.
20. Expenses. Subject to the terms of the Plan and except as otherwise
provided herein, all costs and expenses incurred by the parties hereto in
connection with the transactions contemplated by this Stock Option Agreement or
the Option shall be paid by the party incurring such cost or expense.
21. Termination. This Stock Option Agreement shall terminate and be of no
further force or effect upon the earliest to occur of (A) the Effective Time or
(B) termination of the Agreement in accordance with the terms thereof, except
that if the Agreement is terminated by Sovereign pursuant to Section 6.01(b)(i)
of the Agreement or pursuant to Section 6.01(b)(ii) of the Agreement (provided
the failure of the occurrence of the event specified in Section 6.01(b)(ii) of
the Agreement shall be due to the failure of FSFS to perform or observe its
agreements set forth in the Agreement required to be performed or observed by
FSFS prior to the Closing Date (as defined in the Agreement)), this Stock Option
Agreement shall not terminate until one year after the date of termination of
the Agreement.
IN WITNESS WHEREOF, each of the parties hereto, pursuant to resolutions
adopted by its Board of Directors, has caused this Stock Option Agreement to be
executed by its duly authorized officer and has caused its corporate seal to be
affixed hereunto and to be duly attested, all as of the day and year first above
written.
SOVEREIGN BANCORP, INC.
By /s/ Jay S. Sidhu
----------------------------------
Jay S. Sidhu,
President and Chief
Executive Officer
(CORPORATE SEAL)
Attest: /s/ Dana J. Albera
------------------------------
Dana J. Albera,
Assistant Secretary
FIRST STATE FINANCIAL SERVICES, INC.
By /s/ Michael J. Quigley, III
----------------------------------
Michael J. Quigley, III,
Chairman of the Board,
President and Chief Executive
Officer
(CORPORATE SEAL)
Attest: /s/ Marie G. Martino
------------------------------
Marie G. Martino,
Secretary
B-6
<PAGE>
ANNEX C
OPINION OF MCCONNELL, BUDD & DOWNES, INC.
<PAGE>
McCONNELL, BUDD & DOWNES, INC.
365 SOUTH STREET
MORRISTOWN, NEW JERSEY 07960
201-538-7800
FAX: 201-538-0522
January 15, 1997
The Board of Directors
First State Financial Services, Inc.
1120 Bloomfield Avenue
West Caldwell, New Jersey 07007
Members of the Board:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock, par value $0.01
per share, of First State Financial Services, Inc. ('First State'), of the
consideration to be exchanged for each issued and outstanding share of First
State Common Stock in the merger (the 'Merger') of First State with and into
Sovereign Bancorp ('Sovereign') pursuant to the Agreement and Plan of Merger
dated June 24, 1996 (the 'Agreement') between Sovereign and First State and
amended as of November 25, 1996. As is more specifically set forth in the
Agreement, pursuant to the Merger, each issued and outstanding share of First
State Common Stock will be converted into the right to receive the number of
shares of Sovereign Common Stock with a market value of $14.75, with market
value determined by the Sovereign Market Value (as that term is defined in the
Agreement), constrained by a minimum exchange ratio of 1.225 shares of Sovereign
Common Stock and a maximum exchange ratio of 1.84 shares of Sovereign Common
Stock. Shareholders are urged to carefully read the Proxy Statement/Prospectus
in its entirety including the section concerning the opinion of the financial
advisor.
McConnell, Budd & Downes, Inc. ('MB&D'), as part of its investment banking
business is regularly 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, competitive bidding,
market making as a NASD market maker, secondary distributions of listed
securities, private placements and valuations for corporate, estate and other
purposes. MB&D has acted as financial advisor to First State on a continuous
contractual basis since 1994. Advice and assistance to First State in connection
with the process and negotiations leading up to the Merger with Sovereign were
part of the contractual relationship and involved our attendance at numerous
meetings with management and the Board of Directors. In the course of its role
as financial advisor to First State in conjunction with the Merger, MB&D has
received fees for its services and will receive additional fees contingent on
certain occurrences. While the payment of all or a significant portion of fees
related to financial advisory services provided in connection with arm's-length
mergers and other business combination transactions upon consummation of such
transactions, as is the case with the Merger, might be viewed as giving such
financial advisors a financial interest in the successful completion of such
transactions, such compensation arrangements are standard and customary for
transactions of the size and type of this Merger. MB&D will receive a fee for
rendering this opinion. In the ordinary course of our business, MB&D may from
time to time trade the equity securities of First State or Sovereign for its own
account, for the accounts of its customers and for the accounts of individual
employees of MB&D. Accordingly, MB&D may from time to time hold a long or short
position in the equity securities of either First State or Sovereign. In
addition, various employees of MB&D may from time to time hold positions in the
securities of a wide variety of financial institutions, including First State
and Sovereign. MB&D also covers First State and Sovereign in certain of its
equity research products. MB&D has acted as a market maker for First State since
1994.
C-1
<PAGE>
McCONNELL, BUDD & DOWNES, INC.
