<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 18, 1998
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INVESTORS FINANCIAL SERVICES CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 0-26996 04-3279817
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(State or other jurisdiction of (Commission file number) (I.R.S. Employer
incorporation or organization) Identification No.)
200 Clarendon Street, Boston, MA 02116
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (617) 330-6700
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No change since last report
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(Former name or address, if changed since last report)
<PAGE>
Item 5. Other Events.
As previously reported, on May 29, 1998 the Company completed the
acquisition of AMT Capital Services, Inc. and AMT Capital Advisers, Inc. (the
"Acquisition"). The Acquisition was accounted for using the pooling-of-interests
accounting method. Accordingly, the Company has restated its Consolidated
Financial Statements, including the consolidated balance sheets as of December
31, 1996 and 1997 and the related consolidated statements of income,
stockholders' equity, and cash flows for the year ended October 31, 1995, for
the two-month period ended December 31, 1995 and for the years ended December
31, 1996 and December 31, 1997 and the related Management's Discussion and
Analysis of Financial Condition and Results of Operations. Set forth below is
the Management's Discussion and Analysis of Financial Condition and Results of
Operations for the period ending December 31, 1997. The Company's Restated
Consolidated Financial Statements are set forth in Item 7 of this Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
Company's Consolidated Financial Statements and related notes, which are
included elsewhere in this Report. The Company, through its wholly owned
subsidiaries, Investors Bank & Trust Company and Investors Capital Services,
Inc., provides global custody, multicurrency accounting, institutional transfer
agency, performance measurement, foreign exchange, securities lending, mutual
fund administration and investment advisory services to a variety of financial
asset managers, including 53 mutual fund complexes, investment advisors, banks
and insurance companies. The Company provides financial asset administration
services for assets that totaled approximately $139 billion at December 31,
1997, including approximately $9 billion of assets based outside the United
States. The Company also engages in private banking transactions, including
secured lending and deposit accounts.
The Bank acts as investment advisor to the Merrimac Master Portfolio
and the Merrimac Funds, master-feeder investment companies (the "Funds").
Currently, the Funds have two operating master funds, the Merrimac Cash
Portfolio and the Merrimac Treasury Portfolio, and three operating feeder funds,
the Merrimac Cash Fund, the Merrimac Global Cash Fund, and the Merrimac Treasury
Fund, with assets totaling over $1.4 billion at December 31, 1997. The Company
has engaged The Bank of New York to act as sub-advisor to manage the investments
of the Merrimac Cash Portfolio and has engaged Aeltus Investment Management,
Inc. to act as sub-advisor to manage the investments of the Merrimac Treasury
Portfolio. In addition to acting as advisor to the Funds, the Bank has entered
into agreements to provide custody, fund accounting, administration, transfer
agency and certain other related services to the Funds. The Merrimac feeder
funds offer shares only to institutions and other "accredited investors" (as
that term is defined in Rule 501(a) under the Securities Act of 1933) and invest
all of their assets in the Merrimac master funds. The Funds may add additional
feeder funds and/or master funds in the future.
On January 31, 1997, the Company completed the issuance and sale of
$25,000,000 in 9.77% Capital Securities. The Capital Securities were issued by
Investors Capital Trust I, a Delaware statutory business trust sponsored by the
Company. The capital raised in the offering, along with existing capital and
earnings generated in the future, will be used to support the Company's balance
sheet growth. The Capital Securities qualify as Tier I capital under the capital
guidelines of the Federal Reserve. Under current Federal Reserve guidelines, no
more than 25% of the Company's Tier I capital may comprise Capital Securities
and other capital securities and cumulative preferred stock of the Company. In
September 1997 the Company completed an exchange offer pursuant to which all
outstanding capital securities were exchanged for substantially identical
capital securities registered under the Securities Act of 1933.
The Company's current largest client, Eaton Vance, accounted for 14%,
11%, 10%, and 10% of the Company's net operating revenues for the year ended
October 31, 1995, for the Transition Period, and for the years ended December
31, 1996 and 1997, respectively. The Company believes its relationship with
Eaton Vance is good and expects it to continue. The Company's agreements with
mutual funds managed by Eaton Vance, pursuant to which the Company provides
custody and fund accounting services, extend through August 2000 and continue
thereafter until terminated by either party upon sixty days prior notice. If a
majority of noninterested trustees of a fund determines that the performance of
the Company under any such agreement has been unsatisfactory or adverse to the
interests of the fund's shareholders, or that the terms of the agreement are no
longer consistent with publicly available industry standards, the Company shall
have 60 days after receipt of written notice to such effect to (i) correct its
performance or (ii) renegotiate such terms. If such corrective action or
renegotiation is not satisfactory to such trustees, such agreement may be
terminated on sixty days prior notice. There have been no requests for
corrective action or renegotiation to date pursuant to these contract clauses.
The Company derives its revenues from financial asset administration
services and private banking transactions. Although interest income and
noninterest income are reported separately for financial statement presentation
purposes, the
2
<PAGE>
Company's clients view the pricing of the Company's asset administration and
banking service offerings on a bundled basis. In establishing a fee structure
for a specific client, management analyzes the expected revenue and related
expenses, as opposed to separately analyzing fee income and interest income and
related expenses for each from such relationship. Accordingly, management
believes net operating revenue (net interest income plus noninterest income) and
net income are the most meaningful measures of financial results. Revenue
generated from asset administration and other fees and interest income increased
41% from $77,131,000 for the year ended December 31, 1996 to $108,811,000 for
the year ended December 31, 1997.
Noninterest income consists primarily of fees for financial asset
administration and is principally derived from custody, multicurrency
accounting, transfer agency and administration services for financial asset
managers and the assets they control. The Company's clients pay fees based on
the volume of assets under custody, the number of securities held and portfolio
transactions, income collected and whether other value-added services such as
foreign exchange, securities lending and performance measurement are needed.
Asset-based fees are usually charged on a sliding scale. As such, when the
assets in a portfolio under custody grow as a result of changes in market values
or cash inflows, the Company's fees may be a smaller percentage of those assets.
Fees for individually managed accounts, such as custodial, trust and portfolio
accounting services for individuals, investment advisors, private trustees,
financial planners, other banks and fiduciaries, and other institutions are also
included in noninterest income.
Net interest income represents the difference between income generated
from interest-earning assets and expense on interest-bearing liabilities.
Interest-bearing liabilities are generated by the Company's clients who, in the
course of their financial asset management, generate cash balances which they
deposit on a short-term basis with the Company. The Company invests these cash
balances and remits a portion of the earnings on these investments to its
clients. The Company's share of earnings from these investments is viewed as
part of the total package of compensation paid to the Company from its clients
for performing asset administration services.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made
by its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 8-K) may contain statements which are
not historical facts, so-called "forward-looking statements," which involve
risks and uncertainties. Forward looking statements in this 8-K include certain
statements regarding capital ratios and liquidity. The Company's actual future
results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not limited
to, the factors discussed below. Each of these factors, and others, are
discussed from time to time in the Company's filings with the Securities and
Exchange Commission.
The Company's future results may be subject to substantial risks and
uncertainties. Because certain fees charged by the Company for its services are
based on the market values of assets processed, such fees and the Company's
quarterly and annual operating results are sensitive to changes in interest
rates, declines in stock market values, and investors seeking alternatives to
the investment offerings of the Company's clients. Also, the Company's
interest-related services, along with the market value of the Company's
investments, may be adversely affected by rapid changes in interest rates. In
addition, many of the Company's client engagements are, and in the future are
likely to continue to be, terminable upon 60 days notice.
The Company relies on certain intellectual property protections to
preserve its intellectual property rights. Any invalidation of the Company's
intellectual property rights or lengthy and expensive defense of those rights
could have a material adverse effect on the Company. In addition the Year 2000
Issue discussed below may affect the Company's operations. The segment of the
financial services industry in which the Company is engaged is extremely
competitive. Certain current and potential competitors of the Company are more
established and benefit from greater market recognition and have substantially
greater financial, development and marketing resources than the Company.
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially adversely affect revenues and
profitability, including: the timing of the commencement or termination of
client engagements, the rate of net inflows and outflows of investor funds in
the debt and equity-based investment vehicles offered by the Company's clients,
the introduction and market acceptance of new services by the Company and
changes or anticipated changes in economic conditions. Because the Company's
operating expenses are relatively fixed, any unanticipated shortfall in revenues
in a specified period may have an adverse impact on the Company's results of
operations for that period. As a result of the foregoing and other factors, the
Company may experience material fluctuations in future operating results on a
quarterly or annual basis which could materially and adversely affect its
business, financial condition, operating results and stock price.
3
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Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
In late 1997 the Company, with the assistance of an outside consultant,
completed a detailed assessment of the Company's Year 2000 compliance status. As
part of the assessment process, the Company also developed project plans for
application renovation and testing. Based on this assessment, the Company
determined that it will be required to modify or upgrade portions of its
software so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company presently believes that with modifications to, or
upgrades of, existing software, the Year 2000 Issue can be mitigated. However,
if such modifications and upgrades are not made, or are not completed in a
timely manner, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. The Company's total Year 2000 project cost and estimates to
complete include the estimated costs and time associated with the impact of a
third party's Year 2000 Issue, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The Company will utilize both internal and external resources to modify
or upgrade existing software and to test such software for Year 2000 compliance.
The Company plans to complete the Year 2000 project, including all testing, by
December 31, 1998. The total remaining cost of the Year 2000 project is
estimated at $1,600,000, which will be expensed as incurred over the next twelve
months, and is being funded through operating cash flows. These amounts are not
expected to have a material effect on the Company's results of operations. To
date, the Company has incurred and expensed approximately $165,000 related to
the assessment of, and preliminary remediation efforts in connection with, its
Year 2000 project and the development of a remediation plan.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer code, the compatibility of third-party
interfaces and similar uncertainties. The Company is currently developing
contingency plans to address any failure by the Company or any third party to
properly and/or completely renovate its systems for Year 2000 compliance. The
Company expects to complete these contigency plans during the fourth quarter of
1998.
4
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Statement of Operations
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996
Noninterest Income
Noninterest income increased $23,453,000 to $82,639,000 for the year
ended December 31, 1997 from $59,186,000 for the year ended December 31, 1996.
Noninterest income consists of the following items:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1996 1997 Change
-------------- ------------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $ 57,462 $ 78,325 36%
Computer service fees 482 644 34
Other operating income 1,244 3,556 186
Net gain/(loss) on sale of securities (2) 114 --
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Total Noninterest Income $ 59,186 $ 82,639 40%
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</TABLE>
Asset administration fees increased due principally to higher levels of
assets processed. The Company earns such fees on assets processed by the Company
on behalf of a variety of financial asset managers. Assets processed is the
total dollar value of financial assets on the reported date for which the
Company provides one or more of the following services: global custody,
multicurrency accounting, institutional transfer agency, performance
measurement, foreign exchange, securities lending, mutual fund administration
and investment advisory services. Total assets processed increased to $139
billion at December 31, 1997 from $122 billion at December 31, 1996. Of the $17
billion net increase in assets processed from December 31, 1996 to December 31,
1997, approximately 24% of the increase reflects assets processed for new
clients, and the remainder of the increase reflects growth of assets processed
for existing clients, offset in part by the assets of clients no longer serviced
by the Company. Also contributing to the growth in asset administration fees was
the expansion of relationships with existing clients. The largest component of
asset administration fees is asset based fees, which increased between periods
due to the previously mentioned increase in assets processed. Another
significant portion of the increase in asset administration fees resulted from
the Company's success in marketing ancillary services such as securities
lending, foreign exchange and advisory services.
Computer service fees consist of amounts charged by the Company for
data processing services related to client accounts. Other operating income
consists of dividends received relating to the Federal Home Loan Bank of Boston
("FHLBB") stock investment and miscellaneous transaction-oriented private
banking fees. The increase in other operating income was due to the Company's
increased investment in FHLBB stock as well as an increase in services provided
by Investors Capital Advisers, Inc. a wholly owned subsidiary of the Company.
5
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Operating Expenses
Total operating expenses increased by $22,749,000 to $87,362,000 for
the year ended December 31, 1997 compared to $64,613,000 for the year ended
December 31, 1996. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1996 1997 Change
------------- -------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation and benefits $39,096 $53,457 37%
Technology and telecommunications 7,894 10,656 35
Transaction processing services 5,685 8,000 41
Occupancy 4,527 4,620 2
Depreciation and amortization 1,616 2,070 28
Travel and sales promotion 1,264 1,647 30
Professional fees 1,290 2,011 56
Insurance 876 768 (12)
Other operating expenses 2,365 4,133 75
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Total Operating Expenses $64,613 $87,362 35%
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</TABLE>
Compensation and benefits expense increased by $14,361,000 or 37% from
period to period due to several factors. The average number of employees
increased 29% to 958 at December 31, 1997 from 744 at December 31, 1996. This
increase relates primarily to the increase in client relationships and to the
expansion of existing client relationships during the period. In addition,
compensation expense related to the Company's management incentive plans
increased $799,000 between periods because of the increase in earnings subject
to incentive payments in 1997 compared to 1996. Benefits, including payroll
taxes, group insurance plans, retirement plan contributions and tuition
reimbursement, increased by $984,000 for the year ended December 31, 1997 from
the same period in 1996. The increase was due principally to increased payroll
taxes attributable to the increase in compensation expense.
Technology and telecommunications expense consists of operating lease
payments for microcomputers, fees charged by Electronic Data Systems for
mainframe data processing, telephone expense, software maintenance fees and
licenses, optical imaging and contract programming fees. Increased hardware,
software and telecommunications expenses needed to support the growth in assets
processed accounted for $1,710,000 of the increase between periods. Also
contributing was the Company's increased use of contract programmers to perform
information systems development projects, which accounted for $644,000 of the
increase. License fees on software used to generate automated financial
statements for Company clients as a part of its expanded mutual fund
administration services accounted for $408,000 of the increase.
Transaction processing services expense consists of volume-related
expenses including subcustodian fees and external contract services. The
increase in this expense relates primarily to an increase in subcustodian fees
and pricing services, driven by the growth in assets processed. The Company's
decision to outsource its mailroom and photocopy facility in February of 1996
contributed to $325,000 of the increase from year to year.
Depreciation and amortization expense increased $454,000 to $2,070,000
for the year ended December 31, 1997 from $1,616,000 for the year ended December
31, 1996. This increase resulted from the purchase of furniture and equipment
related to the Company's move to new office space in late 1996 and 1997.
Travel and sales promotion expense consists of expenses incurred by the
sales force, client management staff and other employees in connection with
making sales calls on potential clients, traveling to existing client sites and
the Company's foreign subsidiaries, and attending industry conferences. This
expense increased $383,000 to $1,647,000 for the year ended December 31, 1997
from $1,264,000 for the year ended December 31, 1996 due primarily to increased
travel to the foreign subsidiaries.
Professional fees increased $721,000 to $2,011,000 for the year ended
December 31, 1997 from $1,290,000 for the year ended December 31, 1996. This
increase resulted primarily from an increase in consulting fees relating to
performing technical development work along with additional audit fees related
to compliance with the Federal Deposit Insurance Corporation Improvement Act of
1991.
Insurance expense decreased by $108,000 between the periods due to the
renegotiation of the Company's premiums and coverages for errors and omissions
liability, directors and officers liability and blanket bond during 1996.
6
<PAGE>
Other operating expenses increased $1,768,000 to $4,133,000 for the
year ended December 31, 1997 from $2,365,000 for the year ended December 31,
1996. Other operating expenses include fees for office supplies, recruiting
costs, temporary help and various fees assessed by the Massachusetts Banking
Commission. Recruiting costs and temporary help accounted for $770,000 of the
increase; this increase relates to the tight labor market caused by low
unemployment in Massachusetts in 1997. Fees assessed by the Massachusetts
Banking Commission increased by $278,000 due to the growth in the total assets
of the Bank and a change in the assessment base. The remainder of the increase
relates to growth in assets processed.
Net Interest Income
Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities and changes in
interest rates for the year ended December 31, 1997 compared to the year ended
December 31, 1996.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets
Fed funds sold and
interest-earning deposits $ 1,096 $ 20 $ 1,116
Investment securities 35,563 (564) 34,999
Loans 514 (270) 244
-------- -------- --------
Total interest-earning assets 37,173 (814) 36,359
-------- -------- --------
Interest-bearing liabilities
Deposits 8,768 671 9,439
Borrowings 18,351 405 18,756
-------- -------- --------
Total interest-bearing liabilities 27,119 1,076 28,195
-------- -------- --------
Change in net interest income $ 10,054 $ (1,890) $ 8,164
-------- -------- --------
-------- -------- --------
</TABLE>
Net interest income increased $8,164,000 or 45% to $26,173,000 for the
year ended December 31, 1997 from $18,009,000 for the 1996 period. This net
increase resulted from an increase in interest income of $36,359,000 offset by
an increase in interest expense of $28,195,000. The net impact of the above
changes was an 89 basis point decrease in net interest margin.
The increase in interest income resulted primarily from a higher level
of interest earning assets. The Company's average assets for the year ended
December 31, 1997 increased $607,626,000 or 97% compared to the year ended
December 31, 1996. This growth primarily resulted from an increase in average
interest earning assets of $591,699,000.
Interest expense increased $28,195,000 due primarily to the higher
level of deposits and borrowings and to a lesser extent to an increase in the
interest rate paid by the Company. The average rate paid on deposits and
short-term borrowings increased from 4.83% to 5.03% between periods.
Income Taxes
The Company's earnings were taxed on the federal level at 35% for the
1997 and 1996 periods. State taxes on the gross earnings from the Company's
portfolio of investment securities, held by a wholly-owned subsidiary, were
assessed at the tax rate for Massachusetts securities corporations of 1.32%.
State taxes on the remainder of the Company's taxable income were assessed at
the tax rate for Massachusetts banks of 11.32%. The provision for income taxes
for the year ended December 31, 1997 increased by $2,530,000 over the 1996
provision. The overall effective tax rate decreased to 34.41% for the year ended
December 31, 1997, from 38.76% for the year ended December 31, 1996. The
decrease in the effective tax rate is due to the Company's investment in
municipal securities in the first quarter of 1997.
7
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
Noninterest Income
Noninterest income increased $5,327,000 to $59,186,000 for the year
ended December 31, 1996 from $53,859,000 for the year ended December 31, 1995.
Noninterest income consists of the following items:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------- --------
1995 1996 Change
------------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $ 49,630 $ 57,462 16%
Proceeds from assignment of UIT
servicing, net 2,572 -- --
Computer service fees 501 482 (4)
Other operating income 1,156 1,244 8
Net loss on sale of securities -- (2) --
-------- --------
Total Noninterest Income $ 53,859 $ 59,186 10%
-------- --------
-------- --------
</TABLE>
Asset administration fees increased due principally to higher levels of
assets processed. Total assets processed increased to $122 billion at December
31, 1996 from $94 billion at December 31, 1995. Of the $28 billion net
increase in assets processed from December 31, 1995 to December 31, 1996,
approximately 24% of the increase reflects assets processed for new clients,
and the remainder of the increase reflects growth of assets processed for
existing clients and improved methods for tracking the amount of assets
processed, offset in part by the assets of clients no longer serviced by the
Company. The remainder of the growth in asset administration fees was due to
the net expansion of relationships with existing clients and increased use of
the Company's cash management and foreign exchange services. In addition,
because the Company is now able to accept deposits that had been historically
directed to other financial institutions due to CEBA asset growth
restrictions, the Company has experienced a shift in the mix of compensation
received from its clients. See "Overview" in this Item 5. A larger portion of
the Company's compensation from clients is now in the form of interest income
generated from client deposits, resulting in a decrease to asset
administration fees and a related increase in net interest income. The growth
in asset administration fees was also offset by the transfer of unit
investment trust assets discussed below. The administration of these assets
accounted for approximately $1,491,000 in asset administration fees in the
year ended December 31, 1995.
Unit investment trust ("UIT") assets processed by the Company have
decreased over the last five years, a reflection of declining investor demand
for this type of unmanaged investment product. Declining asset levels led one
client, Merrill Lynch, to consolidate its asset administration service
providers, and it agreed, effective March 1, 1995, to pay the Company to assign
the Company's servicing rights to the Bank of New York Company. The Company
recognized proceeds of $2,572,000, net of expenses, resulting from the
assignment of the rights to service approximately $5.0 billion of the client's
unit investment trust assets. The Company has made the strategic decision to
focus its marketing and processing efforts on mutual funds and other pooled
investments which typically experience higher growth in asset levels and can
utilize a wider variety of services provided by the Company, as compared to unit
investment trusts. See Note 11 of Notes to Consolidated Financial Statements.
Other operating income consists of miscellaneous private banking fees
for safe deposit and checking account services.
8
<PAGE>
Operating Expenses
Total operating expenses increased by $10,974,000 to $64,613,000 for
the year ended December 31, 1996 compared to $53,639,000 for the year ended
December 31, 1995. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------- --------
1995 1996 Change
------------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation and benefits $34,328 $39,096 14%
Technology and telecommunications 6,476 7,894 22
Transaction processing services 2,765 5,685 106
Occupancy 4,510 4,527 --
Depreciation and amortization 1,438 1,616 12
Travel and sales promotion 785 1,264 61
Professional fees 966 1,290 34
Insurance 1,078 876 (19)
Other operating expenses 1,293 2,365 83
------- -------
Total Operating Expenses $53,639 $64,613 20%
------- -------
------- -------
</TABLE>
Compensation and benefits increased by $4,768,000 or 14% from period to
period due to several factors. The number of average employees increased 9% to
744 at December 31, 1996 from 683 at December 31, 1995. In addition,
compensation expense related to the Company's management incentive plan
increased because of the increase in earnings subject to incentive in 1996
compared to 1995. Benefits, including payroll taxes, group insurance plans,
retirement plan contributions and tuition reimbursement, increased $590,000 for
the year ended December 31, 1996 from the same period in 1995. The 12% increase
was due to increased payroll taxes attributable to the increase in compensation
expense and a decrease in the discount rate used to calculate the expense
associated with the defined benefit retirement plan.
Technology and telecommunications expense consists of lease payments
for microcomputers, fees charged by Electronic Data Systems for mainframe data
processing, telephone expense, software maintenance fees and licenses, and
contract programming fees. The expense varies with the level of assets processed
by the Company. The growth in assets processed contributed to $974,000 of the
increase between periods. Also contributing to the increase was the Company's
continued use of contract programmers which accounted for $444,000 of the
increase between periods.
The increase in transaction processing expense relates primarily to an
increase in subcustodian fees and pricing services, driven by the growth in
assets processed. This expense increased $2,920,000 to $5,685,000 for the year
ended December 31, 1996 from $2,765,000 for the year ended December 31, 1995.
This increase resulted from the increase in foreign assets processed, which are
subject to higher subcustodian fees, from $6.4 billion at December 31, 1995 to
$9.3 billion at December 31, 1996, and from the movement by clients into
emerging markets which have higher costs due to structural inefficiencies. These
costs are passed through to clients and contribute to the increase in asset
administration fees. The outsourcing of the photocopy service commenced in 1996
and accounted for approximately $240,000 of the increase between periods. Fees
for daily market pricing data which vary with the level of assets processed,
increased by $119,000 during the period.
Depreciation and amortization expense increased $178,000 between
periods due to purchases of furniture and equipment throughout 1997.
Travel and sales promotion expense increased $479,000 to $1,264,000 for
the year ended December 31, 1996 from $785,000 for the year ended December 31,
1995 due primarily to increased travel to the foreign subsidiaries.
Professional fees increased $324,000 to $1,290,000 for the year ended
December 31, 1996 from $966,000 for the year ended December 31, 1995. Legal fees
which were incurred in connection with the Company's initial compliance with
year-end related filings with the Securities and Exchange Commission and the
change of the Company's fiscal year contributed to this increase.
Insurance expense decreased by $202,000 or 19% between the periods due
to the renegotiation of the Company's coverage for errors and omissions
liability, directors and officers liability and blanket bond.
9
<PAGE>
Other operating expenses increased $1,072,000 to $2,365,000 for the
year ended December 31, 1996 from $1,293,000 for the year ended December 31,
1995. Other operating expenses are comprised of office supplies, recruiting
costs, temporary help, and Delaware excise tax. Expenses such as office supplies
vary with staffing levels. The Delaware excise tax is based on the number of
shares authorized for issuance by the Company. This tax was imposed on the
Company after its formation as a Delaware Company in June 1995 and accounts for
$180,000 of the increase between periods. Approximately $797,000 of the increase
between periods related to recruiting costs and temporary help caused by a tight
labor market resulting from a period of low unemployment in Massachusetts. The
remainder of the increase resulted from the increases in assets processed and
staffing levels.
Net Interest Income
Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities and changes in
interest rates for the year ended December 31, 1996 compared to December 31,
1995.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets
Fed funds sold and
interest-earning deposits $ 1,256 $ (45) $ 1,211
Investment securities 25,876 491 26,367
Loans 1,341 (250) 1,091
-------- -------- --------
Total interest-earning assets 28,473 196 28,669
-------- -------- --------
Interest-bearing liabilities
Deposits 8,249 180 8,429
Borrowings 9,236 (41) 9,195
-------- -------- --------
Total interest-bearing liabilities 17,485 139 17,624
-------- -------- --------
Change in net interest income $ 10,988 $ 57 $ 11,045
-------- -------- --------
-------- -------- --------
</TABLE>
Net interest income increased $11,045,000 or 159% to $18,009,000 for
the year ended December 31, 1996 from $6,964,000 for the 1995 period. This net
increase resulted from an increase in interest income of $28,669,000 offset by
an increase in interest expense of $17,624,000. The net impact of the above
changes was a 240 basis point decrease in net interest margin.
