UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1996
Commission File Number 033-64506
KEYSTONE INVESTMENTS, INC.
KEYSTONE INVESTMENT MANAGEMENT COMPANY
(Exact name of registrants as specified in their charters)
Delaware 04-3071173 / 04-1504645
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
200 Berkeley Street, Boston, Massachusetts 02116-5034
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip code)
(617) 210-3200
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. YES X NO .
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at October 31, 1996
- ------------------------------------- --------------------
Keystone Investments, Inc.:
Common Stock, $0.01 par value 4,939,061
Keystone Investment Management Company:
Common Stock, $0.01 par value 1,000
<PAGE>
KEYSTONE INVESTMENTS, INC.
KEYSTONE INVESTMENT MANAGEMENT COMPANY
FORM 10-Q
For the Quarterly Period Ended September 30, 1996
<TABLE>
<CAPTION>
Page
<S> <C>
Part I: Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets at September 30, 1996 (unaudited)
and December 31, 1995 3
Consolidated Statements of Operations (unaudited) for the
three months ended September 30, 1996 and 1995
and the nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 30, 1996 and 1995 5
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
(unaudited) for the nine months ended September 30, 1996 6
Notes to Unaudited Interim Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II: Other Information 17
Signatures 21
</TABLE>
2
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
-------
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $34,480 $34,729
Short-term investments in an affiliated mutual fund 5,016 5,011
Receivables from affiliated mutual funds 1,159 1,423
Accounts receivable and accrued income 3,059 1,541
Prepaid expenses and other assets 1,639 2,605
-------- --------
Total current assets 45,353 45,309
Intangible assets, net 33,582 37,711
Fixed assets, net 2,802 2,201
Investments in affiliated mutual funds 5,122 733
Other investments 3,028 2,807
Deferred financing costs 4,788 5,136
Unamortized commissions (Note E) 27,453 29,512
Deferred charges and other assets 2,301 2,397
-------- --------
Total assets $124,429 $125,806
======== ========
LIABILITIES
Current liabilities:
Accrued compensation $6,161 $7,063
Accrued interest 1,178 4,713
Accounts payable and other accrued expenses 5,516 6,058
Income taxes payable (Note D) 1,355 ---
Payable to affiliated mutual funds 485 2,648
-------- --------
Total current liabilities 14,695 20,482
Long-term debt:
Senior Secured Notes 145,000 145,000
Other liabilities 10,962 9,596
Deferred income taxes (Note D) 8,263 9,096
-------- --------
Total liabilities 178,920 184,174
STOCKHOLDERS' EQUITY (DEFICIT)
Total stockholders' equity (deficit) (Note F) (54,491) (58,368)
-------- --------
Total liabilities and stockholders' equity (deficit) $124,429 $125,806
======== ========
</TABLE>
See notes to unaudited interim consolidated financial statements.
3
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
-------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Mutual fund management fees $14,005 $13,951 $42,350 $39,933
Distribution fees (Note E) 13,572 11,893 42,894 34,668
Sales commissions 2,658 2,273 7,349 7,348
Transfer agent fees 4,858 4,703 15,097 14,624
Investment income 628 545 1,655 1,468
Other income 2,212 1,811 6,402 5,120
------- ------- ------- -------
Total revenues 37,933 35,176 115,747 103,161
------- ------- ------- -------
Expenses:
Compensation and employee benefits 11,357 10,303 35,826 31,108
Broker-dealer commissions (Note E) 10,221 8,329 28,977 28,997
Amortization and depreciation 1,713 1,689 5,029 5,055
Interest 3,535 3,539 10,605 10,624
Other 8,938 7,794 26,195 21,672
------- ------- ------- -------
Total expenses 35,764 31,654 106,632 97,456
------- ------- ------- -------
Income before provision for income taxes 2,169 3,522 9,115 5,705
Provision for income taxes (Note D) 1,220 1,775 4,402 2,843
------- ------- ------- -------
Net income $949 $1,747 $4,713 $2,862
======= ======= ======= =======
Earnings per share (Note C) $0.17 $0.32 $0.86 $0.53
======= ======= ======= =======
</TABLE>
See notes to unaudited interim consolidated financial statements.
4
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
-------
<TABLE>
<CAPTION>
for the nine-month periods ended
September 30,
-----------------------
1996 1995
------- -------
<S> <C> <C>
Net cash flows from operating activities:
Net income $4,713 $2,862
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation 5,029 5,055
Amortization of broker-dealer commissions 25,730 13,775
Deferred commissions (23,671) (11,545)
Changes in assets and liabilities:
Accrued interest (3,535) (3,535)
Payable to affiliated mutual funds (2,163) 30
Accounts receivable and accrued income (1,518) (673)
Accrued compensation (902) 125
Deferred income taxes (833) (1,493)
Accounts payable and other accrued expenses (542) (2,384)
Other liabilities 1,366 615
Income taxes payable 1,355 728
Prepaid expenses and other current assets 966 (724)
Receivables from affiliated mutual funds 264 (831)
Deferred charges and other assets 96 (1,176)
Other, net (87) (57)
------- -------
Net cash provided by operating activities 6,268 772
------- -------
Cash flows used in investing activities:
Investments in affiliated mutual funds (4,100) (21)
Other investments (469) (1,318)
Additions to fixed assets (1,151) (351)
Proceeds from disposition of other investments --- 276
Other, net --- 2
------- -------
Net cash used in investing activities (5,720) (1,412)
------- -------
Cash flows used in financing activities:
Purchase of treasury stock (1,454) (2,381)
Issuance of treasury stock 653 1,241
Proceeds from exercise of employee stock options 4 173
------- -------
Net cash used in financing activities (797) (967)
------- -------
Decrease in cash and cash equivalents (249) (1,607)
Cash and cash equivalents, beginning of period 34,729 28,826
------- -------
Cash and cash equivalents, end of period $34,480 $27,219
======= =======
Supplemental disclosure of cash flow information:
Interest paid $14,139 $14,159
Income taxes paid $3,394 $3,457
</TABLE>
See notes to unaudited interim consolidated financial statements.
5
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
for the nine-month period ended September 30, 1996
(in thousands)
(unaudited)
-------
<TABLE>
<CAPTION>
Additional Treasury Total
Common paid-in Net unrealized stock stockholders'
stock capital Accumulated gain on (at cost) equity
(Note F) (Note F) deficit investments (Note F) (deficit)
-------- -------- ----------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $53 $14,019 ($69,436) $358 ($3,362) ($58,368)
Net income, nine months ended
September 30, 1996 --- --- 4,713 --- --- 4,713
Net unrealized loss on investments --- --- --- (55) --- (55)
Stock options issued --- 16 --- --- --- 16
Stock options exercised --- 4 --- --- --- 4
Treasury stock purchased (83,419 shares) --- --- --- --- (1,454) (1,454)
Treasury stock issued (35,487 shares) --- 289 --- --- 364 653
----- ------- -------- ------ ------- --------
Balance, September 30, 1996 $53 $14,328 ($64,723) $303 ($4,452) ($54,491)
===== ======= ======== ====== ======= ========
</TABLE>
See notes to unaudited interim consolidated financial statements.
6
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
A. General
The consolidated financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission and according to generally accepted accounting principles, and
reflect all adjustments consisting of normal recurring adjustments which,
in the opinion of management, are necessary to present fairly the results
for the interim periods presented. Certain 1995 amounts have been
reclassified to conform to current year presentation. These financial
statements do not include all disclosures associated with annual
financial statements and, accordingly, should be read in conjunction with
the notes contained in the audited consolidated financial statements of
Keystone Investments, Inc. and Subsidiaries (the "Company") included in
the Company's annual report on Form 10-K for the year ended December 31,
1995.
B. Planned Merger
On September 6, 1996, Keystone Investments, Inc. ("KI") entered into an
Agreement and Plan of Acquisition and Merger (the "Merger Agreement")
whereby KI will be merged with and into a wholly-owned subsidiary of
First Union National Bank of North Carolina ("FUNB"), a national banking
association and a wholly-owned subsidiary of First Union Corporation
("First Union") (the "Merger"). The surviving corporation will be known
as "Keystone Investments, Inc." The Merger is subject to the receipt of
regulatory and fund shareholder approvals, as well as other conditions
set forth in the Merger Agreement. Management of the Company anticipates
that the Merger will be consummated in mid-December 1996. In connection
with the Merger, all of the shares of common stock of KI which are
outstanding immediately prior to the consummation of the Merger will be
exchanged for shares of common stock of First Union and all options to
purchase KI common stock which are outstanding immediately prior to the
consummation of the Merger will be exchanged for options to purchase
First Union common stock.
C. Earnings Per Share
Earnings per share are based upon the weighted average number of common
shares and common share equivalents outstanding for the nine-month
periods ended September 30, 1996 and 1995 of 5,493,892 and 5,359,650,
respectively, and for the three-month periods ended September 30, 1996
and 1995 of 5,611,772 and 5,389,955, respectively. Common share
equivalents included in the computation represent shares issuable upon
assumed exercise of stock options which have a dilutive effect in years
when there are earnings. Earnings per common and common share equivalent
assuming full dilution have not been presented because there are no
additional dilutive common share equivalents.
7
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - continued
D. Income Taxes
The Company files consolidated federal and state income tax returns. The
consolidated federal and state income tax provisions for the nine-month
periods ended September 30, 1996 and 1995 include the following (in
thousands):
Federal State Total
------- ----- -----
1996
Current $ 3,898 $ 1,088 $ 4,986
Deferred (465) (119) (584)
------- ------- -------
$ 3,433 $ 969 $ 4,402
======= ======= =======
1995
Current $ 2,892 $ 1,293 $ 4,185
Deferred (691) (651) (1,342)
------- ------- -------
$ 2,201 $ 642 $ 2,843
======= ======= =======
Reconciliations between the actual income tax expense and income taxes
computed by applying the statutory federal income tax rate to income
before provision for income taxes for the nine-month periods ended
September 30, 1996 and 1995 are as follows:
1996 1995
---- ----
Computed tax at statutory rate 35.0% 34.0%
State income taxes, net of federal
income tax benefits 6.8 8.5
Goodwill amortization 1.6 4.0
Change in tax rate 1.7 --
Other, net 3.2 3.3
---- ----
48.3% 49.8%
==== ====
8
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - continued
D. Income Taxes - continued
Deferred income taxes are recorded based upon differences between the
financial reporting and tax bases of assets and liabilities and available
tax credit carryforwards. The tax effects of these temporary differences
at September 30, 1996 and December 31, 1995 are presented below (in
thousands):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
---------------------------- -----------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Deferred broker-dealer commissions $ --- $ 11,096 $ --- $ 11,884
Net operating loss carryforwards 617 --- 1,103 ---
Compensation and employee benefits 2,330 --- 1,748 ---
Other, net 1,333 1,045 1,473 701
-------- -------- ------- --------
4,280 12,141 4,324 12,585
Valuation allowance (402) --- (585) ---
-------- -------- ------- --------
$ 3,878 $ 12,141 $ 3,739 $ 12,585
======== ======== ======= ========
</TABLE>
E. Distribution Plans
Keystone Investment Distributors Company ("KIDC"), a wholly-owned
subsidiary of Keystone Investment Management Company ("KIMCO"), is the
principal underwriter for the two retail fund groups for which the
Company provides investment advisory services, the Keystone Funds and the
Keystone America Funds ("KAF Funds"). Sales commissions paid to brokers
and dealers on sales of the Keystone Funds and the KAF Funds are
generally deferred to the extent that KIDC expects to recover these
commission payments from future collections of distribution fees and
contingent deferred sales charges related to current-period sales.
Distribution fees in the consolidated statements of operations for the
nine-month periods ended September 30, 1996 and 1995 respectively, are
net of service fee payments to brokers and dealers of $15.5 million and
$15.1 million; amortization of service fee prepayments of $0.6 million
and $0.2 million; and payments to a third party under two agreements for
the sale of rights to receive distribution fees and, for one of these
agreements, related contingent deferred sales charges of $1.8 million and
$0.5 million. Distribution fees for the nine-month period ended September
30, 1995 are also net of $6.2 million in distribution fees paid by
certain Keystone Funds which were used to recover a $7.0 million
settlement of a lawsuit initiated by Chase Manhattan Bank, N.A.
("Chase"). Chase was the purchaser under an agreement for the sale of
distribution fee collection rights (the "Chase Agreement").
9
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - continued
E. Distribution Plans - continued
Prior to November 1, 1995, KIDC expensed all broker-dealer commission
payments on sales of shares of the Funds for which KIDC had an obligation
under the Chase Agreement. Commencing November 1, 1995, KIDC began
deferring broker-dealer commission payments on sales of these Funds due
to the recovery of the settlement.
F. Common Stock and Stock Options
The total number of authorized shares of KI common stock ($.01 par value)
is 6,000,000. At September 30, 1996, 4,937,641 shares of KI common stock
were issued and outstanding and 374,364 shares were held in treasury.
A summary of activity under the 1989 Stock Plan and the 1994 Stock Option
Plan for the nine months ended September 30, 1996 is as follows:
<TABLE>
<CAPTION>
1989 Stock Plan 1994 Stock Option Plan
--------------- ----------------------
Option
Price Per
Options Options Share
------- ------- -----
<S> <C> <C> <C>
Outstanding at
December 31, 1995 37,827 371,685
Granted --- 367,000 $9.375-$18.75
Exercised (4,111) ---
Canceled (4,187) (127,685) $10.25-$18.75
- -----------------------------------------------------------------------------------------
Outstanding at
September 30, 1996 29,529 611,000 $9.375-$18.75
- -----------------------------------------------------------------------------------------
</TABLE>
All options granted under the 1989 Stock Plan have an exercise price equal to
$1.00 per share.
Options representing 1,420 shares issued under the 1989 Stock Plan were
exercised in October 1996. All options granted in 1996, except for options
issued in July representing 20,000 shares with an exercise price equal to 50% of
the estimated fair value of such shares on grant date, were issued with exercise
prices equal to the estimated fair values of such shares on grant dates.
Upon consummation of the Merger (Note B), all options to purchase KI common
stock become fully vested.
10
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - continued
G. Summarized Financial Information of KIMCO and KI
The following tables set forth summarized financial information of KIMCO
and its wholly-owned subsidiaries (collectively referred to herein as
"KIMCO and Subsidiaries") and the parent company, KI, consolidated with two
of its wholly-owned subsidiaries with minimal operating activity and with
KIMCO accounted for on the equity basis (collectively referred to herein as
"KI and Subsidiaries") (in thousands):
<TABLE>
<CAPTION>
KIMCO and Subsidiaries KI and Subsidiaries
---------------------- -------------------
9/30/96 12/31/95 9/30/96 12/31/95
------- -------- ------- --------
<S> <C> <C> <C> <C>
Current assets $ 37,418 $ 39,277 $ 20,131 $ 17,014
Noncurrent assets 72,941 73,742 72,695 74,469
-------- -------- -------- --------
Total assets $110,359 $113,019 $ 92,826 $ 91,483
======== ======== ======== ========
Current liabilities $ 24,681 $ 26,685 $ 2,210 $ 4,779
Noncurrent liabilities 40,494 51,225 145,107 145,072
-------- -------- -------- --------
Total liabilities 65,175 77,910 147,317 149,851
Total stockholders' equity (deficit) 45,184 35,109 (54,491) (58,368)
-------- -------- -------- --------
Total liabilities and
stockholders' equity (deficit) $110,359 $113,019 $ 92,826 $ 91,483
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
KIMCO and Subsidiaries
For the Nine Months Ended September 30,
---------------------------------------
1996 1995
---- ----
<S> <C> <C>
Total revenues $115,445 $102,964
Total expenses (97,657) (89,279)
-------- --------
Income before provision for income taxes $ 17,788 $ 13,685
======== ========
Net income $ 9,800 $ 7,609
======== ========
</TABLE>
<TABLE>
<CAPTION>
KI and Subsidiaries
For the Nine Months Ended September 30,
---------------------------------------
1996 1995
---- ----
<S> <C> <C>
Total revenues $ 302 $ 197
Total expenses (8,975) (8,177)
Equity in net income of KIMCO (consolidated) 9,800 7,609
-------- --------
Income (loss) before credit for income taxes $ 1,127 $ (371)
======== ========
Net income $ 4,713 $ 2,862
======== ========
</TABLE>
11
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
General
On August 19, 1993, the Company effected a recapitalization ("the
"Recapitalization") whereby Company management became the beneficial owners of
all of the outstanding common stock of KI. In connection with the
Recapitalization, KI issued $145.0 million aggregate principal amount of 9 3/4%
senior secured notes due 2003 ("Senior Secured Notes") and used the proceeds
(together with cash on hand) to (i) retire all bank indebtedness and junior
subordinated indebtedness; (ii) redeem all common stock of KI owned by a
partnership ("KTLP") and certain common stock of KI owned by certain members of
management of the Company who had held interests in KTLP; and (iii) pay
transaction costs related to the issuance of the Senior Secured Notes.
The Company's largest sources of revenues are mutual fund investment advisory
and management fees, distribution fees paid under the Retail Funds' 12b-1 Plans
("Distribution Fees") and transfer agent fees received from funds offered to the
public ("Retail Funds"). Retail Fund investment advisory and management fees are
generally based upon average daily net assets and, for the fixed income funds,
also upon gross yields. Distribution Fees are based upon sales of shares of the
Retail Funds and Retail Fund assets under management. Transfer agent fees are
based primarily upon the number of shareholder accounts.
On July 11, 1996, three individuals with portfolio management responsibility for
small company growth funds, private accounts, a global equity fund and a
wrap-fee product resigned. At June 30, 1996, total assets under management for
which such individuals were responsible represented approximately 25% of the
Company's assets under management. In November, an individual was hired to
replace the leader of this team.
As discussed in Note B to the Unaudited Interim Consolidated Financial
Statements, on September 6, 1996 KI entered into the Merger Agreement whereby KI
will be merged with and into a wholly-owned subsidiary of FUNB. Management of
the Company anticipates that the Merger will be consummated in mid-December
1996. Except as noted, the discussion in this report does not give effect to the
planned consummation of the Merger.
The Three Months Ended September 30, 1996 Compared to the Three Months Ended
September 30, 1995
Assets under management at September 30, 1996 were $11.8 billion, an increase of
$0.5 billion, or 4%, from $11.3 billion at September 30, 1995. Retail Fund
assets were $10.3 billion at September 30 1996 and 1995 with net sales during
the last quarter of 1995 and market appreciation offset by net redemptions
during the first nine months of 1996. The increase in total assets under
management included a $286 million increase in assets in a wrap-fee product
sponsored by a major broker-dealer and a $124 million increase in foreign market
mutual fund assets.
12
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations - continued
The Three Months Ended September 30, 1996 Compared to the Three Months Ended
September 30, 1995 - continued
Commissionable sales of shares of the Retail Funds, which include the Keystone
Funds and the KAF Funds, totaled $193 million for the third quarter of 1996, a
decrease of $115 million, or 37%, from $308 million for the third quarter of
1995. Total sales of the Retail Funds (including non-commissionable sales and
dividend reinvestments and net of commissions paid by investors) were $399
million in the third quarter of 1996, a decrease of $230 million, or 37%, from
$629 million in the third quarter of 1995. Retail Fund redemptions totaled $641
million in the third quarter of 1996, a decrease of $13 million, or 2%, from
$654 million in the third quarter of 1995.
Revenues for the third quarter of 1996 were $37.9 million, an increase of $2.7
million, or 8%, from $35.2 million for the third quarter of 1995. Distribution
Fees increased $1.7 million due to the recovery of the settlement paid to Chase
(see Note E to Unaudited Interim Consolidated Financial Statements).
Sales commissions increased $0.4 million due to a higher contingent deferred
sales charge rate on redemptions of Retail Fund assets (note - the rate
generally declines with the age of Fund shares). This increase is reduced by the
impact of a sale on June 1, 1995 of collection rights with respect to
Distribution Fees arising from future sales during a two-year period of Class B
shares of the KAF Funds issued after June 1, 1995 and related contingent
deferred sales charges ("Sale of Collection Rights") (see Note E to Unaudited
Interim Consolidated Financial Statements). Transfer agent fees increased $0.2
million due to an increase in the number of shareholder accounts. Investment
income increased $0.1 million due to higher balances in cash and cash
equivalents. The $0.4 million increase in other income included a $0.6 million
increase in fees earned from the wrap-fee product and a $0.3 million decrease in
fees earned from private and institutional accounts.