In arriving at our opinion, MB&D has reviewed the Proxy
Statement/Prospectus in substantially the form to be mailed to shareholders,
publicly available business, financial and shareholder information relating to
First State and its subsidiaries and certain publicly available financial
information relating to Sovereign. MB&D has also made a detailed review of the
Agreement and the Merger Agreement Amendment. In addition, MB&D has reviewed
certain other information, including internal reports and documents from both
First State and Sovereign and certain management-prepared financial information
provided to us by both First State and Sovereign. MB&D has also met with and had
discussions with members of the senior management of both First State and
Sovereign to discuss their past and current business operations, current
financial condition and future prospects. In addition, MB&D has reviewed the
regulatory report on Form 10-Q for both First State and Sovereign for the
interim periods of 1996. MB&D has reviewed the Annual Report to Shareholders for
both First State and Sovereign for the years ending 1995 and 1994. MB&D has
reviewed and studied the historical stock prices and trading volumes of the
common stock of both First State and Sovereign as well as the terms and material
conditions of a number of recent acquisition transactions involving publicly
traded banking institutions that may be deemed to be comparable to the proposed
acquisition of First State by Sovereign. MB&D has also conducted such other
studies, analyses and investigations as we deem appropriate under the
circumstances surrounding the proposed transaction.
In the course of our review and analysis MB&D has relied upon and assumed,
without independent verification, the accuracy and completeness of the financial
information provided to us by First State and Sovereign or otherwise publicly
obtainable. In reaching our opinion, MB&D has not been provided with any
independent appraisals of either the assets or liabilities of Sovereign. MB&D
has also relied on the management of both First State and Sovereign 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
analysis.
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 Merger, MB&D has assumed that no conditions will be imposed
by any regulatory agency in connection with its approval of the Merger that will
have a material adverse effect on the amount or form of consideration or on the
results of operations, the financial condition or the prospects of Sovereign.
Based upon and subject to the foregoing, it is our opinion, that as of the
date of this letter, the range of possible exchange ratios pursuant to which
First State Common Stock will be converted to shares of Sovereign Common Stock
with a market value of $14.75, with market value determined by the Sovereign
Market Value (as that term is defined in the Agreement), constrained by a
minimum exchange ratio of 1.225 shares of Sovereign Common Stock and a maximum
exchange ratio of 1.84 shares of Sovereign Common Stock, is fair to the holders
of First State Common Stock, $0.01 par value, from a financial point of view.
Very truly yours,
McConnell, Budd & Downes, Inc.
C-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Pennsylvania law provides that a Pennsylvania corporation may indemnify
directors, officers, employees and agents of the corporation against liabilities
they may incur in such capacities for any action taken or any failure to act,
whether or not the corporation would have the power to indemnify the person
under any provision of law, unless such action or failure to act is determined
by a court to have constituted recklessness or willful misconduct. Pennsylvania
law also permits the adoption of a bylaw amendment, approved by shareholders,
providing for the elimination of a director's liability for monetary damages for
any action taken or any failure to take any action unless (1) the director has
breached or failed to perform the duties of his office and (2) the breach or
failure to perform constitutes self-dealing, willful misconduct or recklessness.
The bylaws of Sovereign provide for (1) indemnification of directors,
officers, employees and agents of the registrant and its subsidiaries and (2)
the elimination of a director's liability for monetary damages, to the fullest
extent permitted by Pennsylvania law.
Directors and officers are also insured against certain liabilities for
their actions, as such, by an insurance policy obtained by Sovereign.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
2.1 Agreement and Plan of Merger dated June 24, 1996, between
Sovereign Bancorp, Inc. and First State Financial
Services, Inc. as amended by an Amendment to Agreement and
Plan of merger dated as of November 26, 1996 (included as
II-1
<PAGE>
Annex A to the Proxy Statement/Prospectus). Schedules are
omitted; Sovereign Bancorp, Inc. agrees to furnish copies
of such schedules to the Commission upon request.
2.2 Stock Option Agreement dated as of June 24, 1996, between
Sovereign Bancorp, Inc. and First State Financial
Services, Inc. (included as Annex B to the Proxy
Statement/Prospectus).
3.1 Articles of Incorporation, as amended, of Sovereign Bancorp,
Inc. (Incorporated by reference to Exhibit 3.1 of
Sovereign's Annual Report on Form 10-K for the year ended
December 31, 1995.)
3.2 Bylaws of Sovereign Bancorp, Inc. (Incorporated by
reference to Exhibit 3.2 of Sovereign's Annual Report on
Form 10-K for the year ended December 31, 1993.)
4. Sovereign Bancorp, Inc. has outstanding long-term debt
that does not exceed 10% of the total assets of Sovereign
Bancorp, Inc. and its consolidated subsidiaries;
therefore, copies of the constituent instruments defining
the rights of the holders of such debt are not included as
exhibits to this Registration Statement. Sovereign
Bancorp, Inc. agrees to furnish copies of such instruments
to the Commission upon request.
5. Opinion of Stevens & Lee re: Validity.**
8. Opinion of Stevens & Lee re: Tax Matters.*
10.1 Sovereign Bancorp, Inc. Stock Option Plan, as amended and
restated. (Incorporated by reference to Exhibit 10.1 to
Sovereign's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.)