The increase in interest income resulted primarily from a higher level
of interest earning assets. Prior to the Spin-Off Transaction, the Company was
subject to a 7% annual asset growth cap under CEBA. The elimination of the CEBA
growth restriction has allowed the Company to accept deposits from clients which
it had historically directed to other financial institutions. The Company's
average assets for the year ended December 31, 1996 increased $483,710,000 or
333% compared to the 1995 period. This growth primarily resulted from an
increase in average interest earning assets of $449,720,000.
Interest expense increased $17,624,000 due primarily to the higher
level of deposits and borrowings and to a lesser extent to an increase in the
interest rate paid by the Company. Prior to the Spin-Off Transaction, the
Company was not trying to attract deposits to its balance sheet and therefore
did not pay a competitive interest rate. The average rate paid on deposits and
short-term borrowings increased from 4.12% to 4.83% between periods.
Income Taxes
The Company's earnings were taxed on the federal level at 34.00% for
the 1995 period and 35.00% for the 1996 period. State taxes on the gross
earnings from the Company's portfolio of investment securities, held by a
wholly-owned subsidiary, were assessed at the tax rate for Massachusetts
securities corporations of 1.32%. State taxes on the remainder of the Company's
taxable income were assessed at the tax rate for Massachusetts banks of 11.72%.
The provision for income taxes for the year ended December 31, 1996 increased by
$1,820,000 over the 1995 provision. The overall effective tax rate decreased to
38.76% for the year ended December 31, 1996, from 44.41% for the year ended
December 31, 1995. The decrease in the effective tax rate was due to a decrease
in the income of the Company's Canadian
10
<PAGE>
subsidiary, which was taxed at the Canadian effective rate of 45.73%, and the
related increase in the income of the Company's subsidiaries in Dublin and the
Cayman Islands, which are lower tax jurisdictions. The reduction of the income
in the Company's Canadian subsidiary resulted as the Company transferred certain
offshore processing activities from Toronto to Dublin and the Cayman Islands.
Financial Condition
Investment Portfolio
The following table summarizes the Company's investment portfolio for the dates
indicated:
<TABLE>
<CAPTION>
October 31, December 31,
----------- --------------------------------
1995 1995 1996 1997
----------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury securities $ 60,408 $ -- $ -- $ --
State and political subdivisions -- -- -- 35,225
Mortgage-backed securities 49,609 144,124 414,665 590,365
Federal agency securities -- 10,000 37,517 168,687
Foreign government securities -- -- 7,828 7,769
-------- -------- -------- --------
Total securities held to maturity $110,017 $154,124 $460,010 $802,046
-------- -------- -------- --------
-------- -------- -------- --------
Securities available for sale:
U.S. Treasury securities $ 50,652 $ 40,259 $ 30,092
Municipal bonds -- -- 8,382
Mortgage-backed securities 40,167 230,862 424,376
-------- -------- --------
Total securities available for sale $ 90,819 $271,121 $462,850
-------- -------- --------
-------- -------- --------
</TABLE>
The investment portfolio is used to invest depositors' funds and
provide a secondary source of earnings for the Company. In addition, the
Company uses the investment portfolio to secure open positions at securities
clearing institutions in connection with its custody services. The portfolio
is comprised of U.S. Treasury securities, securities of state and political
subdivisions, mortgage-backed securities issued by the Federal National
Mortgage Association ("FNMA" or "Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("FHLMC" or "Freddie Mac"), and Federal Agency callable
bonds issued by FHLMC and the Federal Home Loan Bank of Boston ("FHLBB"),
municipal securities, and foreign government bonds issued by the Canadian
provinces of Ontario and Manitoba.
The Company invests in mortgage-backed securities and Federal Agency
callable bonds to supplement its portfolio of U.S. Treasury securities and
increase the total return of the investment portfolio. Mortgage-backed
securities generally have a higher yield than U.S. Treasury securities due to
credit and prepayment risk. Credit risk results from the possibility that a loss
may occur if a counterparty is unable to meet the terms of the contract.
Prepayment risk results from the possibility that changes in interest rates may
cause mortgage securities to be paid off prior to their maturity dates. Federal
Agency callable bonds generally have a higher yield than U.S. Treasury
securities due to credit and call risk. Credit risk results from the possibility
that the Federal Agency issuing the bonds may be unable to meet the terms of the
bond. Call risk results from the possibility that fluctuating interest rates and
other factors may result in the exercise of the call option by the Federal
Agency. Credit risk related to mortgage-backed securities and Federal Agency
callable bonds is substantially reduced by payment guarantees and credit
enhancements.
The Company invests in municipal securities to generate stable, tax
advantaged income. Municipal securities generally have lower stated yields than
Federal Agency and U.S. Treasury Securities, but the after-tax yields are
comparable. Municipal Securities are subject to credit risk.
The Company invests in foreign government bonds in order to generate
foreign source income to maximize the use of the foreign tax credit. The foreign
government bonds are denominated in U.S. dollars to avoid foreign currency risk.
These bonds are subject to credit risk.
11
<PAGE>
The book value and weighted average yield of the Company's securities
held to maturity at December 31, 1997, by effective maturity, are reflected in
the following table.
<TABLE>
<CAPTION>
Weighted
Book Average
Value Yield
--------- --------
(Dollars in thousands)
<S> <C> <C>
Due from one to five years $357,581 6.65%
Due after five years up to ten years 183,840 6.57%
Due after ten years 260,625 6.37%
--------
Total securities held to maturity $802,046
--------
--------
</TABLE>
The book value and weighted average yield of the Company's securities
available for sale at December 31, 1997, by effective maturity, are reflected in
the following table.
<TABLE>
<CAPTION>
Weighted
Book Average
Value Yield
--------- --------
(Dollars in thousands)
<S> <C> <C>
Due within one year $ 20,039 5.95%
Due from one to five years 309,518 6.57%
Due after five years up to ten years 132,756 6.76%
Due after ten years 537 5.57%
--------
Total securities available for sale $462,850
--------
--------
</TABLE>
Loan Portfolio
The following table summarizes the Company's loan portfolio for the dates
indicated:
<TABLE>
<CAPTION>
October 31, December 31,
----------- ----------------------------------
1995 1995 1996 1997
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans to individuals $ 13,446 $ 12,610 $ 23,449 $ 26,858
Loans to not-for-profit organizations 289 289 13 13
Loans to mutual funds 0 10,000 42,875 29,174
-------- -------- -------- --------
13,735 22,899 66,337 56,045
Less: allowance for loan losses (35) (35) (100) (100)
-------- -------- -------- --------
Net loans $ 13,700 $ 22,864 $ 66,237 $ 55,945
-------- -------- -------- --------
-------- -------- -------- --------
Floating Rate $ 13,675 $ 22,839 $ 66,224 $ 55,932
Fixed Rate 25 25 13 13
-------- -------- -------- --------
$ 13,700 $ 22,864 $ 66,237 $ 55,945
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Virtually all loans to individually managed account customers are
written on a demand basis, bear variable interest rates tied to the prime rate
and are fully secured by liquid collateral, primarily freely tradable securities
held in custody by the Company for the borrower. Since December 1995, the
Company has entered into agreements to provide up to an aggregate of $40 million
under lines of credit to mutual fund clients. The unsecured lines of credit may,
in the event of a default, be collateralized at the Company's option by
securities held in custody by the Company for those mutual funds. Loans to
mutual funds also include advances by the Company to certain mutual fund clients
pursuant to the terms of the custody agreements between the Company and those
clients.
12
<PAGE>
At December 31, 1997, the Company's only lending concentrations which
exceeded 10% of total loans were the revolving lines of credit to mutual fund
clients discussed above. These loans were made in the ordinary course of
business on the same terms and conditions prevailing at the time for comparable
transactions.
The Company's credit loss experience has been excellent. There have
been no loan chargeoffs or adverse credit actions in the history of the Company.
It is the Company's policy to place a loan on non-accrual status when either
principal or interest becomes 60 days past due and the loan's collateral is not
sufficient to cover both principal and accrued interest. As of December 31,
1997, there were no past due loans, troubled debt restructurings, or any loans
on non-accrual status. Although virtually all of the Company's loans are fully
collateralized with freely tradable securities, management recognizes some
credit risk inherent in the loan portfolio, and has recorded an allowance for
loan losses of $100,000 at December 31, 1997. This amount is not allocated to
any particular loan, but is intended to absorb any risk of loss inherent in the
loan portfolio. Management actively monitors the loan portfolio and the
underlying collateral and regularly assesses the adequacy of the allowance for
loan losses.
Interest Rate Sensitivity
The Company, like all financial intermediaries, is subject to interest
rate risk. Rapid changes in interest rates could adversely affect the
profitability of the Company by causing changes in the market value of the
Company's assets and its net interest income. Interest rate risk arises when an
earning asset matures or when its rate of interest changes in a time frame
different from that of the supporting interest-bearing liability. By seeking to
minimize the difference between the amount of earning assets and the amount of
interest-bearing liabilities that could change interest rates in the same time
frame, the Company attempts to reduce the risk of significant adverse effects on
net interest income caused by interest rate changes. The Company does not
attempt to match each earning asset with a specific interest-bearing liability.
Instead, as shown in the table below, it aggregates all of its earning assets
and interest-bearing liabilities to determine the difference between these in
specific time frames. This difference is known as the rate-sensitivity gap. A
positive gap indicates that more earning assets than interest-bearing
liabilities mature in a time frame, and a negative gap indicates the opposite.
Maintaining a balanced position will reduce risk associated with interest rate
changes, but it will not guarantee a stable interest rate spread because the
various rates within a time frame may change by differing amounts and change in
different directions.
The Company seeks to manage interest rate risk by investment portfolio
actions designed to address the interest rate sensitivity of asset cash flows in
relation to liability cash flows. Portfolio actions used to manage interest rate
risk include managing the effective duration of the portfolio securities and
utilizing interest rate floors and interest rate swaps. Interest rate contracts
are used to hedge against large rate swings and changes in the shape of the
yield curve.
Interest rate contracts involve elements of credit and market risk
which are not reflected in the Company's consolidated financial statements. Such
instruments are entered into for hedging (as opposed to investment or
speculative) purposes. See Note 14 to the Consolidated Financial Statements. The
Company periodically monitors the financial stability of its counterparties
according to prudent investment guidelines and established procedures. There can
be no assurance that such portfolio actions will adequately limit interest rate
risk.
13
<PAGE>
The following table presents the repricing schedule for the Company's
interest earning assets and interest bearing liabilities at December 31, 1997:
<TABLE>
<CAPTION>
Within Over Three Over Six Over One
Three to Six to Twelve Year to Over Five
Months Months Months Five Years Years Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets (1):
Federal funds sold $ 75,000 $ -- $ -- $ -- $ -- $ 75,000
Investment securities (2) 575,410 202,068 180,773 200,640 106,005 1,264,896
Loans -- fixed rate -- -- -- 13 -- 13
Loans -- variable rate 56,032 -- -- -- -- 56,032
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets 706,442 202,068 180,773 200,653 106,005 1,395,941
Interest bearing liabilities
Demand deposit accounts 201,549 -- -- -- -- 201,549
Savings accounts 427,123 -- -- -- -- 427,123
Interest rate contracts (280,000) 60,000 100,000 110,000 10,000 --
Short-term borrowings 499,933 -- -- -- -- 499,933
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 848,605 60,000 100,000 110,000 10,000 1,128,605
---------- ---------- ---------- ---------- ---------- ----------
Net interest sensitivity gap
during the period ($ 142,163) $ 142,068 $ 80,773 $ 90,653 $ 96,005 $ 267,336
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Cumulative gap ($ 142,163) ($ 95) $ 80,678 $ 171,331 $ 267,336
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Interest sensitive assets as a
percent of interest sensitive
liabilities (cumulative) 83.25% 99.99% 108.00% 115.32% 123.69%
Interest sensitive assets as a
percent of total assets
(cumulative) 48.41% 62.25% 74.64% 88.39% 95.66%
Net interest sensitivity gap as a
percent of total asets (9.74%) 9.74% 5.53% 6.21% 6.58%
Cumulative gap as a percent
of total asets (9.74%) (0.01%) 5.53% 11.74% 18.32%
</TABLE>
- ----------
(1) Adjustable rate assets are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due. Fixed rate loans are included in the period in which they are
scheduled to be repaid.
(2) Mortgage-backed securities are included in the pricing category that
corresponds with their contractual maturity.
Liquidity
Liquidity represents the ability of an institution to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management. For
a financial institution such as the Company, these obligations arise from the
withdrawals of deposits and the payment of operating expenses.
The Company's primary sources of liquidity include cash and cash
equivalents, federal funds sold, new deposits, short-term borrowings, interest
payments on securities held to maturity and available for sale, fees collected
from asset administration clients, and the capital raised from the sale of the
Capital Securities. Asset liquidity is also provided by managing the duration of
the investment portfolio. As a result of the Company's management of liquid
assets and the ability to generate liquidity through liability funds, management
believes that the Company maintains overall liquidity sufficient to meet its
depositors' needs, to satisfy its operating requirements and to fund the payment
of an anticipated annual cash dividend of approximately $.12 per share.
The Company's ability to pay dividends on the Common Stock depends on
the receipt of dividends from Investors Bank & Trust Company. In addition, the
Company may not pay dividends on its Common Stock if it is in default under
certain agreements entered into in connection with the sale of the Capital
Securities. Any dividend payments by Investors Bank & Trust Company are subject
to certain restrictions imposed by the Massachusetts Commissioner of Banks.
Subject to regulatory requirements, Investors Bank & Trust Company expects to
pay an annual dividend to the Company, which the
14
<PAGE>
Company expects to pay to its stockholders, currently estimated to be in an
amount equal to $.12 per share of outstanding Common Stock (approximately
$776,438 based upon 6,470,313 shares outstanding as of December 31, 1997).
At December 31, 1997, cash and cash equivalents were 1% of total
assets, compared to 2% of total assets at December 31, 1996. At December 31,
1997, approximately $20 million or 1% of total assets mature within a one year
period.
The Company has informal borrowing arrangements with various
counterparties whereby each counterparty has agreed to make funds available to
the Company at the Federal funds overnight rate. The aggregate amount of these
borrowing arrangements as of December 31, 1997 was $141 million. Each bank may
terminate its arrangement at any time and is under no contractual obligation to
provide requested funding to the Company. The Company's borrowings under these
arrangements are typically on an overnight basis. The Company believes that if
these banks were unable to provide funding as described above, a satisfactory
alternative source of funding would be available to the Company.
The Company also has Master Repurchase Agreements in place with various
counterparties whereby each broker has agreed to make funds available to the
Company at various rates in exchange for collateral consisting of marketable
securities. The aggregate amount of these borrowing arrangements at December 31,
1997 was $1.3 billion.
The Company also has a borrowing arrangement with the Federal Home Loan
Bank of Boston (the "FHLBB") whereby the Company may borrow amounts determined
by prescribed collateral levels and the amount of FHLBB stock held by the
Company. The minimum amount of FHLBB stock held by the Company is required to be
the greater of (i) 1% of its outstanding residential mortgage loan principal
(including mortgage pool securities), (ii) 0.3% of total assets, (iii) total
advances from the FHLBB, divided by a leverage factor of 20. If the Company
borrows under this arrangement, the Company is required to hold FHLBB stock
equal to 5% of such outstanding advances. The aggregate amount of borrowing
available to the Company under this arrangement at December 31, 1997 was $573
million.
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities, and
financing activities. Cash flows provided by operating activities were
$11,392,000 for the year ended December 31, 1997. Net cash used in investing
activities, consisting primarily of purchases of investment securities and
proceeds from maturities of investment securities, was $490,844,000 for the year
ended December 31, 1997. Net cash provided by financing activities, consisting
primarily of net activity in deposits, was $477,656,000 for the year ended
December 31, 1997.
Capital Resources
Historically, the Company has financed its operations principally
through internally generated cash flows. The Company incurs capital expenditures
for furniture, fixtures and miscellaneous equipment needs. The Company leases
microcomputers through operating leases. Such capital expenditures have been
incurred and such leases entered into on an as-required basis, primarily to meet
the growing operating needs of the Company. As a result, the Company's capital
expenditures were $1,669,000 for fiscal 1995, $160,000 for the two-months ended
December 31, 1995, and $3,791,000 and $4,919,000 for the years ended December
31, 1996 and 1997, respectively.
On January 31, 1997, the Company completed the issuance and sale of
$25,000,000 in 9.77% Capital Securities. The capital raised in the offering,
along with existing capital and earnings generated in the future, will be used
to support the Company's balance sheet growth.
Stockholders' equity at December 31, 1997 was $75,713,000, an increase
of $14,046,000 or 23%, from $61,667,000 at December 31, 1996. The ratio of
stockholders' equity to assets decreased to 5.18% at December 31, 1997 from
6.39% at December 31, 1996 due to the significant growth in assets.
The Federal Reserve Board has adopted a system using internationally
consistent risk-based capital adequacy guidelines to evaluate the capital
adequacy of banks and bank holding companies. Under the risk-based capital
guidelines, different categories of assets are assigned different risk weights,
based generally upon the perceived credit risk of the asset. These risk weights
are multiplied by corresponding asset balances to determine a "risk-weighted"
asset base. Certain off-balance sheet items, which previously were not expressly
considered in capital adequacy computations, are added to the risk-weighted
asset base by converting them to a balance sheet equivalent and assigning them
the appropriate risk weight.
Federal Reserve Board and FDIC guidelines require that banking
organizations have a minimum ratio of total capital to risk-adjusted assets
and off balance sheet items of 8.0%. Total capital is defined as the sum of
"Tier I" and "Tier II" capital elements, with at least half of the total
capital required to be Tier I. Tier I capital includes, with certain
restrictions, the sum of common stockholders' equity, non-cumulative
perpetual preferred stock, a limited amount of cumulative perpetual
15
<PAGE>
preferred stock, and minority interests in consolidated subsidiaries, less
certain intangible assets. Tier II capital includes, with certain limitations,
subordinated debt meeting certain requirements, intermediate-term preferred
stock, certain hybrid capital instruments, certain forms of perpetual preferred
stock, as well as maturing capital instruments and general allowances for loan
losses.
The following table summarizes the Company's Tier I and total capital ratios at
December 31, 1997:
<TABLE>
<CAPTION>
Amount Ratio
------ -----
(Dollars in Thousands)
<S> <C> <C>
Tier I capital $ 98,407 29.17%
Tier I capital minimum requirement 13,492 4.00%
-------- -----
Excess Tier I capital $ 84,915 25.17%
-------- -----
-------- -----
Total capital $ 98,507 29.20%
Total capital minimum requirement 26,985 8.00%
-------- -----
Excess total capital $ 71,522 21.20%
-------- -----
-------- -----
Risk adjusted assets, net of intangible assets $336,494
--------
--------
</TABLE>
The following table summarizes the Bank's Tier I and total capital ratios at
December 31, 1997:
<TABLE>
<CAPTION>
Amount Ratio
------ -----
(Dollars in Thousands)
<S> <C> <C>
Tier I capital $ 96,041 28.54%
Tier I capital minimum requirement 13,460 4.00%
-------- -----
Excess Tier I capital $ 82,581 24.54%
-------- -----
-------- -----
Total capital $ 96,141 28.57%
Total capital minimum requirement 26,919 8.00%
-------- -----
Excess total capital $ 69,222 20.57%
-------- -----
-------- -----
Risk adjusted assets, net of intangible assets $336,486
--------
--------
</TABLE>
In addition to the risk-based capital guidelines, the Federal Reserve
Board and the FDIC use a "Leverage Ratio" as an additional tool to evaluate
capital adequacy. The Leverage Ratio is defined to be a Company's Tier I capital
divided by its adjusted total assets. The Leverage Ratio adopted by the federal
banking agencies requires a ratio of 3.0% Tier I capital to adjusted average
total assets for top-rated banking institutions. All other banking institutions
are expected to maintain a Leverage Ratio of 4.0% to 5.0%. The computation of
the risk-based capital ratios and the Leverage Ratio requires the capital of the
Company to be reduced by most intangible assets. The Company's Leverage Ratio at
December 31, 1997 was 6.44%, which is in excess of regulatory requirements. The
Bank's Leverage Ratio at December 31, 1997 was 6.31%, which is also in excess of
regulatory requirements.
16
<PAGE>
The following tables present average balances, interest income and
expense, and yields earned or paid on the major categories of assets and
liabilities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1996 Year Ended December 31, 1997
---------------------------- ---------------------------- ----------------------------
Average Average Average
Average Yield Average Yield Average Yield
Balance Interest /Cost Balance Interest /Cost Balance Interest /Cost
--------- -------- ------- --------- -------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Fed funds sold $ 10,218 $ 595 5.82% $ 33,989 $ 1,859 5.47% $ 53,758 $ 2,981 5.55%
Interest-earning deposits 1,000 59 5.90% 126 6 4.76% -- --
Investment securities 100,861 6,123 6.07% 497,965 32,490 6.52% 1,053,009 67,489 6.41%
Demand Loans 13,863 1,231 8.88% 43,582 2,322 5.33% 60,594 2,566 4.23%
--------- ------- ---- --------- -------- ---- ----------- -------- ----
Total interest-earning assets 125,942 8,008 6.36% 575,662 36,677 6.37% 1,167,361 73,036 6.26%
------- ---- -------- ---- -------- ----
Allowance for loan losses (35) (74) (100)
Noninterest-earning assets 19,276 53,305 69,258
--------- --------- -----------
Total assets $ 145,183 $ 628,893 $ 1,236,519
--------- --------- -----------
--------- --------- -----------
Interest-bearing liabilities
Deposits:
Demand $ 11,995 $ 610 5.09% $ 142,059 $ 6,944 4.89% $ 140,274 $ 7,179 5.12%
Savings 10,742 245 2.28% 56,775 2,302 4.05% 252,408 11,468 4.54%
Time -- -- -- 721 38 5.27% 1,472 76 5.16%
Short Term Borrowings 2,575 189 7.34% 186,952 9,384 5.02% 538,315 28,140 5.23%
Total interest-bearing liabilities 25,312 1,044 4.12% 386,507 18,668 4.83% 932,469 46,863 5.03%
Noninterest-bearing liabilities:
Demand deposits 46,568 132,063 142,436
Noninterest bearing time deposits 46,368 45,601 58,178
Other liabilities 7,442 8,585 12,814
--------- --------- -----------
Total liabilities 125,690 572,756 1,145,897
Trust Preferred Securities -- -- 22,252
Equity 19,493 56,137 68,370
--------- --------- -----------
Total liabilities and equity $ 145,183 $ 628,893 $ 1,236,519
--------- --------- -----------
--------- --------- -----------
Net interest income $ 6,964 $ 18,009 $ 26,173
------- -------- --------
------- -------- --------
Net interest margin (1) 5.53% 3.13% 2.24%
Average interest rate spread (2) 2.24% 1.54% 1.23%
Ratio of interest-earning assets to
interest-bearing liabilities 497.65% 148.90% 125.20%
</TABLE>
- ----------
(1) Net interest income divided by total interest-earning assets.
(2) Yield on interest-earning assets less rate paid on interest-bearing
liabilities.
17
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Restated Consolidated Financial Statements.
For the following consolidated financial information included
herein, see Index on Page F-1:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1997. Consolidated Statements of Income for the
Year Ended October 31, 1995, for the Two-Month
Period Ended December 31, 1995, and for the Years Ended
December 31, 1996 and 1997. Consolidated Statements of
Stockholders' Equity for the Year Ended October 31, 1995, for
the Two- Month Period Ended December 31, 1995, and for the
Years Ended December 31, 1996 and 1997.
Consolidated Statements of Cash Flows for the Year Ended
October 31, 1995, for the Two-Month Period Ended December
31, 1995, and for the Years Ended December 31, 1996 and
1997.
Notes to Consolidated Financial Statements.
(b) List of Exhibits.
Exhibit
No. Description
2.1* Purchase and Sale Agreement dated as of
July 17, 1998 by and between Investors Bank & Trust
Company and BankBoston, N.A.
23.1 Consent of Deloitte & Touche, LLP
The Company will provide to the Securities and Exchange Commission,
upon request, a copy of any omitted schedule or exhibit to the Exhibits
listed above.
* Confidential treatment requested as to certain portions of the
document, which portions have been omitted and filed separately
with the Securities and Exchange Commission.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVESTORS FINANCIAL SERVICES CORP.
By: /s/ Kevin J. Sheehan
----------------------------------------
Kevin J. Sheehan
President, Chief Executive Officer,
and Chairman of the Board
Dated: August 18, 1998
19
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report .............................................. F-2
Consolidated Balance Sheets as of December 31, 1996
and December 31, 1997 .................................................. F-3
Consolidated Statements of Income for the Year Ended October 31,1995,
for the Two-Month Period Ended December 31, 1995 and for the Years
Ended December 31, 1996 and December 31,1997 ............................ F-4
Consolidated Statements of Stockholders' Equity for the Year Ended
October 31, 1995, for the Two-Month Period Ended December 31, 1995
and for the Years Ended December 31, 1996 and December 31, 1997 ......... F-5
Consolidated Statements of Cash Flows for the Year Ended
October 31, 1995, for the Two-Month Period Ended December 31, 1995,
and for the Years Ended December 31, 1996 and December 31, 1997 ......... F-7
Notes to Consolidated Financial Statements ................................ F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the Board of Directors of
Investors Financial Services Corp.:
We have audited the accompanying consolidated balance sheets of Investors
Financial Services Corp., including its predecessor, Investors Bank & Trust
Company and its subsidiaries (collectively, the "Company") as of December 31,
1996 and 1997 and the related consolidated statements of income, stockholders'
equity, and cash flows for the year ended October 31, 1995, for the two-month
period ended December 31, 1995 and for the years ended December 31, 1996 and
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996
and 1997, and the results of their operations and their cash flows for the year
ended October 31, 1995, for the two-month period ended December 31, 1995 and for
the years ended December 31, 1996 and 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in November
1995 Investors Bank & Trust Company became a wholly owned subsidiary of
Investors Financial Services Corp. as a result of the share exchange between
Investors Financial Services Corp. and shareholders of Investors Bank & Trust
Company.