Expenses for the three months ended September 30, 1996 were $35.8 million, an
increase of $4.1 million, or 13%, from $31.7 million for the three months ended
September 30, 1995. Compensation and employee benefits increased $1.1 million
due principally to changes in certain incentive compensation agreements, salary
increases and a decrease in the discount rate used to calculate retirement plan
expense.
Broker-dealer commission expense was $1.9 million higher in the third quarter of
1996 than in the third quarter of 1995 primarily due to greater acceleration of
commissions deferred on sales of the Keystone Funds.
The $1.1 million increase in other expenses included increases in expenses
related to professional services, office services, recruitment and sales
promotion.
13
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations - continued
The Nine Months Ended September 30, 1996 Compared to the Nine Months Ended
September 30, 1995
Commissionable sales of shares of the Retail Funds totaled $945 million for the
nine months ended September 30, 1996, an increase of $168 million, or 22%, from
$777 million for the nine months ended September 30, 1995. Total sales of the
Retail Funds (including non-commissionable sales and dividend reinvestments and
net of commissions paid by investors) were $1.7 billion in the first nine months
of 1996, an increase of $289 million, or 21%, from $1.4 billion in the first
nine months of 1995. Retail Fund redemptions totaled $2.2 billion in the first
three quarters of 1996, an increase of $378 million, or 20%, from $1.9 billion
in the first three quarters of 1995.
Revenues for the first nine months of 1996 were $115.7 million, an increase of
$12.5 million, or 12%, from $103.2 million for the first nine months of 1995.
Distribution Fees increased $8.2 million primarily due to the recovery of the
settlement paid to Chase (see Note E to Unaudited Interim Consolidated Financial
Statements). Additionally, Distribution Fees paid by the Retail Funds were
higher due to higher assets (most notably, in one small company growth fund and
one global equity fund).
Mutual fund management fees increased $2.4 million due to an increase in Retail
Fund asset levels (primarily in the two Funds mentioned above). Transfer agent
fees increased $0.5 million due to an increase in the number of shareholder
accounts. Investment income increased $0.2 million due to higher balances in
cash and cash equivalents. The $1.3 million increase in other income was due to
higher fees earned on increased assets in the wrap-fee account.
Expenses for the nine months ended September 30, 1996 were $106.6 million, an
increase of $9.1 million, or 9%, from $97.5 million for the nine months ended
September 30, 1995. Compensation and employee benefits increased $4.7 million
due to changes in certain incentive compensation agreements, salary increases,
higher commissions earned by wholesalers on higher Retail Fund and wrap-fee
account sales and a decrease in the discount rate used to calculate retirement
plan expense.
Broker-dealer commission expense was $29.0 million for both nine-month periods.
Higher commission payments on higher Keystone Fund sales in 1996 were offset by
the impact of lower incentive payments in 1996 and the Sale of Collection
Rights.
The $4.5 million increase in other expenses included increases in expenses
related to professional services, office services, sales promotion, recruitment
and occupancy.
The provision for income taxes for the first nine months of 1996 of $4.4 million
included a $5.0 million current income tax provision and a $0.6 million deferred
income tax credit.
14
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations - continued
Capital Resources and Liquidity
Cash flows provided by operating activities for the nine-month periods ended
September 30, 1996 and 1995 totaled $6.3 million and $0.8 million, respectively.
Cash flows provided by operating activities for the nine-month periods ended
September 30, 1996 and 1995 included net cash flows from Distribution Fees and
sales commissions collected and retained less commissions and service fees paid
to broker-dealers (excluding the $7.0 million payment to Chase and recoveries
thereof in 1995) of $23.5 million and $21.5 million, respectively. The $2.0
million increase was due primarily to higher distribution fees on higher
Keystone Fund assets. Higher management fees earned on Retail Fund and wrap-fee
account assets also contributed to the increase in cash provided by operations.
Increased compensation payments had a negative effect on operating cash flows in
1996.
Net cash used in investing activities for the nine months ended September 30,
1996 of $5.7 million included $4.1 million utilized to seed new Retail Funds,
$1.2 million in fixed asset additions which are primarily systems-related and a
$0.5 million additional investment in the common stock of a closely-held mutual
fund management company in Taiwan, Chronicle Securities Investment Trust Co. Net
cash flows used in investing activities in the nine months ended September 30,
1995 included a $1.3 million investment in common stock of Kokusai Securities
Co., Ltd. which distributes shares of certain Funds managed by the Company in
Japan.
In the first nine-months of 1996 and 1995, net treasury stock purchases totaled
$0.8 million and $1.1 million, respectively.
As of September 30, 1996, the Company had $34.5 million in unrestricted cash and
cash equivalents, $5.0 million in short-term investments available to fund
current operations, and $4.2 million in accounts receivable and accrued income
(including $1.2 million in receivables from affiliated mutual funds). Current
liabilities totaled $14.7 million.
There were no significant cash commitments as of September 30, 1996 for capital
expenditures nor are there any significant capital expenditures anticipated for
the remainder of 1996. The Company leases most of its furniture and equipment as
well as its two main operating facilities.
The Company's capital resources and liquidity are affected by the level and mix
of sales of shares of the Keystone Funds and Class B shares of the KAF Funds
which are currently sold to investors at net asset value without an initial
sales charge using a "spread-load" pricing structure. In June 1995, the Company
entered into an agreement for the Sale of Collection Rights (see Note E to
Unaudited Interim Consolidated Financial Statements). The purchaser under this
agreement has committed to pay up to $75 million for the collection rights
depending upon the sales volume of KAF fund Class B shares during a two-year
period. Prior to the Merger, the Company will cease selling any collection
rights related to future sales under the agreement for the Sale of Collection
Rights.
15
<PAGE>
Item 2. Management's Discussion And Analysis of Financial Condition and Results
of Operations - Continued
Capital Resources and Liquidity - continued
Ongoing access to retail distribution channels is essential to the Company's
future performance. Expenses associated with maintaining such access have been
increasing and the Company expects this trend to continue. Increases in such
expenses are expected to relate primarily to costs associated with retail
broker-dealers seeking to defray a portion of such retail broker-dealers' costs
of transfer agency services in connection with their clients' investments in the
Company's Retail Funds and costs associated with such retail broker-dealers'
promotional efforts with respect to the Company's Retail Funds, including sales
meetings, seminars and revenue sharing arrangements.
Changes in economic or market conditions may affect the level of assets under
management and, therefore, mutual fund investment advisory and management fees,
managed account fees, Distribution Fees and administrative fees.
The Company expects that cash generated from operations will be adequate to
permit the Company to meet both its debt service requirements and working
capital needs.
The $145.0 million aggregate principal amount of the Senior Secured Notes
matures in 2003. There are certain optional and mandatory repayment provisions
under the indenture for the Senior Secured Notes (the "Indenture") which include
the right to require KI to repurchase (in whole or in part) the Senior Secured
Notes in cash in an amount equal to 101% of the principal amount of the Senior
Secured Note plus accrued and unpaid interest in the event of a change of
control, as defined.
First Union intends to place treasury bills in a trust to be used solely for
satisfying scheduled interest and principal obligations under the Indenture.
First Union intends to exercise an option under the Indenture to redeem the
Senior Secured Notes at a premium during the twelve-month period beginning
September 1, 1998.
16
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item: 1 Legal Proceedings. Not Applicable
Item: 2 Changes in Securities. Not Applicable
Item: 3 Defaults on Senior Securities. Not Applicable
Item: 4 Submission of Matters to a Vote of Security Holders.
Not Applicable
Item: 5 Other Information. Not Applicable
Item: 6 Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K
The following exhibits are filed as part of this Form 10-Q:
Exhibit No. Description
- ----------- --------------------------------
2.1 Securities Redemption Agreement among KI, KIMCO and KTLP(6)
2.2 Instructions from Selling Management Stockholders(4)
2.3 Agreement and Plan of Acquisition and Merger, dated as of
September 6, 1996 by and among Keystone Investments, Inc.,
First Union Corporation, First Union National Bank of
North Carolina and First Union Keystone, Inc.(1)
3.1(a)(i) Restated Certificate of Incorporation of KI(8)
3.1(a)(ii) Amendment to Certificate of Incorporation KI(9)
3.1(b)(i) Restated Certificate of Incorporation of KIMCO(3)
3.1(b)(ii) Amendment to Certificate of Incorporation of KIMCO(9)
3.2(a) By-Laws of KI, as amended(8)
3.2(b)(i) Amended and Restated By-Laws of KIMCO(3)
3.2(b)(ii) Amendment to KIMCO By-Laws(12)
4.1 Indenture among KI, KIMCO and Fleet Bank of Massachusetts,
N.A., as Trustee, dated August 19, 1993(5)
4.2 Pledge and Security Agreement among KI, KIMCO and Fleet
Bank of Massachusetts, N.A., as Collateral Agent, dated
August 19, 1993(5)
10.3 Amended and Restated Stockholders' Agreement dated August
18, 1993(6)
10.4+ Purchase and Sale Agreement dated as of December 31, 1992
among KIDC, Citibank, N.A. ("Citibank") and Citicorp North
America, Inc. ("Citicorp")(4)
10.6 Office Lease for Premises located at 200 Berkeley Street,
Boston, Massachusetts by and between John Hancock Mutual
Life Insurance Company and KIMCO dated as of March 15,
1991, as amended(2)
10.7 Lease for Premises Located at 101 Main Street, Cambridge,
Massachusetts by and between Riverfront Office Park Joint
Venture and KIRC dated as of February 9, 1990(2)
10.8++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and George S. Bissell(2)
17
<PAGE>
Item: 6 Exhibits and Reports on Form 8-K. - continued
10.9++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Albert H. Elfner, III(2)
10.10++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Stephen J. Arpante(2)
10.11++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Edward F. Godfrey(2)
10.12++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Ralph J. Spuehler, Jr.(2)
10.13++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Roger T. Wickers(2)
10.14++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Philip M. Byrne(2)
10.15++ Amendments to Split Dollar Agreements dated October
1994(7)
10.22(a)++ Keystone Group, Inc. 1989 Stock Plan(2)
10.22(b)++ First Amendment to the Keystone Group, Inc. 1989 Stock
Plan(6)
10.23(a)++ Keystone Investments, Inc. Short-Term Management Incentive
Plan, as revised June 1996(13)
10.23(b)++ Keystone Investments, Inc. Short-Term Management Incentive
Plan for Senior Management, as revised June 1996(13)
10.24++ KIMCO Short-Term Incentive Plan for Investment
Professionals, as revised April 1995(12)
10.26++ Keystone Investments Annual Performance Bonus Plan, as
revised October 1995(12)
10.27 KI 1989 Employee Securities Purchase Plan A(2)
10.28 KI 1989 Employee Securities Purchase Plan B(2)
10.29 KI 1992 Employees Securities Purchase Plan C(2)
10.30++ KI Defined Benefit Pension Plan, effective January 1,
1990(4)
10.31++ KI 1994 Stock Option Plan(7)
10.32++ Compensatory Arrangement for Non-Employee KI Directors(7)
10.33 Purchase and Sale Agreement among KIDC, Citibank, and
Citicorp dated as of May 31, 1995(10)
10.34 Undertaking among KI, KIMCO, Citibank, and Citicorp dated
as of May 31, 1995(10)
10.35 Servicing Agreement among KIDC, Citibank, and Citicorp
dated as of May 31, 1995(10)
10.36 Collection Agency Agreement among KIDC, Citibank,
Citicorp, and Bankers Trust Company dated as of May 31,
1995(10)
10.37 Amendments No. 2 and 3 to Office Lease for Premises
located at 200 Berkeley Street, Boston, MA, by and between
John Hancock Mutual Life Insurance Company and Keystone
Investment Management Company, dated October 2, 1994 and
August 25, 1995, respectively(11)
10.38++ Keystone Investments, Inc. Deferred Profit Sharing Plan
for Key Executives dated May 1996(13)
10.39 Amendment to Amended and Restated Stockholders' Agreement
dated March 30, 1994(13)
10.40++ Employment Agreement between Keystone Investments, Inc.
and Albert H. Elfner, III(1)
10.41++ Employment Agreement between Keystone Investments, Inc.
and Edward F. Godfrey(1)
10.42++ Employment Agreement between Keystone Investments, Inc.
and Ralph J. Spuehler(1)
18
<PAGE>
Item: 6 Exhibits and Reports on Form 8-K. - continued
27.00 Financial Data Schedule(1)
99.1 Statement of Policy re Officers' Stock Purchase Program(8)
- --------------------
1 Filed herewith.
2 Incorporated herein by reference to the corresponding exhibit to the
Company's Form S-1 Registration Statement No. 33-64506 filed with the
Securities and Exchange Commission on June 16, 1993.
3 Incorporated herein by reference to the corresponding exhibit to the
Company's Amendment No. 1 to its Form S-1 Registration Statement No.
33-64506 filed with the Securities and Exchange Commission on July 28,
1993.
4 Incorporated herein by reference to the corresponding exhibit to the
Company's Amendment No. 2 to its Form S-1 Registration Statement No.
33-64506 filed with the Securities and Exchange Commission on August
11, 1993.
5 Incorporated herein by reference to the corresponding exhibit to the
Company's Form 10-Q filed with the Securities and Exchange Commission
on November 15, 1993.
6 Incorporated herein by reference to the corresponding exhibit to the
Company's Form 1993 10-K filed with the Securities and Exchange
Commission on March 31, 1994.
7 Incorporated herein by reference to the corresponding exhibit to the
Company's 1994 Form 10-K filed with the Securities and Exchange
Commission on March 31, 1995.
8 Incorporated herein by reference to the corresponding exhibit to the
Company's Form S-8 Registration Statement No. 33-87780 filed with the
Securities and Exchange Commission on December 22, 1994.
9 Incorporated herein by reference to the corresponding exhibit to the
Company's Form 10-Q filed with the Securities and Exchange Commission
on May 15, 1995.
10 Incorporated herein by reference to the corresponding exhibit to the
Company's Form 10-Q filed with the Securities and Exchange Commission
on August 11, 1995.
11 Incorporated by reference herein to the corresponding exhibit to the
Company's Form 10-Q filed with the Securities and Exchange Commission
on November 15, 1995.
12 Incorporated by reference herein to the corresponding exhibit to the
Company's Form 10-K filed with the Securities and Exchange Commission
on March 27, 1996.
13 Incorporated by reference herein to the corresponding exhibit to the
Company's Form 10-Q filed with the Securities and Exchange Commission
on August 13, 1996.
19
<PAGE>
Item: 6 Exhibits and Reports on Form 8-K. - continued
+ Confidential treatment has been granted for portions of this document.
++ Management contract or compensatory plan or arrangement.
+++ Exhibits and Schedules to the Agreement and Plan of Acquisition and
Merger are not filed herewith. A copy of any such Exhibit or Schedule
will be furnished supplementally to the Commission upon request.
(b) Reports on Form 8-K
On September 11, 1996, Keystone Investments, Inc. and Keystone Investment
Management Company filed a Report on Form 8-K dated September 10, 1996. Under
"Item 5 - Other Events" of Form 8-K it was reported that Keystone Investments,
Inc. had entered into an Agreement and Plan of Acquisition and Merger with First
Union Corporation. See Footnote B to the Unaudited Interim Consolidated
Financial Statements of Keystone Investments, Inc. and Subsidiaries.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf this 12th
day of November, 1996 by the undersigned thereunto duly authorized.
Keystone Investments, Inc.
(Registrant)
/s/Edward F. Godfrey
- --------------------------------------------------
Edward F. Godfrey
Senior Vice President, Chief Financial Officer and
Treasurer
/s/John D. Rogol
- --------------------------------------------------
John D. Rogol
Vice President and Controller
Keystone Investment Management Company
(Registrant)
/s/Edward F. Godfrey
- --------------------------------------------------
Edward F. Godfrey
Senior Vice President, Chief Financial Officer and
Treasurer
/s/John D. Rogol
- --------------------------------------------------
John D. Rogol
Vice President and Controller
21
EXECUTION COPY
================================================================================
AGREEMENT AND PLAN OF ACQUISITION AND MERGER
dated as of September 6, 1996
by and among
FIRST UNION CORPORATION,
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
FIRST UNION KEYSTONE, INC.
and
KEYSTONE INVESTMENTS, INC.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
RECITALS 1
(A) The Company 1
(B) First Union 1
(C) FUNB-NC 1
(D) Merging Entity 1
(E) The Funds 2
(F) Approvals 2
(G) Intention of the Parties 3
I. THE ACQUISITION AND MERGER 3
1.01. The Purchase and Sale 3
1.02. Right to Direct Company Assets and Company Liabilities 3
1.03. The Merger 3
1.04. Effective Date; Effective Time 4
II. CONSIDERATION 4
2.01. Acquisition Consideration 4
2.02. Fractional Shares 6
2.03. Exchange Procedures 6
2.04. Anti-Dilution Provisions 6
2.05. Reservation of Right to Revise Transaction 7
2.06. Treatment of Company Stock Options 7
2.07. Dissenters' Rights 8
III. ACTIONS PENDING CONSUMMATION 8
3.01. Equity Securities 8
3.02. Dividends, Etc. 9
3.03. Indebtedness; Liabilities; Etc. 9
3.04. Lines of Business; Operating Procedures; Etc. 9
3.05. Liens 9
3.06. Compensation; Employment Agreements; Etc. 9
3.07. Benefit Plans 10
3.08. Continuance of Business 10
3.09. Amendments 10
3.10. Contracts 10
3.11. Claims 10
3.12. Other Actions 10
3.13. Fund Action 11
3.14. Agreements 11
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<PAGE>
IV. REPRESENTATIONS AND WARRANTIES 11
4.01. Representations and Warranties of the Company 11
4.02. Representations and Warranties of First Union 33
V. COVENANTS 37
5.01. Consents and Approvals 37
5.02. Current Information 38
5.03. Access; Information 39
5.04. Effect of Investigations 40
5.05. Acquisition Proposals 40
5.06. Stock Exchange Listing; Affiliate Letters 41
5.07. Stockholder Approval 42
5.08. Registration Statement 42
5.09. Qualification of the Funds 43
5.10. Press Releases, Etc. 43
5.11. Reasonable Best Efforts 43
5.12. Regulatory Applications 44
5.13. Section 15(f) 44
5.14. Reorganization and Accounting Treatment 45
5.15. Regulatory Conditions 45
5.16. Indemnification 45
VI. CONDITIONS TO CONSUMMATION OF THE ACQUISITION AND MERGER 47
6.01. Conditions to Each Party's Obligations to Consummate 47
6.02. Conditions to Obligations of First Union,
FUNB-NC and the Merging Entity to Consummate 49
6.03. Conditions to Obligations of the Company to
Consummate 51
VII. TERMINATION
7.01. Mutual Consent 52
7.02. Breach 52
7.04. Delay 53
7.05. Injunction, etc. 53
7.06. First Union Common Stock 53
7.07. Other Circumstances 56
7.08. Effect of Termination 56
7.09. Payment in Lieu of Fees and Expenses and
Opportunity Costs 56
VIII. OTHER MATTERS 57
8.01. Survival 57
8.02. Waiver; Amendment 57
8.03. Counterparts 57
8.04. Governing Law 57
8.05. Expenses 58
8.06. Notices 58
8.07. Definitions 58
8.09. Entire Understanding; No Third Party Beneficiaries 60
8.10. Benefit Plans 60
-ii-
<PAGE>
8.11. Assignment 60
8.12. Headings 61
-iii-
<PAGE>
AGREEMENT AND PLAN OF ACQUISITION AND MERGER
AGREEMENT AND PLAN OF ACQUISITION AND MERGER, dated as of the 6th day
of September, 1996 (this "Plan"), by and among KEYSTONE INVESTMENTS, INC. (the
"Company"), FIRST UNION CORPORATION ("First Union"), FIRST UNION NATIONAL BANK
OF NORTH CAROLINA ("FUNB-NC"), and FIRST UNION KEYSTONE, INC. (the "Merging
Entity").
RECITALS:
(A) The Company. The Company is a corporation duly organized and
validly existing in good standing under the laws of the State of Delaware, with
its principal executive offices located in Boston, Massachusetts. As of the date
hereof, the Company has 6,000,000 authorized shares of common stock, each of
$.01 par value ("Company Common Stock")(no other class of equity securities
being authorized), of which 4,933,729.4294 shares of Company Common Stock are
issued and, excluding treasury shares, outstanding.