II-2
<PAGE>
10.2 Sovereign Bancorp, Inc. 1993 Stock Option Plan.
(Incorporated by reference to Exhibit 10.21 to Sovereign's
Annual Report on Form 10-K for the year ended December 31,
1992.)
10.3 Sovereign Bancorp, Inc. Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 4.1 to Sovereign's
Registration Statement No. 33-44108 on Form S-8.)
10.4 Agreement dated as of September 15, 1992, between
Sovereign Bancorp, Inc., Sovereign Bank, a Federal Savings
Bank, and Jay S. Sidhu. (Incorporated by reference to
Exhibit 10.3 to Sovereign's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.)
10.5 Agreement dated as of September 15, 1992, between
Sovereign Bank, a Federal Savings Bank, and Karl D.
Gerhart. (Incorporated by Reference to Exhibit 10.4 of
Sovereign's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992.)
10.6 Agreement dated as of September 15, 1992, between Sovereign
Bank, a Federal Savings Bank, and Lawrence M. Thompson, Jr.
(Incorporated by reference to Exhibit 10.5 of Sovereign's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.)
10.7 Penn Savings Bank Senior Officer Incentive Plan.
(Incorporated by reference to Exhibit 10.6 to Sovereign's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.)
10.8 Rights agreement dated September 19, 1989, between
Sovereign Bancorp, Inc. and Harris Trust Company of New
York. (Incorporated by reference to Exhibit 4.3 to
II-3
<PAGE>
Sovereign's Registration Statement No. 33-89586 on Form
S-8.)
10.9 Sovereign Bancorp, Inc. Non-Employee Director Incentive
Compensation Plan. (Incorporated by reference to
Exhibit 10.12 to Sovereign's Registration Statement
No. 33-43195 on Form S-1.)
10.10 Indemnification Agreement dated December 21, 1993, between
Sovereign Bank and Jay S. Sidhu. (Incorporated herein by
reference to Exhibit 10.25 to Sovereign's Annual Report on
Form 10-K for the year ended December 31, 1993).
23.1 Consent of Ernst & Young LLP.**
23.2 Consent of BDO Seidman LLP**
23.3 Consent of KPMG Peat Marwick LLP.**
23.4 Consent of Stevens & Lee (contained in Exhibit 5).**
23.5 Consent of Stevens & Lee (contained in Exhibit 8).*
23.6 Consent of McConnell, Budd & Downes, Inc.**
24.1 Powers of Attorney of Directors and Officers (included on
signature page hereof).
99.1 Opinion of McConnell, Budd & Downes, Inc., dated January 15,
1997 (included as Annex C to Proxy Statement/Prospectus).
99.2 Form of Proxy for the Special Meeting of Stockholders of
First State Financial Services, Inc.**
II-4
<PAGE>
99.3 1996 Annual Report of Stockholders of First State
Financial Services, Inc.**
- ---------------------
* To be filed by amendment.
** Previously Filed.
(b) Financial Statement Schedules.
None required.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any fact or events
arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in
the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at
II-5
<PAGE>
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(c) (1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information called for
by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of section 10(a)(3) of the Act and is
used in connection with an offering of securities subject to Rule 415,
will be filed as a
II-6
<PAGE>
part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the bylaws of the registrant, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(e) 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.
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<PAGE>
(f) 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-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Borough of
Wyomissing, Commonwealth of Pennsylvania, on January 17, 1997.
SOVEREIGN BANCORP, INC.
(Registrant)
By: /s/ Jay S. Sidhu
-----------------------------------
Jay S. Sidhu,
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Jay S. Sidhu, Karl D. Gerhart
and David W. Swartz, and each of them, his true and lawful attorney-in-fact, as
agent with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacity, to sign any or all amendments to
this Registration Statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as they might or could do in person, hereby
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<PAGE>
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Richard E. Mohn* Chairman and January 16, 1997
- -------------------------- Director
Richard E. Mohn
/s/ Jay S. Sidhu Director, January 16, 1997
- -------------------------- President and
Jay S. Sidhu Chief Executive
Officer (Principal
Executive Officer)
/s/ Howard A. Mackey* Director January 16, 1997
- --------------------------
Howard D. Mackey
/s/ Rhoda S. Oberholtzer* Director January 16, 1997
- --------------------------
Rhoda S. Oberholtzer
/s/ Patrick J. Petrone* Director January 16, 1997
- --------------------------
Patrick J. Petrone
/s/ David K. Rothermel* Director January 16, 1997
- --------------------------
Daniel K. Rothermel
/s/ G. Arther Weaver* Director January 16, 1997
- --------------------------
G. Arthur Weaver
/s/ Theodore Ziaylek, Jr.* Director January 16, 1997
- --------------------------
Theodore Ziaylek, Jr.
/s/ Karl D. Gerhart* Chief Financial January 16, 1997
- -------------------------- Officer
Karl D. Gerhart
/s/ Mark R. McCollom* Chief Accounting January 16, 1997
- -------------------------- Officer
Mark R. McCollom
*By /s/ David W. Swartz
-----------------------
David W. Swartz
Attorney-In-Fact
II-10