DELOITTE & TOUCHE LLP
BOSTON, MASSACHUSETTS
August 12, 1998
F-2
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 19,094,515 $ 17,298,566
Federal funds sold and securities purchased under resale agreements 120,000,000 75,000,000
Securities held to maturity (approximate market values of $460,182,579
and $809,708,389 at December 31, 1996 and December 31, 1997 respectively) 460,009,923 802,046,077
Securities available for sale 271,120,964 462,850,089
Nonmarketable equity securities 967,400 5,476,600
Loans, less allowance for loan losses of $100,000 at December 31, 1996 and
December 31, 1997, respectively 66,236,889 55,944,957
Accrued interest and fees receivable 16,408,680 22,874,836
Equipment and leasehold improvements, net 5,891,800 8,556,231
Other assets 5,663,589 10,399,420
--------------- ---------------
TOTAL ASSETS $ 965,393,760 $ 1,460,446,776
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 264,914,614 $ 354,616,945
Savings 276,602,295 427,122,987
Time 55,000,000 65,000,000
--------------- ---------------
Total deposits 596,516,909 846,739,932
Short-term borrowings 296,820,752 499,932,628
Other liabilities 10,389,198 13,899,936
--------------- ---------------
Total liabilities 903,726,859 1,360,572,496
--------------- ---------------
Commitments and contingencies (Note 15)
Company obligated manditorily redeemable preferred securities of subsidiary
trust holding soley junior subordinated deferrable interest debentures of the
Company -- 24,161,104
--------------- ---------------
STOCKHOLDERS' EQUITY:
Class A common stock 3,595 --
Common stock 62,788 66,643
Surplus 54,823,108 55,903,286
Deferred compensation (1,687,675) (1,248,775)
Retained earnings 7,815,786 19,525,129
Net unrealized gain on securities available for sale 649,299 1,466,893
--------------- ---------------
Total stockholders' equity 61,666,901 75,713,176
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 965,393,760 $ 1,460,446,776
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED DECEMBER 31, 1995
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Two Months Ended
October 31, December 31, December 31, December 31,
1995 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 373,384 $ 289,843 $ 1,864,989 $ 2,980,617
Investment securities held to maturity and
available for sale 5,116,155 1,844,222 32,490,280 67,488,991
Loans 1,202,029 229,690 2,322,158 2,566,321
------------ ------------ ------------ ------------
Total interest income 6,691,568 2,363,755 36,677,427 73,035,929
------------ ------------ ------------ ------------
Interest expense:
Deposits 720,395 286,945 9,271,675 18,722,500
Short-term borrowings 101,198 111,154 9,396,359 28,140,731
------------ ------------ ------------ ------------
Total interest expense 821,593 398,099 18,668,034 46,863,231
------------ ------------ ------------ ------------
Net interest income 5,869,975 1,965,656 18,009,393 26,172,698
Provision for loan losses -- -- 65,000 --
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 5,869,975 1,965,656 17,944,393 26,172,698
Noninterest income:
Asset administration fees 49,253,084 8,129,872 57,462,455 78,324,689
Proceeds from assignment of UIT servicing, net 2,572,298 -- -- --
Computer service fees 505,534 83,424 482,275 643,668
Other operating income 1,276,416 193,977 1,244,453 3,555,986
Gain/(loss) on securities available for sale -- -- (2,488) 113,958
------------ ------------ ------------ ------------
Net operating revenue 59,477,307 10,372,929 77,131,088 108,810,999
------------ ------------ ------------ ------------
OPERATING EXPENSES
Compensation and benefits 33,286,403 6,035,592 39,095,879 53,456,470
Technology and telecommunications 6,404,922 1,052,445 7,894,033 10,655,583
Transaction processing services 2,885,483 382,528 5,684,553 8,000,104
Occupancy 4,543,448 682,675 4,527,043 4,620,412
Depreciation and amortization 1,267,724 194,190 1,615,881 2,070,170
Travel and sales promotion 837,136 122,682 1,264,155 1,647,241
Professional fees 1,080,252 132,933 1,289,976 2,011,291
Insurance 1,060,468 194,016 876,131 768,055
Other operating expenses 1,202,832 79,903 2,365,772 4,133,065
------------ ------------ ------------ ------------
Total operating expenses 52,568,668 8,876,964 64,613,423 87,362,391
------------ ------------ ------------ ------------
NET INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 6,908,639 1,495,965 12,517,665 21,448,608
Provision for income taxes 2,782,225 664,325 4,851,504 7,381,452
Minority interest expense, net of income taxes -- -- -- 1,437,276
------------ ------------ ------------ ------------
NET INCOME $ 4,126,414 $ 831,640 $ 7,666,161 $ 12,629,880
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC EARNINGS PER SHARE $ 0.13 $ 1.15 $ 1.90
------------ ------------ ------------
------------ ------------ ------------
DILUTED EARNINGS PER SHARE $ 0.12 $ 1.14 $ 1.85
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED
DECEMBER 31, 1995 AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Class A
Common Common Deferred
Stock Stock Surplus Compensation
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, NOVEMBER 1, 1994 $ -- $ 10,001,940 $ 470,296 $ --
Net income (Note 2) -- -- -- --
Cash dividend, $0.06 per share -- -- -- --
------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 1995 $ -- $ 10,001,940 $ 470,296 $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Effect of share exchange (Note 1) (Note 2) $ 6,114 $ 36,126 $ 18,491,472 $ --
Common stock issuance, net of costs of $3,829,062 -- 23,000 34,097,938 --
Issuance of restricted stock -- 1,140 2,193,360 (2,194,500)
Conversion of Class A to common stock (179) 179 -- --
Amortization of deferred compensation -- -- -- 76,713
Net income -- -- -- --
Net unrealized gain on securities available for sale -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 5,935 60,445 54,782,770 (2,117,787)
Adjustment to costs of stock issuance -- -- 35,193 --
Conversion of Class A to common stock (2,340) 2,340 -- --
Amortization of deferred compensation -- -- -- 430,112
Exercise of stock options -- 3 5,145 --
Net income -- -- -- --
Cash dividend to IFSC, $0.03 per share -- -- -- --
Cash dividend to S Corp -- -- -- --
Change in net unrealized gain on
securities available for sale -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 3,595 62,788 54,823,108 (1,687,675)
</TABLE>
<TABLE>
<CAPTION>
Net
Unrealized
Gain on
Securities
Retained Available
Earnings For Sale Total
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, NOVEMBER 1, 1994 $ 3,866,372 $ -- $ 14,338,608
Net income (Note 2) 4,126,414 -- 4,126,414
Cash dividend, $0.06 per share (60,000) -- (60,000)
------------ ------------ ------------
BALANCE, OCTOBER 31, 1995 $ 7,932,786 $ -- $ 18,405,022
------------ ------------ ------------
------------ ------------ ------------
Effect of share exchange (Note 1) (Note 2) $ (128,690) $ -- $ 18,405,022
Common stock issuance, net of costs of $3,829,062 -- -- 34,120,938
Issuance of restricted stock -- -- --
Conversion of Class A to common stock -- -- --
Amortization of deferred compensation -- -- 76,713
Net income 831,640 -- 831,640
Net unrealized gain on securities available for sale -- 262,010 262,010
------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 702,950 262,010 53,696,323
Adjustment to costs of stock issuance -- -- 35,193
Conversion of Class A to common stock -- -- --
Amortization of deferred compensation -- -- 430,112
Exercise of stock options -- -- 5,148
Net income 7,666,161 -- 7,666,161
Cash dividend to IFSC, $0.03 per share (193,325) -- (193,325)
Cash dividend to S Corp (360,000) -- (360,000)
Change in net unrealized gain on
securities available for sale -- 387,289 387,289
------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 7,815,786 649,299 61,666,901
</TABLE>
F-5
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED
DECEMBER 31, 1995 AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
Net
Unrealized
Gain on
Class A Securities
Common Common Deferred Retained Available
Stock Stock Surplus Compensation Earnings For Sale Total
-------- -------- ------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 3,595 $ 62,788 $ 54,823,108 $(1,687,675) $ 7,815,786 $ 649,299 $ 61,666,901
Conversion of Class A to common stock (3,595) 3,595 -- -- -- -- --
Amortization of deferred compensation -- -- -- 438,900 -- -- 438,900
Exercise of stock options -- 260 720,178 -- -- -- 720,438
Net income -- -- -- -- 12,629,880 -- 12,629,880
Cash dividend to IFSC, $0.08 per share -- -- -- -- (515,622) -- (515,622)
Cash dividend to S Corp -- -- -- -- (404,915) -- (404,915)
Contribution of capital to S Corp -- -- 360,000 -- -- -- 360,000
Change in net unrealized gain on
securities available for sale -- -- -- -- -- 817,594 817,594
-------- -------- ------------ ----------- ------------ ---------- ------------
BALANCE, DECEMBER 31, 1997 $ -- $ 66,643 $ 55,903,286 $(1,248,775) $ 19,525,129 $1,466,893 $ 75,713,176
-------- -------- ------------ ----------- ------------ ---------- ------------
-------- -------- ------------ ----------- ------------ ---------- ------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED DECEMBER 31, 1995
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
October 31, December 31, December 31, December 31,
1995 1995 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,126,414 $ 831,640 $ 7,666,161 $ 12,629,880
------------- ------------- ------------- -------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,267,724 194,190 1,615,881 2,070,170
Amortization of deferred compensation -- 76,713 430,112 438,900
Provision for loan losses -- -- 65,000 --
Amortization of premiums on securities, net of
accretion on discounts 792,574 205,071 2,521,119 4,455,050
(Gain)/loss on sale of securities available for sale -- -- 2,488 (113,958)
(Gain)/loss on disposal of fixed assets -- -- 15,211 (4,727)
Deferred income taxes (469,000) 78,377 898,513 336,851
Adjustment to carrying value of interest rate floor
contracts 1,057,700 -- -- --
Changes in assets and liabilities:
Accrued interest and fees receivable (189,689) (868,478) (5,967,922) (6,466,156)
Other assets (873,128) 893,110 (3,246,298) (4,735,830)
Other liabilities 1,897,528 (866,148) 4,513,829 2,781,624
------------- ------------- ------------- -------------
Total adjustments 3,483,709 (287,165) 847,933 (1,238,076)
------------- ------------- ------------- -------------
Net cash provided by operating activities 7,610,123 544,475 8,514,094 11,391,804
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale -- -- 48,406,151 105,833,935
Proceeds from maturities of securities held to maturity 18,404,529 12,865,343 39,691,309 107,992,568
Proceeds from sales of securities available for sale -- -- 26,904,258 24,833,488
Purchases of securities available for sale -- -- (243,550,740) (323,691,447)
Purchases of securities held to maturity (40,936,504) (147,559,658) (359,516,797) (451,865,060)
Purchase of nonmarketable equity securities -- -- (967,400) (4,509,200)
Net (increase) decrease in time deposits due from banks (24,345) 24,345 1,000,000 --
Net (increase) decrease in federal funds sold and
securities purchased under resale agreements (36,000,000) 21,000,000 (105,000,000) 45,000,000
Net (increase) decrease in loans (129,487) (9,164,521) (43,437,672) 10,291,932
Proceeds from sales of equipment and leasehold
improvements -- -- -- 189,121
Purchases of equipment and leasehold improvements (1,669,173) (159,587) (3,790,514) (4,918,994)
------------- ------------- ------------- -------------
Net cash used for investing activities (60,354,980) (122,994,078) (640,261,405) (490,843,657)
------------- ------------- ------------- -------------
</TABLE>
F-7
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED DECEMBER 31, 1995
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
October 31, December 31, December 31, December 31,
1995 1995 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits 53,411,987 (39,453,616) 142,007,125 89,702,331
Net increase in time and savings deposits 1,084,214 66,023,363 265,516,792 160,520,692
Net increase (decrease) in short-term borrowings (751,725) 74,401,454 222,019,746 203,111,876
Proceeds from issuance of common stock 130 37,950,000 -- 720,438
Proceeds from exercise of stock options -- -- 5,148 --
Proceeds from issuance of trust preferred stock -- -- -- 25,000,000
Costs of stock issuance -- (3,829,062) 35,193 (838,896)
Contribution of capital to S Corp -- -- -- 360,000
Dividends paid to IFSC shareholders (60,000) -- (193,325) (515,622)
Dividends paid to S Corp shareholders -- -- (360,000) (404,915)
------------- ------------- ------------- -------------
Net cash provided by financing activities 53,684,606 135,092,139 629,030,679 477,655,904
------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 939,749 12,642,536 (2,716,632) (1,795,949)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 8,228,862 9,168,611 21,811,147 19,094,515
------------- ------------- ------------- -------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 9,168,611 $ 21,811,147 $ 19,094,515 $ 17,298,566
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 898,000 $ 197,750 $ 17,253,000 $ 45,968,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Cash paid for income taxes $ 2,919,000 $ 885,000 $ 4,220,000 $ 7,049,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED DECEMBER 31, 1995
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Investors Financial Services Corp. ("IFSC") provides asset administration
services for the financial services industry through its wholly owned
subsidiaries, Investors Bank & Trust Company (the "Bank") and Investors
Capital Services, Inc. The Bank provides global custody, multicurrency
accounting, institutional transfer agency, performance measurement,
foreign exchange, securities lending, mutual fund administration and
investment advisory services to a variety of financial asset managers,
including mutual fund complexes, investment advisors, banks and insurance
companies. IFSC and the Bank are subject to regulation by the Federal
Reserve Board of Governors, the Office of the Commissioner of Banks of the
Commonwealth of Massachusetts and the Federal Deposit Insurance
Corporation.
As used herein, the defined term "the Company" shall mean IFSC together
with the Bank and its domestic and foreign subsidiaries from the date of
the share exchange discussed below and shall mean the Bank prior to that
date.
On November 8, 1995, the business operations of the Company were separated
from its former parent, Eaton Vance Corp. ("EVC"), by means of a tax-free,
pro rata distribution of EVC's ownership interest in the Company to the
EVC stockholders (the "Spin-off Transaction"). Immediately prior to the
Spin-off Transaction, all of the stockholders of the Bank exchanged their
1,000,000 shares of the Bank's capital stock for a combination of
3,418,573 shares of Common Stock and 611,427 shares of Class A Common
Stock ("Class A Stock") of a newly formed bank holding company formed for
the purpose of facilitating the Spin-off Transaction. For financial
reporting purposes, the exchange has been accounted for as if it occurred
on November 1, 1995. Subsequent to the completion of the Spin-off
Transaction, IFSC sold 2,300,000 additional shares of its Common Stock in
an initial public offering at an offering price of $16.50 per share. The
net effect of this transaction was an increase in the Company's
consolidated capital of approximately $34,000,000.
In December 1995, the Company changed its fiscal year end from October 31
to December 31.
On September 19, 1997, pursuant to the terms of the Certificate of
Incorporation of the Company, all shares of the Company's Class A Common
Stock automatically converted into shares of the Company's Common Stock.
The terms of the Class A Common Stock were identical to the terms of the
Common Stock, except that the Common Stock receives only one vote per
share rather than the ten votes per share previously received by Class A
Common Stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its domestic and foreign subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Custody and Trust Assets--Asset administration fees, including
securities lending and foreign exchange services and computer services
fees, are composed primarily of fee and fee-related income and are
recorded on the accrual basis.
Accounting Estimates--The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities--The Company classifies all equity securities that have readily
determinable fair values and all investments in debt securities into
one of three categories, as follows:
- Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held to maturity and reported at
amortized cost.
- Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and
losses included in earnings.
- All other debt and equity securities are classified as available for
sale and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
stockholders' equity.
Fair Value of Financial Instruments--Statement of Financial Accounting
Standards ("SFAS") No. 107 requires the disclosure of the estimated fair
value of financial instruments, whether or not recognized in the Company's
consolidated balance sheets, estimated using available market information or
other appropriate valuation methodologies.
The carrying amounts of cash and due from banks are a reasonable estimate of
their fair value. The fair value of the Company's securities is estimated
based on quoted market prices. Both loans (including commitments to lend) and
deposits (including time deposits) bear interest at variable rates and are
subject to periodic repricing. As such, the carrying amount of loans and
deposits is a reasonable estimate of fair value. The fair value of the
Company's interest rate contracts is estimated based on quoted market prices.
The Company does not have any other significant financial instruments.
Loans--Interest income on loans is recorded on the accrual basis. Losses on
loans are provided for under the allowance method of accounting. The
allowance is increased by provisions charged to operating expenses based on
amounts management considers necessary to meet reasonably foreseeable losses
on loans.
Equipment and Leasehold Improvements--Equipment and leasehold improvements
are stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided on the straight-line method over
the estimated useful lives of the assets which range from three to seven
years.
Income Taxes--Income tax expense is based on estimated taxes payable or
refundable on a tax return basis for the current year and the changes in
deferred tax assets and liabilities during the year in accordance with SFAS
No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities
are established for temporary differences between the accounting basis and
the tax basis of the Company's assets and liabilities at enacted tax rates
expected to be in effect when the amounts related to such temporary
differences are realized or settled.
Translation of Foreign Currencies--The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses
realized from the settlement of foreign currency transactions, which were not
significant in the year ended October 31, 1995, the two-month period ended
December 31, 1995, or the years ended December 31, 1996 and 1997, are
included in other operating expenses in the consolidated statements of
income.
Derivative Financial Instruments--Prior to the assignment of the unit
investment trust servicing more fully described in Note 11, the Bank used
derivative financial instruments in the form of interest rate floor contracts
("Floors"). These instruments were matched with fees on trust and custody
assets that were based on current interest rates. Periodic cash payments were
accrued on a settlement basis. The premiums associated with the instruments
were amortized over their term until they were adjusted to market value in
March 1995 in connection with the sale of the hedged assets as more fully
described in Note 11. The Company does not purchase derivative financial
instruments for trading purposes. Interest rate swap agreements are matched
with specific financial instruments reported on the balance sheet and
periodic cash payments are accrued on a settlement basis.
F-10
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company also enters into interest rate swap agreements as discussed in
Note 14 and foreign exchange contracts as discussed in Note 17. The Company
implemented SFAS 119, "Disclosure About Derivative Financial Investments and
Fair Value of Financial Instruments," in fiscal 1996. This standard requires
expanded disclosure about amounts, nature and terms associated with the
derivative financial instruments held. The adoption of SFAS 119 did not have
a significant impact on the Company's consolidated financial statements.
The Company enters into foreign exchange contracts with clients and
simultaneously enters into a matched position with another bank. These
contracts are subject to market value fluctuations in foreign currencies.
Gains and losses from such fluctuations are netted and recorded as an
adjustment of asset administration fees.
Liabilities--"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," SFAS No. 125 establishes consistent
accounting standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 125 provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers of financial assets that are secured borrowings based upon the
existence of control. SFAS No. 125 was effective and adopted during fiscal
1997. SFAS No. 125 had no material effect upon the Company's consolidated
financial statements.
Stock-Based Compensation--The Company accounts for stock-based compensation
using the intrinsic value-based method of Accounting Principles Board Opinion
No. 25, as allowed under SFAS No. 123, "Accounting for Stock-Based
Compensation."
Earnings Per Share--In 1997, the Company adopted SFAS No. 128, "Earnings per
Share," and SFAS No. 129, "Disclosure of Information about Capital
Structure".
SFAS No. 128 requires that entities with publicly held common stock or
potential common stock compute, present, and disclose earnings per share
based upon the Basic and/or Diluted earnings per share ("EPS"). Basic EPS
were computed by dividing net income by the weighted average number of common
shares outstanding during the year. Diluted EPS were computed by increasing
the weighted average of common shares outstanding used in Basic EPS by the
number of additional common shares that would have been outstanding if the
dilutive common stock had been issued. Based upon the Company's capital
structure, the Statement requires presentation of both Basic and Diluted EPS.
SFAS No. 129 establishes standards for disclosure, in summary form with an
entity's financial statements, the pertinent rights and privileges of the
various securities outstanding. Under SFAS No. 129, the Company discloses
within its financial statements the number of shares issued upon conversion,
exercise, or satisfaction of required conditions during the most recent
annual fiscal period.
New Accounting Principles--"Reporting Comprehensive Income," SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. SFAS
No. 130 requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position.
SFAS No. 130 is effective for financial statements for periods beginning
after December 15, 1997.
"Disclosures about Segments of an Enterprise and Related Information," SFAS
No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in the financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997.
Reclassifications --Certain amounts in the prior periods' financial
statements have been reclassified to conform to the current year's
presentation.
F-11
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Acquisitions--On May 29, 1998, the Company acquired (the "AMT Acquisition")
all of the outstanding share capital of AMT Capital Services, Inc. and AMT
Capital Advisers, Inc. (collectively, "AMT Capital"), pursuant to an
Agreement and Plan of Merger dated as of May 12, 1998 (the "Merger
Agreement"), by and among the Company, Investors Acquisition Sub I, Inc.,
Investors Acquisition Sub II, Inc., AMT Capital and certain stockholders of
AMT Capital (the "Former AMT Capital Stockholders") in exchange for 194,006
shares of the Company's Common Stock. Of the 194,006 shares of Common Stock
issued to the Former AMT Capital Stockholders, 18,938 shares are being held
in escrow by First Chicago Trust Company of New York as escrow agent
pursuant to an Escrow Agreement dated as of May 29, 1998 among the Company,
the Former AMT Capital Stockholders and the escrow agent (the "Escrow
Agreement") until the earlier of (i) February 28, 1999 and (ii) the
Company's first public announcement of earnings following completion by the
Company's independent auditors of the first full-year audit of the Company's
financial statements following May 29, 1998 to cover any reimbursable claims
relating to the AMT Acquisition. The remaining 175,068 shares acquired by
the Former AMT Capital Stockholders pursuant to the AMT Acquisition were
registered on a Registration Statement on Form S-3 (File No. 333-58031),
declared effective on July 9, 1998, and may be sold to the public by the
Former AMT Capital Stockholders.
The AMT Acquisition has been accounted for under the "pooling-of-interests"
method and therefore the consolidated financial statements for all periods
prior to the acquisition have been restated to include the accounts and
operations of AMT Capital Services with those of the Company. The AMT
Acquisition was structured as a tax-free reorganization under the Internal
Revenue Code.
AMT Capital is a New York-based firm recognized for providing fund
administration services to global and domestic institutional investment
management firms. The AMT Acquisition is intended to enhance the Company's
offerings to institutional investment managers who outsource the
administration of pooled investment products. Additionally, management
believes that the combination of the substantial expertise at both the
Company and AMT Capital should further strengthen the Company's strategic
product development capabilities in support of clients worldwide. Upon the
consummation of the AMT Acquisition, the AMT Capital companies were renamed
Investors Capital Services, Inc. and Investors Capital Advisers, Inc.,
respectively.
Prior to the business combination, AMT Capital was an S Corporation for the
fiscal year ended December 31, 1997, and consequently, was not subject to
federal income taxes. The proforma income tax provision for AMT Capital that
would have been reported by the Company as an additional provision to its
historical tax expense, had AMT Capital not been an S Corporation prior to
the combination, was $535,000 for the year ended December 31, 1997.
F-12
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
No adjustments to conform accounting policies of the Company and AMT Capital
were required.