(B) First Union. First Union is a corporation duly organized and
existing in good standing under the laws of the State of North Carolina, with
its principal executive offices located in Charlotte, North Carolina. As of the
date hereof, First Union has 750,000,000 authorized shares of common stock, each
of $3.33 1/3 par value (together with the First Union Rights (as hereinafter
defined) attached thereto, "First Union Common Stock")), 40,000,000 authorized
shares of Class A Preferred Stock, no-par value ("First Union Class A Preferred
Stock"), and 10,000,000 authorized shares of Preferred Stock, no-par value
("First Union Preferred Stock") (no other class of capital stock being
authorized), of which 270,469,128 shares of First Union Common Stock, 1,895,404
shares of First Union Series B Convertible Class A Preferred Stock and no shares
of First Union Preferred Stock, were issued and outstanding as of August 31,
1996.
(C) FUNB-NC. FUNB-NC is a national banking association duly organized
and validly existing under the laws of the United States, with its principal
executive offices located in Charlotte, North Carolina. FUNB-NC is a
wholly-owned subsidiary of First Union (except for directors' qualifying
shares).
(D) Merging Entity. The Merging Entity is a corporation duly organized
and in good standing under the laws of the State of North Carolina, with its
principal
<PAGE>
executive offices located in Charlotte, North Carolina. As of the date hereof,
the Merging Entity has 5,000 authorized shares of common stock, each of $1.00
par value ("Merging Entity Common Stock") (no other class of capital stock being
authorized), of which 5,000 shares are issued and outstanding, all of which are
owned by FUNB-NC.
(E) The Funds. As of the date hereof, certain of the Company
Subsidiaries (as hereinafter defined) provide investment advisory and certain
other services to each of the Investment Companies (as hereinafter defined) and
entities organized under the laws of jurisdictions outside the United States
Previously Disclosed (as hereinafter defined) in Schedule E (as such Schedule E
may be supplemented prior to the Effective Date to add Investment Companies or
other such entities that may be organized after the date hereof) (collectively,
the "Funds" and each, individually, a "Fund"). Each of the Funds (or the trust
of which it is a series) is duly organized and existing in good standing under
the laws of the jurisdiction under which it is organized as Previously Disclosed
on Schedule E. As of the date hereof, each of the Investment Companies is
governed by a board of trustees or directors (each a "Fund Board" and,
collectively, the "Fund Boards") consisting of at least 50% of trustees or
directors who are not "interested persons" (as defined in the Investment Company
Act of 1940 (as amended, the "Investment Company Act")) of the Investment
Companies or the Company.
(F) Approvals. The Boards of Directors of each of the Company, First
Union, FUNB-NC and the Merging Entity, and the sole stockholder of FUNB-NC and
the Merging Entity, have approved this Plan in accordance with applicable law
and their respective constituent documents. Each of the beneficial owners of
Company Common Stock subject to the Management Stockholders' Voting Trust
Agreement, as amended and restated August 18, 1993, or the Management
Stockholders' Option Share Voting Trust Agreement, dated as of August 2, 1993
(each, a "Management Stockholders' Voting Trust"), is entering into an
agreement, in substantially the form of Exhibit A (the "Voting Agreement"),
pursuant to which each such person has agreed to cause to be voted, as a
beneficiary of the Management Stockholders' Voting Trusts, for approval of this
Plan all shares of Company Common Stock over which such person has discretion to
direct the voting. As of the date hereof, the aggregate number of shares of
Company Common Stock held by such beneficial owners and subject to the Voting
Agreement is 2,525,253 shares, which constitutes 51.18% of the Company Common
Stock issued and outstanding on the date hereof.
-2-
<PAGE>
(G) Intention of the Parties. It is the intention of the parties that
(1) the transactions contemplated hereby shall qualify as a "pooling of
interests" under generally accepted accounting principles and (2) the
Acquisition (as hereinafter defined) shall qualify as a reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
In consideration of their mutual promises and obligations, the parties
hereto adopt and make this Plan and prescribe the terms and conditions hereof
and the manner and basis of carrying it into effect, which shall be as follows:
I. THE ACQUISITION AND MERGER
1.01. The Purchase and Sale. Subject to and upon the terms and
conditions of this Plan, on the Effective Date (as hereinafter defined), the
Company shall sell, transfer, convey, assign and deliver to FUNB-NC (or a
subsidiary corporation designated by FUNB-NC pursuant to Section 1.02 that is
controlled by FUNB-NC) all of the assets, including cash balances (the "Company
Assets"), and FUNB-NC (or a subsidiary corporation designated by FUNB-NC
pursuant to Section 1.02 that is controlled by FUNB-NC) shall assume all of the
liabilities of the Company (the "Acquisition") on the Effective Date. The
Company Assets shall be transferred free and clear of any Liens (as hereinafter
defined).
1.02. Right to Direct Company Assets and Company Liabilities. Pursuant
to the right of FUNB-NC to designate, under Section 1.01 above, a subsidiary
corporation to which the Company Assets shall be transferred and which
subsidiary shall assume all the Company Liabilities, FUNB-NC hereby directs that
the Company Assets and the Company Liabilities be transferred to and assumed by
the Merging Entity and also irrevocably directs the Company and the Merging
Entity to implement such transfer and assumption at the Effective Time by means
of the Merger (as hereinafter defined).
1.03. The Merger. At the Effective Time (as hereinafter defined):
(A) The Continuing Corporation. The Company shall merge (the
"Merger") with and into the Merging Entity, the separate existence of
the Company shall cease and the Merging Entity (being sometimes
referred to as the "Continuing Corporation") shall survive and continue
to be governed by the laws of the State of North Carolina. The name of
the Continuing Corporation shall be "Keystone Investments, Inc."
-3-
<PAGE>
(B) Effect of the Merger. The Merger shall have the effects
specified in Section 252 of the Delaware General Corporation Law (the
"DGCL") and Section 55-11- 07 of the North Carolina Business
Corporation Act (the "NCBCA").
(C) Articles of Incorporation; Bylaws; Directors; Officers.
The Articles of Incorporation and Bylaws of the Continuing Corporation
shall be those of Merging Entity, as in effect immediately prior to the
Effective Time. The directors and officers of the Merging Entity in
office immediately prior to the Effective Time shall be the directors
and officers of the Continuing Corporation, respectively, together with
such additional directors and officers as may thereafter be elected,
who shall hold office until such time as their successors are elected
and qualified.
1.04. Effective Date; Effective Time. Subject to the conditions to the
obligations of the parties to effect the Acquisition and Merger, as set forth in
Article VI, the parties shall cause the effective date of the Merger (the
"Effective Date") to occur on (1) the fifth business day after the day on which
all the conditions set forth in Article VI (other than conditions that by their
terms may be satisfied only at the Closing) have been satisfied or waived in
accordance with the terms of this Plan or (2) such other date upon which the
parties may agree in writing. Subject to the terms and conditions herein set
forth, on or prior to the Effective Date, the Company and the Merging Entity
shall execute and deliver to the Secretaries of State of the States of North
Carolina and Delaware, as applicable, a Certificate of Merger or Articles of
Merger, as applicable, in accordance with applicable law necessary to effectuate
the Merger (collectively, the "Articles of Merger"). The time at which the
Merger shall become effective on the Effective Date is referred to as the
"Effective Time".
II. CONSIDERATION
2.01. Acquisition Consideration. Subject to the provisions of this
Plan, at the Effective Time:
(A) Outstanding Merging Entity Common Stock. The shares of
Merging Entity Common Stock issued and outstanding immediately prior to
the Effective Time shall remain outstanding as shares of common stock
of the Continuing Corporation.
-4-
<PAGE>
(B) Outstanding Company Common Stock. Each share of Company
Common Stock issued and outstanding immediately prior to the Effective
Time (other than shares that are held by stockholders ("Dissenting
Stockholders") exercising appraisal rights pursuant to Section 262 of
the DGCL) shall at the Effective Time be converted into the right to
receive that number of shares of First Union Common Stock (the
"Exchange Ratio") obtained by dividing (1) (a) 2,912,000 shares
(subject to possible adjustment as set forth in this Section 2.01,
Sections 2.04 and 7.06, the "Aggregate Share Consideration") of First
Union Common Stock, less (b) the number of shares of First Union Common
Stock which the Company shall be obligated to deliver to Keystone TA
Limited Partnership (or the successors thereto) ("KTALP") pursuant to
the Securities Redemption Agreement, dated as of August 10, 1993, by
and among the Company, Keystone Investment Management Company and
KTALP, as a result of the Acquisition by (2) (a) the number of shares
of Company Common Stock issued and outstanding immediately prior to the
Effective Time (including shares held by Dissenting Stockholders) plus
(b) the number of shares of Company Common Stock for which the Company
Stock Options (as hereinafter defined) are outstanding and unexercised
immediately prior to the Effective Time; provided, however, that if the
Fund Account Value (as hereinafter defined) as of the business day
immediately prior to the Effective Date is equal to or less than the
product of 0.85 and the Fund Account Value as of the close of business
on September 6 (as Previously Disclosed on Schedule 4.01(X)(2)), then
the Aggregate Share Consideration (after taking into account any
adjustments thereto as provided under Sections 2.04 and 7.06) shall be
reduced by 13.5%.
(C) The term "Fund Account Value", as of any date of
determination, shall mean the aggregate for all of the 12 open-end
Investment Companies comprising the Keystone Funds and 21 open-end
Investment Companies comprising the Keystone America Funds
(collectively, the "Retail Funds") of the product of (1) (A) the total
number of shares of each Retail Fund outstanding on September 6, 1996
(as Previously Disclosed on Schedule 4.01(X)(2)), plus or minus (B) the
net number of shares issued or redeemed by such Retail Funds if any,
after September 6, 1996 and before such date of determination, and (2)
the net asset value per share of such Retail Fund as of the close of
business on September 6, 1996 (as Previously Disclosed on Schedule
4.02(X)(2)).
-5-
<PAGE>
2.02. Fractional Shares. Notwithstanding any other provision hereof, no
fractional shares of First Union Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the
Acquisition and Merger; instead, First Union shall pay to each holder of Company
Common Stock who would otherwise be entitled to a fractional share an amount in
cash determined by multiplying such fraction by the last sale price of First
Union Common Stock on the last trading day prior to the Effective Date, as
reported by the New York Stock Exchange Composite Transactions reporting system
(as reported in The Wall Street Journal).
2.03. Exchange Procedures. On or after the Effective Date, the
certificates representing all of the shares of Company Common Stock (or an
indemnity reasonably satisfactory to First Union, if any of such certificates
are lost, stolen or destroyed) outstanding immediately prior to the Effective
Time shall be delivered to First Union or its designee, together with such
endorsements, guarantees and other documentation as First Union or its designee
may reasonably require, in exchange for certificates representing the shares of
First Union Common Stock and fractional share checks issuable as set forth in
Sections 2.01 and 2.02 and any dividends paid on such shares of First Union
Common Stock prior to or on the date of such exchange and for which the record
date for determination of stockholders entitled to such dividends is on or after
the Effective Date. Following the delivery of certificates representing all
shares of Company Common Stock by a former shareholder of the Company (or such
indemnity), such shareholder shall be entitled to receive any dividends paid on
the shares of First Union Common Stock to which he is entitled hereunder for
which the record date for determination of shareholders entitled to receive such
dividends is on or after the Effective Date. No interest will be paid on any
such fractional share checks or dividends to which the holder of such shares
shall be entitled to receive upon such delivery. Certificates surrendered for
exchange by any person constituting an "affiliate" of the Company for purposes
of Rule 145 of the Securities Act of 1933, as amended (the "Securities Act"),
shall not be exchanged for certificates representing First Union Common Stock
until First Union has received a written agreement from such person as specified
in Section 5.06(B).
2.04. Anti-Dilution Provisions. In the event First Union changes the
number of shares of First Union Common Stock issued and outstanding prior to the
Effective Time as a result of a stock split, stock dividend, recapitalization or
similar transaction with respect to the outstanding First
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Union Common Stock and the record date therefor shall be prior to the Effective
Time, the Aggregate Share Consideration shall be proportionately adjusted.
2.05. Reservation of Right to Revise Transaction. If and to the extent
that First Union determines that a change in the method of effecting the
transactions contemplated hereby would facilitate consummation of such
transactions in accordance with the business expectations of the parties, the
Company and First Union agree to discuss such change and cooperate in good faith
in determining whether such change is in the best interests of the parties
hereto, and if agreed in good faith by the Company and First Union, to effect
such change; provided, however, that no such change shall (i) alter or change
the amount or kind of consideration to be issued to holders of Company Common
Stock or Company Stock Options as provided for in this Plan, (ii) adversely
affect the tax treatment to holders of Company Common Stock as a result of such
change,(iii) adversely affect the qualification of the Acquisition and Merger
for pooling-of-interests treatment under generally accepted accounting
principles, or (iv) reasonably be expected to materially impede or delay the
consummation of the Acquisition and Merger.
2.06. Treatment of Company Stock Options. From and after the Effective
Time (i) all employee stock options to purchase shares of Company Common Stock
("Company Stock Options"), which are outstanding and unexercised immediately
prior to the Effective Time, shall be converted into and become options to
purchase shares of First Union Common Stock, and the Merging Entity shall assume
each Company Stock Option in accordance with the terms of the plan and agreement
by which it is evidenced and this Section 2.06, (ii) each Company Stock Option
assumed by the Merging Entity may be exercised solely to purchase shares of
First Union Common Stock, (iii) the number of shares of First Union Common Stock
purchasable upon exercise of each Company Stock Option shall be equal to the
number of shares of Company Common Stock purchasable upon exercise of such
Company Stock Option immediately prior to the Effective Time, multiplied by the
Exchange Ratio and rounded down to the nearest whole share, and (iv) the per
share exercise price under each Company Stock Option shall be adjusted by
dividing such per share exercise price by the Exchange Ratio and rounding to the
nearest cent. The number of shares of Company Common Stock which are issuable
upon exercise of Company Stock Options as of the date hereof and the per share
exercise prices therefor, are Previously Disclosed on Schedule 4.01(C).
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2.07. Dissenters' Rights. No Dissenting Stockholder shall be entitled
to shares of First Union Common Stock or cash in lieu of fractional shares
thereof or any dividends or other distributions pursuant to this Article II
unless and until the holder thereof shall have failed to perfect or shall have
effectively withdrawn or lost such holder's right to dissent from the Merger
under the DGCL, and any Dissenting Stockholder shall be entitled to receive only
the payment provided by Section 262 of the DGCL with respect to shares of
Company Common Stock owned by such Dissenting Stockholder. If any person who
would otherwise be deemed a Dissenting Stockholder shall have failed properly to
perfect or shall have effectively withdrawn or lost the right to dissent with
respect to any shares of Company Common Stock, such shares shall thereupon be
treated as though such shares had been converted into shares of First Union
Common Stock pursuant to Section 2.01 hereof. The Company shall give First Union
and FUNB-NC (i) prompt written notice of any written demands for appraisal,
attempted withdrawals of such demands, and any other instruments served pursuant
to applicable law received by the Company relating to stockholders' rights of
appraisal and (ii) the opportunity to direct all negotiations and proceedings
with respect to demand for appraisal under the DGCL. The Company shall not,
without the prior written consent of First Union and FUNB-NC, voluntarily make
any payment with respect to any demands for appraisals of shares of Dissenting
Stockholders, offer to settle or settle any such demands or approve any
withdrawal of such demands.
III. ACTIONS PENDING CONSUMMATION
The Company shall conduct its business and cause each Company
Subsidiary to conduct its business in the ordinary and usual course consistent
with past practice and shall use its reasonable best efforts to maintain and
preserve in all material respects its and each of such subsidiaries' business
organization, key employees and advantageous business relationships, and,
without limitation of the foregoing, without the prior written consent of First
Union, which consent shall not be unreasonably withheld or delayed, the Company
will not, and will cause each of the Company Subsidiaries not to, agree or
commit to:
3.01. Equity Securities. Except as Previously Disclosed on Schedule
4.01(C), issue, sell, repurchase or otherwise permit to become outstanding any
additional Company Common Stock or any other equity securities of the Company or
any of the Company Subsidiaries, or any Rights (as hereinafter defined), or
enter into any agreement or commitment with respect to the foregoing.
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3.02. Dividends, Etc. Make, declare or pay any dividend (other than
dividends from wholly-owned Company Subsidiaries to the Company or another
wholly-owned Company Subsidiary) on or in respect of, or declare or make any
distribution on, or, other than as Previously Disclosed on Schedule 3.02,
directly or indirectly combine, redeem, reclassify, purchase or otherwise
acquire, any of its equity securities.
3.03. Indebtedness; Liabilities; Etc. Other than in the ordinary course
of business consistent with past practice, incur any indebtedness for borrowed
money, repay any indebtedness except on its due date, or assume, guarantee,
endorse or otherwise as an accommodation become responsible or liable for the
obligations of any other individual, corporation or other entity.
3.04. Lines of Business; Operating Procedures; Etc. Except as may be
directed by any regulatory authority, (i) change its accounting practices or
principles, except as may be required by generally accepted accounting
principles, in any material respect, (ii) incur or commit to incur any capital
expenditures, other than as reasonably necessary to maintain existing assets in
good repair in accordance with normal business practice, or as Previously
Disclosed on Schedule 3.04, or (iii) enter into any type of business materially
different from that conducted by it as of the date hereof or enter into or
participate in any joint venture or partnership, except as Previously Disclosed
on Schedule 3.04.
3.05. Liens. Except as Previously Disclosed on Schedule 3.05, impose,
or suffer the imposition, on any shares of stock of any of the Company
Subsidiaries, any lien, charge or encumbrance, security interest, equity,
option, restriction (including restrictions on voting rights or rights of
disposition) or claims or third party rights of whatever nature (collectively,
"Liens"), or permit any such Lien to exist.
3.06. Compensation; Employment Agreements; Etc. Except as Previously
Disclosed on Schedule 3.06, enter into or amend any compensation, employment,
severance or similar agreement or arrangement with or on behalf of any of its
directors, officers, employees, agents or consultants, or grant any salary or
wage increase, or increase any employee benefit (including incentive or bonus
payments), except (i) the hiring of non-executive employees in the ordinary
course of business at annual salary levels not in excess of $50,000 with respect
to any one such employee, (ii) normal individual or general increases in regular
compensation to
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officers and employees in the ordinary course of business consistent with past
practice or (iii) other changes as may be required by law or to satisfy
contractual obligations existing as of the date hereof, which have been
Previously Disclosed on Schedule 3.06.
3.07. Benefit Plans. Except as Previously Disclosed on Schedule 3.07,
enter into or modify (except as may be required by applicable law or to maintain
qualification pursuant to the Code) any pension, retirement, stock option
(except as may be required in order to comply with Section 2.06), stock
purchase, savings, profit sharing, deferred compensation, consulting, bonus,
group insurance or other employee benefit, incentive or welfare contract, plan
or arrangement, or any trust agreement related thereto, in respect of any of its
directors, officers or other employees, including, without limitation, taking
any action (other than as contemplated by this Agreement) that accelerates the
vesting or exercise of any benefits thereunder.
3.08. Continuance of Business. Except as Previously Disclosed on
Schedule 3.08, dispose of or discontinue any of its assets, business or
properties that are material to the Company and the Company Subsidiaries (as
defined below) taken as a whole, or acquire all or any material portion of the
business or property of any other entity that is material to the Company and the
Company Subsidiaries taken as a whole.
3.09. Amendments. Amend any of its charter or by-laws, except as may
be necessary to facilitate the transactions contemplated hereby.
3.10. Contracts. Except as Previously Disclosed on Schedule 3.10, enter
into, terminate or make any change in any material contract, agreement or lease
(including any such contract, lease or agreement described in Section 4.01(L)),
except in the ordinary course of business consistent with past practice with
respect to contracts, agreements and leases that are terminable by it without
penalty on not more than 60 days prior written notice.
3.11. Claims. Settle any claim, action or proceeding involving any
liability for material money damages or any restrictions upon any of its
operations.
3.12. Other Actions. Except to the extent consistent with the conduct
of its business in the usual and ordinary course or as may be required by the
withdrawal of the recommendation of stockholder approval of the Merger by
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the Company's Board of Directors pursuant to Section 5.07, take any action that
would (A) materially impede or delay the receipt of any approval referred to in
Section 6.01(A) without the imposition of a condition or restriction of the type
referred to in such Section or (B) adversely affect the ability of any party to
perform its obligations under this Plan.
3.13. Fund Action. Except as and to the extent required, based upon the
written advice of counsel, in the exercise of the fiduciary obligations of the
Company or a Company Subsidiary in the case of any Fund, request that any action
be taken by any Fund Board, other than routine actions that would not be
reasonably likely to have a Material Adverse Effect (as hereinafter defined) or
actions Previously Disclosed on Schedule 3.13.