Revenue and net income (loss) for the previously separate companies for the
year ended October 31, 1995, the two-month period ended December 31, 1995,
and the years ended December 31, 1996 and 1997 were:
<TABLE>
<CAPTION>
Two Months
Ended
October 31, December 31, December 31, December 31,
1995 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET OPERATING REVENUE:
IFSC $ 57,432,387 $ 10,050,908 $ 74,576,110 $102,988,898
AMT Capital 2,044,920 322,021 2,554,978 5,822,101
------------ ------------ ------------ ------------
Total $ 59,477,307 $ 10,372,929 $ 77,131,088 $108,810,999
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME:
IFSC $ 4,408,434 $ 899,794 $ 7,773,962 $ 11,580,261
AMT Capital (282,020) (68,154) (107,801) 1,049,619
------------ ------------ ------------ ------------
Total $ 4,126,414 $ 831,640 $ 7,666,161 $ 12,629,880
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC EARNINGS PER
SHARE
IFSC $ 0.14 $ 1.21 $ 1.80
AMT Capital (0.01) (0.06) 0.10
------------- ------------ -------------
Total $ 0.13 $ 1.15 $ 1.90
------------- ------------ -------------
------------- ------------ -------------
DILUTED EARNINGS PER
SHARE
IFSC $ 0.14 $ 1.20 $ 1.75
AMT Capital (0.02) (0.06) 0.10
------------- ------------ -------------
Total $ 0.12 $ 1.14 $ 1.85
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
F-13
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The changes in equity are detailed as follows for the periods excluded from
the reported results of operations and for distinction from the previously
reported effect of the share exchange described in (Note 1) :
Statements of Stockholders' Equity:
<TABLE>
<CAPTION>
Net
Unrealized
Gain on
Class A Securities
Common Common Deferred Retained Available
Stock Stock Surplus Compensation Earnings For Sale Total
------- ----------- ----------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 1,1994 $ -- $10,001,940 $ 470,296 $ -- $3,866,372 $ -- $14,338,608
Net income--IFSC -- -- -- -- 4,408,434 -- 4,408,434
Net income--AMT -- -- -- -- (282,020) -- (282,020)
Cash dividend, $0.06 -- -- -- -- (60,000) -- (60,000)
------- ----------- ----------- ----------- ---------- --------- -----------
Balance, October 31, 1995 $ -- $10,001,940 $ 470,296 $ -- $7,932,786 $ -- $18,405,022
------- ----------- ----------- ----------- ---------- --------- -----------
------- ----------- ----------- ----------- ---------- --------- -----------
Effect of share exchange (Note 1) $ 6,114 $ 34,186 $18,021,176 $ -- $ -- $ -- $18,061,476
Common stock issuance, net of
costs of $3,829,062 -- 23,000 34,097,938 -- -- -- 34,120,938
Issuance of restricted stock -- 1,140 2,193,360 (2,194,500) -- -- --
Conversion of Class A to common
stock (179) 179 -- -- -- -- --
Amortization of defferred
compensation -- -- -- 76,713 -- -- 76,713
Net income--IFSC -- -- -- -- 899,794 -- 899,794
Net income--AMT -- -- -- -- (68,154) -- (68,154)
Effect of pooling of interests -- 1,940 470,296 -- (128,690) -- 343,546
Net unrealized gain on securities
available for sale -- -- -- -- -- 262,010 262,010
------- ----------- ----------- ----------- ---------- --------- -----------
Balance, December 31, 1995 $ 5,935 $ 60,445 $54,782,770 $(2,117,787) $ 702,950 $ 262,010 $53,696,323
------- ----------- ----------- ----------- ---------- --------- -----------
------- ----------- ----------- ----------- ---------- --------- -----------
</TABLE>
F-14
<PAGE>
3. SECURITIES
Carrying amounts and approximate market values of securities are
summarized as follows as of December 31, 1996:
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Approximate
Held to Maturity Value Gains Losses Market Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $414,664,590 $ 1,973,263 $ 1,750,168 $414,887,685
Federal agency securities 37,517,495 49,546 224,972 37,342,069
Foreign government securities 7,827,838 124,987 -- 7,952,825
------------ ------------ ------------ ------------
Total $460,009,923 $ 2,147,796 $ 1,975,140 $460,182,579
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Carrying
Available for Sale Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 40,107,999 $ 151,304 $ 3 $ 40,259,300
Mortgage-backed securities 229,930,801 1,086,092 155,229 230,861,664
------------ ------------ ------------ ------------
Total $270,038,800 $ 1,237,396 $ 155,232 $271,120,964
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Carrying amounts and approximate market values of securities are
summarized as follows as of December 31, 1997:
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Approximate
Held to Maturity Value Gains Losses Market Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
State and political subdivisions $ 35,224,790 $ 2,296,252 $ -- $ 37,521,042
Mortgage-backed securities 590,364,940 5,649,718 514,023 595,500,635
Federal agency securities 168,687,478 545,863 491,229 168,742,112
Foreign government securities 7,768,869 175,731 -- 7,944,600
------------ ------------ ------------ ------------
Total $802,046,077 $ 8,667,564 $ 1,005,252 $809,708,389
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Carrying
Available for Sale Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 30,002,114 $ 90,136 $ -- $ 30,092,250
Municipal bonds 8,348,265 33,588 -- 8,381,853
Mortgage-backed securities 422,207,689 2,624,065 455,768 424,375,986
------------ ------------ ------------ ------------
Total $460,558,068 $ 2,747,789 $ 455,768 $462,850,089
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
F-15
<PAGE>
3. SECURITIES (CONTINUED)
Nonmarketable equity securities at December 31, 1996 and 1997 consisted
of stock of the Federal Home Loan Bank of Boston (the "FHLBB"). As a
member of the FHLBB, the Company is required to invest in $100 par value
stock of the FHLBB in an amount equal to the greater of (i) 1% of its
outstanding residential mortgage loan principal (including mortgage pool
securities), (ii) 0.3% of total assets, and (iii) total advances from the
FHLBB, divided by a leverage factor of 2. If and when such stock is
redeemed, the Company will receive an amount equal to the par value of
the stock.
The carrying amounts and approximate market values of securities by
effective maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
Carrying Approximate Carrying Approximate
Held to Maturity Value Market Value Value Market Value
<S> <C> <C> <C> <C>
Due within one year $ 19,052,213 $ 18,873,837 $ -- $ --
Due from one to five years 114,459,070 113,819,081 357,580,590 360,361,877
Due five years up to ten years 240,620,332 241,016,881 183,840,479 184,373,997
Due after ten years 85,878,308 86,472,780 260,625,008 264,972,515
------------ ------------ ------------ ------------
Total $460,009,923 $460,182,579 $802,046,077 $809,708,389
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
Amortized Carrying Amortized Carrying
Available for Sale Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due within one year $ 19,964,080 $ 20,046,800 $ 20,020,094 $ 20,039,100
Due from one to five years 213,758,992 214,525,641 307,636,460 309,517,768
Due five years up to ten years 36,315,728 36,548,523 132,367,416 132,756,384
Due after ten years -- -- 534,098 536,837
------------ ------------ ------------ ------------
Total $270,038,800 $271,120,964 $460,558,068 $462,850,089
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The maturity distributions of mortgage-backed securities have been
allocated over maturity groupings based upon actual pre-payments to date
and anticipated pre-payments based upon historical experience.
Five securities available for sale were sold during the year ended
December 31, 1997 resulting in gains totaling $113,958.
The carrying value of securities pledged amounted to approximately
$362,000,000 and $590,000,000 at December 31, 1996 and December 31, 1997,
respectively. Securities are pledged primarily to secure public funds and
clearings with other depository institutions.
F-16
<PAGE>
4. LOANS
Loans consist of demand loans with individuals and not-for-profit
institutions located in the greater Boston, Massachusetts metropolitan
area and loans to mutual fund clients. The loans to mutual funds include
lines of credit and advances pursuant to the terms of the custody
agreements between the Company and those mutual fund clients to facilitate
securities transactions and redemptions. Generally, the loans are, or may
be, in the event of default, collateralized with marketable securities
held by the Company as custodian. There were no impaired or nonperforming
loans at December 31, 1996 or December 31, 1997. In addition, there have
been no loan charge-offs or recoveries during the year ended October 31,
1995, the two months ended December 31, 1995 or the years ended December
31, 1996 and 1997. Loans consisted of the following at December 31, 1996
and December 31, 1997:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
<S> <C> <C>
Loans to individuals $23,448,999 $26,857,933
Loans to not-for-profit institutions 12,500 12,500
Loans to mutual funds 42,875,390 29,174,524
----------- -----------
66,336,889 56,044,957
Less allowance for loan losses 100,000 100,000
----------- -----------
Total $66,236,889 $55,944,957
----------- -----------
----------- -----------
</TABLE>
The Company had commitments to lend of approximately $37,128,000 and
$62,845,000 at December 31, 1996 and December 31, 1997, respectively. The
terms of these commitments are similar to the terms of outstanding loans.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The major components of equipment and leasehold improvements are as
follows at December 31, 1996 and December 31, 1997:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
<S> <C> <C>
Furniture, fixtures and equipment $ 8,856,031 $11,660,572
Leasehold improvements 1,229,593 977,336
----------- -----------
Total 10,085,624 12,637,908
Less accumulated depreciation and amortization 4,193,824 4,081,677
----------- -----------
Equipment and leasehold improvements, net $ 5,891,800 $ 8,556,231
----------- -----------
----------- -----------
</TABLE>
F-17
<PAGE>
6. DEPOSITS
Time deposits at December 31, 1996 and December 31, 1997 include
noninterest-bearing amounts of approximately $55,000,000 and
$65,000,000, respectively.
All time deposits had a minimum balance of $100,000 and a maturity of
less than three months at December 31, 1996 and December 31, 1997.
7. SHORT-TERM BORROWINGS
The major components of short-term borrowings are as follows at
December 31, 1996 and December 31, 1997:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
<S> <C> <C>
Repurchase agreements $296,421,201 $499,188,363
Treasury, tax and loan account 399,551 744,265
------------ ------------
Total $296,820,752 $499,932,628
------------ ------------
------------ ------------
</TABLE>
The Company enters into repurchase agreements whereby securities are sold
by the Company under agreements to repurchase. The interest rate on the
outstanding agreements at December 31, 1996 was 5.91% and all agreements
matured on January 2, 1997. The interest rate on the outstanding
agreements at December 31, 1997 ranged from 4.95% to 5.90% and all
agreements mature by March 3, 1998.
The Company receives federal tax deposits from clients as an agent for the
Federal Reserve Bank and accumulates these deposits in the Treasury, Tax
and Loan account. The Federal Reserve Bank charges the Company interest at
the Federal Funds rate on such deposits. The interest rates on the
outstanding balances at December 31, 1996 and December 31, 1997 were 5.10%
and 5.26% respectively.
The following securities were pledged under the repurchase agreements
at December 31, 1996 and December 31, 1997:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
Carrying Approximate Carrying Approximate
Held to Maturity Value Market Value Value Market Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 37,249,940 $ 37,249,940 $ 20,392,469 $ 20,392,469
Federal agency securities 25,000,000 24,803,950 -- --
Mortgage-backed securities 245,689,672 246,777,873 501,141,751 503,300,183
------------ ------------ ------------ ------------
Total $307,939,612 $308,831,763 $521,534,220 $523,692,652
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The amount outstanding at December 31, 1997 was the highest amount
outstanding at any month end during the year ended December 31, 1997. The
average balance during the year ended December 31, 1997 was $509,288,000.
F-18
<PAGE>
8. INCOME TAXES
The components of income tax expenses are as follows for the year ended
October 31, 1995, the two-month period ended December 31, 1995, and the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
October 31, December 31, December 31, December 31,
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Current:
Federal $ 2,763,225 $ 439,507 $ 3,576,931 $ 5,453,161
State 484,000 139,429 182,809 773,510
Foreign 4,000 7,012 193,251 9,462
----------- ----------- ----------- -----------
3,251,225 585,948 3,952,991 6,236,133
----------- ----------- ----------- -----------
Deferred:
Federal (391,000) 50,538 619,357 246,014
State (154,000) 17,580 240,861 90,838
Foreign 76,000 10,259 38,295 --
----------- ----------- ----------- -----------
(469,000) 78,377 898,513 336,852
----------- ----------- ----------- -----------
Minority Interest -- -- -- 808,467
----------- ----------- ----------- -----------
Total income taxes $ 2,782,225 $ 664,325 $ 4,851,504 $ 7,381,452
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Differences between the effective income tax rate and the federal
statutory rates are as follows for the year ended October 31, 1995, the
two-month period ended December 31, 1995, and the years ended December 31,
1996 and 1997:
<TABLE>
<CAPTION>
October 31, December 31, December 31, December 31,
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Federal statutory rate 34.00% 34.00% 35.00% 35.00%
State income tax rate, net of federal benefit 3.15 6.93 2.20 2.61
Foreign income taxes with different rates 0.76 0.76 1.20 0.03
Tax-exempt income, net of disallowance -- -- -- (2.35)
Other 2.36 2.72 0.36 (0.88)
----- ----- ----- -----
Effective tax rate 40.27% 44.41% 38.76% 34.41%
</TABLE>
F-19
<PAGE>
8. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities consist of the following at
December 31, 1996 and December 31, 1997:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
<S> <C> <C>
Deferred tax assets:
Employee benefit plans $ 933,216 $ 829,330
Other 37,562 84,716
----------- -----------
970,778 914,046
Deferred tax liabilities:
Prepaid insurance (620,979) (636,948)
Securities available for sale (432,866) (825,128)
Unearned compensation (183,175) (139,431)
Depreciation and amortization (106,514) (414,409)
----------- -----------
Net deferred tax asset (liability) $ (372,756) $(1,101,870)
----------- -----------
----------- -----------
</TABLE>
Net deferred tax liabilities are reported as a component of other
liabilities in the 1996 and 1997 consolidated balance sheets.
9. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY
On January 31, 1997, a trust sponsored and wholly owned by the Company
issued $25,000,000 in 9.77% Trust Preferred Securities (the "Capital
Securities"), the proceeds of which were invested by the trust in the same
aggregate principal amount of the Company's newly issued 9.77% Junior
Subordinated Deferrable Interest Debentures due February 1, 2027 (the
"Junior Subordinated Debentures"). The $25,000,000 aggregate principal
amount of the Junior Subordinated Debentures represents the sole asset of
the Trust. The Company has guaranteed, on a subordinated basis,
distributions and other payments due on the Capital Securities (the
"Guarantee"). The Guarantee, when taken together with the Company's
obligations under (i) the Debentures; (ii) the indenture pursuant to which
the Junior Subordinated Debentures were issued; and (iii) the Amended and
Restated Declaration of Trust governing the Trust constitutes a full and
unconditional guarantee of the Trust's obligations under the Capital
Securities.
10. STOCKHOLDERS' EQUITY
The Company has authorized 1,000,000 shares of Preferred Stock, 650,000
shares of Class A Common Stock and 20,000,000 shares of Common Stock, all
with a par value of $.01 per share. At December 31, 1996 and December 31,
1997, there were no preferred shares issued or outstanding. There were
359,545 and 0 shares of Class A Common Stock and 6,278,773 and 6,664,319
shares of Common Stock issued and outstanding at December 31, 1996 and
December 31, 1997, respectively.
The Company has three stock option plans, the 1995 Stock Plan, the 1995
Non-Employee Director Stock Option Plan, and the 1997 Employee Stock
Purchase Plan. Under the terms of the 1995 Stock Plan, the Company may
grant options to purchase up to a maximum of 560,000 shares of Common
Stock to certain employees, consultants, directors and officers. On
November 18, 1997, subject to approval by a majority of the holders of the
Company's Common Stock eligible to vote thereon, the Board of Directors of
the Company authorized the issuance of up to an additional 600,000 shares
of Common Stock under the 1995 Stock Plan. The options may be awarded as
incentive stock options (employees only), nonqualified stock options,
stock awards or opportunities to make direct purchases of stock.
F-20
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED)
Under the terms of the 1995 Non-Employee Director Stock Option Plan, the
Company may grant options to non-employee directors to purchase up to a
maximum of 40,000 shares of Common Stock. Options to purchase 2,500 shares of
Common Stock were awarded at the date of initial public offering to each
director. Subsequently, any director elected or appointed after such date
will receive an automatic initial grant of options to purchase 2,500 shares
upon becoming a director. Thereafter, each director will receive an automatic
grant of options to purchase 2,500 shares effective upon each one-year
anniversary of the date of such director's original grant. Additionally,
non-employee directors may elect to receive options to acquire shares of the
Company's Common Stock in lieu of such director's cash retainer. Any election
is subject to certain restrictions under the 1995 Non-Employee Director Stock
Option Plan. The number of shares of stock underlying the option is equal to
the quotient obtained by dividing the cash retainer by the value of an option
on the date of grant as determined using the Black-Scholes model.
The exercise price of options under the 1995 Non-Employee Director Stock
Option Plan and the incentive options under the 1995 Stock Plan may not be
less than the fair market value at the date of the grant. The exercise price
of the nonqualified options from the 1995 Stock Plan is determined by the
compensation committee of the Board of Directors. All options become
exercisable as specified at the date of the grant.
In November 1995, the Company granted 114,000 shares to certain officers of
the Company under the 1995 Stock Plan. Of these grants, 105,000 shares vest
in sixty equal monthly installments, and the remainder vest in five equal
annual installments. Upon termination of employment, the Company has the
right to repurchase all unvested shares at a price equal to the fair market
value at the date of the grant. The Company has recorded deferred
compensation of $1,687,675 and $1,248,775 at December 31, 1996 and December
31, 1997, respectively, pursuant to these grants.
The 1997 Employee Stock Purchase Plan was adopted by the Board of Directors
on January 14, 1997 and subsequently approved by the stockholders at the
Company's 1997 Annual Meeting. The Company has authorized the issuance of
140,000 shares of Common Stock pursuant to the exercise of nontransferable
options granted to participating employees. The 1997 Purchase Plan permits
eligible employees to purchase up to 1,000 shares of Common Stock per payment
period, subject to limitations provided by Section 423(b) of the Internal
Revenue Code, through accumulated payroll deductions. The purchases are made
twice a year at a price equal to the lesser of (i) 90% of the average market
value of the Common Stock on the first business day of the payment period, or
(ii) 90% of the average market value of the Common Stock on the last business
day of the payment period. Annual payment periods consist of two six-month
periods, January 1 through June 30 and July 1 through December 31.
Summary option activity under the 1995 Non-Employee Director Stock Option
Plan and the 1995 Stock Plan is as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
<S> <C> <C>
Outstanding at December 31, 1995 211,500 $ 17
Granted 141,150 26
Exercised (312) 21
Canceled (7,188) 17
------
Outstanding at December 31, 1996 345,150 21
------
Outstanding and exercisable at December 31, 1996 60,489
------
Outstanding at December 31, 1996 345,150 $ 21
Granted 187,262 43
Exercised (14,753) 17
Canceled (375) 17
------
Outstanding at December 31, 1997 517,284 30
------
Outstanding and exercisable at December 31, 1997 148,939
------
</TABLE>
Under the Employee Stock Purchase Plan, adopted in fiscal year 1997,
the Company sold 11,248 shares of Common Stock to employees at
December 31, 1997. The exercise price of the stock was $41.50, or 90% of
the average market value of the Common Stock on the last business day of
the payment period.
F-21
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED)
Employee Stock-Based Compensation - With respect to employee stock-based
compensation, the Company has adopted the disclosure-only requirements of SFAS
No. 123. Accordingly, no compensation cost has been recognized in the
accompanying financial statements for employee stock-based compensation
awarded under the three employee stock option plans. If compensation cost had
been determined for awards granted under the employee stock option plans based
on the fair value of the awards at the date of grant in accordance with the
provisions of SFAS No. 123, the Company's net income and earnings per share
for the years ended December 31, 1996 and December 31, 1997 would have
decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
<S> <C> <C> <C>
Net income As reported $ 7,666,161 $ 12,629,880
Pro forma 7,394,933 12,025,781
Basic earnings per share As reported 1.15 1.90
Pro forma 1.11 1.81
Diluted earnings per share As reported 1.14 1.85
Pro forma 1.10 1.76
</TABLE>
The fair value of each option grant under the employee stock option plan was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions for the years ended December 31, 1997 and 1996,
respectively: an assumed risk-free interest rate of 5.61% and 6.25%, an
expected life of five years for both years, an expected volatility of 27% and
20%, and nominal dividends paid for both years.
The fair value of each option grant under the employee stock purchase plan was
estimated by computing the option discount which is the difference between the
average market value of the Company's Common Stock during the payment period
and the lesser of (i) 90% of the average market value of the Common Stock on
the first business day of the payment period, or (ii) 90% of the average
market value of the Common Stock on the last business day of the payment
period.
F-22
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED)
Earnings Per Share - As a result of the EPS methods required to be
disclosed by the Company under SFAS No. 128, the Statement also requires
disclosure of a reconciliation from Basic EPS to Diluted EPS for the
two-month period ended December 31, 1995, and for the years ended
December 31, 1996 and 1997 as follows:
<TABLE>
<CAPTION>
Per-Share
Income Shares Amount
<S> <C> <C> <C>
December 31, 1997
Basic EPS
Income available to common stockholders $12,629,880 6,640,434 $ 1.90
--------
--------
Dilutive effect of common equivalent shares of stock options 169,175
---------
Diluted EPS
Income available to common stockholders $12,629,880 6,809,609 $ 1.85
----------- --------- --------
----------- --------- --------
December 31, 1996
Basic EPS
Income available to common stockholders $ 7,666,161 6,638,201 $ 1.15
--------
--------
Dilutive effect of common equivalent shares of stock options 60,187
---------
Diluted EPS
Income available to common stockholders $ 7,666,161 6,698,388 $ 1.14
----------- --------- --------
----------- --------- --------
December 31, 1995
Basic EPS
Income available to common stockholders $ 831,640 6,638,006 $ 0.13
--------
--------
Dilutive effect of common equivalent shares of stock options 36,561
---------
Diluted EPS
Income available to common stockholders $ 831,640 6,674,567 $ 0.12
----------- --------- --------
----------- --------- --------
</TABLE>
11. PROCEEDS FROM ASSIGNMENT OF UNIT INVESTMENT TRUST SERVICING, NET
On March 1, 1995, the Company recognized a net gain of $2,572,298 of
noninterest income resulting from the assignment to another company of
the rights to service approximately $5.0 billion of unit investment
trust assets. In connection with the assignment, the Company adjusted to
market value interest rate floors with a notional amount of $80,000,000,
and the resulting loss of $1,057,700 is reported net of the cash
proceeds from the assignment of unit investment trust servicing. These
interest rate floors had previously been designated as hedges of fees
from the unit investment trusts (see Note 14).
F-23
<PAGE>
12. EMPLOYEE BENEFIT PLANS
Pension Plan - The Company has a trusteed, noncontributory, qualified
defined benefit pension plan covering substantially all of its
employees who were hired before January 1, 1997. The benefits are based
on years of service and the employee's compensation during employment.
The Company's funding policy is to contribute annually the maximum
amount which can be deducted for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed
to service to date but also for benefits expected to be earned in the
future.
The Company established a supplemental retirement plan in 1994 that
covers certain employees and pays benefits that supplements any
benefits paid under the qualified plan. Benefits under the supplemental
plan are generally based on compensation not includable in the
calculation of benefits to be paid under the qualified plan. The total
cost of this plan to the Company was $86,563, $6,827, $36,960 and
$60,002 in the year ended October 1995, the two-month period ended
December 31, 1995, and the years ended December 31, 1996 and
December 31, 1997, respectively.
The following table sets forth the funded status and accrued pension cost
for the Company's pension plans.
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of
$3,746,000 and $4,316,000 for December 31, 1996 and
1997, respectively $ 4,109,000 $ 4,775,000
----------- -----------
----------- -----------
Projected benefit obligations for services rendered to date $ 6,885,000 $ 6,285,000
Plan assets at fair value, primarily listed stocks and U.S.
government obligations 6,213,000 8,168,000
----------- -----------
Projected benefit obligations in excess of assets (672,000) 1,883,000
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions (1,075,000) (3,363,000)
Prior service cost not yet recognized in periodic pension cost 238,000 210,000
Unrecognized net (asset) liability (378,000) (339,000)
----------- -----------
Accrued pension cost $(1,887,000) $(1,609,000)
----------- -----------
----------- -----------
</TABLE>
Net pension cost included the following components for the year ended
October 31, 1995, the two-month period ended December 31, 1995 and the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
October 31, December 31, December 31, December 31,
1995 1995 1996 1997
<S> <C> <C> <C> <C>
Service cost - benefits earned
during the period $ 618,000 $ 123,000 $ 848,000 $ 540,000
Interest cost on projected benefit
obligations 425,000 86,000 520,000 557,000
Return on plan assets (420,000) (73,000) (1,013,000) (1,279,000)
Net amortization and deferral (5,000) 1,000 508,000 714,000
----------- ----------- ----------- -----------
Net periodic pension cost $ 618,000 $ 137,000 $ 863,000 $ 532,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-24
<PAGE>
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligations were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
<S> <C> <C>
Weighted average discount rate 7.5% 7.5%
Rate of increase in future compensation levels 5.0 5.0
Long-term rate of return on plan assets 8.5 8.5
</TABLE>
Employee Savings Plan--The Company sponsors a qualified defined
contribution employee savings plan covering substantially all employees
who elect to participate. The Company matches employee contributions to
the plan up to specified amounts. The total cost of this plan to the
Company was $222,000, $36,000, $208,000 and $436,000 in the year ended
October 31, 1995, the two-month period ended December 31, 1995, and the
years ended December 31, 1996 and 1997, respectively.
13. RELATED-PARTY TRANSACTIONS
As a result of the Spin-off Transaction described in Note 1, transactions
between the Company and EVC are no longer considered related-party
transactions. However, prior to the Spin-off Transaction, the Company
entered into various transactions with EVC and a group of mutual funds
sponsored by EVC. The following is a summary of such related-party
transactions for the year ended October 31, 1995:
<TABLE>
<CAPTION>
October 31,
1995
<S> <C>
Asset administration fee income $8,355,000
Computer service fee income 506,000
Occupancy expense 260,000
</TABLE>
The aggregate of the above fees exceeded 10% of the Company's interest
income and non-interest income.
In addition, EVC and its group of mutual funds had the following amounts
outstanding with the Company at October 31, 1995:
<TABLE>
<S> <C>
Fees receivable $ 308,000
Deposits 102,869,000
</TABLE>
F-25
<PAGE>
14. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Lines of Credit - At December 31, 1997, the Company had commitments to
individuals under collateralized open lines of credit totaling $90,726,000,
against which $27,881,000 in loans were drawn. The credit risk involved in
issuing lines of credit is essentially the same as that involved in
extending loan facilities. The Company does not anticipate any loss as a
result of these lines of credit.
Interest-Rate Contracts - The following table summarizes the contractual or
notional amounts of derivative financial instruments held by the Company at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
<S> <C> <C>
Interest rate contracts:
Swap agreements $180,000,000 $340,000,000
Floor contracts 30,000,000 --
</TABLE>
Interest rate contracts involve an agreement with a counterparty to
exchange cash flows based on an underlying interest rate index. An interest
rate floor is a contract purchased from a counterparty which specifies a
minimum interest rate for the specified period of time. A swap agreement
involves the exchange of a series of interest payments, either at a fixed
or variable rate, based upon the notional amount without the exchange of
the underlying principal amount. The Company's exposure from these interest
rate contracts results from the possibility that one party may default on
its contractual obligation. Credit risk is limited to the positive market
value of the derivative financial instrument, which is significantly less
than the notional value. During 1997, the Company entered into agreements
to assume fixed-rate interest payments in exchange for variable
market-indexed interest payments. The original terms range from 12 to 24
months. The weighted-average fixed-payment rates were 5.90 percent at
December 31, 1997. Variable-interest payments received are indexed to 1
month LIBOR. At December 31, 1997, the weighted-average rate of variable
market-indexed interest payment obligations to the Bank was 5.79 percent.