3.14. Agreements. Authorize, commit or enter into any agreement to take
any of the actions referred to in Sections 3.01 through 3.13.
IV. REPRESENTATIONS AND WARRANTIES
4.01. Representations and Warranties of the Company. The Company
represents and warrants to First Union, FUNB-NC and the Merging Entity as
follows:
(A) Recitals. The facts set forth in the Recitals of this Plan
with respect to the Company and the Funds are true and correct.
(B) Qualification; Authority. The Company is duly qualified to
do business and is in good standing in the States of the United States
and foreign jurisdictions where its ownership or leasing of property or
the conduct of its business requires it to be so qualified, other than
those States and jurisdictions in which the failure to be so qualified,
individually or in the aggregate, is not reasonably likely to have a
Material Adverse Effect. The Company has the corporate power and
authority necessary to carry on its business as it is now being
conducted and to own all its material properties and assets. The
Company has in effect all federal, state, local and foreign
governmental permits, licenses, certificates of authority, orders and
approvals necessary for it to own or lease its properties and assets
and to carry on its business as it is now conducted, except for any
such authorizations the absence of which, individually or in the
aggregate, would not be reasonably likely to have a Material Adverse
Effect.
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(C) Company Capital Stock. Except as Previously Disclosed on
Schedule 4.01(C), there are no shares of Company Common Stock
authorized and reserved for issuance, the Company has no Rights (as
defined below) issued or outstanding, and the Company has no
commitments or obligations to authorize, issue, sell or grant any
Company Common Stock or Rights, except (i) pursuant to this Plan, or
(ii) upon the exercise of Company Stock Options (as hereinafter
defined) outstanding at the date hereof. The term "Rights" means
securities or obligations convertible into or exchangeable for, or
giving any person any right to subscribe for or acquire, or any
options, calls or commitments relating to, shares of the Company's
equity securities. There are no preemptive rights in respect of Company
Common Stock. The outstanding shares of Company Common Stock are
validly issued and outstanding, fully paid and nonassessable, and
subject to no preemptive rights.
(D) Subsidiaries. A listing of all the direct or indirect
subsidiaries of the Company (each, a "Company Subsidiary" and,
collectively, the "Company Subsidiaries") is Previously Disclosed on
Schedule 4.01(D), all of the outstanding shares of which (other than
directors' qualifying shares) are owned by the Company or a Company
Subsidiary. No equity securities of any of the Company Subsidiaries are
or may become required to be issued (other than to the Company or a
Company Subsidiary) by reason of any Rights. There are no contracts,
commitments, understandings or arrangements (except as Previously
Disclosed on Schedule 4.01(D)) by which any of the Company Subsidiaries
is or may be bound to sell or otherwise issue any shares of its capital
stock, and there are no contracts, commitments, understandings or
arrangements (except as Previously Disclosed on Schedule 4.01(D))
relating to the rights of the Company or a Company Subsidiary to vote
or to dispose of such shares. All of the shares of capital stock of
each Company Subsidiary held by the Company or a Company Subsidiary are
fully paid and nonassessable and are owned by the Company or a Company
Subsidiary free and clear of any Liens (except as Previously Disclosed
on Schedule 4.01(D)). Each Company Subsidiary is in good standing under
the laws of the jurisdiction in which it is incorporated or organized
(which is Previously Disclosed on Schedule 4.01(D)), and is duly
qualified to do business and in good standing in the jurisdictions
where its ownership or leasing of property or the conduct of its
business requires it to
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be so qualified (which are Previously Disclosed on Schedule 4.01(D)),
other than those jurisdictions in which the failure to be so qualified
is not reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect. Except as Previously Disclosed on Schedule
4.01(D), the Company does not own beneficially, directly or indirectly,
any shares of any equity securities or similar interests of any
corporation, bank, partnership, joint venture, business trust,
association or other organization. Each of the Company Subsidiaries has
all corporate power and authority necessary to carry on its business as
it is now being conducted and to own all its material properties and
assets. Each of the Company Subsidiaries has in effect all federal,
state, local and foreign governmental authorizations necessary for it
to own or lease its properties and assets and to carry on its business
as it is now conducted, except for such authorizations the absence of
which, individually or in the aggregate, is not reasonably likely to
have a Material Adverse Effect.
(E) Authorization. (1) This Plan has been duly authorized,
executed and delivered by the Company and no further corporate
proceedings on the part of the Company are necessary to authorize this
Plan and the transactions contemplated hereby, except for the adoption
of this Plan by the vote of the holders of a majority of the
outstanding shares of Company Common Stock. This Plan is the legal,
valid and binding obligation of the Company, enforceable in accordance
with its terms, subject to bankruptcy, insolvency and other laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
(2) Except for the receipt of the requisite approval of the
Company's stockholders referred to above, the filing of Articles of
Merger and a Certificate of Merger and the receipt of the regulatory
approvals, the expiration of waiting periods and the required filings
under federal and state securities laws and the laws of jurisdictions
outside the United States, in each case as set forth in Schedule
4.01(E), or as otherwise Previously Disclosed on Schedule 4.01(E), the
execution, delivery and performance of this Plan by the Company, and
the consummation by it of the transactions contemplated hereby, does
not and will not (i) constitute a breach or violation of, or a default
under, any law, rule or regulation or any judgment, decree, order,
governmental permit or
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license, or agreement, indenture or instrument of it, any of the
Company Subsidiaries or, to the knowledge of the Company, any of the
Funds, or to which it, any of the Company Subsidiaries or, to the
knowledge of the Company, any of the Funds or its or their properties
is subject or bound, which breach, violation or default is reasonably
likely, individually or in the aggregate, to have a Material Adverse
Effect, (ii) constitute a breach or violation of, or a default under,
its charter or by-laws, or (iii) require any consent or approval under
any such law, rule, regulation, judgment, decree, order, governmental
permit or license or the consent or approval of any other party to any
such agreement, indenture or instrument, other than any such consent or
approval, which if not obtained, would not be reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect.
(3) Except as Previously Disclosed on Schedule 4.01(E) and
except for requirements attributable to First Union and FUNB-NC, no
material notice to, filing with, authorization of, exemption by, or
consent or approval of, any regulatory authority is necessary for the
consummation by the Company, any Company Subsidiary or any Fund of the
transactions contemplated by this Plan.
(F) Company Financial Reports. The Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, and all other
documents filed subsequent to December 31, 1995 under Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), in the form filed with the Securities and
Exchange Commission (the "SEC") (collectively, the "Company Financial
Reports"), did not, and the Company Financial Reports filed with the
SEC after the date hereof will not, as of their respective dates
contain (without giving effect to any amendment thereto filed after the
date hereof) any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they
were or are made, not misleading; and each of the balance sheets
contained in or incorporated by reference into the Company Financial
Reports (including the related notes and schedules thereto) fairly
presents in all material respects the financial position of the entity
or entities to which it relates as of its date and each of the
statements of income, stockholders' equity and cash flows or equivalent
statements in the Company Financial
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Reports (including any related notes and schedules thereto) fairly
presents in all material respects the results of operations, changes in
stockholders' equity and cash flows, as the case may be, of the entity
or entities to which it relates for the periods set forth therein, in
accordance with generally accepted accounting principles consistently
applied, except in each case as may be noted therein, subject to normal
year-end audit adjustments in the case of unaudited statements.
(G) Absence of Undisclosed Liabilities. None of the Company,
the Company Subsidiaries or the Funds has any obligation or liability
(contingent or otherwise) that, individually or in the aggregate, is
material to the financial condition or results of operations of the
Company and the Company Subsidiaries on a consolidated basis, except
(i) as reflected in the Company Financial Reports prior to the date of
this Plan, (ii) for commitments and obligations made, or liabilities
incurred, in the ordinary course of its business consistent with past
practices or (iii) as Previously Disclosed on Schedule 4.01(G).
(H) Absence of Material Adverse Effect. Except as may be
disclosed in the Company Financial Reports filed prior to the date
hereof or as Previously Disclosed on Schedule 4.01(H), since December
31, 1995, no event or development (whether or not described or referred
to in any other paragraph of this Section 4.01) has occurred that,
individually or in the aggregate, has had or is reasonably likely to
have a Material Adverse Effect.
(I) Properties. (1) Except as reflected in the Company
Financial Reports, the Company and the Company Subsidiaries have good
and valid title to all of the properties and assets, tangible and
intangible, reflected in the Company Financial Reports as being owned
by the Company or the Company Subsidiaries as of the dates thereof,
except as Previously Disclosed on Schedule 4.01(I) and except those
sold or otherwise disposed of in the ordinary course of business, free
and clear of all Liens, other than those Liens that, individually or in
the aggregate, are not reasonably likely to have a Material Adverse
Effect. All buildings and all fixtures, equipment, and other property
and assets which are held under leases or subleases by any of the
Company or the Company Subsidiaries are held under valid leases or
subleases.
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(2) Except as Previously Disclosed on Schedule 4.01(I),
each of the Company, the Company Subsidiaries and the Funds has the
right to use, and after consummation of the transactions contemplated
hereby will have the right to use, free and clear of any claims of
others, all patents, patent applications, trademarks, service marks
(whether registered or unregistered), trademark applications, service
mark applications, trade names, copyrights and other proprietary rights
necessary to own and operate its properties and to carry on its
business as currently conducted.
(3) Each of the Company, the Company Subsidiaries and, to
the knowledge of the Company, the Funds owns or licenses all computer
software developed or currently used by it which is material to the
conduct of its business and has the right to use such software without
infringing upon the intellectual property rights (including trade
secrets rights) of a third party.
(J) Litigation; Regulatory Action. Except as Previously
Disclosed on Schedule 4.01(J), there is no action, suit or proceeding
pending against, or to its knowledge, threatened against, the Company,
any Company Subsidiary or to the knowledge of the Company any Fund or
any of their respective properties, or to which any of the foregoing is
subject, before any court or arbitrator or any governmental body,
agency, official or Self-Regulatory Body (as hereinafter defined) which
in any manner is reasonably likely, individually or in the aggregate,
to have a Material Adverse Effect.
(K) Compliance with Laws.
(1) Except as Previously Disclosed on Schedule 4.01(K),
the conduct of its respective business by the Company, each Company
Subsidiary and each Fund (a) currently is not in violation, in any
material respect, of any law, statute, ordinance, license, rule or
regulation (including those of the Self-Regulatory Bodies) and (b) has
not, since December 31, 1993, been in violation of any such law,
statute, ordinance, license, rule or regulation except in the case of
clause (b) for any such violations that, individually or in the
aggregate, are not reasonably likely to have a Material Adverse Effect.
(2) Without limiting the foregoing, each of the Company
and the Company Subsidiaries which is, and
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each of its officers and employees who are, required to be registered
as an investment adviser, broker-dealer, registered representative or
salesperson with the SEC, the securities commission of any state or any
Self- Regulatory Body, is duly registered as such and such registration
is in full force and effect, and a list of all such registrations is
Previously Disclosed on Schedule 4.01(K), except, in the case of any
officer or employee, where any such failure to be registered as a
registered representative or salesperson, individually or in the
aggregate, is not reasonably likely to have a Material Adverse Effect.
(3) There is no proceeding pending, or, to its knowledge,
threatened that is reasonably likely to result in the revocation,
cancellation or suspension, or any adverse modification, of any
material permit, license, certificate of authority, order or approval
referred to in Section 4.01(B), and the execution and delivery of this
Plan and the consummation of the transactions contemplated hereby will
not result in any such revocation, cancellation, suspension or
modification.
(4) Except as Previously Disclosed on Schedule 4.01(K),
none of the Company, the Company Subsidiaries or the Funds, or any
officer, director or employee thereof, is a party or subject to any
order, directive, decree, condition or similar arrangement or action
(other than exemptive orders) relating to the business of the Company,
the Company Subsidiaries or the Funds, with or by any federal, state,
local or foreign regulatory authority, except, in the case of any
officer, director or employee, for any such orders, directives, decrees
or similar arrangements, individually or in the aggregate, that are not
reasonably likely to have a Material Adverse Effect.
(L) Material Contracts. Except as Previously Disclosed on
Schedule 4.01(L), as of the date of this Agreement none of the Company
or the Company Subsidiaries, nor any of its respective assets,
businesses or operations, is a party to, or is bound or subject to, or
receives benefits under, any material contract, lease or agreement
(i.e., a contract, lease or agreement providing for annual payments in
excess of $100,000). Copies of such contracts or agreements have been
supplied or made available to First Union. Except as Previously
Disclosed on Schedule 4.01(L), none of the Company or the Company
Subsidiaries is in default under any such material contract, agreement,
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commitment, arrangement, lease, insurance policy or other instrument to
which it is a party, by which its respective assets, business or
operations may be bound or subject to, or under which it or any of its
respective assets, business or operations receives benefits, which
default, individually or in the aggregate, is reasonably likely to have
a Material Adverse Effect, and there has not occurred any event that,
with the lapse of time or the giving of notice or both, would
constitute such a default by the Company or any Company Subsidiary.
Except as Previously Disclosed on Schedule 4.01(L), neither the Company
nor any Company Subsidiary is subject to or bound by any contract
containing covenants which limit the ability of the Company or any
Company Subsidiary to compete in any line of business or with any
person or which involve any restriction of geographical area in which,
or method by which, the Company or any Company Subsidiary may carry on
its business (other than as may be required by law or any applicable
regulatory authority).
(M) Reports. Except as Previously Disclosed on Schedule
4.01(M), and except for filings (other than with the SEC) that are not
material, the Company, each Company Subsidiary and each Fund have
timely filed all reports, registrations, statements and other filings,
together with any amendments required to be made with respect thereto,
that were required to be filed since December 31, 1993, with (i) the
SEC, (ii) any other applicable federal, state or foreign securities,
banking, insurance, or other regulatory authority, and (iii) the
National Association of Securities Dealers, Inc., the New York Stock
Exchange, the American Stock Exchange or any other self-regulatory body
(the "Self-Regulatory Bodies")(all such reports and statements being
collectively referred to herein as the "Company/Fund Reports"),
including without limitation all reports, registrations, statements and
filings required under the Investment Company Act, the Investment
Advisers Act of 1940 (as amended, the "Investment Advisers Act"), the
Exchange Act, the Securities Act of 1933 (as amended, the "Securities
Act") or any applicable state securities or Blue Sky laws. As of their
respective dates, the Company/Fund Reports complied in all material
respects with the statutes, rules, regulations and orders enforced or
promulgated by the regulatory authority or Self-Regulatory Body with
which they were filed and did not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to
make
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the statements made therein, in light of the circumstances under which
they were made, not misleading.
(N) No Brokers or Finders. Except as set forth in Schedule
4.01(N), neither the Company, any of its stockholders or any of the
Company Subsidiaries has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions
or finder's fees, and no broker or finder has acted directly or
indirectly for the Company, any of its stockholders or any of the
Company Subsidiaries, in each case in connection with this Plan or the
transactions contemplated hereby.
(O) Employee Benefit Plans.
(1) Previously Disclosed on Schedule 4.01(O) is a complete
list of all bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus,
stock purchase, restricted stock and stock option plans, all employment
or severance contracts, all medical, dental, health and life insurance
plans, all other employee benefit plans, contracts or arrangements and
any applicable "change of control" or similar provisions in any plan,
contract or arrangement maintained or contributed to by the Company or
any of the Company Subsidiaries for the benefit of its employees,
former employees, directors, former directors or their beneficiaries
(the "Compensation and Benefit Plans"). True and complete copies of all
Compensation and Benefit Plans, including, but not limited to, any
trust instruments and/or insurance contracts, if any, forming a part
thereof, and all amendments thereto have been supplied to First Union.
(2) Except as Previously Disclosed on Schedule 4.01(O)(2),
all "employee benefit plans" within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
other than "multiemployer plans" within the meaning of Section 3(37) of
ERISA ("Multiemployer Plans"), covering employees or former employees
of the Company or any of the Company Subsidiaries (the "ERISA Plans"),
to the extent subject to ERISA, are in substantial compliance with
ERISA. Each ERISA Plan which is an "employee pension benefit plan"
within the meaning of Section 3(2) of ERISA ("Pension Plan") and which
is intended to be qualified under Section 401(a) of the Code has
received a favorable determination letter from the Internal Revenue
Service, and except as
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Previously Disclosed on Schedule 4.01(O)(2) it is not aware of any
circumstances reasonably likely to result in the revocation or denial
of any such favorable determination letter or the inability to receive
such a favorable determination letter. There is no material pending or,
to its knowledge, threatened litigation relating to the ERISA Plans.
None of the Company, the Company Subsidiaries or any Fund has engaged
in a transaction with respect to any ERISA Plan that could subject the
Company or any of the Company Subsidiaries to a tax or penalty imposed
by either Section 4975 of the Code or Section 502(i) of ERISA in an
amount which would be material.
(3) No liability under Subtitle C or D of Title IV of
ERISA has been or is expected to be incurred by the Company or any of
the Company Subsidiaries with respect to any ongoing, frozen or
terminated "single-employer plan", within the meaning of Section
4001(a)(15) of ERISA, currently or formerly maintained by any of them,
or the single-employer plan of any entity which is considered one
employer with it under Section 4001(a)(15) of ERISA or Section 414 of
the Code (an "ERISA Affiliate"). Neither the Company nor any of the
Company Subsidiaries presently contributes to a Multiemployer Plan, nor
has any of them contributed to such a plan within the past five
calendar years. No notice of a "reportable event", within the meaning
of Section 4043 of ERISA for which the 30-day reporting requirement,
has been waived or has been required to be filed for any Pension Plan
or by any ERISA Affiliate within the past 12-month period.
(4) All contributions required to be made under the terms
of any ERISA Plan have been timely made. Except as Previously Disclosed
on Schedule 4.0(O)(4), neither any Pension Plan nor any single-
employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412
of the Code or Section 302 of ERISA. Neither the Company nor any of the
Company Subsidiaries has provided, or is required to provide, security
to any Pension Plan or to any single-employer plan of an ERISA
Affiliate pursuant to Section 401(a)(29) of the Code.
(5) Under each Pension Plan which is a single-employer
plan, as of the last day of the most recent plan year, the actuarially
determined present value of all "benefit liabilities", within the
meaning of Section 4001(a)(16) of ERISA (as determined on the
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basis of the actuarial assumptions contained in the plan's most recent
actuarial valuation) did not exceed the then current value of the
assets of such plan, and there has been no material change in the
financial condition of such plan since the last day of the most recent
plan year.
(6) Neither the Company nor any of the Company
Subsidiaries has any obligation for retiree health and life benefits
under any plan, except as Previously Disclosed on Schedule 4.01(O).
There are no restrictions on the rights of the Company or any of the
Company Subsidiaries to amend or terminate any such plan without, to
its knowledge, incurring any liability thereunder.
(7) Except as Previously Disclosed on Schedule 4.01(O),
neither the execution and delivery of this Plan nor the consummation of
the transactions contemplated hereby will (i) result in any payment
(including, without limitation, severance, unemployment compensation,
golden parachute or otherwise) becoming due to any director or any
employee of the Company or any of the Company Subsidiaries under any
Compensation and Benefit Plan or otherwise from the Company or any of
the Company Subsidiaries, (ii) increase any benefits otherwise payable
under any Compensation and Benefit Plan, or (iii) result in any
acceleration of the time of payment or vesting of any such benefit.
(P) No Knowledge. It knows of no reason why the regulatory
approvals referred to in Section 6.01(A) should not be obtained without
the imposition of any condition of the type referred to in such Section
6.01(A).
(Q) Labor Matters. Neither the Company nor any of the Company
Subsidiaries is a party to or is bound by any collective bargaining
agreement, contract or other agreement or understanding with a labor
union or labor organization, nor is the Company or any of the Company
Subsidiaries the subject of a proceeding asserting that the Company or
any such subsidiary has committed an unfair labor practice (within the
meaning of the National Labor Relations Act) or seeking to compel the
Company or such subsidiary to bargain with any labor organization as to
wages and conditions of employment, nor is there any strike or other
labor dispute involving the Company or any of the Company Subsidiaries,
pending or, to the best of its knowledge, threatened, nor is it aware
of any activity involving
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the Company's or any of the Company Subsidiaries' employees seeking to
certify a collective bargaining unit or engaging in any other
organization activity.