The effect of these agreements was to lengthen short-term variable rate
liabilities into longer-term fixed rate liabilities. These contracts had no
carrying value and the market value was approximately ($358,000) at
December 31, 1997.
15. COMMITMENTS AND CONTINGENCIES
Restrictions on Cash Balances - The Company is required to maintain certain
average cash reserve balances with the Federal Reserve Bank. The reserve
balance requirement as of December 31, 1997 was $37,081,000. In addition,
other cash balances in the amount of $1,562,000 were pledged to secure
clearings with a depository institution as of December 31, 1997.
Lease Commitments - Minimum future commitments on noncancelable operating
leases at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Bank
Fiscal Year Ending Premises Equipment
<S> <C> <C>
1998 $6,295,249 $ 1,997,720
1999 6,323,661 1,661,790
2000 6,058,369 525,269
2001 5,938,891 -
2002 and beyond 30,915,062 -
</TABLE>
Total rent expense was $5,839,000, $901,000, $6,099,000 and $6,605,000 for
the year ended October 31, 1995, the two months ended December 31, 1995,
and the years ended December 31, 1996 and 1997, respectively.
On February 1, 1996, the Company entered into a five year facility
management agreement with a third party provider of duplicating and
delivery services. Under the terms of the agreement, the Company agreed to
pay minimum annual charges of $387,214, $406,788, $427,119, and $35,735 in
the years ended December 31, 1998, 1999, 2000, and 2001, respectively.
These minimum charges can increase due to certain usage thresholds. Service
expense under this contract was $452,463 for the year ended December 31,
1997.
F-26
<PAGE>
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Contingencies - The Company provides global custody, multicurrency
accounting, institutional transfer agency, performance measurement, foreign
exchange, securities lending and mutual fund administration services to a
variety of financial asset managers, including mutual fund complexes,
investment advisors, banks and insurance companies. Assets under custody
and management, held by the Company in a fiduciary capacity, are not
included in the consolidated balance sheets since such items are not assets
of the Company. Management conducts regular reviews of its fiduciary
responsibilities and considers the results in preparing its consolidated
financial statements. In the opinion of management, there are no contingent
liabilities at December 31, 1997 that are material to the consolidated
financial position or results of operations of the Company.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of financial instruments are as
follows at December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
On-balance sheet amounts:
Cash and due from banks $ 19,226 $ 19,226 $ 17,038 $ 17,038
Federal funds sold 120,000 120,000 75,000 75,000
Securities held to maturity 460,010 460,183 802,046 809,708
Securities available for sale 271,121 271,121 462,850 462,850
Loans 66,237 66,237 55,945 55,945
Deposits 596,517 596,517 846,740 846,740
Off-balance sheet amounts:
Commitments to lend ($37,127 and
$62,845 at December 31, 1996 and 1997) -- 37,127 -- 62,845
Interest rate floor contracts
(notional amounts of $30,000 and
$0 at December 31, 1996 and 1997) -- -- -- --
Interest rate swap agreements
(notional amounts of $180,000 and $340,000
at December 31, 1996 and 1997) -- (112,160) -- (357,927)
Foreign exchange contracts
(notional amounts of $114,302 and
$45,884 at December 31, 1996 and 1997) -- -- -- --
</TABLE>
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1996 and 1997.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
significantly revalued for purposes of these consolidated financial
statements since those dates and therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
F-27
<PAGE>
17. FOREIGN EXCHANGE CONTRACTS
A summary of foreign exchange contracts outstanding at December 31, 1996
and December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
Unrealized Unrealized
Currency Purchases Sales Gain/Loss Purchases Sales Gain/Loss
<S> <C> <C> <C> <C> <C> <C>
Hong Kong (HKD) $ 1,807 $ 1,807 -- $ 5,011 $ 5,011 --
Japan (JPY) 40,828 40,828 -- 5,000 5,000 --
France (FRF) 1,093 1,093 -- 4,292 4,292 --
United Kingdom (GBP) 1,873 1,873 -- 3,440 3,440 --
Malaysia (MYR) 6,009 6,009 -- 1,218 1,218 --
Germany (DEM) 2,118 2,118 -- 1,016 1,016 --
Switzerland (CHF) -- -- -- 483 483 --
Singapore (SGD) 331 331 -- 368 368 --
Sweden (SEK) 139 139 -- 317 317 --
Canada (CAD) -- -- -- 278 278 --
Netherlands (NLG) 918 918 -- 271 271 --
Spain (ESP) 85 85 -- 185 185 --
Italy (ITL) 51 51 -- 145 145 --
Other currencies 1,894 1,894 -- 918 918 --
------- ------- ----- ------- ------- -----
$57,146 $57,146 -- $22,942 $22,942 --
------- ------- ----- ------- ------- -----
------- ------- ----- ------- ------- -----
</TABLE>
The maturity of contracts outstanding as of December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Maturity Purchases Sales
<S> <C> <C>
January 1998 $ 17,279 $ 17,279
February 1998 5,663 5,663
</TABLE>
18. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Company's and the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Company and the Bank meet all
capital adequacy requirements to which it is subject.
F-28
<PAGE>
18. REGULATORY MATTERS (CONTINUED)
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Company and the Bank must maintain
minimum total risk-based, Tier I risk based, and Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the Company's or the
Bank's category. The following table presents the capital ratios for the
Bank and the Company for the years ended December 31, 1997 and December 31,
1996. The capital ratios for the Bank were substantially the same as the
capital ratios of the Company for the year ended December 31, 1996.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
-------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk $98,507,386 29.20% $26,984,903 8.00% N/A
Weighted Assets--the Company)
(to Risk
Weighted Assets--the Bank) $96,140,693 28.57% $26,918,947 8.00% $33,648,684 10.00%
Tier I Capital
(to Risk $98,407,386 29.17% $13,492,452 4.00% N/A
Weighted Assets--the Company)
(to Risk
Weighted Assets--the Bank) $96,040,693 28.54% $13,459,473 4.00% $20,189,210 6.00%
Tier I Capital
(to Average Assets--the Company) $98,407,386 6.44% $61,105,815 4.00% N/A
(to Average Assets--the
Bank) $96,040,693 6.31% $60,892,699 4.00% $76,115,874 5.00%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $61,010,892 24.61% $19,833,287 8.00% $24,791,609 10.00%
Tier I Capital
(to Risk Weighted Assets) $60,910,892 24.57% $ 9,916,644 4.00% $14,874,965 6.00%
Tier I Capital
(to Average Assets) $60,910,892 9.68% $25,128,284 4.00% $31,410,355 5.00%
</TABLE>
Under Massachusetts law, trust companies such as the Bank may only pay
dividends out of "net profits" and only to the extent that such payments
will not impair the Bank's capital stock and surplus account. If, prior
to declaration of a dividend, the Bank's capital stock and surplus
accounts do not equal at least 10% of its deposit liabilities, then prior
to the payment of the dividend, the Bank must transfer from net profits
to its surplus account the amount required to make its surplus account
equal to either (i) together with capital stock, 10% of deposit
liabilities, or (ii) subject to certain adjustments, 100% of capital
stock.
F-29
<PAGE>
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Interest income $15,031,602 $16,991,919 $19,117,584 $21,894,824
Interest expense 8,575,466 10,402,357 13,020,232 14,865,176
Noninterest income 18,891,471 19,632,073 21,059,964 23,054,793
Operating expenses 20,252,299 20,976,977 21,752,152 24,380,963
Income before income taxes and
Minority Interest 5,095,308 5,244,658 5,405,164 5,703,478
Income taxes 1,827,581 1,759,506 1,876,470 1,917,895
Minority Interest 258,498 392,835 395,143 390,800
Net income 3,009,229 3,092,317 3,133,551 3,394,783
Basic earnings per share 0.45 0.47 0.47 0.51
Diluted earnings per share 0.44 0.46 0.46 0.49
</TABLE>
F-30
<PAGE>
20. FINANCIAL STATEMENTS OF INVESTORS FINANCIAL SECURITIES CORP. (PARENT ONLY)
The following represents the separate condensed financial statements of
IFSC as of December 31, 1996 and 1997, and for the two-month period ended
December 31, 1995 and the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
Two Months
Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Statements of Income
Equity in undistributed income of bank
subsidiary $ 899,794 $ 7,601,082 $ 11,026,680
Equity in undistributed income of non-
bank subsidiaries (68,154) (107,801) 1,078,094
Dividend income from bank subsidiary -- 478,546 2,142,391
Dividend income from non-bank
subsidiaries -- -- 69,528
Interest expense on subordinated debt -- -- (2,315,271)
Income tax benefit -- -- 908,284
Operating expenses -- (305,666) (279,826)
------------ ------------ ------------
Net income $ 831,640 $ 7,666,161 $ 12,629,880
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
<S> <C> <C>
Assets:
Cash $ -- $ 1,154,645
Investments in bank subsidiary 61,367,783 97,507,587
Investments in non-bank subsidiaries (192,409) 1,545,241
Receivable due from bank subsidiary 493,089 1,455,953
Income tax receivable -- 1,584
Other assets 3,438 5,168
------------- -------------
Total Assets $ 61,671,901 $ 101,670,178
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Accrued expenses $ -- $ 23,426
Other liabilities 5,000 159,576
Subordinated debt -- 25,774,000
------------- -------------
Total Liabilities 5,000 25,957,002
------------- -------------
Stockholders' Equity
Common stock 66,383 66,643
Surplus 54,823,108 55,903,286
Deferred compensation (1,687,675) (1,248,775)
Retained earnings 7,815,786 19,525,129
Net unrealized gains on available for
sale securities 649,299 1,466,893
------------- -------------
Total Stockholders' Equity 61,666,901 75,713,176
------------- -------------
Total Liabilities and Stockholders' Equity $ 61,671,901 $ 101,670,178
------------- -------------
------------- -------------
</TABLE>
F-31
<PAGE>
20. FINANCIAL STATEMENTS OF INVESTORS FINANCIAL SECURITIES CORP. (PARENT ONLY)
(CONTINUED)
<TABLE>
<CAPTION>
Two Months
Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Statements of Cash Flows
Cash flows from operating activities:
Net income $ 831,640 $ 7,666,161 $ 12,629,880
------------ ------------ ------------
Adjustments to reconcile net
income to net cash provided by operating
activities:
Amortization of deferred compensation 76,713 430,112 438,900
Change in assets and liabilities:
Receivable due from bank subsidiary -- (416,376) (962,864)
Income tax receivable -- -- (1,584)
Accrued expenses -- -- 23,426
Other assets -- (3,438) (1,731)
Other liabilities -- 5,000 154,576
Equity in undistributed earnings of
bank subsidiary (976,507) (7,601,082) (11,055,155)
Equity in undistributed earnings of non-bank
subsidiary 68,154 107,801 (1,049,619)
------------ ------------ ------------
Total adjustments (831,640) (7,477,983) (12,454,051)
------------ ------------ ------------
Net cash provided by operating activities -- 188,178 175,829
------------ ------------ ------------
Cash flows from investing activities:
Payments for investments in and
advances to subsidiary (34,120,938) (35,193) (25,000,000)
------------ ------------ ------------
Net cash used by investing activities (34,120,938) (35,193) (25,000,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from common stock 37,950,000 -- --
Costs of stock issuance (3,829,062) 35,193 720,438
Proceeds from issuance of
subordinated debt, net of issuance costs -- -- 25,774,000
Proceeds from exercise of stock options -- 5,148 --
Dividends paid (193,326) (515,622)
------------ ------------ ------------
Net cash provided (used) by financing
activities 34,120,938 (152,985) 25,978,816
------------ ------------ ------------
Net increase in cash and due from banks -- -- 1,154,645
Cash and Due from Banks, beginning of period -- -- --
------------ ------------ ------------
Cash and Due from Banks, end of period $ -- $ -- $ 1,154,645
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-32
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
2.1* Purchase and Sale Agreement dated as of July 17, 1998 by and between
Investors Bank & Trust Company and BankBoston, N.A.
23.1 Consent of Deloitte & Touche LLP
* Confidential treatment requested as to certain portions of the
document, which portions have been omitted and filed separately
with the Securities and Exchange Commission.
<PAGE>
Exhibit 2.1
PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT (this "Agreement") is made as of this
17th day of July, 1998 by and between BankBoston, N.A., a national banking
association (the "Seller"), and Investors Bank & Trust Company, a Massachusetts
trust company (the "Buyer").
WHEREAS, subject to the terms, provisions and conditions set forth
herein, the Buyer wishes to purchase from the Seller, and the Seller wishes to
sell to the Buyer, the Seller's institutional trust and custody business, as
further described herein;
NOW, THEREFORE, in consideration of the foregoing premises and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Seller and the Buyer hereby agree as follows:
1. Definitions. Except as otherwise provided herein, the following
terms shall have the respective meanings indicated when used in this Agreement:
"Actual Receivables" shall mean, as of the Reconciliation Date, the
aggregate total of Receivables which have been invoiced to a customer.
"Accrued Receivables" shall mean the aggregate total of Receivables,
as of the Closing Date, regardless of whether or not such Receivables have been
invoiced to a customer by the Seller on or before the Closing Date.
"Affiliate" means, with respect to any Person, any other Person
controlling, controlled by or under common control with, such Person. As used
in this definition, "control" (including, with its correlative meanings,
"controlled by" and "under common control with") means the possession, directly
or indirectly, of power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
"Agreement" has the meaning set forth in the preamble.
"Apportioned Obligations" has the meaning set forth in Section 3.7.
"Assignment and Assumption Agreement" has the meaning set forth in
Section 4.2(b).
"Assumed Liabilities" has the meaning set forth in Section 2.3.
<PAGE>
"AUA Schedule" has the meaning set forth in Section 5.15 hereof
"Benefit Plans" has the meaning set forth in Section 5. 11.
"Benefits Program" has the meaning set forth in Section 8.4(b).
"Bill of Sale" has the meaning set forth in Section 4.2(a).
"Business" has the meaning set forth in the definition of the term
"Institutional Trust and Custody Business."
"Buyer" has the meaning set forth in the preamble.
"Buyer Noninterest Income" has the meaning set forth in Section 3.4.
"Client Termination Schedule" has the meaning set forth in Section
5.15.
"Closing" has the meaning set forth in Section 4.1.
"Closing Date" has the meaning set forth in Section 4.1.
"Closing Payment" has the meaning set forth in Section 3.3.
"Confidentiality Agreements" means those certain confidentiality
letter agreements dated May 11, 1998 and July 6, 1998 between the parties
hereto.
"Contracts" has the meaning set forth in Section 5.9(a).
"Conversion Team" has the meaning set forth in Section 8.4(a).
"Custody Service Agreements" has the meaning set forth in Section 2. 1
(c).
"Damages" has the meaning set forth in Section 12.4.
"Deferred Amount" has the meaning set forth in Section 3.3.
"Deposit" has the meaning set forth in Section 3.2.
"Deposit Schedule" has the meaning set forth in Section 5.15.
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"Employees" has the meaning set forth in Section 5.11.
"Encumbrance" means any lien, pledge, security interest, license,
easement, conditional sale agreement, title retention agreement, restriction
against transfer or assignment or other encumbrance.
"ERISA" has the meaning set forth in Section 5.11.
"Equipment" has the meaning set forth in Section 2.1(a).
"Excluded Assets" has the meaning set forth in Section 2.2.
"Excluded Businesses" means the Seller's business of providing (a)
investment management advice and related asset administration services and
employee benefit administration services for international, domestic and
institutional private banking, private equity fund and asset management
customers of the Seller, (b) custody and/or trust administration services
outside of the United States; (c) custody and/or trust administration services
to any Benefit Plan of Seller or any Affiliate of Seller or (d) providing real
estate custody services.
"Excluded Clients" means any Excluded Business customer of the Seller.
"Excluded Liabilities" has the meaning set forth in Section 2.4.
"Excluded Receivables" shall mean the portion of all fees payable in
arrears under the Custody Service Agreements which are allocable to the period
prior to the Closing Date, including but not limited to, the right of the
Seller to receive reimbursement of expenses paid by it or any other amounts
accruing to the Seller in connection with the Business prior to the Closing
Date, in each case, which, as of the Closing Date, are more than one-hundred
and twenty (120) days from the date of invoice by Seller to the respective
customer.
"FDIC" means the Federal Deposit Insurance Corporation.
"Final Schedule of Seller Noninterest Income" has the meaning set forth
in Section 3.4(a).
"Indemnified Party" has the meaning set forth in Section 12.3(a).
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"Indemnifying Party" has the meaning set forth in Section 12.3(a).
"Institutional Trust and Custody Business" or "Business" means the
Seller's business of providing, as custodian or directed (non-discretionary)
trustee, global trust and custody services in the United States, including but
not limited to, core custody, safekeeping of assets, income collection, trade
settlement and proxy administration services to pension and profit sharing
fund, municipality, mutual fund, financial institution and other institution
customers, all of whom conduct business primarily in the United States, but
shall not include the Excluded Businesses.
"Intellectual Property" has the meaning set forth in Section 2.1(i).
"Material Adverse Effect" means (a) with respect to the Seller, a
material adverse effect on the business, assets, financial condition or results
of operations of the Business or a material adverse effect on the ability of the
Seller to perform its obligations under this Agreement; provided, however that
any material adverse effect on the business, assets, financial condition or
results of operations of the Business resulting directly or indirectly from
changes in the general level of the securities markets and interest rates
affecting the Business or changes in the economic, financial or market
conditions affecting institutional custodial businesses generally, shall not
constitute a Material Adverse Effect, and (b) with respect to the Buyer, a
material adverse effect on the ability of the Buyer to perform its obligations
under this Agreement or to operate the Business after the Closing Date or
perform its obligations under the Outsourcing Agreement; provided, however that
any material adverse effect on Buyer resulting directly or indirectly from
changes in the general level of the securities markets and interest rates
affecting Buyer or changes in the economic, financial or market conditions
affecting institutional custodial businesses generally, shall not constitute a
Material Adverse Effect.
"Miscellaneous Contracts" has the meaning set forth in Section 2.1(e).
"Offered Employees" has the meaning set forth in Section 8.4(a).
"Original Clients" shall mean those clients of the Business as of the
Closing Date.
"Outsourcing Agreement" means that certain Outsourcing Agreement,
dated as of the date hereof, by and between Buyer and Seller, pursuant to which
Buyer shall provide to the Seller, in connection with the Excluded Business,
certain trust and custody services after the Closing Date.
"Outsourcing Team" has the meaning set forth in Section 8.4(a) hereof
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"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other legal entity, or any governmental agency or political
subdivision thereof.
"Personal Property Leases" has the meaning set forth in Section 2.1(b).
"Preliminary Schedule of Seller Noninterest Income" has the meaning
set forth in Section 3.4(a) hereof.
"Purchase Price" has the meaning set forth in Section 3. 1.
"Purchased Assets" has the meaning set forth in Section 2.1.
"Receivables" shall mean the portion of all fees payable in arrears
under the Custody Service Agreements which are allocable to the period prior to
the Closing Date, including but not limited to, the right of the Seller to
receive reimbursement of expenses paid by it or any other amounts accruing to
the Seller in connection with the Business prior to the Closing Date, but shall
not include the Excluded Receivables.
"Reconciliation Date" has the meaning set forth in Section 3.8 hereof
"Related Agreements" means the Transitional Services Agreement, the
Outsourcing Agreement, the Interim Lease Agreement, the Bill of Sale, the
Assignment and Assumption Agreement and the Confidentiality Agreement.
"Required Regulatory Approvals" has the meaning set forth in Section 11
(a) (ii).
"Retention Percentage" means the percentage determined by dividing (a)
Buyer Noninterest Income by (b) Seller Noninterest Income.
"Schedule of 1997 Noninterest Income" has the meaning set forth in
Section 5.15.
"Schedule of Accrued Receivables" has the meaning set forth in Section
3. 1.
"Schedule of Buyer Noninterest Income" has the meaning set forth in
Section 3.4(b).
"Seller" has the meaning set forth in the preamble.
"Seller Noninterest Income" has the meaning set forth in Section 3.4.
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"Subject Damages" has the meaning set forth in Section 12.6.
"Tax" means any federal, state, local or foreign income, profits,
gains, gross receipts, franchise, estimated, alternative minimum, add-on
minimum, sales, use, transfer, registration, value added, excise, natural
resources, telecommunications, severance, stamp, occupation, premium, windfall
profit, environmental (including Section 59A of the Internal Revenue Code of
1986, as amended), customs, duties, real property, personal property, capital
stock, intangibles, social security, employment, unemployment, disability,
payroll, license, employee or other tax, withholding tax, or other governmental
assessment, charge, duty, or levy, of any kind whatsoever, including any
interest, penalties or additions to tax in respect of the foregoing.
"Transfer Dates" has the meaning set forth in Section 8.4(a).
"Transferred Employees" has the meaning set forth in Section 8.4(a).
"Transitional Services Agreement" means one or more transitional
services agreements to be entered into on the Closing Date by Buyer and Seller,
in the forms attached hereto as Schedule 4.2(c) hereto.
"Unassigned Custody Service Agreements" has the meaning set forth in
Section 13.1.
"Updated AUA Schedule" has the meaning set forth in Section 5.15.
"Update Client Termination Schedule" has the meaning set forth in
Section 5.15.
"Updated Deposit Schedule" has the meaning set forth in Section 5.15.
"Updated Schedules" has the meaning set forth in Section 2.5.
"WARN Act" has the meaning set forth in Section 8.4(a).
2. Purchase and Sale of Business.
2.1. Purchase and Sale. Subject to the terms, provisions and
conditions set forth herein, the Seller hereby agrees to sell, assign, transfer
and convey to the Buyer, and the Buyer hereby agrees to purchase, acquire and
accept from the Seller, free and clear of all Encumbrances, on the Closing
Date, all of the Seller's right, title and interest in, to and under the
following assets relating to the Seller's Institutional Trust and Custody
Business, but excluding the Excluded Assets (collectively, the "Purchased
Assets"):
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(a) Any and all fixtures, machinery, equipment, furniture,
supplies and other personal property used solely in conjunction with
the operation of the Business and separable from the Seller's other
businesses, as set forth on Schedule 2.1(a) hereto (the "Equipment");
(b) Any and all leases of personal property used solely in
conjunction with the operation of the Business, as set forth on
Schedule 2.1(b) hereto (the "Personal Property Leases");
(c) Any and all contracts with customers relating to the
Business, as set forth on Schedule 2.1(c) hereto (collectively, the
"Custody Service Agreements");
(d) Any and all miscellaneous contracts of the Seller relating
solely to the Business and listed on Schedule 2.1(d) hereto (the
"Miscellaneous Contracts");
(e) (i) Copies of any and all accounting books, records,
ledgers and client lists of the Business, and (ii) originals of the
Custody Service Agreements and the Contracts;
(f) the Receivables;
(g) Any and all rights of Seller in connection with prepaid
expenses related to the Business and allocable to the period from and
after the Closing Date;
(h) Any and all rights of Seller in and to advances from
customers of the Seller for expenses related to the Business that are
not incurred by the Seller prior to the Closing Date;
(i) third party indemnities and any insurance claims or rights
relating solely to the Purchased Assets or the Assumed Liabilities, and
all claims, credits, causes of action, choses in action, rights of
recovery, and rights of set-off of any kind pertaining to any Assumed
Liability or, with respect to the period commencing on the Closing
Date, any Custody Service Agreement or Contract;
(j) the right to represent to third parties that Buyer is the
successor to the Business; and
(k) the know-how of the Transferred Employees.
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2.2. Excluded Assets. Except as expressly set forth in Section 2.1
above, the Seller is not selling and the Buyer is not purchasing any other
assets of the Seller (the "Excluded Assets"). Notwithstanding anything in
Section 2.1 hereof, the term "Purchased Assets" shall not include any of the
following assets, each of which shall be an Excluded Asset:
(a) Any cash held by the Seller at Closing, other than cash
held by Seller pursuant to the terms of a Custody Service Agreement;
(b) Any rights in any of the Seller's trade names, service
marks, logos or similar corporate identification, or any stationery,
office supplies, business forms, manuals or similar property bearing
any of the same, unless the same shall have been redacted therefrom;
(c) Any income tax refunds or claims therefor which the Seller
may be entitled to receive from any federal, state or local authorities
(d) Any rights of the Seller under the Custody Service
Agreements, the Contracts or any of the other Purchased Assets to fees,
indemnification or reimbursements, or any other claims or rights of the
Seller under such agreements or assets, in each case relating to the
conduct of the Business prior to the Closing, except as they relate to
any Assumed Liabilities and excluding any Receivables;
(e) Any rights to any security deposits or other amounts
deposited with any state or other jurisdiction or regulatory authority
in connection with the qualification, certification, licensing or
permitting of the Seller in connection with the conduct of the Seller's
businesses, including, without limitation, the Business;
(f) Any consideration received by the Seller pursuant to this
Agreement;
(g) Any rights of the Seller under this Agreement;
(h) Any Benefit Plan, any rights of the Seller under any
Benefit Plan, and any pension funds or other assets held pursuant to
the terms of any Benefit Plan;
(i) Any assets held in trust, custody or managed by the Seller
for Excluded Clients; and
(j) the Excluded Receivables.