(R) Insurance. Previously Disclosed on Schedule 4.01(R) is a
complete list, as of the date hereof, of the material insurance
policies related to the business currently conducted by the Company,
any of the Company Subsidiaries or any Fund or for the benefit of the
Company, the Company Subsidiaries or any Fund, or affiliate thereof
(copies of which have been supplied to First Union). None of the
Company, the Company Subsidiaries or the Funds is in material default
under or with respect to any such policy, and none of them has received
any written or oral notice of cancellation or termination with respect
to any such policy. The fidelity insurance of the Company, the Company
Subsidiaries and the Funds has been and will be maintained in
accordance with all requirements of applicable law except where the
failure to so maintain is not reasonably likely to have a Material
Adverse Effect. Except as Previously Disclosed on Schedule 4.01(R),
none of the aforementioned parties has made any claim under any
insurance policy since December 31, 1993 or is aware of any event or
condition that is reasonably likely to give rise to any such claim.
(S) State Takeover Law. The Company has taken all necessary
action to exempt this Plan and the transactions contemplated hereby
from, and this Plan and the transactions contemplated hereby are exempt
from, (i) any applicable state takeover laws, including without
limitation the provisions of Section 203 of the DGCL, and (ii) any
applicable takeover provisions in the Company's constituent documents.
(T) Environmental Matters. Except as Previously Disclosed on
Schedule 4.01(T), to its knowledge,(i) the Company, each of the Company
Subsidiaries and each of the Funds have complied in all material
respects with all applicable Environmental Laws; (ii) the Company, each
of the Company Subsidiaries and each of the Funds is not subject to any
claim or liability under any Environmental Law that, individually or in
the aggregate, is reasonably likely to have a Material Adverse Effect.
"Environmental Law" means (i) any federal, state, foreign or local law,
statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, common law, legal doctrine, order,
judgment, decree, injunction, requirement or agreement with any
governmental entity,
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(x) relating to the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, surface land, subsurface
land, plant and animal life or any other natural resource), or to human
health or safety, or (y) the exposure to, or the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances (as
hereinafter defined), in each case as amended and as now in effect.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous,
or otherwise regulated, under any Environmental Law, whether by type or
by quantity, including any substance containing any such substance as a
component.
(U) Taxes. Except as Previously Disclosed on Schedule 4.01(U),
(i) all reports and returns with respect to Taxes (as defined below)
and tax related information reporting requirements that are required to
be filed by or with respect to the Company or by or with respect to any
of the Company Subsidiaries, including without limitation consolidated
federal income tax returns of the Company and the Company Subsidiaries
(collectively, the "Company Tax Returns"), have been duly filed, or
requests for extensions have been timely filed and have not expired,
except to the extent all such failures to file, taken together, are not
reasonably likely to have a Material Adverse Effect, and such Tax
Returns were true, complete and accurate in all material respects, (ii)
all taxes (which shall mean all federal, state, local or foreign taxes
or other governmental charges, fees, levies and assessment of whatever
kind or nature, including without limitation, all federal, state, local
or foreign income, gross receipts, windfall profits, severance,
property, production, sales, use, license, excise, franchise,
employment, premium, recording, documentary, transfer, back-up
withholding or similar taxes, together with any interest, additions, or
penalties with respect thereto and any interest in respect of such
additions or penalties, collectively the "Taxes") shown to be due on
the Tax Returns have been or will be paid in full when due except where
the failure to so pay would not have a Material Adverse Effect, (iii)
except as Previously Disclosed on Schedule 4.01(U), the Tax Returns
have been examined by the Internal Revenue Service or the appropriate
state, local or foreign taxing authority or the period for
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assessment of Taxes in respect of which such Tax Returns were required
to be filed has expired, (iv) all Taxes due with respect to completed
and settled examinations have been paid in full, (v) no issues have
been raised by the relevant taxing authority in connection with the
examination of any of the Tax Returns which are reasonably likely,
individually or in the aggregate, to result in a determination that
would have a Material Adverse Effect, except to the extent reserved
against in the Company Financial Reports filed prior to the date of
this Plan, and (vi) there have not been any waivers of statutes of
limitations with respect to any Taxes of the Company or any of the
Company Subsidiaries, and (vii) except as Previously Disclosed on
Schedule 4.01(U), none of the Company, the Company Subsidiaries, First
Union or any direct or indirect subsidiary of First Union, as a
consequence of the Company's actions prior to the Closing, will be
obligated to make a payment to an individual that would be a "parachute
payment" as such term is defined in Section 280G of the Code without
regard to whether such payment is to be performed in the future.
(V) Accuracy of Information. The statements with respect to
the Company, the Company Subsidiaries and the Funds contained in this
Plan, the Schedules and any other written documents executed and
delivered by or on behalf of the Company pursuant to the terms of this
Plan are true and correct in all material respects and such documents
do not omit to state any material fact required to be stated therein or
necessary to make the statements contained therein, in the light of the
circumstances under which they were made, not misleading.
(W) Accounting Controls. Each of the Company and the Company
Subsidiaries has devised and maintained systems of internal accounting
controls sufficient to provide reasonable assurances that (i) all
material transactions are executed in accordance with management's
general or specific authorization; (ii) all material transactions are
recorded as necessary to permit the preparation of financial statements
in conformity with generally accepted accounting principles
consistently applied, and to maintain proper accountability for items;
(iii) access to the material property and assets of the Company and the
Company Subsidiaries is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability
for items is compared with the actual levels at reasonable intervals
and
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appropriate action is taken with respect to any differences.
(X) Investment Advisory Activities.
(1) Definition of Investment Company. As used in this
Plan, the term "Investment Company" shall have the meaning provided in
the Investment Company Act, provided that for purposes of this Plan the
term Investment Company shall exclude any person organized under the
laws of a jurisdiction outside the United States that is not required
to register under the Investment Company Act and provided, further,
that solely for purposes of this Section 4.01(X), the term Investment
Company shall also exclude, the World Equity Portfolio of the Variable
Investors Series Trust (the "VIS Trust").
(2) Investment Contracts, Funds and Clients. (a)
Previously Disclosed on Schedule 4.01(X)(2) is a listing of (i) all of
the Investment Companies to which the Company or any of the Company
Subsidiaries provides investment management, investment advisory, sub-
advisory, administration, distribution or other services on the date
hereof, including an indication of whether a Fund is a tax-exempt
municipal bond fund, and all of the non-Investment Company clients
(including any entities organized under the laws of jurisdictions
outside the United States) to which the Company or any of the Company
Subsidiaries provides investment management, investment advisory,
sub-advisory, administration, distribution or other services on the
date hereof (the "Clients"), (ii) each contract or agreement, and all
amendments thereto, in effect on the date hereof relating to the
Company's or a Company Subsidiary's rendering of investment advisory or
management services (including without limitation all sub-advisory
services), administration or distribution services to any Fund or other
person (together with any such contract or agreement entered into after
the date hereof, the "Investment Contracts"), (iii) the most recent
date on which each Investment Contract with an Investment Company and
VIS Trust was renewed or continued in accordance with Section 15 of the
Investment Company Act or Rule 12b-1 thereunder to the extent
applicable, and (iv) the net asset value (as defined for purposes of
the Investment Company Act) of each of the Investment Companies and
each of the Funds that are not Investment Companies, the aggregate
amount of assets under management for the Clients (other than any Fund
that is not an Investment Company) and the
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Fund Account Value and Total Account Value, each as of September 6,
1996. (u) Each Investment Contract and any subsequent renewal has been
duly authorized, executed and delivered by the Company or a Company
Subsidiary and, to the knowledge of the Company, each other party
thereto and, to the extent applicable, has been adopted in compliance
with Section 15 of the Investment Company Act or Rule 12b-1 thereunder
(or, in the case of any Investment Contract with a non- Investment
Company Fund, in compliance with any statute, order, ordinance, rule or
regulation to which such Fund or such Investment Contract is subject)
and is a valid and binding agreement of the Company or a Company
Subsidiary and each other party thereto, enforceable in accordance with
its terms (subject to bankruptcy, insolvency, moratorium, fraudulent
transfer and similar laws affecting creditors' rights generally and to
general equity principles; (v) each of the Company, the Company
Subsidiaries, and, to the Company's knowledge, each Fund and Client
party thereto is in compliance in all material respects with the terms
of each Investment Contract to which it is a party, and is not
currently in default under any of the terms of any such Investment
Contract; (w) to its knowledge, no event has occurred or condition
exists that with notice or the passage of time or both would constitute
such a default; (x) all payments due since December 31, 1993 under each
distribution or principal underwriting agreement to which any
Investment Company is a party have been made in compliance with the
related distribution plan adopted by the relevant Fund Board under Rule
12b-1 under the Investment Company Act (a "12b-1 Plan"); (y) a copy of
each 12b-1 Plan adopted by any Investment Company (or form of 12b-1
Plan adopted by similar series or classes of shares offered by more
than one Investment Company) has been supplied to First Union and each
12b-1 Plan adopted by an Investment Company and the operation of each
such 12b-1 Plan currently complies with Rule 12b-1; and (z) each such
Investment Contract is in full force and effect. Except as Previously
Disclosed on Schedule 4.01(X)(2), none of the Investment Contracts, or
any other arrangements or understandings relating to the Company's or
any Company Subsidiary's rendering of investment advisory or management
services (including without limitation all sub-advisory services),
administration or distribution services to any Fund, Client or other
person, contains any undertaking by such entity to cap fees or to
reimburse any or all fees thereunder, except as required by the
applicable law of any jurisdiction in which the shares of any Fund
party thereto are
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qualified for distribution. Copies of each Investment Contract for each
institutional Client, including a current fee schedule, have been
supplied to First Union.
(b) Each Fund that is a juridical entity has been duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has full power, right and
authority to own its properties and to carry on its business as it is
now conducted, and is qualified to do business in each jurisdiction
where the failure so to qualify would, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect. Each
Fund (or the trust of which it is a series) has full power (corporate
and other), right and authority to own its properties and assets and to
carry on its business as it is now being conducted. No Fund is required
to qualify to do business in any state or foreign jurisdiction where
not already so qualified, except where a failure to so qualify would
not be reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect. Except as Previously Disclosed on Schedule
4.01(X)(2), no Fund has any subsidiaries or affiliates (as defined in
Rule 12b-2 under the Exchange Act), other than the Company, the Company
Subsidiaries and the Funds.
(c) Each Fund has been, is being and will be operated in
compliance in all material respects with its respective investment
objectives and policies.
(d) Schedule 4.01(X)(2) indicates each Client that is subject
to ERISA; the accounts of each such Client have been managed by the
Company and the Company Subsidiaries in compliance in all material
respects with the applicable requirements of ERISA.
(e) Except as Previously Disclosed on Schedule 4.01(X)(2), (i)
each of the Investment Companies and VIS Trust has elected to be
treated as a "regulated investment company" under Subchapter M of
Chapter 1 of Subtitle A of the Code, and each of the Investment
Companies and VIS Trust has, except for any taxable year of such Fund
that has been closed and for which the statute of limitations for
assessments has expired, qualified as a "regulated investment company"
and each of the Investment Companies and VIS Trust has complied with
all applicable provisions of law necessary to preserve and retain such
Fund's election and status as a regulated investment company; (ii)
except for any
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taxable year that has been closed and for which the statute of
limitations for assessment has expired, each Investment Company
Previously Disclosed on Schedule 4.01(X)(2) as being a tax-exempt
municipal bond fund has satisfied the requirements of Section 852(b)(5)
of the Code and is qualified to pay exempt interest dividends as
defined therein; (iii) each Fund has timely filed all federal, state,
local and foreign income and other tax returns and reports that such
Fund is required to file and all such tax returns and reports are
accurate and complete in all material respects; (iv) each Fund has
timely paid, or reserved for, Taxes that such Fund is required to pay
and has paid or reserved for any deficiencies or other Tax assessments,
including but not limited to all estimated Taxes and interest or
penalties owed by such Fund; (v) each Fund has complied with all
required tax information reporting requirements to which it is subject;
and (vi) such tax information reporting returns and reports have been
timely filed and are accurate and complete in all material respects.
(f) The Fund Boards operate in all material respects in
conformity with the requirements and restrictions of Sections 10 and 16
of the Investment Company Act and the Boards of Directors of any non-
Investment Company Fund having such a Board operate in conformity with
all similar requirements and restrictions applicable to such Funds
under all foreign statutes, ordinances, orders, rules and regulations
to which such Funds are subject.
(g) Each Fund that is not an Investment Company (other than
VIS Trust) has operated, for a period of six years, prior to the date
hereof (or since inception, if such period is shorter) and currently
operates in a manner such that it was not and is not subject to
taxation on a net income basis under the Code and no action has been
taken by the Company or any of the Company Subsidiaries that would be
inconsistent with such status. The shares of each such Fund are not
sold or distributed in the United States or to U.S. residents and each
such Fund does not exercise managerial control over any firm in which
it invests.
(h) To its knowledge, no basis exists upon which the Company
or a Company Subsidiary would have any material liability to any Fund
or Client.
(i) The resolutions of each Fund Board and, if
required, each Board of Directors of each Fund that is
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not an Investment Company, Previously Disclosed on Schedule 4.01(X)(2),
including, among other things, recommendations to stockholders of the
Funds for approval of new Investment Contracts and, as applicable,
approval of new distribution and marketing services agreements,
acceptances of resignations of certain members of Fund Boards effective
as of the Effective Time, if any, pursuant to applicable restrictions
of the Glass-Steagall Act or otherwise, and nomination of certain
persons as additional directors, if any, who may be nominated by such
Boards of Directors as new directors of the Funds as of the Effective
Time (the "Fund Board Resolutions") were duly adopted by each such
Board of Directors by an affirmative vote of all members of such Board
and such additional votes as may be required under Section 15 of the
Investment Company Act and, if applicable, Rule 12b-1 thereunder, at a
meeting on September 5, 1996, duly called with notice and, in the case
of the Fund Boards, held in person as contemplated by Section 15(c) of
the Investment Company Act, and such resolutions remain in full force
and effect.
(j) There exists no "out of balance", "out of proof" or
similar condition with respect to any shareholder account maintained by
the Company, any Company Subsidiary or any Fund, except for any such
conditions that are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect.
(3) Regulatory Compliance. (a) Each Fund required by law
to be so registered is duly registered as an investment company under
the Investment Company Act. Except as Previously Disclosed on Schedule
4.01(X)(3): the shares of each Investment Company are qualified for
sale, or an exemption therefrom is in full force and effect, in each
state of the United States and the District of Columbia; all sales of
shares of or other interests in each Fund not registered under the
Investment Company Act have been made in compliance with all laws,
rules, regulations and orders applicable to such sales; and all
outstanding shares of each Fund that are required to be registered
under the Securities Act have been sold pursuant to an effective
registration statement filed thereunder. To its knowledge, in the case
of documents applicable to the Funds, no such registration statement
contained, as of its effective date, any untrue statement of a material
fact or omitted to state a material fact required to be stated therein
in order to make the statements therein not misleading or is
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subject to any stop order or similar order restricting its use. Each
Fund has operated and is currently operating in compliance in all
material respects with all laws, rules, regulations and orders
applicable to it or its business, including but not limited to, in the
case of each Investment Company, the Securities Act and the Investment
Company Act, except for any failure of any Fund to be so in compliance,
individually or in the aggregate, that is not reasonably likely to have
a material adverse effect on the financial condition, business, results
of operations or properties of such Fund.
(b) The Company and the Company Subsidiaries have adopted a
formal code of ethics and a written policy regarding insider trading, a
copy of each of which has been provided or supplied to First Union.
Such code and policy comply with Section 17(j) of the Investment
Company Act, Rule 17j-1 thereunder and Section 204A of the Investment
Advisers Act, respectively. Each Investment Company has duly adopted
procedures pursuant to Rule 17e-1 under the Investment Company Act; and
each Investment Company has complied, for a period of at least six
years prior to the date hereof, currently complies and will comply with
the requirements of Section 17(e) of the Investment Company Act and
Rule 17e-1 thereunder. The policies of the Company and the Company
Subsidiaries with respect to avoiding conflicts of interest are as set
forth in the most recent Form ADV thereof, as amended, a copy of which
has been delivered or made available to First Union. To its knowledge,
there have been no violations or allegations of violations of such
policies that have occurred or been made that have had or would be
reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect.
(c) Except as Previously Disclosed on Schedule 4.01(X)(3),
none of the Company, any of the Company Subsidiaries or, to the
knowledge of the Company, any of the Funds, and to the knowledge of the
Company, no other person "associated" (as defined under the Investment
Advisers Act) with the Company, any of the Company Subsidiaries or any
of the Funds, have for a period not less than five years prior to the
date hereof been convicted of any crime or is or been subject to any
disqualification that would be a basis for denial, suspension or
revocation of registration of an investment adviser under Section
203(e) of the Investment Advisers Act or Rule 206(4)-4(b) thereunder or
of a broker-dealer under Section 15 of the Exchange
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Act, or for disqualification as an investment adviser for any
Investment Company pursuant to Section 9(a) of the Investment Company
Act, and to its knowledge there is no basis for, or proceeding or
investigation that is reasonably likely to become the basis for, any
such disqualification, denial, suspension or revocation.
(d) Copies of each current prospectus (which term, as used in
this Plan, shall include any related statement of additional
information and any private placement memorandum), as amended or
supplemented, relating to each Fund, with respect to which a prospectus
exists or is required under any applicable law, and all current
supplemental advertising and marketing material relating to each
Investment Company have been supplied or made available to First Union;
and the Company has used its best efforts to supply or make available
to First Union all other supplemental advertising and marketing
material relating to each Fund in use since December 31, 1993. In the
case of each Fund that is an Investment Company, each such prospectus,
as amended or supplemented, and all such advertising and marketing
material complies in all material respects with the Securities Act and
the Investment Company Act, applicable state laws and, where
applicable, the rules of the NASD. Except as Previously Disclosed on
Schedule 4.01(X)(3), none of such prospectuses, amendments, supplements
or supplemental advertising and marketing materials, as of their
respective dates, includes or included an untrue statement of a
material fact or omits or omitted to state a material fact necessary in
order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
(e) The annual report to shareholders of each of the
Investment Companies and, to the best knowledge of the Company and the
Company Subsidiaries, the VIS Trust for its fiscal year most recently
ended, all other documents filed subsequent to such fiscal year-end
under Section 30(a) or 30(b) of the Investment Company Act, in each
case in the form filed with the SEC and each equivalent report to
shareholders of a non- Investment Company Fund for its fiscal year most
recently ended and any financial or other reports filed by any such
Fund with foreign governmental authorities (each, a "Fund Financial
Report"), did not, and the Fund Financial Reports filed or delivered to
shareholders after the date hereof will not, as of their respective
dates contain (without giving effect
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to any amendment thereto filed after the date hereof) any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were or are made, not
misleading; and each of the financial statements contained in or
incorporated by reference into the Fund Financial Reports (including
the related notes and schedules thereto) fairly presents in all
material respects the financial position of the entity or entities to
which it relates as of its date, in accordance with generally accepted
accounting principles consistently applied, except in each case as may
be noted therein, subject to normal year-end audit adjustments in the
case of unaudited statements.
(f) None of the Funds has any obligation or liability
(contingent or otherwise) that, individually or in the aggregate, is
material to the financial condition or results of operations of such
Fund, except (i) as reflected in the Fund Financial Reports prior to
the date of this Plan, (ii) as Previously Disclosed on Schedule
4.01(X)(3) or (iii) as may be incurred in the ordinary course of
business consistent with past practice.
(g) All advertising or marketing materials relating to any
Fund that are currently required to be filed with the NASD have been
appropriately filed therewith.
(h) Except as Previously Disclosed on Schedule 4.01(X)(3), no
exemptive orders have been obtained, nor are any requests pending
therefor, with respect to any Fund under the Exchange Act, the
Securities Act, the Investment Company Act or the Investment Advisers
Act other than any such orders which are no longer in effect or
applicable to the current operation of any Fund.
(4) Fund Approvals. Except as contemplated by Section
5.01(B), no action of the Fund Boards, the Board of Directors of any
non- Investment Company Fund or the shareholders of the Funds is
required in connection with the transactions contemplated by this Plan.
(5) Certain Information. Each of (i) the proxy
solicitation materials to be distributed to the shareholders of each
Investment Company and, to the best knowledge of the Company and the
Company
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Subsidiaries, VIS Trust in connection with the approvals described in
Section 5.01(B), (ii) the materials provided to the Fund Boards in
connection with the approvals described in Section 4.01(Y)(2)(h), and
(iii) Forms ADV and B-D of the Company and the Company Subsidiaries,
have provided and will provide all information necessary in order to
make the disclosure of information therein satisfy the requirements of
Section 14 of the Exchange Act, Sections 15 and 20 of the Investment
Company Act and such Forms ADV and B-D, as applicable, and such
materials and information (except to the extent supplied by First Union
or FUNB-NC) will be complete in all material respects and will not
contain (at the time such materials or information is distributed,
filed or provided, as the case may be) any statement which, at the time
and in the light of the circumstances under which it is made, is false
or misleading with respect to any material fact, and will not omit to
state any material fact necessary in order to make the statements
therein not false or misleading or (with respect to information
included in proxy statements) necessary to correct any statement or any
earlier communication with respect to the solicitation of a proxy for
the same meeting or subject matter which has become false or
misleading.