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2.3. Assumed Liabilities. Subject to the terms, provisions and
conditions set forth herein, on the Closing Date, the Buyer shall assume and
agree to pay, perform and discharge all liabilities and obligations of the
Seller described below (the "Assumed Liabilities"), and from and after the
Closing Date, the Buyer shall pay, perform and discharge the Assumed
Liabilities as they become due. The Assumed Liabilities shall consist of the
following:
(a) Any and all liabilities and obligations of Seller under the
Custody Service Agreements and the Contracts, in each case arising after the
Closing; and
(b) Any and all other liabilities and obligations relating to the
Purchased Assets and arising after the Closing out of the operation of the
Business or otherwise relating to or arising out of the operation of the
Business from and after the Closing Date.
2.4. Excluded Liabilities. Except as expressly set forth in Section
2.3 above, the Buyer is not assuming or agreeing to pay, perform or discharge
any liabilities or obligations of the Seller, including but not limited to any
liabilities with respect to the Excluded Assets, the Excluded Business and the
following liabilities (the "Excluded Liabilities"):
(a) Any and all liabilities and obligations under the Custody
Service Agreements and the Contracts, in each case arising prior to the
Closing Date;
(b) Any and all liabilities and obligations relating to the
Purchased Assets and arising out of the operation of the Business prior
to the Closing Date or otherwise relating to or arising out of the
operation of the Business prior to the Closing Date;
(c) Except as provided in Section 8.4 hereof, any and all
liabilities and obligations arising out of the employment and/or
termination of employment of any employee of Seller or any of its
Affiliates at any time;
(d) Except as provided in Section 8.4 hereof, any and all
liabilities and obligations under, or with respect to, any employee
benefit plan, program, contract or arrangement covering past or present
employees of Seller or any of its Affiliates or the Business and/or
their beneficiaries, including, without limitation, the Benefit Plans;
(e) Any and all liabilities and obligations relating to any
claims, dispute or litigation asserted or threatened or governmental
proceedings or investigation instituted or threatened, arising out of,
or in connection with, any alleged violation
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or noncompliance by Seller of, or failure to perform, any obligations
imposed upon Seller in its conduct of the Business under any statute,
rule, regulation or ordinance of any nature whatsoever, including
without limitation, those pertaining to protection of the environment,
employee or occupational safety and health, wage and hour, civil
rights, customs and export control and zoning, which alleged violation,
noncompliance or failure to perform occurred or existed on or prior to
the Closing Date, but only to the extent of such pre-existing
violation, noncompliance or failure to perform;
(f) All liabilities and obligations for infringement or
misappropriation arising from the use of the Intellectual Property by
Seller or any of its customers on or prior to the Closing Date; and
(g) Except as set forth in Sections 3.7 and 3.8 hereof, any
and all liabilities and obligations of Seller or any of its Affiliates
for Taxes of any kind or nature, and with respect to the Business or
the Purchased Assets, all liabilities of any kind or nature (including
Taxes that arise out of the transactions contemplated by this
Agreement) relating to Taxes attributable to any period ending prior to
the Closing Date.
2.5. Updated Schedules. The Seller shall update all of the Schedules
attached to this Agreement to the extent necessary to reflect any non-material
changes in the Purchased Assets occurring prior to the Closing in the ordinary
course of business or any other changes in the Purchased Assets or the Excluded
Assets as may be agreed upon in writing by the parties hereto. The Seller shall
deliver to the Buyer such updated Schedules (the "Updated Schedules") on or
prior to the Closing Date, and any such Updated Schedule as adjusted shall be
deemed to be the definitive Schedule with regard to the information contained
therein for all purposes of this Agreement, including, without limitation, the
specification of the assets intended to be purchased and sold under the terms
of this Agreement.
3. Purchase Price and Proration.
3.1. Purchase Price. In consideration of the transfer of the Purchased
Assets by the Seller to the Buyer hereunder, the Buyer agrees to assume the
Assumed Liabilities and to pay to the Seller an amount, subject to adjustment
pursuant to Sections 3.4 and 7.4 hereof, equal to the sum of (a) Fifty Million
Dollars ($50,000,000), plus (b) the aggregate total of Accrued Receivables as
of the Closing Date as reflected on the books of Seller and as set forth on a
schedule to be delivered by Seller to Buyer on the Closing Date (the "Schedule
of Accrued Receivables" (collectively, (a) and (b) are hereinafter referred to
as, the "Purchase Price").
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
3.2. Deposit. Simultaneously herewith, and in consideration for the
Seller's entering into this Agreement, the Buyer has paid to the Seller the sum
of $1,000,000 (the "Deposit"), which Deposit shall be credited against the
Closing Payment and the Purchase Price. In the event that this Agreement is
terminated by Seller pursuant to Section 11(a)(iii) hereof, or, in the event
that, on or after September 30, 1998, if all of the conditions to Closing set
forth in Section 9 have been satisfied and Buyer shall have failed to
consummate the Closing, other than by reason of the Buyer having failed to
receive a Required Regulatory Approval, Seller shall be entitled to retain the
Deposit provided that Seller is not in material breach of any representation,
warranty, covenant or other agreement contained herein.
3.3. Payment at Closing. On the Closing Date, Buyer shall pay to
Seller by federal funds wire transfer to such account(s) as shall be identified
by the Seller by written notice to the Buyer prior to the Closing Date, an
amount (the "Closing Payment") equal to (a) the Purchase Price, less (b)
$6,000,000 (the $6,000,000 hereinafter referred to as the "Deferred Amount").
3.4. Contingent Payment.
(a) On the Closing Date, Seller shall deliver to Buyer a
schedule (the "Preliminary Schedule of Seller Noninterest Income") setting
forth (i) a list of*********************and (ii)***********************
****************************************************************************
***************************************************************************
**********************************("Seller Noninterest Income"). On the date
which is ninety (90) days after the Closing Date, Seller shall deliver to Buyer
an updated Schedule of Seller Noninterest Income (the "Final Schedule of Seller
Noninterest Income") setting forth the amount of Seller Noninterest Income for
******************************************************. Seller represents and
warrants to Buyer that the Final Schedule of Seller Noninterest Income to be
delivered by Seller pursuant to this Section 3.4(a) will accurately reflect the
*****************and Seller Noninterest Income*********************************
*************************.
(b) On a date within ninety (90) days after the first
anniversary of the Closing Date, Buyer shall deliver to Seller a schedule (the
"Schedule of Buyer Noninterest Income") setting forth (i)**************
**************************************************************************
******************************************************************************
***********************************************************("Buyer Noninterest
Income") and (ii) Buyer's determination of the Retention Percentage. Buyer
represents and warrants to Seller that the Schedule of Buyer Noninterest Income
to be delivered by Buyer pursuant to this Section 3.4(b) will
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
accurately reflect********************and Buyer Noninterest Income********.
***********************************************. On the date which is five (5)
Business Days after delivery of the Schedule of Buyer Noninterest Income, Buyer
shall pay to Seller, the Contingent Payment, plus interest on the Contingent
Payment for each day from the Closing Date to the date of payment, such interest
to be calculated at the effective federal funds rate. The Contingent Payment
shall be determined in the following manner: If the Retention Percentage is
greater than or equal to****, the Contingent Payment shall be $6,000,000. If the
Retention Percentage is less than*****but greater than or equal to****, the
Contingent Payment shall be the amount equal to the product of (x) the Deferred
Amount, multiplied by (y) the Retention Percentage. If the Retention Percentage
is less than****, there shall be no Contingent Payment; provided, however, that
in the event Seller has made or is required to make a payment to Buyer pursuant
to Section 7.4 hereof, for purposes of determining the Retention Percentage in
accordance with this Section 3.4,********************************************
*******************************************************************************
**************************************.
3.5. Proration of Income and Expenses. Except as otherwise
specifically provided in this Agreement, items of income and expense shall be
prorated as of the Closing and settled between Seller and Buyer on the Closing
Date, whether or not such adjustment would normally be made as of such time.
Items of proration will be handled on the Closing Date as an adjustment to the
Purchase Price unless otherwise agreed by the parties hereto. Notwithstanding
the foregoing, if accurate arrangements cannot be made as of the Closing Date
for any items of proration, the parties shall apportion the charges or receipts
for such items on the basis of the charges or receipts for the most recent
applicable period prior to the Closing, and the Seller and the Buyer shall
promptly, and in any event within thirty (30) days after the Closing, readjust
the apportionments in accordance with the charges or receipts for the first
applicable period after the Closing.
3.6. Allocation. The Purchase Price shall be allocated among the
Purchased Assets in accordance with Schedule 3.6 to be mutually agreed upon by
the parties hereto and to be made a part of this Agreement not less than ten
(10) days prior to the Closing Date. Seller and Buyer shall adhere to the
allocation of the Purchase Price for all purposes including any federal,
foreign, state, country or local income Tax return filed by them subsequent to
the Closing Date.
3.7. Apportionment of Taxes. All real property Taxes, personal
property Taxes and similar ad valorem obligations levied with respect to the
Purchased Assets for a taxable period which includes (but does not end on)
the Closing Date (collectively, the "Apportioned Obligations") shall be
apportioned between Buyer and Seller based on the number of days of such
taxable period that includes the operations of the Business on and
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after the Closing Date and the number of the days of such taxable period that
includes the operations of the Business prior to the Closing Date. Seller shall
be liable for the proportionate amount of such Taxes that is attributable to the
number of days of such taxable period that includes the operations of the
Business prior to the Closing Date and Buyer shall be liable for the
proportionate amount of such Taxes that is attributable to the number of days of
such taxable period that includes the operations of the Business on and after
the Closing Date. If one party receives any bill for an Apportioned Obligation,
such party shall timely pay the amount owed and promptly deliver such bill to
the other party together with the amount of reimbursement to which the
presenting party is entitled along with such supporting evidence as is
reasonably necessary to calculate the amount of reimbursement. The other party
shall make such reimbursement promptly but in no event later than thirty (30)
days after the presentation of a statement setting forth the amount owed and the
supporting evidence satisfying the requirements of the preceding sentence.
3.8. Transfer Taxes. Subject to Section 3.7 hereof, all sales,
transfer and other similar taxes payable in connection with the sale
contemplated hereby other than income taxes and other similar taxes imposed
upon the receipt of income by Seller shall be borne by the Buyer.
3.9. Receivables. Buyer acknowledges that on or before the Closing
Date, not all of the Receivables set forth on the Schedule of Accrued
Receivables will be Actual Receivables and that, pursuant to the Transitional
Services Agreements, Seller shall be responsible for invoicing to customers
Receivables for the period prior to the Closing Date. Within ninety (90) days
after the Closing Date, the Seller shall deliver to Buyer a schedule, together
with such other documentation as Buyer shall reasonably request, setting forth
the aggregate total of Actual Receivables for the period prior to the Closing
Date. On the date which is five (5) days after delivery of such schedule (the
"Reconciliation Date"), Buyer shall pay to Seller, by wire transfer of
immediately available funds to a bank account designated in writing by Seller
prior to the Reconciliation Date, the amount, if any, by which the Actual
Receivables exceeds the Accrued Receivables or, in the event that the aggregate
total of Accrued Receivables exceeds the aggregate total of Actual Receivables,
Seller shall pay to Buyer, by wire transfer of immediately available funds to a
bank account designated in writing by Buyer prior to the Reconciliation Date,
the amount of such excess, if any.
4. The Closing.
4.1. Closing Time and Place. Subject to the provisions of Sections 9,
10 and 11 hereof, the consummation of the transactions contemplated by this
Agreement shall take place at a closing (the "Closing") to be held at 10:00
a.m. at the Boston, Massachusetts offices of Bingham Dana LLP, as soon as
practicable, and in no event
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more than five (5) business days, after the date on which all of the conditions
contained in Sections 9 and 10 hereof have been satisfied or waived or at such
other place, day and time as the parties hereto may mutually agree in writing;
provided, that the parties shall use reasonable efforts to cause the Closing to
occur on or before September 30, 1998. The date on which the Closing hereunder
occurs is sometimes referred to herein as the "Closing Date". Notwithstanding
the first sentence of this Section 4.1, for all purposes of this Agreement,
including, without limitation, the provisions of Sections 2 and 3 above, the
consummation of the transactions contemplated by this Agreement and the
corresponding effectiveness of the Closing shall be deemed to occur at 12:01
A.M. on the Closing Date.
4.2. Seller Deliveries. On the Closing Date, Seller shall deliver to
Buyer:
(a) A bill of sale for the Purchased Assets in the form of
Schedule 4.2(a) hereto (the "Bill of Sale");
(b) An assignment and assumption agreement with respect to the
Assumed Liabilities in the form of Schedule 4.2(b) hereto (the
"Assignment and Assumption Agreement");
(c) Transitional Services Agreement;
(d) The Officer's Certificate described in Section 9.3 hereof,
(e) the Preliminary Schedule of Seller Noninterest Income;
(f) the Updated AUA Schedule;
(g) the Updated Client Termination Schedule;
(h) the Updated Deposit Schedule;
(i) Legal opinions of Bingham Dana LLP and in-house counsel of
Seller (which may be from the General Counsel or Assistant General
Counsel of Seller) in form and substance reasonably satisfactory to
Buyer and customary in transactions of the type contemplated by this
Agreement; and
(j) Such other documents necessary to effect the transactions
contemplated hereby as may be customary in transactions of this type
and which the Buyer shall reasonably request.
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4.3. Buyer Deliveries. On the Closing Date, Buyer shall deliver to
Seller:
(a) The Assignment and Assumption Agreement;
(b) Transitional Services Agreement;
(c) The Officer's Certificate described in Section 10.3
hereof,
(d) A legal opinion of Testa, Hurwitz & Thibeault, LLP in form
and substance reasonably satisfactory to Seller and customary in
transactions of the type contemplated by this Agreement; and
(e) Such other documents necessary to effect the transactions
contemplated hereby as may be customary in transactions of this type
and which the Seller shall reasonably request.
5. Representations and Warranties of the Seller. As of the date hereof
and (except to the extent the following representations and warranties
specifically relate to a prior date or period) as of the Closing Date, the
Seller hereby represents and warrants to the Buyer as follows in this Section
5, which for all purposes shall be deemed to include the Schedules hereto:
5.1. Organization, Etc. The Seller is a duly organized and validly
existing national banking association, and has all requisite power and
authority to own and operate the Purchased Assets, to carry on the Business as
now conducted, to enter into this Agreement and the Related Agreements to which
it is a party and to perform its obligations hereunder and thereunder.
5.2. Authority; Compliance with Other Instruments. The execution,
delivery and performance by the Seller of this Agreement and each of the Related
Agreements to which it is a party have been duly authorized by all necessary
action on the part of the Seller and will not result in any violation of or
conflict with or constitute a default under (a) any term of the charter or
by-laws or other constitutive documents of the Seller or (b) except for Required
Regulatory Approvals and consents required to transfer the Custody Service
Agreements and the Contracts, as set forth on Schedule 5.5 hereto, any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to the Seller, the Business or the Purchased Assets, or
otherwise result in the creation of any Encumbrance upon any of the Purchased
Assets, except for any such violation, conflict or default under clause (b)
above or any such Encumbrance which shall not have a Material Adverse Effect.
This Agreement has been duly executed and delivered by the Seller and
constitutes, and each Related Agreement to which the Seller is
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<PAGE>
a party constitutes or, when executed and delivered by it, will constitute, the
legal, valid and binding obligation of the Seller, enforceable against the
Seller in accordance with the terms hereof and thereof, except as enforcement
thereof may be limited by receivership, conservatorship, and supervisory powers
of bank regulatory authorities generally as well as bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or similar laws of general
applicability relating to or affecting creditors' rights or to general equity
principles (regardless of whether such matters are considered in a proceeding in
equity or at law) and the availability of equitable remedies.
5.3. Title to Purchased Assets. The Seller is the lawful owner of all
of the Purchased Assets, free and clear of any Encumbrance, except for such
restrictions or encumbrances which do not materially and adversely effect the
use of the Purchased Assets or which otherwise do not materially impair the
value of the Purchased Assets, and, except for consents required to transfer the
Custody Service Agreements and the Contracts, as set forth on Schedule 5.5
hereto, has the right to sell, convey, transfer, assign and deliver to Buyer all
of the Purchased Assets. There are no filings under the Uniform Commercial Code
or any similar statute in any jurisdiction showing the Seller as debtor which
create or perfect or which purport to create or perfect any Encumbrance in or on
any of the Purchased Assets. The Purchased Assets, together with the Excluded
Assets, include all of the assets, properties or other rights which are used in,
held for, or form a part of, the Business as presently conducted. Each of the
Purchased Assets which consists of tangible personal property is fit for the
purposes for which it was intended and is in good operating condition and
repair, ordinary wear and tear excepted. All of the Purchased Assets are located
at Seller's place of business in Canton, Massachusetts.
5.4. Required Regulatory Approvals. Except as set forth on Schedule 5.4
hereto, no consent, approval or authorization of, or registration, qualification
or filing with or notice to, any governmental agency or authority is required
for the execution and delivery of this Agreement by the Seller or for the
consummation by the Seller of the transactions contemplated hereby. The Seller
has no knowledge of any fact or circumstance relating to the Seller that is
reasonably likely to materially impede or delay receipt of any Required
Regulatory Approval.
5.5. Third Party Consents. Except as set forth on Schedule 5.5 hereto,
no consent, approval or authorization of, or notice to, any nongovernmental
third party is required for the execution and delivery of this Agreement by the
Seller or for the consummation by the Seller of the transactions contemplated
hereby.
5.6. Insurance. The Seller maintains insurance with respect to the
Business and the Purchased Assets of the kinds, with respect to the risks, and
in such amounts as are described on Schedule 5.6 hereto.
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5.7. Compliance with Laws. The Seller is, and after giving effect to
the transactions contemplated hereby will be, in compliance with all laws,
regulations, judgments, orders and decrees applicable to the Business and the
Purchased Assets, except for such violations of law that singly or in the
aggregate would not have a Material Adverse Effect.
5.8. Litigation. Except as set forth on Schedule 5.8 hereto, no civil,
criminal or administrative action, hearing, proceeding, suit, demand, claim
(including employee or employment claims) or investigation is as of the date of
this Agreement pending or, to the knowledge of the Seller, threatened, against
the Seller or any of its directors or officers which questions the validity of
this Agreement or challenges any of the transactions contemplated hereby or
otherwise relates to the Business or any of the Purchased Assets or Assumed
Liabilities, except for any such action, hearing, proceeding, suit, demand,
claim or investigation that singly or in the aggregate would not have a Material
Adverse Effect.
5.9. Certain Contracts.
(a) Each of the Personal Property Leases and Miscellaneous
Contracts (the "Contracts") is a valid, binding and enforceable
obligation of the Seller and, to the knowledge of the Seller, of the
other party or parties thereto, except as enforcement thereof may be
limited by receivership, conservatorship, and supervisory powers of
bank regulatory authorities generally, where applicable, as well as
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
or similar laws of general applicability relating to or affecting
creditors' rights or to general equity principles (regardless of
whether such matters are considered in a proceeding in equity or at
law) and the availability of equitable remedies, and each Contract is
in full force and effect.
(b) Except as set forth on Schedule 5.9(b), neither the Seller
nor, to the knowledge of the Seller, the other party or parties to any
Contract, is in breach of any term of any Contract, and no event has
occurred or failed to occur which event or failure would, with the
passage of time or the giving of notice or both, be a breach of any
term of any Contract, except in any such case for any breaches that
singly or in the aggregate would not have a Material Adverse Effect.
5.10. Custody Service Agreements.
(a) Schedule 2.1(c) hereto sets forth a list of the customers
of the Business who generated revenue of $4,000 or more during 1997.
Each of such customers is
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a party to a Custody Service Agreement that is a valid, binding and
enforceable obligation of the Seller and, to the knowledge of the
Seller, of the other party or parties thereto, except as enforcement
thereof may be limited by receivership, conservatorship, and
supervisory powers of bank regulatory authorities generally, where
applicable, as well as bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar laws of general applicability
relating to or affecting creditors' rights or to general equity
principles (regardless of whether such matters are considered in a
proceeding in equity or at law) and the availability of equitable
remedies, and each Custody Service Agreement is in full force and
effect.
(b) Except as set forth on Schedule 5.10(b), neither the
Seller nor, to the knowledge of the Seller, the other party or parties
to any Custody Service Agreement, is in breach of any term of any
Custody Service Agreement, and no event has occurred or failed to occur
which event or failure would, with the passage of time or the giving of
notice or both, be a breach of any term of any Custody Service
Agreement, except in any such case for any breaches that singly or in
the aggregate would not have a Material Adverse Effect.
5.11. Employees, Benefit Plans. The Seller has made available to the
Buyer a list of all employees of the Business (the "Employees"), showing for
each the position held as of the date hereof, the date of hire, the regular
work schedule, and current salary. None of the Employees is covered by any
collective bargaining or similar agreement. There is no strike or other labor
dispute pending or, to the knowledge of the Seller, threatened, against the
Seller which would have a Material Adverse Effect on the Seller or the Buyer.
Seller has previously provided to Buyer a list of all of Seller's employee
pension benefit plans within the meaning of Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), including all
pension, retirement, profit-sharing, and employee stock ownership plans, all
employee welfare benefit plans within the meaning of Section 3(l) of ERISA,
including all vacation, sick leave, medical, hospitalization, life insurance
and other insurance plans, and all deferred compensation, bonus, stock option,
stock purchase and incentive plans or other arrangements whether written or
oral, in each case, pertaining to the Employees (collectively, the "Benefit
Plans"). All of Seller's Benefit Plans are in material compliance with
applicable laws and regulations and, to the extent any such plans are intended
to be tax-qualified, such plans are so qualified. Seller agrees that it will
timely provide such notices and certificates to the Transferred Employees as
may be required by Sections 4980B and 9801 of the Internal Revenue Code of
1986, and the Treasury Regulations thereunder.
5.12. Broker Agreements. Except as set forth on Schedule 5.12 hereto,
neither the Seller nor any Affiliate of the Seller has employed or is subject
to any valid claim of
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any broker, finder, consultant or other intermediary in connection with the
transactions contemplated by this Agreement who would be entitled to any
commission or broker's or finder's fee in connection with the transactions
contemplated hereby.
5.13. Receivables. Each of the Receivables represents a claim for
payment for the bona fide performance of services by Seller, arose in the
ordinary course of Business, and is and will be paid in full not later than 120
days after the date such Receivables are invoiced to the respective customer. To
the knowledge of the Seller, the Receivables are not subject to customer or
other claims, offsets or adjustments and represent the legal, valid and binding
obligations of such customers, enforceable against such customers in accordance
with the terms of the applicable Custody Service Agreement, except as
enforcement thereof may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium or similar laws of general applicability
relating to or affecting creditors' rights or to general equity principles
(regardless of whether such matters are considered in a proceeding in equity or
at law) and the availability of equitable remedies.
5.14. Intentionally Omitted.
5.15. Customers. Schedule 5.15(i) attached hereto sets forth a complete
and accurate list (the "Schedule of 1997 Noninterest Income") of all customer
accounts of the Business as of December 31, 1997, together with the noninterest
income generated by Seller from such customers for the twelve (12) month period
ended December 31, 1997. The Preliminary Schedule of Seller Noninterest Income
to be delivered at Closing pursuant to Section 3.4(a) hereto will accurately
reflect the accounts of the Original Clients and Seller Noninterest Income as of
the last day of a month not more than ninety days prior to the Closing Date.
Schedule 5.15(ii) attached hereto sets forth a complete and accurate list, by
customer account, of the amount of assets under administration of the Business
(the "AUA Schedule"), as of May 31, 1998. The AUA Schedule to be delivered at
Closing pursuant to Section 4.2(f) hereof will accurately reflect a list, by
customer account, of the amount of assets under administration of the Business
as of the month end prior to Closing (the "Updated AUA Schedule"). Schedule
5.15(iii) attached hereto sets forth, as of June 30, 1998, a list (the "Client
Termination Schedule ") of those customers of the Business, whose average annual
revenues exceeded $5,000, who have terminated or given written notice of
termination to Seller, after December 31, 1997 and through and including June
30, 1998, of the applicable Custody Service Agreement between Seller and such
customer. The update to the Client Termination Schedule to be delivered at
Closing pursuant to Section 4.2(g) hereof will accurately reflect a list of
those customers of the Business, whose average annual revenues exceeded $5,000,
who have terminated or given written notice of termination to Seller as of the
month end prior to Closing, of the applicable Custody Service Agreement between
Seller and such customer (the "Updated Client Termination Schedule "). To the
Seller's knowledge, which for purposes
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of this sentence shall be limited to the actual knowledge of those individuals
set forth on Schedule 5.17(b) hereto, except as set forth on Schedule 5.15(iii)
hereto, no customer of the Business whose average annual revenues exceeded
$5,000 has provided notice of termination of such customer's Custody Service
Agreement to Seller. Schedule 5.15(iv) attached hereto accurately reflects the
average amount of deposits (the "Deposit Schedule ") held by Seller on behalf of
customers of the Business, for the periods set forth thereon. The Deposit
Schedule to be delivered at Closing pursuant to Section 4.2(h) hereof will
accurately reflect the average amount of deposits held by Seller on behalf of
customers of the Business, for the month end prior to Closing (the "Update
Deposit Schedule").
5.16. Taxes. Except as set forth in Schedule 5.16, with respect to the
six taxable years ending December 31, 1997, no governmental authority has
challenged in any audit, suit, proceeding, claim or examination the federal or
state income Tax treatment of the Purchased Assets or the results of operation
of the Business, and no audit, suit, proceeding, claim or examination of the
federal or state income Tax treatment of the Purchased Assets or the results of
operation of the Business is pending or, to the knowledge of Seller, threatened.
5.17. Absence of Other Warranties. Except as and to the extent of the
representations and warranties expressly set forth in Article 5 of this
Agreement, the Seller (a) makes no representations or warranties whatsoever in
connection with the transactions contemplated hereby, and (b) disclaims any
liability and responsibility for any negligent representation, warranty,
statement or information otherwise made or communicated, by oversight or
otherwise (orally or in writing), to the Buyer in connection with the
transactions contemplated hereby (including without limitation, any opinion,
information, projection, statement or advice which may have been provided to the
Buyer by any employee, officer, agent, stockholder or other representative of
the Seller in connection with the transactions contemplated hereby).