4.02. Representations and Warranties of First Union. First Union hereby
represents and warrants to the Company as follows:
(A) Recitals. The facts set forth in the Recitals of this Plan
with respect to First Union, FUNB-NC and the Merging Entity are true
and correct.
(B) Corporate Authority. Each of First Union, FUNB-NC and the
Merging Entity has full corporate power and authority to enter into,
and carry out its obligations under, this Plan. First Union is duly
registered as a bank holding company with the Board of Governors of the
Federal Reserve (the "Federal Reserve Board") under the Bank Holding
Company Act of 1956, as amended. Each of First Union, FUNB-NC and the
Merging Entity has all governmental authorizations to own or lease its
respective properties and assets and to carry on its business as now
being conducted except for any such authorizations the absence of
which, individually or in the aggregate, would not be reasonably likely
to have a Material Adverse Effect.
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(C) Authorization.
(1) This Plan has been duly authorized, executed and
delivered by each of First Union and the Merging Entity and (subject to
ratification at the next scheduled meeting of the Board of Directors of
FUNB-NC) by FUNB-NC and no further corporate proceedings on the part of
First Union or the Merging Entity or (other than such ratification) by
FUNB-NC are necessary to authorize this Plan and the transactions
contemplated hereby. This Plan is the legal, valid and binding
obligation of each of First Union, FUNB-NC (subject to such
ratification) and the Merging Entity, enforceable in accordance with
its terms, subject to bankruptcy, insolvency and other laws of general
applicability relating to or affecting creditors' rights and to general
equity principles.
(2) Neither the execution, delivery and performance of
this Plan by First Union, FUNB-NC or the Merging Entity nor the
consummation by them of the transactions contemplated hereby, will (a)
violate, conflict with, or result in a breach of any provisions of, or
constitute a default (or an event which, with notice or lapse of time
or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in
a right of termination or acceleration under, or the creation of any
Lien upon any of the properties or assets of First Union or any
subsidiary of First Union (each a "First Union Subsidiary" and
collectively the "First Union Subsidiaries") under any of the terms,
conditions or provisions of (x) the constituent documents of First
Union or any First Union Subsidiary, or (y) except where such event
would not, individually or in the aggregate, be reasonably likely to
have a Material Adverse Effect, any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or
obligation to which First Union or any First Union Subsidiary is a
party or by which First Union or any First Union Subsidiary may be
bound, or to which First Union or any First Union Subsidiary or the
properties or assets of First Union or any First Union Subsidiary may
be subject, or ruling, order, writ, injunction, decree, statute, rule
or regulation applicable to First Union or any First Union Subsidiary
or to the properties or assets of First Union or any First Union
Subsidiary.
(3) Except as Previously Disclosed on Schedule 4.02(C) and
except for requirements
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attributable to the Company, any Company Subsidiary or any Fund, no
material notice to, filing with, authorization of, exemption by, or
consent or approval of, any regulatory authority is necessary for the
consummation by First Union, FUNB-NC or the Merging Entity of the
transactions contemplated by this Plan.
(D) First Union Reports. First Union's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, and all other
documents, as amended prior to the date of this Agreement, filed
subsequent to December 31, 1995 under Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, in the form filed with the SEC (in each such
case, the "First Union Reports"), did not, and the First Union Reports
filed after the date hereof will not, as of their respective dates
contain (without giving effect to any amendment thereto filed after the
date hereof) any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they
were made, not misleading; and each of the consolidated balance sheets
contained in or incorporated by reference into the First Union Reports
(including the related notes and schedules thereto) fairly presents the
consolidated financial position of First Union as of its date and each
of the consolidated statements of income and changes in stockholders'
equity and cash flows or equivalent statements in the First Union
Reports (including any related notes and schedules thereto) fairly
presents the consolidated results of operations, consolidated changes
in stockholders' equity and consolidated changes in cash flows, as the
case may be, of First Union for the periods set forth therein, in each
case in accordance with generally accepted accounting principles
consistently applied to banks and bank holding companies during the
periods involved, except as may be noted therein, subject to normal and
recurring year-end audit adjustments in the case of unaudited
statements.
(E) Absence of Material Adverse Effect. Except as set forth in
the First Union Reports, since December 31, 1995, no event or
development (whether or not described or referred to in any other
paragraph of this Section 4.02) has occurred that has had or is
reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect.
(F) Litigation. There is no action, suit or proceeding
pending, or to the knowledge of First Union
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threatened, against or affecting First Union or any First Union
Subsidiary or any of their respective properties before any court or
arbitrator or any governmental body, agency or official or Self-
Regulatory Body which, individually or in the aggregate, is reasonably
likely to have a Material Adverse Effect.
(G) Brokers and Finders. Neither First Union, FUNB-NC nor the
Merging Entity has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions
or finder's fees, and no broker or finder has acted directly or
indirectly for First Union, FUNB-NC or the Merging Entity in connection
with this Plan or the transactions contemplated hereby.
(H) First Union Common Stock. The shares of First Union Common
Stock to be issued hereunder (i) have been duly authorized for issuance
and, when issued in accordance with this Plan, will be validly issued,
fully paid, nonassessable, free of preemptive rights and not subject to
any restrictions on transfer (other than restrictions imposed by
applicable securities laws) or voting and (ii) will be issued together
with rights (the "First Union Rights") under the Shareholder Protection
Rights Agreement, dated as of December 28, 1990, as amended (the "First
Union Rights Agreement"), to which First Union is a party or any
similar arrangement that may be in place at the time of issuance.
(I) Regulatory Approvals. Except as Previously Disclosed on
Schedule 4.02(I) and except for requirements attributable to the
Company, any Company Subsidiary or any Fund, no notice to, filing with,
authorization of, exemption by, or consent or approval of, any
regulatory authority is necessary for the consummation by First Union,
FUNB-NC or the Merging Entity of the transactions contemplated by this
Plan. As of the date hereof, neither First Union nor FUNB-NC is aware
of any reason why the regulatory approvals and consents referred to in
Section 6.01(A) will not be received without the imposition of a
condition or requirement as described therein.
(J) Compliance with Laws. Each of First Union, FUNB-NC and
each of their subsidiaries:
(a) Is in compliance with all laws, regulations, reporting and
licensing requirements, and orders
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applicable to its business or to the employees conducting its
business, the breach or violation of which, individually or in
the aggregate, would be reasonably likely to have a Material
Adverse Effect; and
(b) Has received no notification or communication from any
agency or department of federal, state, or local government or
the staff thereof (i) asserting that, or commencing any
investigation as to whether, any of such entities is not in
compliance with any of the statutes, regulations, or
ordinances which such governmental authority enforces, which,
as a result of such noncompliance in any such instance,
individually or in the aggregate, would be reasonably likely
to have a Material Adverse Effect, (ii) threatening to revoke
any license, franchise, permit or governmental authorization,
which revocation, individually or in the aggregate, would be
reasonably likely to have a Material Adverse Effect.
(K) No Violation of First Union Rights Agreement. Assuming
that no person holds, or at the Effective Date will hold, Beneficial
Ownership (as defined in the First Union Rights Agreement) of 15% or
more of the then outstanding shares of First Union Common Stock, none
of the execution or delivery of this Agreement, the issuance of First
Union Common Stock to the holders of Company Common Stock pursuant to
this Agreement or any other transactions contemplated by this Agreement
will (x) cause a Separation Time (as defined in the First Union Rights
Agreement) to occur or (y) cause any person to be deemed an "Acquiring
Person" within the meaning of the First Union Rights Agreement.
V. COVENANTS
The Company covenants to First Union, FUNB-NC and the Merging Entity,
and each of First Union, FUNB-NC and the Merging Entity jointly and severally
covenants to the Company that:
5.01. Consents and Approvals. (A) Subject to the terms and conditions
herein provided, it agrees to cooperate with the other parties hereto and use
its reasonable best efforts to take, or cause to be taken, all action, and to
do, or cause to be done, all things necessary, proper or advisable under the
Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act") and all other
applicable laws, regula-
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tions and contractual arrangements to consummate and make effective the
transactions contemplated by this Plan. It will take no action (1) which would
render any of its representations and warranties contained herein untrue in any
material respect at and as of the Effective Date, (2) which would materially and
adversely affect its ability to satisfy any of the conditions set forth in
Article VI, (3) which would adversely affect the eligibility of the transactions
contemplated hereby for pooling-of-interests accounting treatment, or (4) which
would cause the Acquisition to fail to be a reorganization within the meaning of
Section 368(a) of the Code.
(B) To the extent that the rights of the Company or any of the
Company Subsidiaries under any agreement, including any Investment Contract, may
not be assigned by operation of law without the consent or approval of another
party thereto or terminates upon any assignment, the Company shall use its
reasonable best efforts to obtain any such consent. Without limiting the
foregoing, the Company, as promptly as practicable but subject to its fiduciary
obligations, will (1) use, and use its reasonable best efforts to cause each
Fund to use, its reasonable best efforts to obtain, or cause to be obtained, all
consents necessary to be obtained by the Company, any of the Company
Subsidiaries or any of the Funds in order for the Company to consummate the
transactions contemplated hereby (including all approvals contemplated by the
Fund Board Resolutions), (2) use its reasonable best efforts to cause each
Investment Company to prepare, file with and cause to be cleared by the SEC and
all other governmental and regulatory agencies having jurisdiction thereover, as
promptly as practicable after the date hereof, all proxy solicitation materials
required to be distributed to shareholders of the Funds with respect to the
actions recommended for shareholder approval by the Fund Boards as set forth in
the Fund Board Resolutions and (3) cause each Investment Company to mail such
proxy solicitation materials to such shareholders promptly after clearance by
the SEC and cause to be submitted to a meeting of shareholders of the Investment
Companies as soon as practicable after such mailing the proposals described in
clause (2), above, all such consents and such proxy solicitation, to be in form
and substance reasonably satisfactory to First Union and in compliance with
Section 4.01(X)(5).
5.02. Current Information. (A) During the period from the date of this
Plan to the Effective Date, the Company and First Union will cause one or more
of their representatives to confer on a regular and frequent basis with respect
to the status of the ongoing operations of the
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Company, the Company Subsidiaries and the Funds. The Company will promptly
notify First Union of any material change in the normal course of the business
of the Company, any of the Company Subsidiaries or any of the Funds or of any
complaints from a governmental or regulatory authority or a Self-Regulatory
Body, investigations or hearings (or communications indicating that the same may
be contemplated), or the institution or the threat of any litigation that comes
to its attention which would, in any manner, challenge, prevent, alter or
materially delay any of the transactions contemplated hereby and the Company
will keep First Union fully informed with respect to such events. The Company
will also notify First Union of the status of regulatory applications and third
party consents required to be obtained by the Company, any of the Company
Subsidiaries or any of the Funds related to the transactions contemplated
hereby. First Union will notify the Company of the status of its regulatory
applications and third-party consents required to be obtained by First Union,
FUNB-NC or the Merging Entity related to the transactions contemplated hereby.
(B) Each of First Union and the Company shall give prompt
notice to the other of any fact, event or circumstance known to it that (i) is
reasonably likely, individually or taken together with all other facts, events
and circumstances known to it, to result in any Material Adverse Effect with
respect to it or (ii) would be reasonably likely to cause or constitute a
material breach of any of its representations, warranties, covenants or
agreements contained herein.
5.03. Access; Information. (A) The Company shall upon reasonable notice
afford to First Union, FUNB-NC and their representatives (including, without
limitation, officers and employees of First Union and counsel, accountants and
other professionals retained by First Union) such access during normal business
hours throughout the period prior to the Effective Date to its, each Company
Subsidiary's and, subject to each Fund's consent (which the Company shall use
reasonable best efforts to procure), each Fund's books, records (including,
without limitation, Tax Returns and appropriate work papers of independent
auditors under normal professional courtesy), properties, and to such other
information as First Union or FUNB-NC may reasonably request.
(B) First Union and FUNB-NC shall not use for any purpose
unrelated to the consummation of the transactions contemplated by this Plan, and
shall hold, and shall cause their respective subsidiaries and their directors,
officers,
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employees, agents, consultants and advisors to hold, in strict confidence,
unless and to the extent that disclosure to a bank regulatory authority is
necessary and required by law in connection with any necessary regulatory
approval or unless compelled to disclose by judicial or administrative process
or by other requirement of law or the applicable requirements of any regulatory
agency or relevant stock exchange, all non-public records, books, contracts,
instruments, computer data and other data and information (collectively, the
"Information") concerning any of the Company, the Company Subsidiaries or the
Funds (or, if required under a contract with a third party, such third party)
furnished it by the Company, the Company Subsidiaries or the Funds or their
respective representatives pursuant to this Plan (except to the extent that such
information can be shown to have been (1) previously known by such party on a
non-confidential basis, (2) in the public domain through no fault or action of
First Union or FUNB-NC or (3) later lawfully acquired from other sources by
First Union or FUNB- NC from a party not known by them to be under an obligation
to refrain from making such disclosure) and First Union and FUNB-NC shall not
release or disclose such Information to any other person, except its auditors,
attorneys, financial advisors, other consultants and advisors and, to the extent
permitted above, to bank regulatory authorities. In the event of the termination
of this Plan, First Union and FUNB- NC shall return or destroy all information
furnished to such party and its representatives and all analyses, compilations,
data, studies and other documents prepared by such party or its representatives
containing or based in whole or in part on any such furnished information or
reflecting First Union's or FUNB-NC's review of, or interest in, the Company,
the Company Subsidiaries or the Funds.
5.04. Effect of Investigations. No investigation by the parties hereto
made heretofore or hereafter, or the provision of any documents, whether
pursuant to this Plan or otherwise (including without limitation, any action
taken by or information provided to First Union or FUNB-NC pursuant to the
provisions of Sections 5.02 and 5.03) shall affect the representations and
warranties of the parties which are contained herein.
5.05. Acquisition Proposals. The Company agrees that neither it nor any
of the Company Subsidiaries nor their respective officers, directors, employees,
agents or representatives (including, without limitation, any investment banker,
attorney or accountant retained by any of them) shall initiate, solicit or
encourage, directly or indirectly, any inquiries or the making of any proposal
or offer with respect to a merger, consolidation or similar
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transaction involving, or any purchase of all or any significant portion of the
assets or any equity securities or partnership (capital or profits) interests
of, either the Company, any of the Company Subsidiaries or any of the Funds, or
the assignment of any investment advisory, sub-advisory, administrative or
distribution agreement with the Company or any of the Company Subsidiaries (any
such proposal or offer being hereinafter referred to as an "Acquisition
Proposal") or engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal, except as contemplated by this Plan;
provided, however, with the authorization of the Company's Board of Directors,
that the Company, any Company Subsidiary or any officer, director or employee
of, the Company or any Company Subsidiary may, following the receipt of an
Acquisition Proposal from a third party that the Board of Directors of the
Company determines in good faith (after duly considering the written advice of
its counsel) must be considered in order to comply with the Board of Directors'
fiduciary duties to the Company's stockholders under applicable law, participate
in discussions or negotiations regarding such Acquisition Proposal and furnish
related information. The Company shall promptly advise First Union and FUNB-NC
orally and in writing of the receipt by it (or any of the other persons or
entities referred to above) of any Acquisition Proposal, or any inquiry that
could lead to any Acquisition Proposal, the material terms and conditions of
such Acquisition Proposal or inquiry, and the identity of the person making such
Acquisition Proposal or inquiry. The Company will keep First Union and FUNB-NC
fully informed of the status and details of any such Acquisition Proposal or
inquiry. The Company will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. The Company will take the
necessary steps to inform the appropriate individuals or entities referred to in
the first sentence to comply with the obligations undertaken in this Section
5.05.
5.06. Stock Exchange Listing; Affiliate Letters. (A) First Union shall
use its reasonable best efforts to list as of the Effective Date on the NYSE,
upon official notice of issuance, the First Union Common Stock to be issued as
contemplated by this Plan.
(B) As promptly as practicable, the Company shall deliver to
First Union a schedule of each person that, to the best of its knowledge, is or
is reasonably likely to be,
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as of the date of the Meeting (as hereinafter defined), deemed to be an
"affiliate" of it (each, an "Affiliate") as that term is used in Rule 145 under
the Securities Act or SEC Accounting Series Releases 130 and 135. The Company
shall use its reasonable best efforts to cause each person who may be deemed to
be such an Affiliate to execute and deliver to First Union on or before the date
of mailing of the Proxy Statement an agreement in the form attached hereto as
Exhibit B.
5.07. Stockholder Approval. The Company shall take, in accordance with
applicable law, all action necessary to convene, respectively, an appropriate
meeting of stockholders to consider and vote upon the approval of this Plan and
to vote on any other stockholder approval matters required for consummation of
the Acquisition and Merger (the "Meeting") as promptly as practicable after the
Registration Statement (as hereinafter defined) is declared effective. The Board
of Directors of the Company will recommend such approval, and will take all
reasonable lawful action to solicit such approval by its stockholders; provided;
however, that if, in the exercise of its good faith judgment as to its fiduciary
duties to the Company's shareholders under applicable law, the Company's Board
of Directors (after duly considering the written advice of its outside counsel)
determines that such action is required, the Board of Directors may withdraw or
modify such recommendation.
5.08. Registration Statement. (A) Each of First Union and the Company
agrees to cooperate in the preparation of a registration statement on Form S-4
(the "Registration Statement") to be filed by First Union with the SEC in
connection with the issuance of shares of First Union Common Stock as
contemplated by this Plan (including the proxy statement and prospectus and
other proxy solicitation materials of First Union and the Company constituting a
part thereof (the "Proxy Statement"). Each of the Company and First Union agrees
to use all reasonable best efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as reasonably
practicable after filing thereof. First Union also agrees to use all reasonable
best efforts to obtain all necessary state securities law or "Blue Sky" permits
and approvals required to carry out the transactions contemplated by this
Agreement. The Company agrees to furnish to First Union all information
concerning the Company, the Company Subsidiaries, officers, directors and
stockholders as may be reasonably requested in connection with the foregoing.
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(B) Each of the Company and First Union agrees, as to itself
and its subsidiaries, that none of the information supplied or to be supplied by
it for inclusion or incorporation by reference in (i) the Registration Statement
will, at the time the Registration Statement and each amendment or supplement
thereto, if any, becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(ii) the Proxy Statement and any amendment or supplement thereto will, at the
date of mailing to stockholders and at the time of the Meeting, contain any
statement which, in the light of the circumstances under which such statement is
made, will be false or misleading with respect to any material fact, or which
will omit to state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement in any
earlier statement in the Proxy Statement or any amendment or supplement thereto.
5.09. Qualification of the Funds. Subject to applicable fiduciary
duties to the Funds, the Company will use its reasonable best efforts to ensure
that the Funds take no action (i) that would prevent any Investment Company or
VIS Trust from qualifying as a "regulated investment company", within the
meaning of Section 851 of the Code, (ii) that would cause any Fund which is not
an Investment Company (other than VIS Trust) to be subject to taxation on a net
income basis under the Code or (iii) that would be inconsistent with any Fund's
prospectus and other offering, advertising and marketing materials.
5.10. Press Releases, Etc. First Union and the Company will consult
with each other as to the form, substance and timing of any press release or
other public disclosure of matters related to this Plan, or any of the
transactions contemplated hereby and no such press release or other public
disclosure shall be made without the consent of the other party, which shall not
be unreasonably withheld or delayed; provided, however, that the parties may
make such disclosures as are required by law after making reasonable efforts
under the circumstances to consult in advance with the other parties.
5.11. Reasonable Best Efforts. Subject to the terms and conditions of
this Plan, it shall use its reasonable best efforts in good faith to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or desirable, or advisable under applicable laws, so as to
fulfill all conditions and
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obligations on its part to be performed or fulfilled under this Plan and to
permit consummation of the Acquisition and Merger on the Effective Date and to
otherwise enable consummation of the transactions contemplated hereby and shall
cooperate fully with the other parties hereto to that end.