For purposes of this Agreement, the term "knowledge of the Seller" or
similar qualifiers shall be limited to the actual knowledge of any of those
officers and employees of Seller listed on Schedule 5.17(a) hereto.
6. Representations and Warranties of the Buyer.
As of the date hereof and (except to the extent the following
representations and warranties specifically relate to a prior date or period) as
of the Closing Date, the Buyer hereby represents and warrants to the Seller as
follows in this Section 6, which for all purposes shall be deemed to include the
Schedules hereto:
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6.1. Organization, Etc. The Buyer is a duly organized and validly
existing Massachusetts trust company and has all requisite power and authority
to enter into this Agreement and the Related Agreements to which it is a party,
and to perform its obligations hereunder and thereunder.
6.2. Authority; Compliance with Other Instruments. The execution,
delivery and performance by the Buyer of this Agreement and each of the Related
Agreements to which it is a party have been duly authorized by all necessary
corporate action on the part of the Buyer and will not result in any violation
of or conflict with or constitute a default under (a) any term of the charter
or by-laws or other constitutive documents of the Buyer or (b) except for
Required Regulatory Approvals, any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to the Buyer or
otherwise result in the creation of any Encumbrance upon any of the properties
or assets of the Buyer, except for any such violation, conflict or default
under clause (b) above or any such Encumbrance which shall not have a Material
Adverse Effect. This Agreement has been duly executed and delivered by the
Buyer and constitutes, and each Related Agreement to which the Buyer is a party
constitutes or, when executed and delivered by it, will constitute, the legal,
valid and binding obligation of the Buyer, enforceable against the Buyer in
accordance with the terms hereof and thereof except as enforcement thereof may
be limited by receivership, conservatorship, and supervisory powers of bank
regulatory authorities generally as well as bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium or similar laws of general applicability
relating to or affecting creditors' rights or to general equity principles
(regardless of whether such matters are considered in a proceeding in equity or
at law) and the availability of equitable remedies.
6.3 Required Regulatory Approvals. Except as set forth on Schedule 6.3
hereto, no consent, approval or authorization of, or registration,
qualification or filing with or notice to any government agency or authority is
required for the execution and delivery of this Agreement by the Buyer or for
the consummation by the Buyer of the transactions contemplated hereby. The
Buyer has no knowledge of any fact or circumstance relating to the Buyer that
is reasonably likely to materially impede or delay receipt of any Required
Regulatory Approval. As of the date hereof, without giving effect to the
transactions contemplated hereby, and following the consummation of the
transactions contemplated hereby, on a pro forma basis, Buyer will (i) remain
"adequately capitalized", as defined in the Federal Deposit Insurance
Corporation Improvement Act of 1991, as amended, and (ii) meet all capital
requirements, standards and ratios required by each state or federal bank
regulator with jurisdiction over Buyer.
6.4. Third Party Consents. Except as set forth on Schedule 6.4 hereto,
no consent, approval or authorization of, or notice to, any nongovernmental
third party is
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required for the execution and delivery of this Agreement by the Buyer or for
the consummation by the Buyer of the transactions contemplated hereby.
6.5. Compliance with Laws. The Buyer is in compliance with all federal
and state laws applicable to its institutional trust and custody business; and,
after giving effect to the transactions contemplated hereby, the Buyer will be
in compliance with all federal and state laws applicable to its institutional
trust and custody business and the Business, except for such violations of law
that singly or in the aggregate would not have a Material Adverse Effect.
6.6. Litigation, Etc. Except as set forth on Schedule 6.6 hereto, no
civil, criminal or administrative action, suit, demand, claim (including
employee or employment claims), hearing, proceeding or investigation is as of
the date of this Agreement pending or, to the knowledge of the Buyer,
threatened, against the Buyer or any of its directors or officers which
questions the validity of this Agreement or challenges any of the transactions
contemplated hereby, except for any action, suit, demand, claim, hearing,
proceeding or investigation that singly or in the aggregate would not have a
Material Adverse Effect.
6.7. Financing. The Buyer has available to it sources of capital and
financing sufficient to fulfill its obligations under this Agreement and to
consummate all of the transactions contemplated hereby and Buyer's ability to
pay the Purchase Price hereunder is not contingent on raising any equity
capital, obtaining specific financing therefor or the consent of any lender.
6.8. Broker Agreements. Except as set forth on Schedule 6.8 hereto,
neither the Buyer nor any Affiliate of the Buyer has employed or is subject to
any valid claim of any broker, finder, consultant or other intermediary in
connection with the transactions contemplated by this Agreement who would be
entitled to any commission or broker's or finder's fee in connection with the
transactions contemplated hereby.
6.9. Absence of Other Warranties. Except as and to the extent of the
representations and warranties expressly set forth in Article 6 of this
Agreement, the Buyer (a) makes no representations or warranties whatsoever in
connection with the transactions contemplated hereby and (b) disclaims any
liability and responsibility for any negligent representation, warranty,
statement or information otherwise made or communicated, by oversight or
otherwise (orally or in writing), to the Seller in connection with the
transactions contemplated hereby (including without limitation, any opinion,
information, projection, statement or advice which may have been provided to
the Seller by any employee, officer, agent, stockholder or other representative
of the Buyer in connection with the transactions contemplated hereby).
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For purposes of this Agreement, the term "Knowledge of the Buyer" or
similar qualifiers shall be limited to the actual knowledge of any of those
officers and employees of Buyer listed on Schedule 6.9 hereto.
7. Covenants of the Seller. The Seller hereby covenants and agrees
that, from and after the date hereof, except as otherwise specifically
consented to or approved by the Buyer in writing:
7.1. Reasonable Efforts. The Seller will use reasonable efforts to
cause the transactions contemplated by this Agreement to be consummated in
accordance with the terms and conditions hereof as promptly as practicable
after the date hereof
7.2. Cooperation. The Seller agrees to cooperate in good faith with
the Buyer and to use reasonable efforts to obtain all consents, including
Required Regulatory Approvals and all third-party consents, including any
approval or consent of the Board of Trustees of the 1784 Funds, required in
order to consummate the transactions contemplated hereby.
7.3. Conduct of the Business. The Seller shall:
(a) conduct the Business only in the ordinary course
consistent with past practices;
(b) use reasonable efforts to preserve the Business and to
keep available the services of the Employees;
(c) maintain the books of account and records of the Business
in the ordinary course consistent with past practices;
(d) maintain the insurance on the Business in place on the
date hereof,
(e) not increase the salaries or wages of any Employee or any
bonus, pension, option, incentive or deferred compensation, retirement,
death, profit sharing or similar benefit of the Employees, except,
other than with respect to those Employees listed on Schedule 7.3(e)
hereof, in the ordinary course consistent with past practices
(including annual salary increases in the ordinary course);
(f) not terminate any existing Custody Service Agreement
(other than by expiration in accordance with its terms) or materially
amend or modify any
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
such agreement, other than in the ordinary course consistent with past
practices; and
(g) not sell or transfer any Purchased Asset or Assumed
Liability except in the ordinary course consistent with past practices.
7.4.***********. In the event that, on or before the Closing Date, the
********************************** has voted not to consent to the transactions
contemplated hereby and to terminate the Custody Service Agreement between
Seller and the***********, the Closing Payment and the Purchase Price shall be
reduced by the sum of***********. If, however, as of the Closing Date, the******
***************************** has (a) not held a meeting to consider consenting
to the transactions contemplated hereby, or (b) not voted to refuse to consent
to the transactions contemplated hereby and to terminate the Custody Service
Agreement between Seller and the***********, the Closing Payment shall not be
reduced and Buyer shall assist Seller in providing the services required to be
provided by Seller to the*********** under such Custody Service Agreement;
provided, further, that, if, as of December 31, 1998, the************shall still
not have consented to the transactions contemplated hereby, but the Custody
Service Agreement shall not have been terminated by the ******, Seller shall
pay to Buyer the sum of***********, to such account as Buyer shall designate in
writing prior to such payment, plus interest on the payment for each day from
the Closing Date to the date of payment, such interest to be calculated at the
effective federal funds rate. In the event that, during the two year period
after the Closing Date, the************shall terminate the Custody Service
Agreement between the Buyer and the************(other than for a No Damage
Termination Event, which shall not include a change-of-control of Buyer, in each
case as defined in the Custody Service Agreement), Seller shall pay to Buyer the
sum of************to such account as Buyer shall designate in writing prior to
such termination, plus interest on the payment for each day from the Closing
Date to the date of payment, such interest to be calculated at the effective
federal funds rate. If such termination occurs more than two years after the
Closing Date, but less than five years, Seller shall pay to Buyer an amount
equal to the product of (x)************multiplied by (y) a fraction, the
numerator of which shall be the number of months' remaining before the
expiration of five years from the Closing Date, and the denominator of which
shall be thirty-six.
7.5. Exclusive Dealing. During the period from the date of this
Agreement to the earlier of the Closing Date or the termination of this
Agreement, Seller shall not take any action to, and shall cause its
Affiliates not to take any action to, directly or indirectly, encourage,
initiate or engage in discussions or negotiations with, or provide any
information to, any person or entity other than Buyer, its Affiliates and
their representatives concerning any sale of the Purchased Assets or the
Business (other than in
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connection with the sale of all or substantially all of the assets of the
Seller or its parent company or in connection with any merger or consolidation
of Seller or its parent company with any third party). Seller will promptly
communicate to Buyer the terms of any proposal of inquiry that it or any of its
Affiliates may receive in respect of any such transaction or of any such
negotiations or discussions being sought to be initiated with Seller or any of
its Affiliates and, if known, the identity of the third party initiating any
such proposal, inquiry, discussion or negotiation.
7.6. Customer Retention. Seller shall use reasonable efforts to assist
Buyer in retaining customers of the Business during the transactions
contemplated hereby and the subsequent transfer of customer assets to Buyer.
Such efforts shall include appropriate contact as Buyer shall reasonably
request from time to time with customers by senior executives of Seller who
have personal or professional relationships with such customers.
7.7. Sunguard License. Seller shall use reasonable efforts to assist
the Buyer in entering into a software license agreement on or after the Closing
Date with Sunguard with respect to its PERA system.
7.8. Taxes.
(a) Subject to Sections 3.7 and 3.8, the Seller shall timely
pay (i) all Taxes which arise from, with respect to, or otherwise
relate to the Purchased Assets and are incurred in or attributable to
the operation of the Business for any Tax period (or portion thereof)
that ends prior to the Closing Date, and (ii) all Taxes which arise
from the transactions contemplated by this Agreement, in each case the
nonpayment of which would result in an Encumbrance on the Purchased
Assets or would result in Buyer becoming liable thereof.
(b) The Seller agrees to furnish or cause to be furnished to
Buyer, upon request, as promptly as practicable, such information and
assistance relating to the Purchased Assets and the Business as is
reasonably necessary for the filing of all Tax returns, and making of
any election related to Taxes, the preparation for any audit by any
taxing authority, and the prosecution or defense of any claim, suit or
proceeding relating to any Tax return. The Seller shall cooperate with
Buyer in the conduct of any audit or other proceeding related to Taxes
involving the Business.
7.9 License of Donor Accounting Software. Seller grants to Buyer,
effective as of the Closing Date, a perpetual, irrevocable, nonexclusive,
royalty-free, unrestricted right and license to use, reproduce, prepare
derivative works of, modify, distribute, make, sell, sublicense, import, and
export Seller's computer program entitled "Donor Accounting" (the "Licensed
Software"). Buyer shall have the right to assign, sublicense or
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transfer such license rights to third parties. On the Closing Date, Seller shall
provide to Buyer a copy of the most current version of the Licensed Software on
a commonly used magnetic media together with the most current version of the
source code and documentation relating to such Licensed Software. Buyer
acknowledges that Seller shall not provide any maintenance or support services
in connection with the Licensed Software. THE LICENSED SOFTWARE, AND ALL RELATED
SOURCE CODE AND DOCUMENTATION SHALL BE PROVIDED TO BUYER "AS IS", WITHOUT ANY
WARRANTIES, EXPRESS OR IMPLIED, WHATSOEVER, INCLUDING WITHOUT LIMITATION
WARRANTIES OF MERCHANTABILITY, USE FOR A PARTICULAR PURPOSE, TITLE, OR
NON-INFRINGEMENT; OR ANY IMPLIED WARRANTIES ARISING OUT OF USAGE OF TRADE,
COURSE OF DEALING, OR COURSE OF PERFORMANCE.
8. Covenants of the Buyer. The Buyer hereby covenants and agrees that,
from and after the date hereof until the Closing and, with respect to Section
8.4 below, after the Closing, except as otherwise specifically consented to or
approved by the Seller in writing:
8.1. Reasonable Efforts. The Buyer will use reasonable efforts to
cause the transactions contemplated by this Agreement to be consummated in
accordance with the terms and conditions hereof as promptly as practicable
after the date hereof
8.2. Cooperation. The Buyer agrees to cooperate in good faith with the
Seller and to use reasonable efforts to obtain all consents, including all
third party consents, required to be obtained in order to consummate the
transactions contemplated hereby, including, without limitation, making itself
available for presentations to customers of the Seller, including but not
limited to, presentations to the Board of Trustees of the 1784 Funds, and
providing information reasonably requested by the Seller or such customers of
the Seller.
8.3. Regulatory Approvals and Capitalization. Buyer will use its best
efforts to obtain as expeditiously as possible the Required Regulatory
Approvals and will use its best efforts to prepare and file within thirty (30)
days after the execution of this Agreement all necessary applications of Buyer
for Required Regulatory Approvals. Buyer will supply to Seller in advance
copies of all proposed regulatory applications and filings and will use
reasonable efforts to reflect any comments of Seller in such applications and
filings. From the date hereof through, and including, the Closing Date and
consummation of the transactions contemplated hereby, Buyer will (i) remain
"adequately capitalized" as defined in the Federal Deposit Insurance
Corporation Improvement Act of 1991, as amended, and (ii) meet all capital
requirements, standards and ratios required by each state or federal bank
regulator with jurisdiction over Buyer.
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8.4. Employees and Benefits.
(a) Employment. At least ten (10) business days prior to the
Closing Date, but conditioned upon the Closing, the Buyer shall offer
employment to all of the Employees listed on Schedule 8.4(a) hereto
(the "Offered Employees"). Such offered employment shall be effective
(a) for the employees listed on Schedule 8.4(b) attached hereto (the
"Conversion Team") on a date agreed to by the parties within a
reasonable period after the date on which the conversion of the
Business to a SEI Trust 3000 system is completed and (b) for the
employees listed on Schedule 8.4(c) attached hereto (the "Outsourcing
Team") on a date agreed to by the parties within a reasonable period
after the date on which the outsourcing of asset management functions
is completed (collectively, the "Transfer Dates ") and (c) for all
other Offered Employees on the Closing Date. Such offered employment,
with respect to each Offered Employee, shall (i) be at least at the
same salary and at substantially the same level and hours of work as
the last employment of such Offered Employee by the Seller, (ii)
require a substantially similar skill set and background, (iii) be in
Boston, Massachusetts or within a thirty mile radius of the location
where such Offered Employee is last employed by the Seller and (iv) be
at a work schedule substantially similar to the last work schedule of
the Offered Employee with the Seller. The Buyer shall communicate the
offers of employment to the Offered Employees in writing. The Buyer
shall be responsible for advising Offered Employees of the details of
employment and answering any questions relating thereto, but the Seller
shall cooperate in this regard to the extent that the Buyer may
reasonably request. As of the Closing Date, all of the Offered
Employees who have accepted the Buyer's offer of employment (the
"Transferred Employees") other than the Conversion Team and the
Outsourcing Team will become employees of the Buyer. The members of the
Conversion Team and the Outsourcing Team shall become Transferred
Employees on their respective Transfer Dates. Nothing herein shall be
deemed to create an obligation on the part of the Buyer to employ any
Employee, including any Offered Employee or any Transferred Employee,
for any specific term after the Closing Date. The Buyer agrees that,
for a period of 60 days after the Closing Date, it will not cause any
of the Transferred Employees to suffer "employment loss" for purposes
of the Worker Adjustment and Retraining Notification Act and related
regulations (the "WARN Act") if such employment loss could create any
liability for the Seller, unless the Buyer delivers notices under the
WARN Act in such a manner and at such time that the Seller bears no
liability with respect thereto.
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(b) Benefits After the Closing Date. Upon the date of hire,
Transferred Employees shall be eligible to participate in Buyer's then
current employee benefit program (the "Benefits Program"). The Buyer
will waive any exclusion for an existing condition that was not
excluded, with respect to any Transferred Employee on the Transfer
Date, under Seller's Benefit Plans and any waiting period under any
health plan so maintained and will treat the service of Employees with
the Seller as service rendered to the Buyer for purposes of eligibility
to participate and vesting and for other appropriate benefits, but not
for benefit accrual, under any pension benefit plan or welfare benefit
plan of the Buyer, other than the "Investors Bank & Trust Pension Plan
and Trust" so long as such plan shall remain frozen. Without limiting
the generality of the foregoing, the Buyer agrees that, if the
employment by the Buyer of any Transferred Employee is terminated by
the Buyer for any reason other than for cause during the twelve-month
period immediately following the Closing Date or later Transfer Date,
the Buyer shall make available to that Transferred Employee either the
separation benefits the Transferred Employee would have been entitled
to receive from the Seller if that Transferred Employee were terminated
by the Seller immediately prior to the Closing Date or later Transfer
Date (under the Seller's Separation Plan, but not including the
Transitional Assistance Plan) or the separation benefits offered by the
Buyer to its employees generally at the time of termination, whichever
benefits are most favorable to the Transferred Employee. Buyer shall
provide to any Transferred Employee terminated by Buyer reasonable
employment outplacement assistance.
(c) Benefits Before the Closing Date. The Seller will
administer in accordance with the terms thereof its pension benefit
plans, welfare benefit plans and pay practices with respect to service
with the Seller, and no service will be recognized thereunder for
Transferred Employees after the Closing Date or later Transfer Date.
The Buyer will permit Transferred Employees to make direct rollovers
from the Seller's Thrift-Incentive Plan to its 401(k) Plan.
8.5. Taxes. The Buyer agrees to furnish or cause to be furnished to
Seller, upon request, as promptly as practicable, such information and
assistance relating to the Purchased Assets and the Business as is reasonably
necessary for the filing of all Tax returns, and making of any election related
to Taxes, the preparation for any audit by any taxing authority, and the
prosecution or defense of any claim, suit or proceeding relating to any Tax
return. The Buyer shall cooperate with Seller in the conduct of any audit or
other proceeding related to Taxes involving the Business.
8.6. Buyer Integration Plan. Within thirty (30) days after the date
hereof, the Buyer shall deliver to Seller, Buyer's proposed plan with respect
to the integration
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and transition of the Business and the Purchased Assets from the Seller to the
Buyer, including without limitation, Buyer's plans with respect to the
conversion of the Business from the Seller's data processing and computer
systems to the Buyer's data processing and computer systems and the interface
between employees of Seller and Transferred Employees and other employees of
Buyer during and after the conversion periods referred to in the Transitional
Services Agreements, which plan shall provide for a smooth and orderly
transition of the Business from the Seller to the Buyer in a manner designed to
minimize disruption to Customers of the Business. Seller shall use reasonable
efforts to cooperate with Buyer in the development of such an integration plan.
9. Conditions Precedent to the Buyer's Obligations. The obligation of
the Buyer to consummate the Closing under this Agreement shall be subject to the
satisfaction, prior to or at the Closing, of each of the following conditions:
9.1. Representations and Warranties True at Closing Date.
Except as otherwise permitted or contemplated by this Agreement, the
representations and warranties of the Seller contained in this Agreement shall
have been true and correct in all material respects at and as of the date
hereof, and shall be true and correct in all material respects at and as of the
Closing Date with the same force and effect as though newly made at and as of
the Closing Date (except to the extent that such representations and warranties
specifically relate to a prior date or period, in which case such
representations and warranties shall continue to be true as of the respective
dates thereof and for the respective periods covered thereby).
9.2. Seller's Performance. Each of the obligations of the Seller to be
performed or complied with on or before the Closing Date pursuant to the terms
of this Agreement shall have been duly performed or complied with in all
material respects on or before the Closing Date.
9.3. Officer's Certificate. The Seller shall have delivered to the
Buyer a certificate dated as of the Closing Date signed by an appropriate
officer of the Seller certifying the satisfaction of the conditions set forth in
Sections 9.1, 9.2, 9.4 and 9.6 hereof.
9.4. Required Regulatory Approvals. All Required Regulatory Approvals
shall have been obtained and shall be in full force and effect on the Closing
Date.
9.5. Delivery of Seller Deliverables. Seller shall have delivered to
Buyer all of the items set forth in Section 4.2 hereof.
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9.6. Absence of Material Adverse Changes. There shall not have occurred
any change in the business, assets, financial condition or results of operations
of the Business which has had or is reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect on the Business.
10. Conditions Precedent to the Seller's Obligations. The obligation of
the Seller to consummate the Closing under this Agreement shall be subject to
the satisfaction, prior to or at the Closing, of each of the following
conditions:
10.1. Representations and Warranties True at Closing Date. Except as
otherwise permitted or contemplated by this Agreement, the representations and
warranties of the Buyer contained in this Agreement shall have been true and
correct in all material respects at and as of the date hereof, and shall be true
and correct in all material respects at and as of the Closing Date with the same
force and effect as though newly made at and as of the Closing Date (except to
the extent that such representations and warranties specifically relate to a
prior date or period, in which case such representations and warranties shall
continue to be true as of the respective dates thereof and for the respective
periods covered thereby).
10.2. Buyer's Performance. Each of the obligations of Buyer to be
performed or complied with on or before the Closing Date pursuant to the terms
of this Agreement shall have been duly performed or complied with in all
material respects on or before the Closing Date.
10.3. Officer's Certificate. The Buyer shall have delivered to the
Seller a certificate dated as of the Closing Date signed by an appropriate
officer of the Buyer certifying the satisfaction of the conditions set forth in
Sections 10.1, 10.2, 10.4 and 10.6 hereof.
10.4. Required Regulatory Approvals. All Required Regulatory Approvals
shall have been obtained and shall be in full force and effect on the Closing
Date.
10.5. Delivery of Buyer Deliverables. Buyer shall have delivered to
Seller all of the items set forth in Section 4.3 hereof.
10.6. Absence of Material Adverse Changes. There shall not have
occurred any change in the business, assets, financial condition or results of
operations of Buyer which has had or is reasonably likely to have, individually
or in the aggregate, a Material Adverse Effect on Buyer.
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11. Termination.
(a) This Agreement may be terminated at any time prior to the
Closing:
(i) by mutual written consent of the Seller and the
Buyer;
(ii) by the Buyer or the Seller (A) thirty (30) days
after the date on which any request or application for a
required regulatory approval, authorization, consent or order
from any federal or state banking or other regulatory
authority or agency necessary for the consummation of the
transactions contemplated hereby and so identified on either
Schedule 5.4 hereto or Schedule 6.3 hereto (the "Required
Regulatory Approvals") shall have been denied, unless within
the thirty (30) day period following such denial a petition
for rehearing or an amended application has been filed with
such governmental regulatory authority or agency; provided,
however, that no party shall have the right to terminate this
Agreement pursuant to this clause (A) if such denial shall be
due to the failure of the party seeking to terminate this
Agreement to perform or observe the covenants and agreements
of such party set forth herein, or (B) if any federal or state
banking or other regulatory authority or agency, or court of
competent jurisdiction, shall have issued a final permanent
order, injunction or other legal restraint or prohibition
preventing the consummation of the transactions contemplated
hereby and the time for appeal or petition for reconsideration
of such order, injunction, restraint or prohibition shall have
expired without such appeal or petition being granted or such
order, injunction, restraint or prohibition shall otherwise
have become final and non-appealable;
(iii) by the Buyer or the Seller (provided that the
terminating party is not then in material breach of any
representation, warranty, covenant or other agreement
contained herein), in the event of a material
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EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
breach by the other party of any representation, warranty,
covenant or other agreement contained herein, which breach is
not cured after forty-five (45) days written notice thereof is
given to the party committing such breach; or
(iv) by the Seller or the Buyer if the Closing shall
not have occurred on or prior to December 31, 1998, unless the
failure of the Closing to occur by such date shall be due to
the failure of the party seeking to terminate this Agreement
hereunder to perform or observe in any material respect the
covenants and agreements of such party set forth in this
Agreement.
(b) In the event of termination of this Agreement by either
the Seller or the Buyer as provided in Section 11(a) above, this
Agreement shall forthwith become null and void (other than Sections
3.2, 11(b), 13.8, 13.9 and 13.19 hereof, which shall remain in full
force and effect) and there shall be no further liability on the part
of Seller or Buyer or their respective officers or directors to the
other, except (i) any liability of Seller and Buyer under said Sections
3.2, 11(b), 13.8, 13.9 and 13.19 and (ii) in the event of a willful
breach by either party of any representation, warranty, covenant or
agreement contained in this Agreement, in which case, the breaching
party shall remain liable for any and all damages, costs and expenses,
including all reasonable attorneys' fees, sustained or incurred by the
nonbreaching party as a result thereof or in connection therewith or
with the enforcement of its rights hereunder, whether sustained or
incurred prior to or after the date of such breach.
12. Indemnification, Etc.
12.1 Survival of Representations, Warranties and Covenants. Except as
otherwise specifically provided in this Agreement, (i) the representations and
warranties contained in Sections 5.3 and 5.13 hereof shall survive the Closing
indefinitely and (ii) all other representations, warranties and covenants or
other agreements contained in this Agreement shall survive the Closing for a
period of*********************, except as to any claim for which written notice
shall have been given prior to such date.