5.12. Regulatory Applications. (A) In the case of each of the parties
hereto, (i) it shall promptly prepare and submit applications to the appropriate
regulatory authorities for approval of the Acquisition and Merger, and (ii)
promptly make all other appropriate filings to secure all other approvals,
consents and rulings which are necessary for the consummation of the Acquisition
and Merger by it.
(B) Each of First Union and the Company agrees to cooperate
with the other and, subject to the terms and conditions set forth in this
Agreement, use its reasonable best efforts to prepare and file all necessary
documentation, to effect all necessary applications, notices, petitions, filings
and other documents, and to obtain all necessary permits, consents, orders,
approvals and authorizations of, or any exemption by, all third parties and
regulatory authorities necessary or advisable to consummate the transactions
contemplated by this Plan, including without limitation the regulatory approvals
referred to in Section 6.01. Each of First Union and the Company shall have the
right to review in advance, and to the extent practicable each will consult with
the other, in each case subject to applicable laws relating to the exchange of
information, with respect to all material written information submitted to, any
third party or any regulatory authorities in connection with the transactions
contemplated by this Plan. In exercising the foregoing right, each of the
parties hereto agrees to act reasonably and as promptly as practicable. Each
party hereto agrees that it will consult with the other party hereto with
respect to the obtaining of all material permits, consents, approvals and
authorizations of all third parties and regulatory authorities necessary or
advisable to consummate the transactions contemplated by this Plan and each
party will keep the other party apprised of the status of material matters
relating to completion of the transactions contemplated hereby.
5.13. Section 15(f). The parties each agree for a period of three years
following the Effective Time to use their respective reasonable best efforts to
assure compliance with the conditions of Section 15(f) of the Investment Company
Act as it applies to the transactions
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contemplated by this Agreement. Notwithstanding anything to the contrary
contained herein, the covenants of First Union and FUNB-NC contained in this
Section 5.13 are intended only for the benefit of parties to this Plan and their
respective stockholders and holders of stock options immediately prior to the
Effective Time and for no other person.
5.14. Reorganization and Accounting Treatment. Neither First Union nor
the Company will take, or permit their subsidiaries to take, any action after
the Effective Time which would cause the Acquisition to fail to be characterized
as a tax-free reorganization under Section 368 of the Code or the Merger to fail
to be characterized as a pooling of interests for accounting purposes.
5.15. Regulatory Conditions. To the extent required by any regulatory
authority as a condition to approval of the Acquisition and Merger or the other
transactions contemplated hereby, the Company shall take such reasonable action
as may be required in order to comply with any such requirement.
5.16. Indemnification. (A) For six years after the Effective Date, the
Continuing Corporation shall indemnify, defend and hold harmless the present and
former directors and officers of the Company and the Company Subsidiaries as of
the date hereof (each, an Indemnified Party) against all costs and expenses
(including reasonable attorney's fees), judgements, fees, losses, claims,
damages or liabilities (collectively, "Costs") incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out or actions or omissions occurring
at or prior to the Effective Time (including, without limitation, the
transactions contemplated by this Plan and the related agreements executed
contemporaneously or contemplated in connection herewith) to the fullest extent
that such persons may as of the date hereof be indemnified by the Company under
the laws of the State of Delaware and the Company's certificate of incorporation
and by-laws at in effect on the date hereof (and during such period the
Continuing Corporation shall also advance expenses (including expenses
constituting Costs described in Section 5.16(E)) as incurred to the fullest
extent permitted under applicable law, provided that the person to whom the
expenses are advanced provides an undertaking to repay such advances if it is
ultimately determined that such person is not entitled to indemnification with
no bond or security to be required); provided that any determination required to
be made with respect to whether an officer's or director's conduct
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complies with the standards set forth under Delaware law and such certificate of
incorporation and by-laws, which determination shall not be required or
necessary in any event for the advancement of expenses which shall be made upon
the giving of the undertaking required above, shall be made by independent
counsel (which shall not be counsel that provides services to First Union or its
affiliates) selected by First Union and reasonably acceptable to such officer or
director; and provided, further, that in the absence of judicial precedent to
the contrary, such counsel, in making such determination, shall presume such
officer's or director's conduct complied with such standard and the Continuing
Corporation shall have the burden to demonstrate that such officer's or
director's conduct failed to comply with such standard.
(B) First Union shall maintain the Company's existing directors' and
officers' liability policy (or a policy providing a comparable coverage amount
on terms no less favorable, including the Company's existing policy if it meets
the foregoing standard) covering persons who are currently covered by such
insurance for a period of three years after the Effective Date; provided, that
First Union shall not be obligated to make a premium payment in respect of such
policy (or replacement policy) which exceeds, for the portion related to the
Company's directors and officers, 150% of the annual premium payment on the
Company's current policy in effect as of the date of this Plan; provided,
further, that if such coverage can only be obtained upon the payment of a
premium in excess of 150% of the annual premium payment of the Company's current
policy, First Union shall obtain such coverage as can reasonably be obtained by
paying a premium of 150% of the annual premium payment of the Company's current
policy in effect as of the date of this Plan.
(C) Any Indemnified Party wishing to claim Indemnification under
Section 5.16(A), upon learning of any claim, action, suit, proceeding or
investigation described above, shall promptly notify the Continuing Corporation
thereof; provided that the failure so to notify shall not affect the obligation
of the Continuing Corporation under Section 5.16(A) unless and to the extent
such failure materially increases the Continuing Corporation's liability under
such subsection (A). In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Date), (1) the
Continuing Corporation shall have the right to assume the defense thereof, if it
so elects, and the Continuing Corporation shall pay all reasonable fees and
expenses of counsel for the Indemnified Parties promptly as statements therefor
are
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received; provided, however, that the Continuing Corporation shall be obligated
pursuant to this subsection (C) to pay for only one firm of counsel for all
Indemnified Parties in any jurisdiction for any single action, suit or
proceeding or any group of actions, suits or proceedings arising out of or
related to a common body of facts, (2) the Indemnified Parties will cooperate in
the defense of any such matter, and (3) the Continuing Corporation shall not be
liable for any settlement effected without its prior written consent.
(D) The Continuing Corporation shall pay all reasonable Costs,
including attorneys' fees, that may be incurred by any Indemnified Party in
enforcing the indemnity and other obligations provided for in Section 5.16. The
rights of each Indemnified Party hereunder shall be in addition to any other
rights such Indemnified Party may have under applicable law.
VI. CONDITIONS TO CONSUMMATION OF THE ACQUISITION AND MERGER
6.01. Conditions to Each Party's Obligations to Consummate. The
respective obligations of each party to consummate the Acquisition and Merger
shall be subject to the fulfillment or waiver at or prior to the Effective Time
of the following conditions:
(A) Regulatory Approvals. The transactions contemplated by
this Plan shall have been approved by any federal, state, foreign or
local governmental or regulatory authority or Self-Regulatory Body the
approval of which is required to permit consummation thereof, without
the imposition of any condition or requirement of any commitment which,
in the good faith opinion of First Union, is reasonably likely to have
a Material Adverse Effect with respect to the Company or the continued
conduct of its business; and all waiting periods arising under the HSR
Act or any other applicable law shall have duly lapsed or been
terminated.
(B) No Orders. None of First Union, FUNB-NC, the Merging
Entity, the Company, any Company Subsidiary or any Fund shall be
subject to any order, decree or injunction of a court or agency of
competent jurisdiction which enjoins or prohibits the consummation of
any of the transactions contemplated by this Plan.
(C) Litigation. No action or proceeding shall have been
instituted or threatened by any court,
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governmental body, Self-Regulatory Body or other person or entity and
remain pending before any court, governmental body or Self-Regulatory
Body or be threatened, to restrain or prohibit or to recover damages in
respect of any or all of the transactions contemplated by this Plan;
nor shall any governmental body have notified any party to this Plan or
any of their respective affiliates that consummation of any or all of
the transactions contemplated by this Plan would constitute a violation
of the laws of any jurisdiction or that it intends to commence any
action or proceeding to restrain or prohibit or to recover damages in
respect of any or all of the transactions contemplated by this Plan,
unless such governmental body or other person or entity shall have
withdrawn such notice and abandoned such action or proceeding.
(D) Tax Opinion. Each party shall have received a written
opinion, dated as of the Effective Date, regarding federal income tax
matters from Sullivan & Cromwell, counsel to First Union, to the effect
that, subject to the customary representations and assumptions referred
to therein, (a) the Acquisition will constitute a tax-free
reorganization within the meaning of Section 368(a) of the Code, (b)
the exchange in the Acquisition of the Company Common Stock for First
Union Common Stock will not give rise to income, gain or loss to the
Company, First Union or the stockholders of the Company (including
voting trust beneficiaries) with respect to such exchange except for
cash received in lieu of fractional shares, (c) the adjusted tax basis
of the First Union Common Stock received by shareholders of the Company
(including voting trust beneficiaries) who exchange all of their
Company Common Stock in the Acquisition will be the same as the
adjusted tax basis of the shares of the Company Common Stock
surrendered in exchange therefor, and (d) the holding period of the
shares of the First Union Common Stock received in the Acquisition will
include the period during which the shares of Company Common Stock
surrendered in exchange therefor were held, provided such shares of
Company Common Stock were held as capital assets at the Effective Time.
(E) Pooling Letter. First Union shall have received from KPMG
Peat Marwick LLP a letter, dated on or shortly prior to the Effective
Date, to the effect that the Merger will qualify for
pooling-of-interests accounting treatment under Accounting Principles
Board Opinion No. 16 if closed and consummated in accordance
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with this Agreement and the related agreements executed in connection
with or contemplated hereby.
(F) Stockholder Vote. This Plan shall have been duly approved
and adopted by the holders of a majority of the outstanding shares of
the Company Common Stock in accordance with Section 252 of the DGCL and
the Certificate of Incorporation and by-laws of the Company.
6.02. Conditions to Obligations of First Union, FUNB-NC and the Merging
Entity to Consummate. The obligations of First Union, FUNB-NC and the Merging
Entity to consummate the Acquisition and Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Time of the following
additional conditions:
(A) Representations and Warranties. The representations and
warranties of the Company set forth in Article IV hereof shall be true
and correct as of the date of this Plan and on the Effective Date with
the same effect as though all such representations and warranties had
been made on the Effective Date, except (i) for any such
representations and warranties made as of a specified date, which shall
be true and correct as of such date, or (ii) as expressly contemplated
or permitted or as a result of actions permitted by this Plan.
Notwithstanding anything to the contrary contained in this Section
6.02(A), the condition contained in this Section shall be deemed to
have been satisfied even if such representations and warranties are not
true and correct unless the failure of any of the representations and
warranties to be so true and correct, if any (excluding, for these
purposes, the effect of any materiality limitations therein), shall be
reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on the Company or the Continuing Corporation. First
Union, FUNB-NC and the Merging Entity each shall have received a signed
certificate of the Chief Executive Officer and Chief Financial Officer
of the Company to the effect set forth in this clause (A).
(B) Performance of Obligations. The Company shall have
performed in all material respects all obligations required to be
performed by it under this Plan on or prior to the Effective Date, and
First Union, FUNB-NC and the Merging Entity shall have received a
signed certificate of the Chief Executive Officer and the Chief
Financial Officer of the Company to that effect.
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(C) Legal Opinions. First Union, FUNB-NC and the Merging
Entity shall have received written opinions dated the Effective Date,
from (1) Rosemary D. Van Antwerp, General Counsel for the Company; (2)
Goodwin, Procter & Hoar LLP, special counsel for the Company and (3)
Sullivan & Worcester, counsel for the Funds and the Fund Boards, in
forms customary for transactions of the type contemplated hereby and
reasonably satisfactory to First Union.
(D) Coopers & Lybrand L.L.P. Letters. First Union, FUNB-NC and
the Merging Entity shall have received from Coopers & Lybrand L.L.P. a
letter or letters, dated the date of or shortly prior to the Effective
Date, in form and substance reasonably satisfactory to First Union,
which shall include customary negative assurances with respect to the
Company's consolidated financial position and results of operations,
and to the effect that Coopers & Lybrand L.L.P. are not aware of any
facts or circumstances which might cause the Merger not to qualify for
pooling of interests accounting treatment.
(E) Consents. (1) The Fund Board Resolutions shall not have
been rescinded, amended or repealed and shall remain in full force and
effect; and (2) the Company shall have obtained all the consents or
approvals of the Fund shareholders referred to in Section 5.01(B) from
Funds the assets of which generated at least 90% of the management fees
received by the Company and the Company Subsidiaries from the Funds on
a consolidated basis during the 12 month period ended August 31, 1996,
each in form and substance reasonably satisfactory to First Union.
(F) Total Account Value. The Total Account Value as of the
business day immediately preceding the Effective Date shall not be less
than the product of 0.75 and the Total Account Value as of the date
hereof; and First Union shall have received a written calculation
thereof, certified as of the Effective Date by the Chief Executive
Officer and the Chief Financial Officer of the Company.
(G) Distribution Financing. (1) As of the Effective Time,
after giving effect to the consummation of the transactions
contemplated in this Plan and in the Fund Board Resolutions (but not
any actions taken or omitted to be taken by First Union or its
affiliates or by the Funds on or after the Effective Date) there shall
have occurred no default, event of termination or
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breach (which has not been timely cured) under the Purchase and Sale
Agreement, dated as of May 31, 1995 (the "Purchase and Sale
Agreement"), among Keystone Investment Distributors Company ("KIDCO"),
Citibank, N.A. and Citicorp North America, Inc. or the related
Undertaking, dated as of May 31, 1995 (the "Undertaking"), among the
Company, KIMCO, Citibank, N.A. and Citicorp North America, Inc.,
excluding any such default or breach resulting from the failure of
First Union to cause the successor to KIDCO as principal underwriter of
the Funds (as defined in the Purchase and Sale Agreement) to take any
action necessary on the part of such successor to comply with the
provisions of Section 4.03(a)(1) of the Undertaking.
(H) Senior Notes. The Company shall have taken no action, a
result of which would preclude the 9 3/4% Senior Secured Notes of the
Company from being defeased under Section 403 of the Indenture, dated
as of August 19, 1993, relating to such 9 3/4% Senior Secured
Notes at the Effective Time.
(I) Fund Management. If any of the persons Previously
Disclosed on Schedule 6.02(I), shall have ceased to be employed by the
Company, the Company shall have either (1) replaced such person with a
person acceptable to First Union or (2) made other arrangements
reasonably satisfactory to First Union.
6.03. Conditions to Obligations of the Company to Consummate. The
obligations of the Company to consummate the Acquisition and Merger shall be
subject to the fulfillment or waiver at or prior to the Effective Time of the
following additional conditions:
(A) Representations and Warranties. The representations and
warranties of First Union set forth in Article IV hereof shall be true
and correct, as of the Effective Date as though made at and as of the
Effective Date, except (i) for any such representations and warranties
made as of a specified date, which shall be true and correct as of such
date, or (ii) as expressly contemplated or permitted or as a result of
actions permitted by this Agreement. Notwithstanding anything to the
contrary contained in this Section 6.03(A), the condition contained in
this Section shall be deemed to have been satisfied even if such
representations and warranties are not true and correct unless the
failure of any of the representations and warranties to be so true and
correct, if any
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(excluding, for these purposes, the effect of any materiality
limitations therein), shall be reasonably likely to have, individually
or in the aggregate, a Material Adverse Effect on First Union. The
Company shall have received a signed certificate of an executive
officer of First Union, FUNB-NC and the Merging Entity to that effect.
(B) Performance of Obligations. First Union, FUNB-NC and the
Merging Entity shall have performed in all material respects all
obligations required to be performed by them under this Plan on or
prior to the Effective Date, and the Company Stockholders and the
Company shall have received a signed certificate of an executive
officer of First Union, FUNB-NC and the Merging Entity to that effect.
(C) Registration Statement. The Registration Statement shall
have become effective and no stop order or other order suspending its
effectiveness shall be in effect.
(D) NYSE Listing. The shares of First Union Common Stock
issuable as contemplated by this Plan shall have been approved for
listing on the NYSE, subject to official notice of issuance.
(E) Legal Opinion. The Company shall have received a written
opinion, dated the Effective Date, of Marion A. Cowell, Jr., Esq. to
the effect that the shares of First Union Common Stock to be issued in
the Merger are duly authorized and validly issued and are fully paid
and nonassessable.
VII. TERMINATION
This Plan may be terminated prior to the Effective Date:
7.01. Mutual Consent. By the mutual consent of First Union and the
Company.
7.02. Breach. By First Union or the Company, in the event of (i) a
material breach by any party hereto unaffiliated with the nonbreaching party of
any representation or warranty contained herein, which breach cannot be, or has
not been, cured within 30 days of its occurrence or (ii) a material breach by
such party of any of the covenants or agreements contained herein, which breach
cannot be or has not been cured.
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7.03. Satisfaction of Conditions. By First Union or the Company, upon
the occurrence of any event or condition that would preclude satisfaction of any
of the conditions to such party's obligation to consummate the Acquisition and
Merger set forth in Article VI.
7.04. Delay. By First Union or the Company, in the event that the
Acquisition and Merger is not consummated by June 30, 1997 through no fault of
the party seeking to terminate.
7.05. Injunction, etc. By either the Company or First Union, if any
permanent injunction or action by any court or other governmental agency or body
of competent jurisdiction enjoining, denying approval of or otherwise
prohibiting consummation of any of the transactions contemplated by this Plan
shall become final and nonappealable.
7.06. First Union Common Stock. By the Company, if its Board of
Directors so determines by a vote of a majority of the members of its entire
Board, at any time during the three-day period commencing two days after the
Determination Date, if both of the following conditions are satisfied:
(x) the Average Closing Price on the Determination Date of
shares of First Union Common Stock shall be less than the product of
0.85 and the Starting Price; and
(y) (i) the number obtained by dividing the Average Closing
Price on such Determination Date by the Starting Price (such number
being referred to herein as the "First Union Ratio") shall be less than
(ii) the number obtained by dividing the Index Price on the
Determination Date by the Index Price on the Starting Date (such number
being referred to herein as the "Index Ratio") and subtracting 0.15
from the quotient in this clause (y)(ii);
subject, however, to the following three sentences. If the Company elects to
exercise its termination right pursuant to the immediately preceding sentence,
it shall give prompt written notice to First Union and FUNB-NC; provided that
such notice of election to terminate may be withdrawn at any time within the
aforementioned three-day period. During the two-day period commencing with the
receipt of such notice, First Union and FUNB-NC shall have the option of
adjusting the Aggregate Share Consideration to equal the product of 2,912,000
(as such number may have been adjusted pursuant to Section 2.04) and the lesser
of (i) the quotient of the
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Starting Price divided by the Average Closing Price and (ii) the quotient of the
Index Ratio divided by the First Union Ratio. If First Union makes an election
contemplated by the preceding sentence, within such two-day period, it shall
give prompt written notice to the Company of such election and the revised
Aggregate Share Consideration, whereupon no termination shall have occurred
pursuant to this Section 7.06 and this Plan shall remain in effect in accordance
with its terms (except to reflect the modification of the Aggregate Share
Consideration as provided in this Section 7.06), and references in this
Agreement to "Exchange Ratio" shall thereafter be deemed to refer to the
Exchange Ratio as adjusted to reflect the modification of the Aggregate Per
Share Consideration pursuant to this Section 7.06; provided, however that the
Aggregate Share Consideration and Exchange Ratio as so modified shall be subject
to any further adjustments in accordance with Sections 2.04 and 2.01(B).
For purposes of this Section 7.06, the following terms shall have the
meanings indicated:
"Average Closing Price" means the average of the daily last
sales prices of First Union Common Stock as reported on the NYSE
Composite Transactions reporting system (as reported in The Wall Street
Journal or, if not reported therein, in another mutually agreed upon
authoritative source) for the ten consecutive full trading days in
which such shares are traded on the NYSE ending with the closing of
trading on the Determination Date.
"Determination Date" means the business day five business days
before the Effective Date.
"Index Group" means the group of each of the 17 bank holding
companies listed below, the common stock of all of which shall be
publicly traded and as to which there shall not have been, since the
Starting Date and before the Determination Date, an announcement of a
proposal for the acquisition or sale of such company. In the event that
the common stock of any such company ceases to be publicly traded or
any such announcement is made with respect to any such company, such
company will be removed from the Index Group, and the weights (which
have been determined based on the number of outstanding shares of
common stock) redistributed proportionately for purposes of determining
the Index Price. The 17 bank holding companies and the weights
attributed to them are as follows:
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Bank Holding Company Weighting
-------------------- ---------
NationsBank Corporation 15.33%
BankAmerica Corporation 13.86
Banc One Corp. 8.28
Norwest Corporation 6.92
First Chicago-NBD Corporation 6.71
Fleet Financial Group, Inc. 5.46
PNC Financial Corp. 5.29
KeyCorp 4.60
CoreStates Financial Corp. 4.51
First Bank System, Inc. 4.37
Sun Trust Banks, Inc. 4.28
National City Corporation 4.14
Wachovia Corporation 3.79
Mellon Bank Corporation 3.58
Barnett Banks, Inc. 3.14
U.S. Bancorp 2.96
Comerica Incorporated 2.78
"Index Price" on a given date means the weighted average
(weighted in accordance with the factors listed above) of the closing
prices of the companies composing the Index Group.
"Starting Date" means the date hereof.
"Starting Price" shall mean the last sale price per share of
First Union Common Stock on the Starting Date, as reported by the NYSE
Composite Transactions reporting system (as reported in The Wall Street
Journal or, if not reported therein, in another mutually agreed upon
authoritative source).
If any company belonging to the Index Group or First Union
declares or effects a stock dividend, reclassification,
recapitalization, split-up, combination, exchange of shares or similar
transaction between the Starting Date and the Determination Date, the
prices for the common stock of such company or
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First Union shall be appropriately adjusted for the purposes of
applying this Section 7.06.
7.07. Other Circumstances. By (i) First Union in the event that (a) as
provided in Section 5.07, the Board of Directors of the Company withdraws its
recommendation of this Agreement, fails to make such recommendation or modifies
or qualifies its recommendation in a manner adverse to First Union or (b) as
provided in Section 5.05, the Board of Directors participates in (or authorizes
participation in) negotiations of the type described in Section 5.05 regarding
the substantive terms of a formal Acquisition Proposal; or (ii) the Company if,
in the exercise of its good faith judgment as to its fiduciary duties to its
shareholders under applicable law, the Company's Board of Directors (after duly
considering the written advice of its outside counsel) determines that such
termination is required; provided, however, that the right of termination by the
Company contemplated by this Section 7.07 may only be exercised if, prior to or
contemporaneously with the determination by the Company's Board of Directors to
terminate this Agreement, the Company shall have entered, or be entering, into a
binding agreement with respect to an Acquisition Proposal.
7.08. Effect of Termination. In the event of termination of this Plan
pursuant to this Article VII, no party hereto (or any of its directors or
officers) shall have any liability or further obligation to any other party to
this Plan, except (i) as set forth in Section 8.01, or (ii) that nothing herein
will relieve any party from liability for any willful breach of this Plan.
7.09. Payment in Lieu of Fees and Expenses and Opportunity Costs. If
this Agreement is terminated by First Union pursuant to Section 7.02 (as a
result of a willful breach by the Company) or by First Union pursuant to Section
7.07 and prior thereto or within 18 months after such termination:
(i) the Company shall have entered into an agreement to engage
in an Acquisition Event (as hereinafter defined in either case) or an
Acquisition Event shall have occurred (other than as contemplated by
this Agreement); or
(ii) the Board of Directors of the Company shall have
authorized or approved an Acquisition Event or shall have publicly
announced an intention to authorize or approve or shall have
recommended that the shareholders of the Company approve or accept any
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Acquisition Event in each case other than as contemplated by this
Agreement,
then the Company shall promptly, but in no event later than one day after the
first of such events shall have occurred, pay First Union a fee equal to
$4,000,000; provided, however, that such fee shall not be paid if either First
Union or FUNB-NC was in material breach of its material covenants or agreements
contained in this Agreement when this Agreement was terminated.
"Acquisition Event" shall mean any of the following: (i) a merger,
consolidation or similar transaction involving the Company, (ii) a purchase,
lease or other acquisition of assets of the Company or the Company Subsidiaries
representing 25% or more of the consolidated assets of the Company and the
Company Subsidiaries or (iii) a purchase or other acquisition (including by way
of merger, consolidation, share exchange or any similar transaction) or
securities representing 25% or more of the voting power of the Company or any
Company Subsidiary in each case with or by a Person other than First Union or an
affiliate of First Union.
VIII. OTHER MATTERS
8.01. Survival. The representations, warranties, agreements and
covenants contained in this Plan shall not survive the Effective Time except for
such covenants all or any part of the performance of which is expressly provided
to occur after the Effective Time. If this Plan is terminated prior to
occurrence of the Effective Time, the agreements and representations of the
parties in Sections 5.03(B), 7.08 and 7.09 and Article VIII shall survive such
termination.
8.02. Waiver; Amendment. Prior to the Effective Time, any provision of
this Plan may be (i) waived in writing by the party benefitted by the provision,
or (ii) amended or modified at any time (including the structure of the
transactions contemplated hereby) only by an agreement in writing among the
parties hereto and executed in the same manner as this Plan.
8.03. Counterparts. This Plan may be executed in one or more
counterparts, each of which shall be deemed to constitute an original. This Plan
shall become effective when one counterpart has been signed by each party
hereto.
8.04. Governing Law. This Plan shall be governed by, and interpreted in
accordance with, the laws of the
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State of North Carolina, except as federal law may be applicable.
8.05. Expenses. Each party hereto will bear all expenses incurred by it
in connection with this Plan and the transactions contemplated hereby.
8.06. Notices. All notices, requests and other communications hereunder
to a party shall be in writing and shall be deemed to have been given when
delivered by hand, telecopied (with confirmation), or mailed by registered or
certified mail return receipt requested to such party at its address set forth
below or such other address as such party may specify by notice to the parties
hereto.
If to First Union,
FUNB-NC or the
Merging Entity, to: First Union Corporation
One First Union Center
Charlotte, NC 28288-0013
Attn: Chief Executive Officer
with copies to: Marion A. Cowell, Jr., Esq.
First Union Corporation
One First Union Center
Charlotte, NC 28288-0013
(Fax No. (704) 374-3425)
Mitchell S. Eitel, Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
(Fax No. (212) 558-3588)
If to the Company, to: Keystone Investments, Inc.
200 Berkley Street
Boston, MA 02116
Attn: Alfred H. Elfner, III
(Fax No. (617) 338-3468)
with a copy to: Keystone Investments, Inc.
200 Berkley Street
Boston, MA 02116
Attn: Rosemary D. Van Antwerp, Esq.
(Fax No. (617) 338-3468)
8.07. Definitions. Any term defined anywhere in this Plan shall have
the meaning ascribed to it for all purposes of this Plan (unless expressly noted
to the contrary). In addition, when used in this Plan:
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(i) The term "Total Account Value", as of a specified date,
shall mean the aggregate net asset value, as of such date, of all the
assets with respect to which the Company or any Company Subsidiary
provides investment advisory services (whether or not assets of
Investment Companies).
(ii) with respect to First Union, FUNB-NC or the Merging
Entity, the term "Material Adverse Effect" shall mean (A) a material
adverse effect (whether taken individually or in the aggregate with all
other such effects, whether or not described in a representation or
warranty herein) on the financial condition, business, results of
operations or properties of First Union and the First Union
Subsidiaries, taken as a whole, or which would materially impair any
such person's ability timely to consummate the transactions
contemplated hereby or (B) any event, circumstance or condition
affecting any such person which, individually or in the aggregate,
would prevent or materially delay the consummation of the transactions
contemplated by this Plan;
(iii) with respect to the Company or the Funds, the term
"Material Adverse Effect" shall mean (A) a material adverse effect
(whether taken individually or in the aggregate with all other such
effects, whether or not described in a representation or warranty
herein) on the financial condition, business, results of operations or
properties of the Company and the Company Subsidiaries, taken as a
whole, or the Funds, taken as a whole, or which would materially impair
the Company's ability timely to consummate the transactions
contemplated hereby or (B) any event, circumstance or condition
affecting any such person which, individually or in the aggregate,
would prevent or materially delay the consummation of the transactions
contemplated by this Plan;
(iv) the term "person" shall include any individual,
corporation, business trust, partnership, association or similar
organization, or any governmental or regulatory authority or body;
(v) the term "Previously Disclosed" by a party shall mean
information set forth in a Schedule that is delivered by that party to
an unaffiliated party contemporaneously with the execution of this Plan
and specifically designated as information "Previously Disclosed"
pursuant to this Plan;
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(vi) with respect to any person, the term "subsidiary" shall
mean any corporation, partnership, business trust, association or other
similar organization of which such person directly or indirectly owns
more than 50% or the voting stock or other voting equity interest or
which is required to be consolidated with such person under generally
accepted accounting principles; and
(vii) with respect to any person, the term "Board of
Directors" includes any equivalent entity performing similar functions
with respect to such person under the laws of such person's
jurisdiction of organization or organizational documents.
8.09. Entire Understanding; No Third Party Beneficiaries. This Plan
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and thereby and supersedes any and all other
oral or written agreements heretofore made. Nothing in this Plan, expressed or
implied, is intended to confer upon any person, other than the parties hereto or
their respective successors, any rights, remedies, obligations or liabilities
under or by reason of this Plan other than the covenants contained in Sections
5.13 and 5.16, the benefits of which are conferred on third parties only to the
extent expressly provided therein.
8.10. Benefit Plans. Upon consummation of the Acquisition and Merger,
except as Previously Disclosed on Schedule 8.10, as soon as administratively
practicable, employees of the Company and Company Subsidiaries shall be
generally entitled to participate in the pension, benefit and similar plans on
substantially the same terms and conditions as employees of First Union. For the
purpose of determining eligibility to participate in such plans and the vesting
of benefits under such plans (but not for the accrual of benefits under such
plans), First Union shall give effect to years of service with the Company or
the Company Subsidiaries, as the case may be, as if such service were with First
Union.
8.11. Assignment. Except as contemplated by Section 1.01(A), neither
this Plan nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other parties hereto. Subject to the
preceding sentence, this Agreement shall be binding upon, inure to the benefit
of and be enforceable by the parties hereto and their respective successors and
permitted assigns.
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8.12. Headings. The headings contained in this Plan are for reference
purposes only and are not part of this Plan.
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed in counterparts, all as of the day and year first above
written.
FIRST UNION CORPORATION
By: /s/ Kenneth R. Stancliff
-------------------------------------
Name: Kenneth R. Stancliff
Title: Senior Vice President
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By: /s/ Donald A. McMullen
-------------------------------------
Name: Donald A. McMullen
Title: Executive Vice President
FKI, INC.
By: /s/ Kenneth R. Stancliff
-------------------------------------
Name: Kenneth R. Stancliff
Title: Senior Vice President
KEYSTONE INVESTMENTS, INC.
By: /s/ Alfred H. Elfner, III
-------------------------------------
Name: Alfred H. Elfner, III
Title: President and Chairman
of the Board
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September 6, 1996
Albert H. Elfner, III
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
Dear Mr. Elfner:
This letter sets forth the agreement between you and Keystone Investments, Inc.
("Keystone") with respect to the payment to you by Keystone of certain
compensation if the acquisition of Keystone by First Union National Bank of
North Carolina (or an affiliate thereof) were to occur (the "Acquisition") and
you continue as an active, full-time employee of Keystone for the full one-year,
two-year and/or three-year periods following the effective date of the
Acquisition (each, a "Pay-to-Stay Period" and together, the "Pay-to-Stay
Periods") or termination occurs as provided below.
If you remain an employee of Keystone in your present or a substantially
equivalent position for a Pay-to-Stay Period, at the end of each such
Pay-to-Stay Period during which you remain so employed you will receive a
payment in an amount equal to $440,000 (the "Annual Payment"). The annual level
of base salary paid to you during the Pay-to-Stay Periods will be no less than
such level as of the date hereof.
Except as provided herein in the event of your death or disability, if your
employment terminates at any time during any Pay-to-Stay Period for any reason,
during the 12-month period (the "Standstill Period") following such termination
you agree (i) not to accept employment from any entity engaged in providing
investment advice to investment companies or acquire or hold any interest as a
stockholder, director, agent or otherwise in any such entity, and (ii) not to
hire any person who was employed by Keystone or any of its affiliates within the
six-month period preceding any such hiring. At the end of such Standstill
Period, (a) in the event you voluntarily terminated employment, Keystone agrees
to pay you the Annual Payment, if any or (b) in the event your employment is
terminated for any other reason other than for Cause (as hereinafter defined),
Keystone agrees to pay you any remaining unpaid Annual Payments.
During the Pay-to-Stay Periods, your job will be located in Boston,
Massachusetts. If during the Pay-to-Stay Periods your job is relocated more than
25 miles from Boston or is changed so that it is no longer a substantially
equivalent position, and as a result you terminate your employment, your job
will be considered terminated for other than Cause.
During the Pay-to-Stay Periods, Keystone will not terminate your employment for
any reason other than (a) misconduct or (b) willful neglect of your duties after
Keystone has given you written notice specifying such conduct by you and giving
you a reasonable period of time (not
<PAGE>
less than 30 days), to conform your conduct to such duties (each of the
foregoing (a) or (b) constituting "Cause"). In the event of your death or
disability prior to the end of any Pay-to-Stay Period or the Standstill Period,
Keystone will make any remaining unpaid Annual Payments. The Annual Payments
will be less required withholding taxes. This letter agreement sets forth the
entire agreement between us with respect to the subject matter hereof and is
governed by the laws of Massachusetts.
You agree to remain employed by Keystone during the period from the date of this
letter through the effective date of the Acquisition. It is understood and
agreed that any of the payments by Keystone (or any successor corporation
following the Acquisition) to you pursuant to this letter agreement may be made
in the form of cash or shares of First Union Corporation common stock, at the
option of Keystone (or any such successor corporation following the
Acquisition).
If you accept this offer and agree to its terms, please sign both copies of this
letter and return one copy to Rosemary D. Van Antwerp, General Counsel of
Keystone.
KEYSTONE INVESTMENTS, INC.
By: /s/ Edward F. Godfrey
------------------------------
Name:
Title:
Accepted and agreed to
this 6th day of September, 1996
/s/ Albert H. Elfner, III
- ------------------------------------
Albert H. Elfner, III
September 6, 1996
Edward F. Godfrey
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
Dear Mr. Godfrey:
This letter sets forth the agreement between you and Keystone Investments, Inc.
("Keystone") with respect to the payment to you by Keystone of certain
compensation if the acquisition of Keystone by First Union National Bank of
North Carolina (or an affiliate thereof) were to occur (the "Acquisition") and
you continue as an active, full-time employee of Keystone for the full one-year,
two-year and/or three-year periods following the effective date of the
Acquisition (each, a "Pay-to-Stay Period" and together, the "Pay-to-Stay
Periods") or termination occurs as provided below.
If you remain an employee of Keystone in your present or a substantially
equivalent position for a Pay-to-Stay Period, at the end of each such
Pay-to-Stay Period during which you remain so employed you will receive a
payment in an amount equal to $345,000 (the "Annual Payment"). The annual level
of base salary paid to you during the Pay-to-Stay Periods will be no less than
such level as of the date hereof.
Except as provided herein in the event of your death or disability, if your
employment terminates at any time during any Pay-to-Stay Period for any reason,
during the 12-month period (the "Standstill Period") following such termination
you agree (i) not to accept employment from any entity engaged in providing
investment advice to investment companies or acquire or hold any interest as a
stockholder, director, agent or otherwise in any such entity, and (ii) not to
hire any person who was employed by Keystone or any of its affiliates within the
six-month period preceding any such hiring. At the end of such Standstill
Period, (a) in the event you voluntarily terminated employment, Keystone agrees
to pay you the Annual Payment, if any or (b) in the event your employment is
terminated for any other reason other than for Cause (as hereinafter defined),
Keystone agrees to pay you any remaining unpaid Annual Payments.
During the Pay-to-Stay Periods, your job will be located in Boston,
Massachusetts. If during the Pay-to-Stay Periods your job is relocated more than
25 miles from Boston or is changed so that it is no longer a substantially
equivalent position, and as a result you terminate your employment, your job
will be considered terminated for other than Cause.
During the Pay-to-Stay Periods, Keystone will not terminate your employment for
any reason other than (a) misconduct or (b) willful neglect of your duties after
Keystone has given you written notice specifying such conduct by you and giving
you a reasonable period of time (not
<PAGE>
less than 30 days), to conform your conduct to such duties (each of the
foregoing (a) or (b) constituting "Cause"). In the event of your death or
disability prior to the end of any Pay-to-Stay Period or the Standstill Period,
Keystone will make any remaining unpaid Annual Payments. The Annual Payments
will be less required withholding taxes. This letter agreement sets forth the
entire agreement between us with respect to the subject matter hereof and is
governed by the laws of Massachusetts.
You agree to remain employed by Keystone during the period from the date of this
letter through the effective date of the Acquisition. It is understood and
agreed that any of the payments by Keystone (or any successor corporation
following the Acquisition) to you pursuant to this letter agreement may be made
in the form of cash or shares of First Union Corporation common stock, at the
option of Keystone (or any such successor corporation following the
Acquisition).
If you accept this offer and agree to its terms, please sign both copies of this
letter and return one copy to Rosemary D. Van Antwerp, General Counsel of
Keystone.
KEYSTONE INVESTMENTS, INC.
By: /s/ Albert H. Elfner III
------------------------------------
Name:
Title:
Accepted and agreed to
this 6th day of September, 1996
/s/ Edward F. Godfrey
- ------------------------------------
Edward F. Godfrey
September 6, 1996
Ralph J. Spuehler, Jr.
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
Dear Mr. Spuehler:
This letter sets forth the agreement between you and Keystone Investments, Inc.
("Keystone") with respect to the payment to you by Keystone of certain
compensation if the acquisition of Keystone by First Union National Bank of
North Carolina (or an affiliate thereof) were to occur (the "Acquisition") and
you continue as an active, full-time employee of Keystone for the full one-year,
two-year and/or three-year periods following the effective date of the
Acquisition (each, a "Pay-to-Stay Period" and together, the "Pay-to-Stay
Periods") or termination occurs as provided below.
If you remain an employee of Keystone in your present or a substantially
equivalent position for each Pay-to-Stay Period, at the end of each such
Pay-to-Stay Period during which you remain so employed you will receive a
payment in an amount equal to $220,000 (the "Annual Payment"). The annual level
of base salary paid to you during the Pay-to-Stay Periods will be no less than
such level as of the date hereof.
Except as provided herein in the event of your death or disability, if your
employment terminates at any time during any Pay-to-Stay Period for any reason,
during the 12-month period (the "Standstill Period") following such termination
you agree (i) not to accept employment from any entity engaged in providing
investment advice to investment companies or acquire or hold any interest as a
stockholder, director, agent or otherwise in any such entity, and (ii) not to
hire any person who was employed by Keystone or any of its affiliates within the
six-month period preceding any such hiring. At the end of such Standstill
Period, (a) in the event you voluntarily terminated employment, Keystone agrees
to pay you the Annual Payment, if any or (b) in the event your employment is
terminated for any other reason other than for Cause (as hereinafter defined),
Keystone agrees to pay you any remaining unpaid Annual Payments.
During the Pay-to-Stay Periods, your job will be located in Boston,
Massachusetts. If during the Pay-to-Stay Periods your job is relocated more than
25 miles from Boston or is changed so that it is no longer a substantially
equivalent position, and as a result you terminate your employment, your job
will be considered terminated for other than Cause.
During the Pay-to-Stay Periods, Keystone will not terminate your employment for
any reason other than (a) misconduct or (b) willful neglect of your duties after
Keystone has given you written notice specifying such conduct by you and giving
you a reasonable period of time (not
<PAGE>
less than 30 days), to conform your conduct to such duties (each of the
foregoing (a) or (b) constituting "Cause"). In the event of your death or
disability prior to the end of any Pay-to-Stay Period or the Standstill Period,
Keystone will make any remaining unpaid Annual Payments. The Annual Payments
will be less required withholding taxes. This letter agreement sets forth the
entire agreement between us with respect to the subject matter hereof and is
governed by the laws of Massachusetts.
You agree to remain employed by Keystone during the period from the date of this
letter through the effective date of the Acquisition. It is understood and
agreed that any of the payments by Keystone (or any successor corporation
following the Acquisition) to you pursuant to this letter agreement may be made
in the form of cash or shares of First Union Corporation common stock, at the
option of Keystone (or any such successor corporation following the
Acquisition).
If you accept this offer and agree to its terms, please sign both copies of this
letter and return one copy to Rosemary D. Van Antwerp, General Counsel of
Keystone.
KEYSTONE INVESTMENTS, INC.
By: /s/ Albert H. Elfner, III
------------------------------------
Name:
Title:
Accepted and agreed to
this 6th day of September, 1996
/s/ Ralph J. Spuehler, Jr.
- ------------------------------------
Ralph J. Spuehler, Jr.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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