12.2. Indemnification.
(a) Seller agrees to indemnify and hold Buyer, and its
Affiliates, employees, officers, directors, controlling persons,
successors and assigns, harmless from and with respect to any and all
Damages resulting from or arising directly or indirectly out of (i) any
breach of any representation or warranty made by Seller in this
Agreement, (ii) any breach by Seller of any covenant, obligation or
undertaking made by Seller in this Agreement, (iii) any liabilities of
Seller relating to the Benefit Plans or (iv) the Excluded Assets and
the Excluded Liabilities.
(b) Buyer agrees to indemnify and hold Seller, and its
Affiliates, employees, officers, directors, controlling persons,
successors and assigns, harmless from and with respect to any and all
Damages resulting from or arising directly or indirectly out of (i) any
breach of any representation or warranty made
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
by Buyer in this Agreement, (ii) any breach by Buyer of any covenant,
obligation or undertaking made by Buyer in this Agreement or (iii) the
Purchased Assets or the Assumed Liabilities.
12.3. Claims.
(a) In case any claim shall be made or any action shall be
brought with respect to a matter referred to in Section 12.1 hereof,
the party entitled to indemnification (the "Indemnified Party") shall
promptly notify the party liable therefor hereunder (the "Indemnifying
Part") in writing, setting forth the particulars of such claim or
action. The Indemnifying Party shall have the right to elect to assume
the defense of such claim or action, including, without limitation,
employing counsel selected by it; provided, however, that the
Indemnified Party shall be entitled to participate in any such claim or
action with counsel of its own choice at the expense of the
Indemnifying Party if, in the good faith judgment of the Indemnified
Party's counsel, representation by the Indemnifying Party's counsel may
present a conflict of interest or there may be defenses available to
the Indemnified Party which were different from or in addition to those
available to the Indemnifying Party. If the Indemnifying Party shall
not have elected to assume the defense of a claim or action within a
reasonable time after receiving notice of commencement of any such
claim or action, then the Indemnified Party may take actions separately
in its own defense and employ counsel reasonably satisfactory to the
Indemnifying Party in its own defense and all legal and other expenses,
including, without limitation, the reasonable fees and expenses of such
counsel, incurred by the Indemnified Party in such defense shall be
borne by the Indemnifying Party. The Indemnifying Party shall not,
without the prior written consent of the Indemnified Party, such
consent not to be unreasonably withheld, settle or compromise any claim
or consent to the entry of any judgment that does not include as an
unconditional term thereof the giving by the claimant or the plaintiff
to the Indemnified Party of a release from all liability in respect of
such claim. The Indemnified Party shall not settle or compromise any
claim the defense of which has been assumed by the Indemnifying Party.
(b) Notwithstanding any other provision of this Agreement, no
claim for indemnification shall be made pursuant to Section 12.2 hereof
(i) for breach of any representation or warranty, other than the
representations and warranties set forth in Sections 5.3 and 5.13
hereof, more than*********************after the Closing Date, or (ii)
for failure to perform any covenant, obligation or other undertaking
set forth herein more than**********************after the later of the
Closing Date
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or the date on which such covenant, obligation or other undertaking was
required to be performed.
(c) If an Indemnified Party receives any payment from any
third party (including any insurer) as compensation for any claim by
the Indemnified Party after the Indemnifying Party has made any payment
under Section 12.2 above to the Indemnified Party on account of such
claim, then the Indemnified Party shall promptly pay the dollar amount
of all such prior indemnification payments to the Indemnifying Party,
without demand or notice of any kind made by the Indemnifying Party, to
the extent of all such third party payments received by the Indemnified
Party.
(d) The Indemnified Party shall use reasonable efforts to
mitigate any Damages incurred in connection with any matter subject to
indemnification, including, without limitation, by making claims
against third parties and filing claims with its third party insurers.
The Indemnified Party shall cooperate and provide such assistance as
the Indemnifying Party may reasonably request in connection with the
defense of any matter subject to indemnification and in connection with
recovering from any third parties amounts that the Indemnifying Party
may pay or be required to pay by way of indemnification hereunder.
(e) For purposes of this Section 12 only, the existence of a
breach of a representation or warranty in this Agreement and the
calculation of Damages arising out of a breach of any representation or
warranty in this Agreement shall be determined without giving effect to
any exception or qualification of such representation or warranty as to
the materiality of the breach thereof or the Material Adverse Effect on
any Person of such breach.
12.4. Damages. As used in this Section 12, the term "Damages"
means any and all losses, claims, damages, liabilities, obligations,
judgments, settlements, awards and reasonable out-of-pocket costs,
expenses and attorneys' fees and penalties and interest, if any, but
shall not include any such amounts for which the Indemnified Party
receives payment from a third party (including insurers) and shall be
net of any associated Tax benefit. For purposes of this Section 12.4,
"associated Tax benefit" means the discounted present value of the
cumulative reduction in Taxes enjoyed by an Indemnified Party or any
Affiliate of the Indemnified Party in any taxable year or years as a
result of the Tax treatment of the Damages, such reduction to be
reduced (but not below zero) by any incremental Taxes paid by the
indemnified party (or any such affiliate) by reason of the inclusion of
the indemnification payment in income. The amount of any associated Tax
benefit shall be deducted from an indemnifying payment when
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
such payment is otherwise to be made, and shall be computed by the
Indemnifying Party on such reasonable assumptions as it may select.
Each indemnification payment from which an associated Tax benefit has
been deducted shall be accompanied by a computation of such benefit
sufficient in detail to enable the Indemnified Party to assess the
basis of the computation. If the Indemnified Party disagrees with the
Indemnifying Party's computation, it shall provide the Indemnifying
Party with its computation and sufficient information to enable the
Indemnifying Party to assess its computation, and the parties shall
thereafter work together in good faith to resolve the matter and
develop a framework for future adjustments. In all cases, the
Indemnifying Party shall reimburse the Indemnified Party for any
reduction in Tax benefit (but not in an amount in excess of the Tax
benefit as originally determined), including without limitation
reductions as a result of an audit by taxing authorities. Such
reimbursement shall be increased for any interest incurred by the
Indemnified Party by reason of an adjustment following such an audit
and any penalties incurred by the Indemnified Party as a result of
positions forming the basis for the computation of the associated Tax
benefit; provided, that the Indemnified Party shall give the
Indemnifying Party prompt notice of any such audit adjustments or
proposed audit adjustments; and provided, further, that the
Indemnifying Party shall have the right to defend or compromise such
audit adjustments but in no event shall the Indemnifying Party settle
or compromise such audit adjustment without the consent of the
Indemnified Party, which consent shall not be unreasonably withheld,
conditioned or delayed. A request for reimbursement may be made by the
Indemnified Party and notwithstanding any other provision of this
Agreement to the contrary, the obligation of the Indemnifying Party to
make such reimbursement shall survive the Closing Date until thirty
(30) years after the Closing Date. Any payment (including insurance
proceeds) received by the Indemnified Party with respect to any matter
that has been the subject of any prior indemnification payment(s) by
the Indemnifying Party shall be promptly remitted (net of collection
expenses) to the Indemnifying Party up to the aggregate amount of such
prior indemnification payment(s).
12.5. Maximum Indemnification/Threshold. Notwithstanding any other
provision of this Agreement to the contrary (a) the maximum aggregate liability
of Seller to Buyer under Section 12.2(a) or Buyer to Seller under Section
12.2(b) shall be an amount equal to********************************************
****************************and (b) except for a claim for breach of the
representations and warranties set forth in Section 5.13 hereof, no Indemnified
Party shall be entitled to any indemnification under Sections 12.2 (a)(i) or
(ii) or 12.2(b)(i) or (ii) unless,*******************************************
***********************************************.
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
12.6. Exclusive Remedy; Damage Limitations. Except as otherwise
provided in Section 11(b) above and except for actions for specific performance
or injunctive relief, the parties hereto acknowledge and agree that the
indemnification rights and remedies available to each party under this Section
12 shall be the sole and exclusive rights and remedies of the parties hereto
with respect to any Damages arising out of or relating in any way to (a) any
breach of this Agreement, (b) the acquisition of the Business by the Buyer or
(c) the consummation of the transactions contemplated hereby (collectively, the
"Subject Damages"), including, without limitation, any claims, rights or
remedies for negligent misrepresentation. Without limiting the generality of
the foregoing, except as specifically authorized by this Section 12.6, the
parties hereto hereby waive, release and disclaim any claims, rights or
remedies arising in tort, by statute or otherwise with respect to the Subject
Damages. In no event shall any party hereto be entitled to recover from the
other party in respect of any incidental, consequential, exemplary, special or
punitive damages, and for all purposes of this Agreement, the term "Damages"
shall be deemed not to include any such damages.
12.7. Noncompetition and Nonsolicitation. During the period beginning
on the Closing Date and ending on the*******************thereof, neither the
Seller nor any of its Affiliates shall engage in the Institutional Trust and
Custody Business. During the period beginning on the Closing Date and ending on
the*******************thereof, neither the Seller nor any of its Affiliates
shall solicit any customers of the Business set forth on the Schedule of 1997
Noninterest Income, the Preliminary Schedule of Noninterest Income or Final
Schedule of Noninterest Income, in each case, for the provision of
Institutional Trust and Custody Business services. Notwithstanding the
foregoing, however, the agreement of the Seller not to engage in the
Institutional Trust and Custody Business in the United States for a period of
**************after the Closing Date shall not apply to (a) any institution
that acquires the Seller or any of Seller's Affiliates; (b) any institution
resulting from any merger of the Seller or any of Seller's Affiliates with or
into any institution or (c) any institution that is acquired by the Seller or
any of Seller's Affiliates; provided, however, that such institution that
acquires, merges with, or is acquired by the Seller shall not, during such
****************, solicit nor bid for the business of any Original Clients for
the provision of Institutional Trust and Custody Services; provided, further,
however, that such institution shall be permitted to engage in general
marketing campaigns not specifically targeted to Original Clients with respect
to the provision of Institutional Trust and Custody services. Notwithstanding
the foregoing, nothing in this Section 12.7 shall prohibit the Seller or its
Affiliates from engaging in the Excluded Businesses. During the period
beginning on the Closing Date or applicable Transfer Date, with respect to
Offered Employees, and on the Closing Date, with respect to other employees of
Buyer, and ending on the********************from such foregoing applicable
dates, neither Seller nor any of its Affiliates shall solicit any of the
Offered Employees or any of Buyer's other employees who remain employed by
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
Buyer during such time, as the case may be, to accept employment with Seller or
any of its Affiliates; provided, however, that after the Closing Date, Seller
shall be permitted to solicit for employment any Transferred Employee who shall
be terminated by Buyer; provided, further, however, that, from and after the
date of hire by Seller pursuant to this Section 12.7, Buyer shall have no
obligation to pay separation benefits to any Transferred Employee pursuant to
Section 8.4(b) who shall be terminated by Buyer and who shall become an
employee of Seller.
12.8. Referrals. Seller agrees that, for a period of****************from
the date of this Agreement, it will use reasonable efforts to refer to Buyer
any customers seeking the provision of services formerly provided by the Seller
as part of the Institutional Trust and Custody Business; provided, however,
that notwithstanding the foregoing, neither Buyer nor any of its Affiliates
shall solicit such new customers for the provision of any services other than
the provision of Institutional Trust and Custody services or cash sweep
services, securities lending or foreign exchange services related to the
provision of Institutional Trust and Custody Business services. In exchange for
such referrals during the designated period, the Buyer shall pay Seller a
referral fee equal to*****of the first year's revenues received from each new
customer relationship which Seller refers to Buyer, which referral results in
the appointment of Buyer by such referred customer and retention of such
referred customer by Buyer at least one year. The referral fee is payable as of
the end of the calendar quarter during which the one-year retention period
ends. Upon the appointment of the Buyer by a customer referred by the Seller,
the Buyer shall promptly notify Seller of such appointment and shall provide
updates to Seller on a quarterly basis thereafter with respect to the revenues
derived by Buyer from such referred customer. Buyer agrees that, from and after
the date hereof, in connection with the Buyer's settlement of securities
transactions outside of the United States under a Custody Service Agreement or
a custody or similar agreement between Buyer and a customer, to the extent
Buyer requires the services of sub-custodian in Argentina, Buyer shall use
reasonable efforts to retain Seller (or a foreign branch of Seller or Affiliate
of Seller) to act as such sub-custodian in Argentina.
12.9. Access to Files. For a period of seven (7) years commencing on
the Closing Date, or for such longer period as may be required by applicable
law, the Buyer will grant the Seller and its representatives access to all
books, records and other data included in the Purchased Assets during regular
business hours upon reasonable prior notice.
12.10. Customer Retention. Buyer shall use reasonable efforts to
retain as customers of the Buyer those customers of the Business who become
Original Clients from and after the Closing Date, including, the appointment of
Seller as sub-custodian or agent on behalf of Buyer during the conversion
periods referred in the Transitional
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CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
Services Agreement. Buyer agrees that, from and after the Closing Date,***
**************************************************************************
*******************************************************************************
****************************************************************.
12.11. Additional Buyer Covenant. Buyer agrees that from and after the
date hereof and for so long as the Outsourcing Agreement shall not have been
terminated in accordance with its terms, members of senior management of Buyer
shall consult with members of senior management of Seller at such times as may
be reasonably requested by Seller, with respect to the performance of Buyer
under the Outsourcing Agreement and other matters specifically relating to, or
impacting, the provision of services by Buyer to Seller under the Outsourcing
Agreement, including but not limited to, significant new client retentions or
business opportunities of Buyer or technology developments concerning Buyer.
13. General.
13.1. Further Assurances. At the request of the other party hereto,
each party hereto shall take any and all actions, and execute and deliver any
and all documents, which may be reasonably necessary to carry out the
transactions contemplated by this Agreement. In the event, that, on the Closing
Date, there are Custody Service Agreements for which a consent to the
transactions contemplated hereby has not been obtained and for which no
termination notice has been received prior to the Closing Date (collectively,
the "Unassigned Custody Service Agreements"), in addition to the foregoing,
until such time as such consent is obtained or such Unassigned Custody Service
Agreement is terminated in accordance with its terms, Buyer and Seller shall use
reasonable efforts to (i) provide to Buyer the benefits and burdens of any
Unassigned Custody Service Agreement, (ii) cooperate in any reasonable and
lawful arrangement designed to provide such benefits to Buyer, including without
limitation the appointment of Buyer as Seller's sub-custodian or agent for
purposes of such Unassigned Custody Service Agreement, and (iii) enforce, at the
request of Buyer and for the account of Buyer, any rights of Seller arising from
any such Unassigned Custody Service Agreement. In addition, from and after the
Closing Date, the Buyer shall assist the Seller in perfecting any security
interests held by Seller in any of the custodial assets being transferred,
together with the applicable Custody Service Agreements, to the Buyer hereunder,
which assets secure loans of the Seller.
13.2. Entire Agreement. This Agreement (including the Exhibits and
Schedules hereto) together with the Related Agreements contains the entire
understanding of the parties hereto and thereto, supersedes all prior agreements
and understandings relating to the subject matter hereof and thereof and shall
not be amended except by a written
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instrument hereafter signed by all of the parties hereto or thereto, as
applicable. No waiver of any provision of this Agreement shall be effective
unless evidenced by a written instrument signed by the waiving party. Each of
the parties hereto further acknowledge and agree that, in entering into this
Agreement and entering into the Related Agreements, they have not in any way
relied upon any oral or written agreements, statements, promises, information,
arrangements, understandings, representations or warranties, express or implied,
not specifically set forth in this Agreement or the Related Agreements.
13.3. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns; provided, however, that this Agreement and the rights and obligations
of the parties hereunder may not be assigned by any party hereto except with the
written consent of the other party hereto, and that nothing in this Agreement is
intended to confer, expressly or by implication, upon any other Person any
rights or remedies under or by reason of this Agreement.
13.4. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original as against any
party whose signature appears thereon, and all of which shall together
constitute one and the same instrument. This Agreement shall become binding when
one or more counterparts hereof, individually or taken together, shall bear the
signature of all of the parties reflected hereon as the signatories.
13.5. Notices. All notices, demands and other communications hereunder
shall be in writing, and shall be deemed to have been duly given if delivered
personally or if mailed by certified mail, return receipt requested, postage
prepaid or if sent by overnight courier, as follows:
If to the Seller at:
BankBoston, N.A.
100 Federal Street
Boston, MA 02110
Attention: Peter J. Manning
Executive Director, Mergers and Acquisitions
Facsimile: (617) 434-7825
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and to:
BankBoston, N.A.
100 Federal Street
Boston, MA 02110
Attention: Gary A. Spiess, Esq., General Counsel
Facsimile: (617) 434-7825
with a copy to:
Bingham Dana LLP
100 Federal Street
Boston, MA 02110
Attention: Norman J. Shachoy, Esq.
Facsimile: (617) 951-8736
If to the Buyer at:
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
Attention: Michael F. Rogers, Executive Vice President
Facsimile: (617) 351-0314
and to:
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
Attention: John E. Henry, Esq., General Counsel
Facsimile: (617) 351-4282
with a copy to:
Testa, Hurwitz & Thibeault
125 High Street
Boston, MA 02110
Attention: Steven C. Browne, Esq.
Facsimile: (617) 248-7100
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Any such notice or other communication hereunder shall be deemed to
have been given as of the date delivered to the receiving party. Any party may
change the address to which such communications are to be sent to it by giving
written notice of change of address to the other party in the manner provided
above for giving notice.
13.6. Severability. In the event that any one or more provisions of
this Agreement shall for any reason be held invalid, illegal or unenforceable in
any respect by any court of competent jurisdiction, such invalidity, illegality
or unenforceability shall not affect any other provisions of this Agreement and
the parties shall use all reasonable efforts to substitute a valid, legal and
enforceable provision which, insofar as practicable, implements the purposes and
intents of this Agreement.
13.7. Captions. The captions herein have been inserted solely for
convenience of reference and in no way define, limit or describe the scope or
substance of any provision of this Agreement.
13.8. Public Announcements; Regulatory Filings. Except as otherwise
required by law, regulation or the rules of the New York Stock Exchange, the
National Association of Securities Dealers, or the Nasdaq National Market, the
Seller and the Buyer will cooperate with each other in the development and
distribution of all news releases and other public information disclosures with
respect to this Agreement or any of the transactions contemplated hereby. Seller
and Buyer shall each deliver to the other copies of all proposed filings with
bank regulatory and other governmental authorities, shall use their respective
reasonable efforts to accommodate any suggestions or recommendations made by the
other with respect thereto and shall deliver to the other, as soon as
practicable, all final applications to bank regulatory and other governmental
authorities.
13.9. Expenses. Except as expressly set forth in this Agreement, all
expenses of the preparation, execution and consummation of this Agreement and
the Related Agreements and of the transactions contemplated hereby, including,
without limitation, attorneys', accountants and outside advisers' fees and
disbursements, shall be borne by the party incurring such expenses.
13.10. Time Deadlines. If the last day of the time period for the
giving of any notice or the taking of any action required under this Agreement
falls on a Saturday, Sunday or legal holiday or a date on which banks in Boston,
Massachusetts are authorized by law to close, the time period for giving such
notice or taking such action shall be extended through the next business day
following the original expiration date of such.
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13.11. Construction. The parties hereto acknowledge that each party and
its counsel have reviewed and revised this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any Related Agreement.
13.12. Number and Gender. As used in this Agreement and the Schedules
and Exhibits hereto, the masculine shall include the feminine and neuter, the
singular shall include the plural and the plural shall include the singular, as
the context may require.
13.13. Scope of Agreements. This Agreement shall not create any
partnership, joint venture or other similar arrangement between the Buyer and
the Seller with respect to the Business.
13.14. Amendment, Extension and Waiver. At any time prior to the
consummation of the transactions contemplated by this Agreement or the
termination of this Agreement in accordance with the provisions of Section 11
hereof, the Buyer and the Seller may (a) amend this Agreement, (b) extend the
time for the performance of any of the obligations or other acts of any party
hereto, (c) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto or (d) waive
compliance, to the extent legally permissible, with any of the agreements or
conditions contained herein. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto. Any
agreement on the part of a party hereto to any extension or waiver shall be
valid only to the extent set forth in an instrument in writing signed on behalf
of such party, but such waiver or failure to insist on strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
13.15. Consent to Jurisdiction. EACH OF THE PARTIES HERETO AGREES THAT
ANY SUIT, ACTION OR PROCEEDING INSTITUTED AGAINST SUCH PARTY UNDER OR IN
CONNECTION WITH THIS AGREEMENT SHALL BE BROUGHT EXCLUSIVELY IN A COURT OF
COMPETENT JURISDICTION SITTING IN THE COMMONWEALTH OF MASSACHUSETTS. BY
EXECUTION HEREOF, EACH PARTY HERETO IRREVOCABLY WAIVES ANY OBJECTION TO, AND ANY
RIGHT OF IMMUNITY ON THE GROUNDS OF, IMPROPER VENUE, THE CONVENIENCE OF THE
FORUM, THE PERSONAL JURISDICTION OF SUCH COURTS OR THE EXECUTION OF JUDGMENTS
RESULTING THEREFROM. EACH PARTY HERETO HEREBY IRREVOCABLY ACCEPTS AND SUBMITS TO
THE EXCLUSIVE JURISDICTION OF SUCH COURTS IN ANY SUCH ACTION, SUIT OR
PROCEEDING.
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13.16. Governing Law. The execution, interpretation, and performance of
this Agreement shall be governed by the laws of the Commonwealth of
Massachusetts (without reference to principles of choice or conflicts of law).
13.17. Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY RIGHTS THAT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT OR ANY OF THE
RELATED AGREEMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS OR
ACTIONS OF ANY OF THEM RELATING THERETO.
13.18. Waiver of Certain Damages. EXCEPT AS OTHERWISE PROVIDED UNDER
SECTION 11(b) ABOVE, EACH OF THE PARTIES HERETO TO THE FULLEST EXTENT PERMITTED
BY LAW IRREVOCABLY WAIVES ANY RIGHTS THAT THEY MAY HAVE TO PUNITIVE, SPECIAL,
INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY LITIGATION
BASED UPON, OR ARISING OUT OF, THIS AGREEMENT OR ANY RELATED AGREEMENT OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS OR ACTIONS OF ANY OF THEM
RELATING THERETO.
13.19. Confidentiality. All information disclosed by the parties hereto
to each other pursuant to this Agreement shall be subject to the terms of the
Confidentiality Agreement.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed as an instrument under seal by its officer thereunto duly
authorized as of the date first above written.
BANKBOSTON, N.A.
By: /s/ Peter J. Manning
-------------------------------
Name: Peter J. Manning
Title: Executive Director, Merger and Acquisition
INVESTORS BANK & TRUST
COMPANY
By: /s/ Michael F. Rogers
-------------------------------
Name: Michael F. Rogers
Title: Executive Vice President
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Purchase and Sale Agreement - List of Disclosure Schedules
Schedule 2.1(a) -- Fixtures, machinery, equipment, furniture, supplies and other
personal property used in the Institutional Trust and Custody Business
Schedule 2.1(b) -- Leases of personal property used in the Institutional Trust
and Custody Business
Schedule 2.1(c) -- List of Custody Service Agreements
Schedule 2.1(d) -- Miscellaneous contracts related to the Institutional Trust
and Custody Business
Schedule 3.6 -- Allocation of Purchase Price (to be delivered at Closing)
Schedule 4.2(a) -- Form of Bill of Sale
Schedule 4.2(b) -- Form of Assignment and Assumption Agreement with respect to
assumed Liabilities
Schedule 4.2(c) -- Form of Transitional Services Agreement
Schedule 5.4 -- Seller government consents required
Schedule 5.5 -- Seller third-party consents required
Schedule 5.6 -- Description of insurance of Seller on assets related to
Institutional Trust and Custody Business
Schedule 5.8 -- Seller pending litigation related to Institutional Trust and
Custody Business and assets used in business
Schedule 5.9(b) -- Known breaches of any contracts by Seller or third-parties
Schedule 5.10(b) -- Known breaches of Custody Service Agreements by Seller or
third parties
Schedule 5.12 -- Schedule of Seller Brokers
Schedule 5.15(i) -- Schedule of 1997 Noninterest Income
Schedule 5.15(ii) -- AUA Schedule
Schedule 5.15(iii) -- Client Termination Schedule
<PAGE>
Schedule 5.15(v) -- Deposit Schedule
Schedule 5.16 -- Tax disputes
Schedule 5.17(a) -- Seller officers and employees with "knowledge"
Schedule 5.17(b) -- Seller officers with "knowledge" for purposes of
Section 5.15
Schedule 6.3 -- Buyer government consents required
Schedule 6.4 -- Buyer third-party consents required
Schedule 6.6 -- Buyer pending litigation
Schedule 6.8 -- Schedule of Buyer Brokers
Schedule 6.9 -- Buyer officers and employees with "knowledge"
Schedule 7.3(e) -- Scheduled Employees
Schedule 8.4(a) -- Offered Employees
Schedule 8.4(b) -- Conversion Team
Schedule 8.4(c) -- Outsourcing Team
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-3440 and 333-43353 of Investors Financial Services Corp. (the "Company")
on Forms S-8 and Registration Statement No. 333-58031 of the Company on Form
S-3 of our report dated August 12, 1998 (which expresses an unqualified
opinion and includes an explanatory paragraph relating to the tax-free, pro
rata distribution of Eaton Vance Corp.'s ownership in the Company), appearing
in the Current Report on Form 8-K of the Company dated August 18, 1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, MA
August 18, 1998
